Business context and reporting period
The supplied filing is Visualant, Incorporated’s unaudited Form 10-Q for the three months ended December 31, 2017—not a filing identifying USBC, Inc. as registrant. Visualant develops ChromaID substance-identification technology; its TransTech identification-products distribution business generated substantially all revenue. ChromaID had produced minimal revenue. The company’s fiscal year ends September 30.
Financial performance and condition
| Metric | Quarter ended Dec. 31, 2017 | Comparable 2016 quarter / balance-sheet comparison |
|---|---|---|
| Revenue | $1.233 million | $1.149 million; up 7.3% |
| Gross profit and margin | $247,834; 20.1% | $190,358; 16.6% |
| Operating loss | $254,251 | $2.141 million |
| Net loss / loss per share | $528,265 / $0.11 | $2.608 million / $0.81 |
| Operating cash flow | $(371,397) | $(573,228) |
| Cash at period end | $92,258 | $103,181 at Sept. 30, 2017 |
| Current assets / current liabilities | $1.024 million / $5.418 million | $1.050 million / $5.149 million at Sept. 30, 2017 |
Interest expense was $293,202, including $216,774 of noncash debt-discount amortization. Current debt included $870,000 of convertible notes and $1.224 million of notes payable; all reported notes payable were classified current. Total liabilities were dominated by accounts payable and accrued expenses, including $1.234 million accrued to related parties. The company reported a $4.394 million working-capital deficit.
Changes versus the prior comparable period
Revenue rose 7.3%, and gross margin increased 3.5 percentage points. Net loss narrowed mainly because the 2016 quarter included a $983,645 goodwill impairment, substantially higher SG&A, and a $417,432 derivative-liability loss. SG&A fell to $414,365 from $1.308 million. The improvement was partly offset by higher interest expense, up to $293,202 from $52,273. The 2017 quarter’s loss included approximately $234,000 of noncash expenses. TransTech reported operating net income of $21,000 versus an operating net loss of $101,000 a year earlier.
Outlook, risks and unusual items
- Management expected existing cash to fund operations only through March 31, 2018, anticipated continuing losses, and said additional financing was needed to fund operations and pay debt. Failure to obtain financing could require restructuring, asset divestitures, reduced development, or bankruptcy. The filing states that substantial doubt exists about the company’s ability to continue as a going concern.
- Near-term obligations included a $199,935 Umpqua loan extended to March 31, 2018; $600,000 of related-party notes extended to March 31, 2018; and a $424,489 Capital Source facility due or subject to renewal by June 12, 2018. The Capital Source facility is secured by TransTech assets and guaranteed by Visualant, with a security interest in Visualant assets.
- In December, the company received $250,000 and issued a $300,000 senior convertible debenture and warrants to purchase 1.2 million shares. The notes carried a 20% interest rate and were immediately convertible; associated warrant and conversion-feature values were expensed as interest. Additional borrowing may increase interest costs, while equity financing could dilute shareholders.
- In January and February 2018, the company issued 559,240 common shares for service awards. Customer concentration was significant: one customer represented 32.6% of quarterly revenue and one customer represented 61.8% of receivables at December 31.
- Disclosure controls were deemed ineffective due to material weaknesses, including no full-time CFO and no audit committee financial expert. Management identified no material legal proceedings beyond ordinary routine matters. The filing gives no quantified revenue or profitability guidance.
Important facts for investors to verify
- Whether the company obtained sufficient financing and met or renegotiated the March and June 2018 debt obligations.
- Current liquidity, related-party balances and security interests, and the terms and dilution potential of convertible securities, preferred stock and warrants.
- Whether TransTech can sustain improved margins and whether ChromaID produces material commercial revenue.
- Progress in remediating the disclosed internal-control weaknesses and reducing customer concentration.
- The post-quarter share issuance and updated fully diluted share count.