Business context and reporting period
The supplied filing is Visualant, Incorporated’s Form 10-Q, not a filing identified as USBC, Inc. It covers the fiscal quarter and six months ended March 31, 2012; the company’s fiscal year ends September 30. Visualant develops Spectral Pattern Matching (SPM) technology and operates TransTech, a distributor of security and authentication systems. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2012 | Prior-year quarter | Six months ended Mar. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1.899 million | $2.866 million | $3.712 million | $4.934 million |
| Gross profit | $333,433 | $344,893 | $656,681 | $758,097 |
| Gross margin | 17.6% | 12.0% | 17.7% | 15.4% |
| Operating loss | $585,655 | $492,486 | $1.097 million | $731,733 |
| Net loss attributable to common shareholders | $630,853 | $520,001 | $1.190 million | $779,773 |
| Basic and diluted loss per share | $0.01 | $0.01 | $0.02 | $0.02 |
For the six months, operating cash flow was negative $289,612, compared with positive $928,731 in the prior-year period. Investing activities provided $7,639 and financing activities provided $224,487, including $272,941 from common-stock issuance. Cash declined from $92,313 at September 30, 2011 to $34,827 at March 31, 2012.
At quarter-end, current assets were $1.499 million and current liabilities were $4.820 million, a working-capital deficit of approximately $3.321 million. Total assets were $3.974 million. The debt schedule reported $2.518 million of notes, leases and long-term debt, including $1.509 million current; convertible notes payable were separately reported at $975,000. The filing cites total indebtedness of approximately $2.5 million. It reports a $650,000 payment to TransTech’s seller due June 8, 2012. Interest expense was $116,242 for the six months.
Material changes versus the prior comparable period
- Quarterly revenue fell 33.7% and six-month revenue fell 24.8%. Management attributed the declines to a large aerospace-company sale in the prior-year periods that did not recur.
- Gross profit declined less than revenue, and gross margin improved in both comparisons. However, six-month SG&A rose $200,000 to $1.678 million and R&D rose to $76,000 from $12,000, contributing to a larger operating loss.
- Six-month net loss attributable to common shareholders increased by approximately $411,000. Management cited higher operating costs, interest expense, business-development and investor-relations spending, and $612,000 of non-cash expenses.
- Common shares issued and outstanding rose from 49.1 million at September 30, 2011 to 61.0 million at March 31, 2012; 61.4 million were outstanding May 1. Equity issuance and convertible-debt conversion create material dilution risk.
Outlook, risks and unusual items
- Going concern: Management said additional financing is needed to execute its plan and service debt, anticipated operating losses for the foreseeable future, and disclosed substantial doubt about the company’s ability to continue as a going concern. It warned that failure to obtain financing could require restructuring, divestitures or bankruptcy.
- Financing and dilution: A $1.2 million, 10% convertible-debenture issuance had $975,000 outstanding at March 31; its maturity was extended to September 30, 2012. Conversion terms include market-price-based pricing. The company also had an equity drawdown facility with Ascendiant of up to $3 million, subject to conditions, share-price and trading-volume limits.
- Potential transactions: An April 4, 2012 nonbinding LOI with Sumitomo Precision Products contemplated up to $3 million of stock investment and an SPM license with an initial payment of up to $1 million. Completion, terms and payments remained subject to due diligence and definitive agreements. A nonbinding Javelin LOI contemplated a stock exchange and possible investment; its expiration was extended to June 30, 2012.
- Other commitments and risks: Contractual obligations included $290,195 of operating leases, $2.518 million of debt and $325,000 of planned capital expenditures. Management cited risks from financing access, share issuance, stock-price volatility, acquisitions and key-person dependence. The filing reports no pending legal proceedings expected to have a material adverse effect.
- Controls: Management concluded internal control over financial reporting was ineffective and disclosed a material weakness related to audit-committee financial expertise and independence. The filing also states disclosure controls were not effective, referring in that discussion to an assessment as of September 30, 2011.
- Technology and commercial activity: Visualant reported three U.S. patents issued since September 2011 and described commercialization, licensing and market development as priorities. No quantified revenue or earnings guidance was provided.
Important facts for investors to verify
- Confirm the issuer: this document names Visualant, Incorporated (ticker VSUL.OB), not USBC, Inc.
- Assess near-term liquidity, financing availability and the company’s ability to meet the $650,000 seller payment and other debt maturities.
- Reconcile the reported $2.5 million indebtedness with the separately presented $975,000 convertible notes and evaluate the conversion and dilution terms.
- Check whether the Sumitomo and Javelin LOIs resulted in definitive agreements, funding, license revenue or other completed transactions.
- Review the status of the disclosed material weakness and the effectiveness of financial-reporting controls.
- Evaluate the sustainability of TransTech revenue and margins without the nonrecurring aerospace sale, and the assumptions behind planned SPM commercialization spending.