Filing summary
Entity and period: The supplied filing is Visualant, Incorporated’s Form 10-Q, not a filing identified as USBC, Inc. It covers the quarter and nine months ended June 30, 2014; the quarter is Visualant’s fiscal third quarter. Financial statements are unaudited.
Business context and results
Visualant develops ChromaID optical scanning technology and sells identification, authentication, and security products through its TransTech subsidiary. TransTech generated most revenue; ChromaID commercialization remained at an early stage. The company reported shipping 20 ChromaID F12 Lab Kits to inventors in IDMC’s network during December 2013 and January 2014.
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Revenue | $2.021 million, down 1.9% year over year | $5.923 million, down 6.5% |
| Gross profit / margin | $311,180 / 15.4%, versus 20.3% | $957,523 / 16.2%, versus 24.1% |
| Operating loss | $635,399 | $1.990 million |
| Net income (loss) attributable to common shareholders | $1.337 million income, or $0.01 per share | $1.239 million loss, or $(0.01) per share |
| Cash used in operating activities | Not presented for the quarter | $901,522 |
Quarterly net income chiefly reflected a $1.997 million noncash gain from remeasuring warrant derivative liabilities, despite an operating loss. For the nine-month period, the comparable warrant remeasurement was a gain of $817,941. Lower year-over-year revenue primarily reflected the completion of Sumitomo license-fee revenue recognition in May 2013; higher TransTech sales partly offset the decline. Lower gross margins also reflected the absence of that license revenue. Management attributed expense reductions in part to lower R&D, legal, stock-compensation, and TransTech costs.
Financial position and liquidity
- At June 30, 2014, cash was $78,837, down from $747,129 at September 30, 2013. Total assets were $3.466 million, compared with $4.629 million.
- Current liabilities were $7.095 million, including $2.324 million trade accounts payable, $3.366 million warrant derivative liability, and $985,128 of current debt. Stockholders’ deficit was $3.702 million.
- Management reported a $2.162 million working-capital deficit excluding the warrant derivative liability. The accumulated deficit was $21.777 million.
- Nine-month operating cash use was $901,522; investing activities provided $3,125. The cash-flow statement reports $230,105 provided by financing activities, including $500,000 in note proceeds offset by $267,460 shown as a line-of-credit outflow. Management’s discussion describes financing cash flow as “used” rather than “provided”; investors should reconcile this wording.
- The $481,863 BFI secured credit-facility balance was due when the facility expired December 11, 2014 unless renewed. The facility had $80,589 of availability at June 30. The $200,000 Umpqua note matured December 31, 2014. Related-party notes totaling $500,000 were extended to September 30, 2014 after quarter-end, with a second lien on company assets if not repaid or converted on acceptable terms.
Outlook, risks, and unusual items
- Management expected operating losses to continue while commercializing ChromaID and said additional financing would be needed. It cautioned that unavailable or unacceptable financing could require restructuring or divestiture. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The Sumitomo joint development agreement expired December 31, 2013; its $1 million license fee had already been fully recognized. Management identified ChromaID product sales, licensing, royalties, and related services as expected future revenue sources, but provided no quantified forecast.
- The June 2013 private placement and IDMC warrant include down-round provisions and were accounted for as derivative liabilities. Warrant remeasurement materially affected reported earnings. At June 30, outstanding options covered 13.1 million shares and warrants covered 128.6 million shares; common shares outstanding were 167.2 million at August 14, 2014.
- TransTech depended on four major vendors for approximately 70% of its revenue. One customer represented 10.1% of nine-month consolidated revenue; one customer represented 16.4% of receivables at June 30. The filing reports no pending legal proceedings expected to have a material adverse effect.
- Management concluded disclosure controls were not effective because the audit committee lacked a financial expert, a disclosed material weakness. It said it expected to appoint an independent audit committee financial expert.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Visualant, Inc., despite the request metadata naming USBC, Inc.
- Reconcile the financing cash-flow description and verify near-term repayment, extension, or renewal of debt and the related-party note terms.
- Assess cash runway, financing availability, and the going-concern disclosure against subsequent events and later filings.
- Review the warrant derivative valuation and the noncash gain’s contribution to quarterly profit, including the filing’s warrant-liability disclosures.
- Track ChromaID commercial adoption and licensing progress, TransTech margins and vendor concentration, and potential dilution from outstanding warrants and options.