Business context and reporting period
The supplied filing is Visualant, Incorporated’s Form 10-Q for the quarter ended December 31, 2015, not a filing identified as USBC, Inc. It reports consolidated results, including TransTech Systems, a distributor of identification and security products that generated substantially all revenue. Visualant is developing its ChromaID light-based identification and authentication technology; ChromaID had generated only limited revenue.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 |
|---|---|---|
| Revenue | $1.285 million | $1.843 million |
| Gross profit / margin | $198,122 / 15.4% | $297,764 / 16.2% |
| Operating loss | $630,047 | $474,826 |
| Net loss | $2.012 million | $3.157 million |
| Basic and diluted loss per share | $1.73 | $2.82 |
| Cash used in operating activities | $548,928 | $340,771 |
At December 31, cash was $141,059; current assets were $975,407 and current liabilities were $9.693 million. Stockholders’ deficit was $7.258 million. The company reported a working-capital deficit of approximately $4.666 million excluding its $4.051 million warrant derivative liability. Current notes payable and long-term-debt current portion totaled $1.386 million; convertible notes payable were $479,000. All reported debt maturities were within twelve months.
Financing activities provided $607,721, primarily from $370,000 of convertible notes and $221,457 drawn on a line of credit. Cash increased by $58,793 during the quarter. The $1.346 million loss from changes in warrant derivative liabilities was a major noncash expense.
Material changes versus the prior comparable period
- Revenue fell 30.3%, which management attributed mainly to lower TransTech sales of products from one large vendor. Gross profit declined 33.6%, and gross margin decreased from 16.2% to 15.4%.
- Operating loss widened by approximately $156,000. Selling, general and administrative expense rose $83,000, including higher investor-relations and consulting costs; research and development expense declined $27,000.
- Net loss improved by approximately $1.145 million, principally because the derivative-liability loss was smaller than in the prior-year quarter—not because operations improved.
- Operating cash use increased by approximately $208,000 year over year.
Outlook, risks, contingencies and unusual items
- Management expected continuing losses while commercializing ChromaID and stated that additional financing was necessary to fund operations, repay debt and implement its business plan. The filing’s audited 2015 financial statements included substantial doubt about the company’s ability to continue as a going concern.
- The filing says cash on hand would fund operations through “March 31, 2015” in one passage, but through March 31, 2016 elsewhere. The first date precedes this quarter and appears inconsistent; the filing text does not clarify the discrepancy.
- The $410,624 Capital Source borrowing was due when the facility expired June 12, 2016 unless renewed; availability under the facility was reported as $6,000 at quarter-end. Two $600,000 related-party notes matured March 31, 2016 and could result in a second lien if not repaid or converted. Umpqua Bank debt of $199,935 was extended to December 31, 2016.
- Subsequent events: the company disclosed $165,000 of 10% convertible notes issued February 4, 2016, with $128,500 received net of fees, and repayment of the Vis Vires note for $114,979. The repayment date is printed as February 6, 2015, although described as subsequent to December 31, 2015; verify the intended year.
- The proposed $10 million public offering and Nasdaq listing had been delayed, with no assurance of completion. New equity financing could dilute existing holders; debt or discounted convertible financing could add repayment, security and dilution risks.
- Disclosure controls were judged ineffective because of a material weakness: the audit committee lacked a financial expert. The filing reported no material legal proceedings outside routine litigation and no material off-balance-sheet arrangements.
- TransTech depended on a concentrated vendor base: four major vendors accounted for approximately 73% of its revenue. One customer represented 14.4% of consolidated quarterly revenue; one customer represented 32.0% of receivables at quarter-end.
- ChromaID’s liquid kit was described as a prototype, despite an earlier anticipated availability date of fall 2015. The filing does not provide a clear update on whether it became available.
Most important facts an investor should verify
- Confirm the issuer identity: this source is Visualant, Incorporated, whereas the request metadata names USBC, Inc.
- Determine current funding runway, whether the cited cash-sufficiency date was intended to be March 31, 2016, and how near-term maturities were met.
- Verify the status and terms of the delayed public offering, subsequent convertible notes, and any related-party debt repayment, extension or conversion.
- Assess whether the revenue decline tied to a major TransTech vendor and customer/vendor concentration continued, and whether margins recovered.
- Seek an update on ChromaID commercialization, customer adoption, licensing revenue and the liquid Lab Kit.
- Check whether the audit-committee financial-expert deficiency and other internal-control weaknesses were remediated.