USBC, Inc. annual report, FY2011

Full document

Business context and reporting period

The supplied filing is Visualant, Inc.’s Form 10-K for the fiscal year ended September 30, 2011—not a USBC, Inc. filing or a quarterly report. Visualant develops Spectral Pattern Matching (SPM) optical authentication technology and operates TransTech Systems, a security-products distributor acquired in June 2010. TransTech generated the reported revenue; the filing says Visualant had no SPM revenue.

Financial performance and position

  • Revenue: $9.14 million, up $6.59 million (259%) from $2.54 million in fiscal 2010. The increase largely reflects including more of TransTech’s results after its acquisition.
  • Profitability: Gross profit was $1.57 million, a 17.1% gross margin, versus $447,000 and 17.6% in 2010. Operating loss was $2.26 million (24.7% of revenue), compared with $1.02 million in 2010. Net loss was $2.40 million, or $0.06 per share, versus $1.15 million, or $0.04 per share.
  • Expenses and unusual items: SG&A rose to $3.69 million from $1.38 million. Management attributed the increase to business expansion, including personnel, professional fees, investor relations, legal costs and TransTech expenses. Fiscal 2011 included $1.20 million of noncash expenses, as described in MD&A.
  • Cash flow: Operating activities used $1.31 million; investing activities used $108,000; financing activities provided $1.43 million. Cash increased by only $8,000 to $92,313.
  • Liquidity and debt: Current assets were $1.66 million and current liabilities $4.87 million, a working-capital deficit of approximately $3.2 million. The debt schedule reports $2.55 million of notes payable and long-term debt, including $1.54 million due within one year. Separately, the balance sheet reports $1.18 million of current convertible notes. The filing’s stated $2.6 million total indebtedness does not clearly reconcile these amounts.
  • Other balance-sheet data: Total assets were $4.31 million and stockholders’ deficit was $1.61 million. Common shares issued and outstanding were 49.1 million at September 30; the filing reports 53.45 million as of November 29, 2011.

Material changes versus the prior comparable period

  • Revenue and gross profit rose substantially, principally because fiscal 2011 included a longer period of TransTech operations than fiscal 2010.
  • Net loss more than doubled, from $1.15 million to $2.40 million, while SG&A and interest expense increased.
  • Operating cash use increased from $441,000 to $1.31 million. Cash remained very limited despite equity and debt financing.
  • Visualant acquired RATLab-related SPM assets in June 2011 for stock and cash consideration, and announced its first SPM patent in September 2011.

Outlook, risks and contingencies

  • Going concern: The auditor’s report states that substantial doubt exists about Visualant’s ability to continue as a going concern, citing the need for additional working capital and debt service. Management anticipated operating losses for the foreseeable future. The statements contain no adjustments that might result if the company cannot continue as a going concern.
  • Financing and dilution: The company said it needed additional financing to support operations, repay debt and pursue acquisitions, with no assurance funding would be available. A May 2011 financing involved $1.2 million principal of 10% convertible debentures, issued for approximately $1.0 million before fees, plus warrants. The company also had a $3 million equity drawdown facility, subject to trading, registration and other conditions; the filing warns it might not be able to access the full amount. Conversions, warrants and other share issuances could materially dilute shareholders.
  • Acquisition plans: Eagle Technologies remained a proposed acquisition, with the letter of intent extended to December 31, 2011. Management described potential additional revenue of about $1 million initially and $3–$4 million within two years if completed; these are projections, not realized results. The proposed transaction remained subject to due diligence, approvals and other conditions.
  • SPM commercialization: The filing describes licensing and product commercialization plans, including an exclusive environmental-applications license with Javelin. It does not report SPM sales, and future commercialization and royalty income are uncertain.
  • Controls and governance: The filing says disclosure controls were not effective and identifies a material weakness involving audit committee financial expertise and independence. A separate management report in the filing says internal control over financial reporting was effective; this apparent inconsistency merits attention. The auditor did not audit internal control effectiveness.
  • Other risks: The filing identifies volatile share price, penny-stock trading restrictions, customer and vendor concentration, acquisition integration risk, dependence on key personnel and limited insurance. It reports no pending legal proceedings expected to have a material adverse effect.

Most important facts for investors to verify

  1. Confirm the issuer identity: the supplied filing names Visualant, Inc., while the request metadata names USBC, Inc.
  2. Reconcile the reported $2.55 million debt schedule, $1.18 million current convertible notes and management’s approximately $2.6 million indebtedness figure; verify maturities and repayment status.
  3. Assess current liquidity, subsequent financing and debt payments, and whether the company obtained sufficient funding to address the auditor’s going-concern warning.
  4. Check actual share issuance and dilution from convertible debentures, warrants and the equity drawdown facility after September 30, 2011.
  5. Verify whether the Eagle acquisition closed and compare realized results with management’s projections; also assess SPM commercialization and Javelin license performance.
  6. Clarify the conflicting statements on controls and the status of remediation of the disclosed material weakness.