Business context and reporting period
The supplied filing identifies the registrant as Visualant, Inc. and subsidiaries, not USBC, Inc.; confirm that this is the intended filing. This Form 10-Q covers the quarter and six months ended March 31, 2013. Visualant develops its ChromaID spectral-pattern technology and, through subsidiary TransTech, sells security and authentication products. The balance sheet compares March 31, 2013 with audited September 30, 2012; operating results compare with the periods ended March 31, 2012.
Financial results and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2013 / 2012 | $2.218m / $1.899m | $4.273m / $3.712m |
| Gross profit, 2013 / 2012 | $575k / $333k | $1.108m / $657k |
| Gross margin, 2013 / 2012 | 25.9% / 17.6% | 25.9% / 17.7% |
| Operating loss, 2013 / 2012 | $(1.133)m / $(586)k | $(1.816)m / $(1.097)m |
| Net loss attributable to common shareholders, 2013 / 2012 | $(2.347)m / $(631)k | $(3.055)m / $(1.190)m |
| Basic and diluted loss per share, 2013 / 2012 | $(0.02) / $(0.01) | $(0.03) / $(0.02) |
Six-month operating cash use was $1.294m, versus $290k in the prior-year period. Investing activities used $3k and financing activities provided $171k. Cash fell from $1.141m at September 30 to $14,722 at March 31. Current assets were $1.763m and current liabilities $5.529m, a working-capital deficit of approximately $3.766m. Total debt was $2.549m, nearly all current; accounts payable and accrued expenses increased. Total assets were $4.143m and stockholders’ deficit was $1.429m.
Material changes versus prior comparable periods
Quarterly and six-month revenue rose 16.8% and 15.1%, respectively, attributed to SPP license revenue and improved TransTech sales. Gross profit increased, with cost of sales growing more slowly than revenue. However, R&D and selling, general and administrative expenses rose substantially as the company funded ChromaID commercialization and business-development, public-relations and investor-relations activity. A $1.150m loss on purchase of warrants and additional investment rights was recorded in 2013, driving the larger net loss. Management reported non-cash expenses of $1.640m for the quarter and six months, though its MD&A separately cites $644k and $790k of non-cash SG&A expenses for those periods.
Common shares outstanding were 111,978,606 at March 31 and 116,662,674 as of May 10. The filing reports conversion of debentures into shares during the quarter and an additional 4,564,068 shares issued to Ascendiant after quarter-end on April 26.
Outlook, risks and unusual items
No quantitative revenue, earnings or cash-flow guidance is provided. Management expects operating losses to continue and says additional financing is required to fund operations and debt payments; it gives no assurance financing will be available. The filing states that substantial doubt exists about the company’s ability to continue as a going concern. It warns that inability to raise funds may require restructuring or divestiture and could jeopardize TransTech.
Near-term obligations disclosed include $1m due to James Gingo on June 8, 2013; a $250k Gemini warrant-repurchase payment already past due as of March 31, with interest accruing at 18%; and two $425k installments under the AIR Termination Agreement due June 30 and September 30, 2013, plus interest. Failure to pay the AIR note may increase the amount due to 120% of the balance plus interest. The company also had an option, exercisable by May 31, to pay $300k to repurchase 4m shares from Ascendiant; Ascendiant had exercised its warrant for 4,564,068 shares on April 26. The remaining $1m Gingo note is secured by TransTech stock and assets; default remedies could put the subsidiary at risk. The SPP joint development agreement was extended through December 31, 2013, and SPP holds an exclusive license in identified Asian territories.
Management concluded that disclosure controls and internal control over financial reporting were not effective as of March 31, 2013, citing material weaknesses and the absence of an audit committee financial expert. No material adverse pending legal proceedings were reported. Dilution, share-price volatility, dependence on financing and key personnel, and execution of ChromaID commercialization are also identified risks.
Investor verification priorities
- Verify the registrant identity: the filing is for Visualant, Inc., although the request names USBC, Inc.
- Confirm the status and funding sources for the near-term debt and warrant-related payments, including the past-due Gemini amount and Gingo note.
- Assess the going-concern disclosure against cash of only $14,722, the $3.766m working-capital deficit, and six-month operating cash use of $1.294m.
- Reconcile the reported $1.150m warrant/additional-right loss with the $850k non-cash cash-flow adjustment and the terms of the related agreements.
- Review dilution from debt conversions, warrants, options, and the post-quarter Ascendiant share issuance; confirm the May 10 share count and any subsequent repurchase or financing.
- Check the filing’s internal numerical differences, including accounts payable stated as $2,005,335 on the balance sheet versus $2,005,355 in the note, and the differing non-cash expense descriptions.
- Track remediation of the disclosed material weaknesses and progress under the SPP development and commercialization agreement.