Business Context and Reporting Period
The supplied filing is Visualant, Inc.’s Form 10-K for the fiscal year ended September 30, 2013; it does not identify USBC, Inc. The company combined TransTech, a security and identification products distributor, with development of its ChromaID light-based identification technology. TransTech generated most revenue. The filing was signed January 13, 2014.
Key Financial Metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $8.573 million | $7.924 million |
| Gross profit / margin | $1.856 million / 21.6% | $1.580 million / 19.9% |
| Operating loss | $3.894 million | $2.222 million |
| Net loss | $6.605 million | $2.726 million |
| Net loss attributable to common shareholders | $6.622 million | $2.732 million |
| Loss per share | $0.05 | $0.04 |
| Cash used in operations | $3.504 million | $58,000 |
| Cash at year-end | $747,129 | $1.141 million |
| Total assets | $4.629 million | $5.320 million |
Revenue rose 8.2%, while net loss more than doubled. TransTech sales were $7.906 million, versus $7.591 million in FY2012; Sumitomo license revenue was $667,000, versus $333,000. TransTech’s gross margin declined from 16.4% to 15.0%; total margin improved primarily because of the higher-margin license revenue. Research and development expense increased to $1.169 million from $177,000, and selling, general and administrative expense rose to $4.581 million from $3.625 million.
At September 30, 2013, current liabilities were $7.385 million, including a $4.184 million warrant derivative liability; management reported a working-capital deficit of approximately $760,000 excluding that derivative liability. Total debt was approximately $755,000, substantially current, including $749,323 under TransTech’s secured credit facility. Stockholders’ equity was a deficit of $2.807 million; accumulated deficit was $20.538 million. The filing reports no cash dividends.
Material Changes and Unusual Items
- The June 2013 private placement raised $5.230 million, including conversion of $500,000 of officer debt, in exchange for 52.3 million shares and warrants for up to 104.6 million shares. The warrants’ down-round features required liability accounting and contributed $1.449 million of noncash expense. The company also recorded a $1.150 million loss related to warrant and additional-investment-right transactions.
- Cash used in operations increased sharply from $58,000 to $3.504 million. Noncash expenses included $1.449 million from warrant remeasurement and $850,000 related to purchase of warrant/additional investment rights.
- The company paid the final $1.0 million principal balance and accrued interest on its TransTech acquisition note in June 2013.
- After year-end, the Sumitomo joint development agreement expired on December 31, 2013; the parties were defining their future relationship. The separate Asian-territory license remained in place, with running royalties still to be negotiated.
- In November 2013, Visualant entered an agreement with IDMC involving ChromaID development, licensing and business development. Visualant issued IDMC a warrant for up to 14.575 million shares at $0.20 and agreed to revenue shares and royalties. The company also agreed to delay most ChromaID development-kit sales for 140 days, with stated exceptions.
Outlook, Risks, and Contingencies
Management expected continuing losses and further financing needs, potentially within six months of the filing’s risk-factor discussion. The auditor’s report included a going-concern explanatory paragraph, citing recurring losses and accumulated deficit; the company said continued operations depended on obtaining additional working capital. The filing provides no revenue or profitability guidance.
ChromaID F12 Lab Kit shipments began in late calendar 2013, after the fiscal year, but Visualant had not yet generated revenue from ChromaID product sales. Commercial adoption, licensing and royalty opportunities remained uncertain. Medical and other regulated applications may require regulatory approval. TransTech’s vendors represented approximately 70% of its revenue, creating supplier concentration risk.
Liquidity and dilution are material risks. At year-end the company had $747,129 cash and a working-capital deficit; the BFI facility balance was reported as approximately $749,000, with approximately $534,000 then outstanding under the receivables line in the subsequent disclosure. The facility was renewed for six months in December 2013 and was due to expire June 11, 2014 absent renewal. The filing also discloses a January 2014 related-party loan of $200,000 due March 31, 2014. Exercise of the 104.6 million private-placement warrants could provide substantial cash, but exercise is not assured and could materially dilute shareholders; the filing also lists 12.735 million options and other warrants.
Management concluded internal control over financial reporting was not effective, identifying the absence of an audit committee financial expert as a material weakness. Management also disclosed a missed advisory vote on executive compensation and planned compliance remediation. The auditor did not express an opinion on internal-control effectiveness. A court ordered Ascendiant to deliver 1,715,475 shares in September 2013, and delivery occurred; Visualant expected to continue pursuing a damages claim. The filing says no pending proceedings were expected to have a material adverse effect.
Most Important Facts to Verify
- Confirm the issuer: the provided 10-K is for Visualant, Inc. (OTCQB: VSUL), not USBC, Inc.
- Review the audited financial statements and notes for going-concern disclosures, current obligations, and the composition and accounting of the warrant liability.
- Verify subsequent cash needs, the BFI facility’s status and repayment or renewal, and repayment of the January 2014 related-party loan.
- Track actual ChromaID sales, licensing, royalty terms, IDMC economics and warrant issuance, and the post-expiration Sumitomo relationship.
- Assess potential dilution from outstanding warrants, options and other equity-linked awards, including applicable adjustment provisions.
- Monitor remediation of the disclosed control weakness and the status and potential exposure of the Ascendiant damages claim.