Filing summary
Entity and period: The supplied filing is Visualant, Incorporated’s Form 10-Q, not a filing for USBC, Inc. It covers the three months ended December 31, 2016, Visualant’s fiscal first quarter, and was signed February 21, 2017. Financial statements are unaudited except where noted.
Business context
Visualant develops ChromaID, a light-based technology intended to identify and authenticate materials, and owns TransTech Systems, a distributor of identification products that generates substantially all reported revenue. ChromaID commercialization remains early-stage and has produced minimal revenue. The company reported ten granted patents and 20 pending applications.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2016 | Comparable 2015 quarter |
|---|---|---|
| Revenue | $1.149 million | $1.285 million |
| Gross profit / margin | $190,358 / 16.6% | $198,122 / 15.4% |
| Research and development | $40,608 | $91,962 |
| Selling, general and administrative | $1.791 million | $736,207 |
| Operating loss | $1.641 million | $630,047 |
| Net loss | $2.108 million | $2.012 million |
| Basic and diluted loss per share | $0.65 | $1.73 |
| Cash used in operations | $573,228 | $548,928 |
Cash was $180,847 at quarter-end, down from $188,309 at September 30, 2016. Current assets were $1.044 million and current liabilities were $5.500 million. Management reported a working-capital deficit of approximately $3.893 million excluding the $563,000 derivative liability; including it, the balance-sheet shortfall was approximately $4.455 million. Total assets were $1.856 million, and stockholders’ deficit was $3.643 million.
Current liabilities included $2.099 million of trade payables, $1.083 million of accrued expenses due to related parties, $555,000 of convertible notes, and $1.100 million of current notes payable and long-term debt. All reported long-term debt was classified as current. Related parties owed by or affiliated with CEO Ronald Erickson were owed approximately $1.560 million in total, including advances, expenses and compensation.
Financing activities provided $565,000, primarily from $300,000 of convertible-note proceeds and $300,000 from common and preferred stock, partly offset by $35,000 of line-of-credit repayments. Noncash charges and adjustments materially affected results, including $484,000 of goodwill impairment, $121,000 of receivable-loss provision, $417,000 of derivative-liability loss, and $207,000 of stock issued for services and expenses.
Changes versus the comparable period
- Revenue fell 10.6%, attributed to lower TransTech product sales. Gross profit declined modestly, but gross margin increased to 16.6% from 15.4%.
- SG&A rose by approximately $1.055 million, principally reflecting goodwill impairment, a disputed-customer receivable reserve, a BioMedx investment write-down, and higher business-development, investor-relations, consulting and legal costs.
- Operating loss widened substantially. Net loss increased less sharply because the derivative-liability loss was lower than in the prior-year quarter ($417,432 versus $1.346 million).
- Research and development expense decreased to $40,608; management attributed the reduction partly to lower commercialization spending and said RATLab no longer provided services.
- Goodwill declined from $983,645 to $500,000 after a $483,645 impairment tied to TransTech. Accounts receivable, net, fell to $635,471 from $808,955, while the allowance increased to $175,000 from $55,000.
Outlook, risks and unusual items
Management said cash on hand was expected to fund operations only through February 28, 2017, and that additional financing was needed to fund operations, execute the business plan and pay debts. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management warned that unavailable or unacceptable financing could require restructuring, divestitures, reduced development, or bankruptcy. No specific revenue or profitability guidance was provided; losses were expected to continue.
- The company intended to raise up to $2.5 million gross through a best-efforts Series D offering, but gave no assurance of completing it. It reported 375,000 Series D shares issued through February 21, 2017.
- Near-term maturities and repayment needs were significant. The Capital Source facility was renewed for six months, with the remaining $300,136 balance due by June 12, 2017 unless renewed. Related-party notes totaling $600,000 were due March 31, 2017; the filing also describes subsequent extensions. The Umpqua loan matures December 31, 2017.
- On November 1, 2016, Visualant paid $260,000 for a BioMedx convertible note with $286,000 principal and received shares as partial consideration. Management valued the note and BioMedx shares at zero at quarter-end because repayment depended on BioMedx obtaining financing; the filing describes a full reserve. If unpaid, Visualant had a right to convert the note into 51% of BioMedx.
- Customer concentration and collection risk were present: one customer represented 31.9% of quarter-end receivables, had not paid since December 31, and was the subject of a dispute. The company reserved $120,000 related to the account.
- Disclosure controls were deemed ineffective. Identified material weaknesses included lack of an audit committee financial expert, delinquent SEC filings, insufficient segregation of financial-reporting duties, and issues recording equity transactions. Management said it was working to address them.
- Other risks highlighted include ChromaID’s uncertain market acceptance, reliance on partners and suppliers, TransTech vendor concentration, potential dilution from preferred stock and warrants, and possible regulatory approval for future medical applications. The company reported no pending material legal proceeding outside routine litigation.
Important facts for investors to verify
- Confirm the filing’s issuer: the document identifies Visualant, Incorporated (OTCQB: VSUL), not USBC, Inc., and covers the quarter ended December 31, 2016.
- Reconcile warrant and potential-share counts: the notes report 4,827,020 warrants outstanding, while other sections cite 4,494,080; the stated potential common shares also vary by section.
- Confirm the exact BioMedx reserve and expense recognized: the filing describes a $260,000 cash purchase, $286,000 note principal, a full-value reserve, and a $250,000 impairment expense in management’s discussion.
- Verify the status and terms of the Series D financing, required preferred-share authorization, and subsequent related-party debt extensions.
- Assess liquidity after the stated February 28, 2017 cash runway, near-term debt maturities, and the going-concern warning.
- Review the customer dispute and receivable collectability, along with remediation progress for the disclosed internal-control weaknesses.