Business context and reporting period
This Form 10-Q is for the quarter ended March 31, 2015, Visualant, Inc.’s fiscal second quarter, and includes six-month comparisons with the period ended March 31, 2014. The filing identifies the registrant as Visualant, Inc.; the request metadata names USBC, Inc., a discrepancy investors should verify. Visualant develops ChromaID, a light-based material identification and authentication technology, and operates TransTech Systems, a distributor that generated substantially all company revenue. ChromaID commercialization remained at an early stage, with minimal product revenue.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2015 | $1.435 million | $3.278 million |
| Revenue, 2014 | $2.025 million | $3.902 million |
| Gross profit / margin, 2015 | $230,392 / 16.1% | $528,156 / 16.1% |
| Gross profit / margin, 2014 | $340,275 / 16.8% | $646,343 / 16.6% |
| Operating loss, 2015 | $721,773 | $1.197 million |
| Net income (loss) attributable to common shareholders, 2015 | $2.242 million | $(915,058) |
- Quarterly revenue fell 29.1%; six-month revenue fell 16.0%, primarily from lower TransTech sales. Six-month operating loss narrowed from $1.355 million to $1.197 million.
- The quarterly profit was primarily driven by a $3.032 million gain from revaluing warrant and other derivative liabilities; it did not reflect operating profitability. Six-month results included a $381,023 derivative gain, versus a $1.179 million loss in the prior period.
- Operating cash use was $125,790 for six months, improved from $836,696. Cash at March 31 was $121,862, compared with $70,386 at September 30, 2014. Operating cash use was partly offset by a $760,980 increase in trade payables and accrued expenses.
- Current assets were $1.364 million and current liabilities $6.809 million, including a $2.216 million warrant derivative liability. Management reported a $3.229 million working capital deficit excluding that derivative liability.
- Debt included $1.201 million of current notes and long-term debt (all classified current), plus a $64,000 convertible note. The $399,599 secured credit-facility balance was due at the facility’s June 12, 2015 expiry unless renewed; $600,000 of related-party notes were due June 30, 2015; and the Umpqua loan matured December 31, 2015. The filing also reports approximately $1.328 million owed to the CEO and affiliates, including advances and unpaid expenses/compensation; investors should verify how this relates to reported debt balances.
- Stockholders’ deficit was $3.788 million and accumulated deficit was $22.450 million at March 31. The company had 169.8 million common shares outstanding as of May 14, 2015, alongside 135.0 million warrants and 10.9 million options outstanding at quarter-end.
Outlook, risks, and unusual items
- Management expected continued losses while commercializing ChromaID and stated that cash on hand was expected to fund operations through at least July 2015. The company said it needed additional financing to operate and repay debt; failure to obtain funding could require restructuring or divestitures. The auditor’s report for fiscal 2014 expressed substantial doubt about the company’s ability to continue as a going concern.
- The ChromaID Liquid Lab Kit was a functional laboratory prototype; management anticipated availability to customers by the fiscal fourth quarter ending September 30, 2015. ChromaID had generated limited revenue, and TransTech remained the principal revenue source.
- On April 24, 2015, the company filed an S-1 to register $10 million of securities and applied to list its common stock and warrants on Nasdaq. The filing does not establish that the offering was completed or that proceeds were received.
- On May 7, 2015, the company filed an information statement concerning a proposed 1-for-50 to 1-for-150 reverse split and reductions in authorized shares. The filing warns that the split might not secure or maintain Nasdaq listing, and that the proposed offering might not proceed.
- Series A preferred shares were sold for $350,000 and included warrants; the preferred conversion price was being amended from $0.10 to $0.20 per share, subject to adjustment. Numerous warrants have down-round provisions, which could reduce exercise prices and potential proceeds while increasing dilution.
- Disclosure controls were deemed ineffective due to a material weakness associated with the audit committee’s lack of a financial expert. Management expected to appoint an independent audit committee financial expert.
- Other stated risks include dependence on TransTech and concentrated suppliers, weak ChromaID customer adoption and limited sales capacity, financing and debt-renewal needs, related-party obligations, potential dilution, and intellectual-property and regulatory risks for future medical applications.
Important facts for investors to verify
- Confirm the correct issuer: the provided metadata says USBC, Inc., while the filing names Visualant, Inc. and reports ticker VSUL.
- Verify the status and terms of the proposed $10 million offering, Nasdaq application, reverse split, and authorized-share changes; none should be treated as completed based solely on this filing.
- Check whether the Capital Source facility was renewed or repaid by June 12, 2015, and whether related-party notes due June 30 and other near-term obligations were refinanced or paid.
- Reconcile the approximately $1.328 million owed to the CEO and affiliates with the balance-sheet debt and accrued-liability totals, and assess liquidity after quarter-end.
- Distinguish reported earnings from operating performance: the quarter’s net income depended on a large noncash derivative revaluation gain, while operating losses and financing needs persisted.
- Monitor ChromaID commercialization, especially customer adoption, recurring or licensing revenue, and delivery of the Liquid Lab Kit; the filing reports limited ChromaID revenue and provides no quantified revenue guidance.