Business context and reporting period
The supplied filing is Visualant, Incorporated’s Form 10-Q for the quarter ended March 31, 2018—not a filing identified in its text as USBC, Inc. The quarter is the company’s fiscal second quarter; results are also reported for the six months ended March 31. Visualant develops ChromaID and Bio-RFID substance-identification technology. Its TransTech Systems subsidiary, a distributor of identification products, generated substantially all reported revenue; the new technologies had generated minimal revenue.
Financial results and liquidity
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $1.092 million, down 27.1% year over year | $2.325 million, down 12.1% |
| Gross profit and margin | $227,000; 20.8% versus 20.3% | $474,000; 20.4% versus 16.6% |
| Operating loss | $505,000 versus $263,000 | $759,000 versus $2.354 million |
| Net loss | $1.299 million versus $1.045 million | $1.827 million versus $3.602 million |
| Interest expense | $794,000 versus $16,000 | $1.087 million versus $68,000 |
Six-month operating cash use was $443,000, compared with $569,000 a year earlier. Financing provided $339,000, primarily from $530,000 of convertible-note proceeds, partly offset by $191,000 of credit-line repayments. Cash was zero at March 31, with a $14,750 cash overdraft.
At March 31, total assets were $895,000 and current liabilities were $5.628 million, including $2.140 million of trade payables, $2.390 million of convertible notes, and $375,000 of current debt. Management reported a $4.844 million working-capital deficit and a $33.361 million accumulated deficit. Total stockholders’ deficit was $4.734 million.
Material changes versus the prior comparable period
- Quarterly revenue declined because a TransTech sale in the prior-year quarter did not recur; six-month sales also fell on lower TransTech sales.
- Quarterly gross margin edged up, and six-month margin improved as reported, while research and development spending increased to $241,000 for six months from $47,000, reflecting product development, including Bio-RFID.
- Six-month SG&A fell to $992,000 from $1.818 million, primarily due to lower business-development, investor-relations, and bad-debt expenses. The prior-year period included a $984,000 goodwill impairment, contributing to the lower comparative operating loss.
- Net loss worsened in the quarter despite lower revenue, with interest expense rising sharply. The company attributed much of the interest burden to convertible financing, including debt discounts and conversion-related items.
Outlook, risks, contingencies, and unusual items
- Going concern and funding: The filing says recurring losses, operating cash outflows, limited capital, and debt obligations raise substantial doubt about the company’s ability to continue as a going concern. Management expected available cash to fund operations only through May 31, 2018 and said further financing was required. It warned that unavailable or unacceptable financing could force restructuring, asset divestitures, curtailed development, or bankruptcy.
- Near-term obligations: The Capital Source facility had a $175,000 balance and was due to expire June 12, 2018 unless renewed; it is secured by TransTech assets and guaranteed by Visualant. Umpqua debt of approximately $200,000 was extended to March 31, 2019, according to the debt note. Contractual obligations also include $2.390 million of convertible notes and $244,773 of operating leases.
- Concentration and dilution: One customer represented 36.2% of six-month revenue and one customer held 71.5% of receivables. At March 31, 11.84 million warrants were outstanding, in addition to convertible preferred shares and convertible notes that could create substantial, partly unspecified share dilution.
- Business and reporting risks: ChromaID and Bio-RFID commercialization remains uncertain, with limited customer adoption and no assurance of significant future revenue. The company reported ineffective disclosure controls and a material weakness tied to the lack of a full-time CFO and an audit committee financial expert. It reported no material pending legal proceedings and no off-balance-sheet arrangements.
- Post-quarter developments: The company disclosed 2.225 million common shares issued for service awards, a proposed acquisition of RAAI Lighting for 2 million Visualant shares, and the appointment of Phillip A. Bosua as CEO, replacing Ronald P. Erickson, who remained Chairman. On May 1, 2018, the company changed its name to Know Labs, Inc.; the proposed trading-symbol change was subject to FINRA confirmation.
Important facts for investors to verify
- Confirm the issuer’s identity: the request metadata names USBC, Inc., but the filing identifies Visualant, Incorporated and describes a subsequent name change to Know Labs, Inc.
- Check the company’s financing and cash position after the stated May 31, 2018 cash runway, including renewal or repayment of the Capital Source facility due in June 2018.
- Reconcile related-party balances: the filing gives $517,916 in one note for amounts owed to Erickson or affiliates, but elsewhere cites a total of $1,701,452; determine whether the latter includes converted notes or other obligations.
- Reconcile debt disclosures, including the differing Umpqua interest rates stated in the filing (4.75% in the debt note versus 4.00% in the risk discussion) and confirm the applicable maturity terms.
- Assess the full dilution from warrants, preferred-stock conversions, convertible debt, post-quarter service shares, and the RAAI merger consideration; confirm the final share count and FINRA symbol-change status.