Filing summary
Registrant and period: The filing identifies the registrant as Visualant, Inc. (OTCQB: VSUL), not USBC, Inc. It is a Form 10-K for the fiscal year ended September 30, 2015; it does not report a separate 2015 fourth-quarter period.
Business context
Visualant is developing ChromaID, a light-based technology intended to identify and authenticate materials. Its subsidiary TransTech, a distributor of identification and security products, generated substantially all company revenue. ChromaID was in early commercialization, with limited revenue from lab-kit sales. The company reported nine granted patents and 21 pending applications in its business discussion.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $6.291 million | $7.983 million |
| Gross profit / margin | $1.016 million / 16.2% | $1.289 million / 16.1% |
| Operating loss | $2.330 million | $2.561 million |
| Net loss | $2.631 million | $1.017 million |
| Operating cash flow | $(240,000) | $(1.379) million |
Revenue fell 21.2%, mainly because TransTech sales declined following reduced sales of one major vendor’s products. Gross margin was broadly stable. The net loss widened largely because FY2014 included a $1.605 million gain on remeasurement of warrant derivative liabilities; FY2015 recorded a $108,000 loss on that item. Research and development spending declined to $363,000 from $671,000.
At September 30, 2015, the audited balance sheet showed cash of $82,266, current assets of $948,000, current liabilities of $7.839 million, total assets of $2.461 million, and stockholders’ deficit of $5.378 million. Management separately reported a working-capital deficit of approximately $4.186 million excluding warrant derivative liabilities. The balance sheet reported a $2.705 million derivative liability.
Cash used in operations was $240,000; investing activities provided $21,000 and financing activities provided $230,000. The filing’s MD&A, however, states cash was $828,000, conflicting with the audited balance-sheet figure of $82,266; the filing text does not provide a clear reconciliation.
Debt, liquidity and capital
Year-end notes payable and long-term debt, all classified as current, totaled $1.165 million: $364,757 under the Capital Source facility, $199,935 owed to Umpqua Bank, and $600,000 in related-party notes. The filing also describes approximately $1.653 million owed to CEO Ronald Erickson or affiliated entities, including advances and unpaid expenses or compensation, and cites approximately $2.192 million of loan obligations requiring repayment in the near term. These figures cover different debt and related-party categories; the filing does not clearly reconcile them.
Capital Source’s facility was due to expire December 12, 2015, with $364,757 outstanding; Umpqua and the related-party notes were scheduled to mature December 31, 2015. The company raised $350,000 through Series A preferred stock and received $173,000 in convertible-note proceeds during FY2015. As of November 3, 2015, it reported commitments from debtors to convert $1 million into common stock in connection with a proposed Nasdaq listing. A proposed $10 million public offering had been delayed, with no assurance it would be completed.
Outlook, risks and unusual items
- Management expected operating losses to continue and said available cash would fund operations only through at least December 2015. The auditor’s report included a going-concern explanatory paragraph, citing recurring losses and substantial doubt about the company’s ability to continue without additional working capital.
- ChromaID commercialization remained uncertain: the company reported minimal product revenue, and adoption depends on customer validation, successful licensing and increased sales. A liquid-analysis lab kit was described as a prototype, with availability anticipated in fall 2015; the filing does not confirm whether that milestone was achieved.
- TransTech depended on a concentrated vendor base: four major vendors accounted for approximately 73% of its revenue. Revenue also had customer concentration, including one customer representing 11.1% of consolidated revenue.
- Management concluded disclosure controls were ineffective and identified a material weakness related to the absence of an audit committee financial expert. The filing also notes material weaknesses in internal control over financial reporting.
- The company effected a 1-for-150 reverse stock split on June 17, 2015. It had 1,155,991 common shares outstanding at year-end, plus substantial outstanding warrants and options. The filing warns that future financing may dilute existing holders; certain warrants have price-adjustment provisions.
- The filing describes related-party borrowing from the CEO’s affiliates, a derivative-liability accounting impact, and a delayed public offering. It reports no material pending legal proceeding outside ordinary routine litigation.
Important facts for investors to verify
- Confirm the issuer identity: the supplied metadata says USBC, Inc., while the filing names Visualant, Inc. and ticker VSUL.
- Reconcile the $82,266 audited cash balance with the $828,000 figure in MD&A, and confirm subsequent cash and financing available after the filing date.
- Check the status of the December 2015 facility and loan maturities, the related-party balances, and the proposed $1 million debt conversion and $10 million offering.
- Verify actual ChromaID customer uptake, licensing or royalty revenue, and whether the liquid lab kit reached customers.
- Review the outstanding warrant, option and convertible-security terms, potential dilution, and remediation of the disclosed control weaknesses.