Business context and reporting period
The filing is Visualant, Incorporated’s unaudited Form 10-Q for the quarter and six months ended March 31, 2016 (fiscal Q2), filed May 5, 2016. This does not match the request metadata naming USBC, Inc.; the filing identifies Visualant, Incorporated (OTCQB: VSUL). Visualant develops ChromaID light-based identification technology and owns TransTech Systems, a personnel-identification products distributor that generated substantially all reported revenue.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2016 | $1.467 million | $2.752 million |
| Revenue, 2015 | $1.435 million | $3.278 million |
| Gross profit, 2016 | $215,190; 14.5% margin | $413,312; 15.0% margin |
| Operating loss, 2016 | $684,353 | $1.314 million |
| Net income (loss), 2016 | $(294,691) | $(2.307) million |
| Net income (loss), 2015 | $2.242 million | $(915,058) |
- Six-month operating cash outflow was $1.188 million, versus $126,000 in the same 2015 period. Investing cash outflow was $490,000; financing provided $1.627 million. Reported cash increased by $438,415.
- At March 31, total assets were $3.040 million, current liabilities $9.661 million, and stockholders’ deficit $6.622 million. Cash was reported as $520,281 on the balance sheet; the cash-flow statement reports ending cash of $520,681, a $400 inconsistency.
- Management reported a $4.467 million working-capital deficit excluding the $3.574 million derivative liability. Current liabilities include $2.557 million of trade payables, $3.574 million of derivative liabilities, $868,749 of convertible notes, and $1.308 million of current notes and long-term debt.
- All $1.308 million of notes and debt was classified as due within 12 months. The $507,697 Capital Source borrowing was due when its facility expired June 12, 2016 unless renewed; the facility was secured by company assets. Related-party debt included $600,000 in notes and a $199,935 note associated with the Umpqua loan.
Material changes versus prior comparable periods
- Second-quarter revenue rose 2.2% year over year, but gross profit fell 6.5% and gross margin declined from 16.0% to 14.5%, which management attributed to lower TransTech selling prices and slightly lower margins.
- Six-month revenue fell 16.0%, with management attributing the decline primarily to reduced sales of one major TransTech vendor’s products. Gross profit declined 21.8%; operating loss widened from $1.197 million to $1.314 million.
- Six-month net loss increased to $2.307 million from $915,058. A $870,000 noncash loss from revaluing derivative liabilities, compared with a $381,000 gain in 2015, contributed to the deterioration. Quarterly results also benefited from a $476,454 derivative-liability gain; the prior-year quarter included a $3.032 million gain. These fair-value changes make reported earnings volatile and do not represent operating cash generation.
- Financing included $924,500 of convertible-note proceeds, $169,360 from warrant exercises, and $505,000 in preferred-stock proceeds. The company issued 255 Series B preferred shares in a transaction stated at $2.5 million, but reports receiving $500,000 cash plus $5,000; the related $1.995 million promissory note was not recorded because future funding was uncertain.
Outlook, risks and unusual items
- Management expects continuing losses while commercializing ChromaID and said cash on hand was expected to fund operations only through June 30, 2016. It stated that additional financing is necessary; failure to obtain it could require restructuring, divestitures, or reduced operations. The filing reports substantial doubt about the company’s ability to continue as a going concern.
- ChromaID revenue remained minimal. The filing describes a March 2016 collaboration and license granting Intellicheck Mobilisa exclusive ChromaID rights in homeland security, law enforcement, and crime prevention. The liquid Lab Kit remained in prototype form.
- Financing creates dilution and conversion risk: convertible notes carry conversion terms tied to future financing or market prices, and warrants include price-adjustment provisions. The company also had 830,326 warrants outstanding and 56,641 options at March 31, in addition to preferred shares and convertible securities.
- TransTech depends on a concentrated vendor base: four major vendors represented approximately 73% of its revenue. Customer concentration was also disclosed, including one customer at 16.1% of six-month revenue and two customers exceeding 10% of receivables.
- Disclosure controls were deemed ineffective due to a material weakness: the audit committee lacked a financial expert. Management said it expected to appoint an independent director to address the gap. The filing reported no material non-routine pending litigation.
- Subsequent to quarter-end, April 29 amendments extended $600,000 of related-party demand notes and the $200,000 Umpqua-related note to June 30, 2016. The filing also contains inconsistent or potentially erroneous figures, including the $400 cash difference and a risk-factor reference to six-month net loss of $2.335 million rather than the financial statements’ $2.307 million.
Important facts for investors to verify
- Confirm the issuer and ticker: the supplied metadata says USBC, Inc., while the filing is for Visualant, Incorporated (VSUL).
- Reconcile ending cash, the reported net loss figures, and the terms and accounting treatment of the Series B transaction and its $1.995 million note.
- Track near-term liquidity, renewal or repayment of the Capital Source facility, related-party debt extensions, and the company’s ability to secure additional financing.
- Assess potential dilution and derivative-liability valuation effects, alongside the commercial traction and revenue contribution of ChromaID.
- Check whether the audit-committee financial-expert and internal-control weaknesses were remediated in subsequent filings.