Business context and reporting period
Filing identity: The request identifies USBC, Inc., but the supplied Form 10-Q is for Visualant, Incorporated and subsidiaries (OTCQB: VSUL). The filing covers the quarter and nine months ended June 30, 2015; June 30 is the company’s fiscal third-quarter end.
Visualant’s business combines TransTech, a distributor of personnel-identification and security products that provides substantially all revenue, with development and early commercialization of its ChromaID light-based identification and authentication technology. The financial statements are unaudited, except where noted.
Financial results and position
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Revenue | $1.547 million, down 23.5% year over year | $4.825 million, down 18.5% |
| Gross profit / margin | $256,000 / 16.5%, versus $311,000 / 15.4% | $784,000 / 16.3%, versus $958,000 / 16.2% |
| Operating loss | $654,000, versus $635,000 | $1.851 million, versus $1.990 million |
| Net income (loss) attributable to common shareholders | $767,000, versus $1.337 million | $(148,000), versus $(1.239) million |
| Basic and diluted earnings (loss) per share | $0.68, versus $1.21 | $(0.13), versus $(1.12) |
Quarterly and year-to-date net results included substantial noncash gains from revaluing warrant and other derivative liabilities: $1.428 million for the quarter and $1.809 million for the nine months. Accordingly, reported quarterly profit did not reflect profitable core operations; TransTech reported operating losses of $62,000 for the quarter and $98,000 year to date. Nine-month interest expense rose to $138,000 from $68,000.
Cash flow: Operating activities used $150,000 in the first nine months, compared with $902,000 in the prior-year period. Investing activities provided $21,000, and financing activities provided $106,000. Cash declined from $70,386 at September 30, 2014 to $47,569 at June 30, 2015.
Balance sheet and liquidity: Total assets were $2.609 million, current assets $1.042 million, and current liabilities $5.617 million. Stockholders’ deficit was $3.008 million and accumulated deficit $21.683 million. Management reported a working-capital deficit of approximately $3.787 million excluding the $788,000 warrant derivative liability. Accounts payable and related-party accrued expenses were significant. All reported debt of $1.149 million was classified as current; an additional $64,000 convertible note was also current.
Material changes versus the prior comparable period
- Revenue declined primarily because TransTech sales of one large vendor’s products fell. Management cited lower sales of approximately $1.544 million for the quarter and $4.823 million for the nine-month period.
- Gross margin improved modestly, which management attributed in part to a higher share of higher-margin radio-frequency identification products.
- Research and development expense fell to $286,000 from $571,000 for the nine months, partly because of lower supplier spending and the IDMC arrangement. SG&A was nearly flat at $2.349 million.
- The nine-month net loss narrowed considerably, but the improvement was substantially affected by the noncash derivative fair-value gain, alongside lower R&D expense.
- Intangible assets, net, fell to $194,000 from $432,000, including amortization; the TransTech intellectual property was fully amortized as of June 30, 2015.
Outlook, risks, contingencies, and unusual items
- Management expected losses to continue while commercializing ChromaID and stated that additional financing was needed to fund operations, execute its business plan, and service debt. The filing says the 2014 audit report raised substantial doubt about the company’s ability to continue as a going concern.
- ChromaID had generated limited product revenue. The company described the liquid-analysis kit as a prototype and anticipated making it available in fall 2015; this was a forward-looking target, not a reported result. No quantified revenue or earnings guidance was provided.
- On April 24, 2015, the company filed an S-1 to register up to $10 million of securities and applied to list its common stock and warrants on Nasdaq. The filing does not establish that the offering or listing was completed.
- On June 12, the TransTech secured credit facility was renewed for six months. Its $348,840 outstanding balance was due by December 12, 2015 unless extended; reported availability at June 30 was $85,211. The facility is secured by TransTech assets and guaranteed by Visualant, with a security interest in Visualant assets.
- Other near-term obligations included $600,000 of related-party notes maturing September 30, 2015, a $200,000 Umpqua Bank loan maturing December 31, 2015, and a $64,000 KBM convertible note due October 27, 2015. The company disclosed approximately $1.528 million owed to CEO Ronald P. Erickson or affiliated entities as of June 30.
- As a subsequent event, the company reported July 1 commitments from debtors to convert $903,000 into common stock, expected to increase equity by that amount. On July 15, certain $600,000 related-party notes and a $200,000 note associated with the Umpqua loan were amended to extend their due date to September 30, 2015.
- A 1-for-150 reverse stock split was approved and determined in June; share and per-share information in the filing reflects the split retroactively. The company also issued $350,000 of Series A preferred stock during the nine months, with associated warrants and potential dilution.
- Management concluded disclosure controls were not effective because of a material weakness: the audit committee lacked a financial expert. The company said it expected to appoint an independent audit committee chair with that expertise.
- The filing reported no material pending legal proceeding outside routine litigation and no material off-balance-sheet arrangements. It identified customer and supplier concentration, financing availability, commercialization, dilution, intellectual-property, and listing risks.
Most important facts for investors to verify
- Whether the filing is relevant to the requested issuer: it names Visualant, Incorporated, not USBC, Inc.
- Whether the $903,000 debt-conversion commitments were completed, on what terms, and how they affected shares outstanding and liquidity.
- How the company addressed the September–December 2015 debt maturities, credit-facility renewal, and continuing cash needs.
- Whether the proposed securities offering and Nasdaq listing proceeded, and the resulting financing, dilution, or warrant repricing.
- Whether TransTech sales recovered from the decline in one major vendor’s products and whether ChromaID generated material customer, licensing, or royalty revenue.
- Whether the audit-committee financial-expert and other internal-control weaknesses were remediated.