Business context and reporting period
This is Visualant, Incorporated’s unaudited Form 10-Q for the quarter and nine months ended June 30, 2017, filed August 14, 2017. The filing identifies Visualant, Inc. as the registrant; this differs from the request metadata’s company name, USBC, Inc. Visualant develops ChromaID substance-identification technology and owns TransTech Systems, a distributor of identification products that generated substantially all company revenue. ChromaID had produced minimal revenue.
Financial results and liquidity
| Metric | Three months ended June 30, 2017 | Nine months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $1.019 million | $3.665 million | $1.833 million and $4.586 million |
| Gross profit / margin | $175,000 / 17.1% | $670,000 / 18.3% | $338,000 / 18.4%; $751,000 / 16.4% |
| Operating loss | $467,000 | $2.822 million | $475,000; $1.789 million |
| Net income (loss) | $528,000 | $(3.074) million | $1.721 million; $(595,000) |
| Operating cash flow | Not separately presented | $(807,000) | $(1.857) million |
Quarterly net income reflected a $1.005 million gain from the change in derivative liability, despite an operating loss; the nine-month period instead recorded a $218,000 derivative-related loss. Nine-month results also included a $984,000 goodwill impairment and $136,000 bad-debt expense. Management attributed lower revenue to reduced TransTech product sales and a large prior-year sale that did not recur. It reported lower R&D spending because RATLab and related suppliers were no longer providing commercialization services.
At June 30, cash was $22,856, current assets were $766,471, and current liabilities were $4.935 million, including a $410,524 derivative liability. The reported net working capital deficit was approximately $3.758 million excluding that derivative liability. Total assets were $1.029 million and stockholders’ deficit was $3.907 million. Current debt included $210,000 of convertible notes and $1.013 million of notes payable and long-term debt classified as current. Trade accounts payable were $2.060 million; accrued expenses due to related parties were $1.186 million.
Nine-month financing activities provided $640,000, including $330,000 in convertible-note proceeds and $557,089 net proceeds from common/preferred stock issuance, offset by debt and line-of-credit repayments. Cash declined by $165,453 over the period. The filing reports 3,860,486 common shares outstanding at June 30 and 3,910,486 at August 14.
Material changes versus the prior comparable period
- Revenue fell 44.4% for the quarter and 20.1% for the nine-month period. Nine-month gross margin improved to 18.3% from 16.4%, but the operating loss widened by about $1.032 million, principally reflecting goodwill impairment and higher SG&A.
- Nine-month net loss increased to $3.074 million from $595,000. The comparison was affected by a substantially smaller derivative-liability gain than in 2016, as well as goodwill impairment.
- Accounts receivable declined to $423,363 from $808,955, while cash fell to $22,856 from $188,309 at September 30, 2016. Common shares outstanding increased during the period, and the company issued Series D preferred stock and warrants.
Outlook, risks, contingencies and unusual items
- Going concern and funding: Management said cash on hand was expected to fund operations only through August 31, 2017. The filing cites substantial doubt about the company’s ability to continue as a going concern, recurring losses, limited capital resources, and the need for additional financing to operate and service debt. Failure to obtain financing could require restructuring, divestitures, reduced development activity, or bankruptcy.
- Potential financing and dilution: The company intended to raise up to $2.5 million through a best-efforts offering of up to 3.125 million Series D shares and an equal number of warrants; there was no assurance of completion, and additional preferred shares would need to be authorized to complete the full offering. At June 30, the filing disclosed substantial potential dilution from warrants, preferred-stock conversions and other instruments.
- Debt maturities and related parties: $600,000 in demand notes owed to CEO-affiliated entities matured September 30, 2017 and could create a second lien if unpaid or not converted on acceptable terms. A $199,935 Umpqua Bank loan matured December 31, 2017; a related $200,000 CEO-affiliated demand note could apply upon default. The company reported owing the CEO or affiliated entities $1.577 million in total. A July 14, 2017 amendment extended certain note due dates to September 30, 2017.
- Business execution: Management expected losses to continue while commercializing ChromaID. It cited limited customer adoption and revenue, dependence on external engineering and product-development resources, and reliance on partners and key suppliers. TransTech’s four major vendors accounted for approximately 61% of its revenue.
- Controls and governance: Disclosure controls were assessed as ineffective due to material weaknesses, including lack of an audit committee financial expert, lack of segregation of financial-reporting duties, and late SEC filings. The filing states management was strengthening finance resources and using a CFO consultant.
- Subsequent events: The CFO and Secretary resigned July 31, 2017. On August 4, the board approved a CEO employment agreement through June 30, 2018, with annual compensation of $180,000 plus potential bonus and equity awards. The filing reports no material pending legal proceedings and no off-balance-sheet arrangements expected to have a material effect.
Important facts for investors to verify
- Confirm the correct issuer and filing identity: the supplied metadata says USBC, Inc., while the filing names Visualant, Incorporated.
- Verify the company’s financing since the filing, cash runway, and status of the proposed $2.5 million Series D offering.
- Check repayment, extension, conversion, or collateral status of debt due in 2017, including CEO-affiliated obligations and the Umpqua-related note.
- Assess whether TransTech revenue and gross margins stabilized, and whether ChromaID partnerships produced commercial products or meaningful revenue.
- Review the goodwill impairment and derivative-liability accounting, including the extent to which reported quarterly profit depended on non-cash valuation changes.
- Track remediation of material weaknesses and late filings, and quantify dilution from preferred shares, warrants, and other convertible securities.