Visualant, Inc. — Form 10-Q Summary
Entity note: The filing identifies the registrant as Visualant, Inc., not USBC, Inc. The reporting period was the three months ended December 31, 2012, Visualant’s fiscal first quarter. The consolidated statements are unaudited.
Business context and results
Visualant develops patented Spectral Pattern Matching (SPM) and ChromaID technology and, through subsidiary TransTech, sells security and authentication products. The quarter’s revenue growth included license revenue from Sumitomo Precision Products (SPP), with which Visualant has a development agreement and an exclusive license arrangement for specified Asian territories.
| Metric | Q1 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $2.055 million | $1.813 million |
| Gross profit / margin | $533,395 / 26.0% | $323,248 / 17.8% |
| Operating loss | $683,428 | $511,580 |
| Net loss | $700,936 | $554,866 |
| Net loss attributable to common shareholders | $707,619 | $559,621 |
| Basic and diluted loss per share | $0.01 | $0.01 |
| Cash used in operating activities | $559,137 | $77,478 |
Financial condition and period-over-period changes
- Revenue increased 13.3%; management attributed the increase to SPP license revenue. Gross profit rose 65.0%, and gross margin improved about 8.2 percentage points.
- Operating expenses rose: research and development increased to $166,379 from $39,000 as SPM commercialization and SPP development work advanced; selling, general and administrative expense increased to $1.050 million from $795,828. Management cited business-development, public-relations and investor-relations activity.
- Despite stronger revenue and gross profit, the operating loss widened to $683,428 from $511,580, and net loss widened to $700,936 from $554,866. Interest expense declined to $40,265 from $58,538. The company reported $145,000 of non-cash expenses in the quarter.
- Cash was $602,077 at December 31, down from $1.141 million at September 30. Current assets were $2.221 million and current liabilities $4.936 million, a working-capital deficit of about $2.715 million. Accounts payable-trade rose to $1.906 million from $1.594 million; inventory rose to $710,808 from $344,692.
- Total debt in the debt note was $1.552 million, mostly current; the balance sheet also reported $650,000 of current convertible notes. Cash used in operations was $559,137. Investing activities used $2,620. The cash-flow statement reports financing cash provided of $22,669, and cash declined by $539,088.
- Common shares outstanding were 94,428,058 at December 31, versus 90,992,954 at September 30. The filing reports 109,928,606 shares outstanding as of February 11, 2013.
Outlook, liquidity, risks and unusual items
- Management said additional financing is needed to fund the business plan and meet debt obligations, and expected operating losses to continue for the foreseeable future. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Financing may not be available on acceptable terms, or at all; failure to obtain it could require restructuring or divestiture.
- Near-term obligations disclosed include $1 million due to James Gingo on June 8, 2013, $550,000 for warrant repurchases due March 31, 2013, and an $850,000 note under the Additional Investment Rights (AIR) termination agreement, payable in two $425,000 installments on June 30 and September 30, 2013, plus interest. The filing’s stated total indebtedness and obligation schedules should be reconciled with these subsequent-event commitments.
- After quarter-end, Gemini and Ascendiant converted their remaining debenture principal and accrued interest into shares at $0.05 per share; the debentures were fully converted by January 28, 2013. The company also repurchased the Ascendiant warrant for $300,000 due March 31, extended Gemini warrant-purchase payment to that date, and agreed to the $850,000 AIR termination note. These transactions increase cash requirements and share dilution exposure.
- An Ascendiant equity line had $2,516,859 of stated availability as of February 11, 2013, but draws depend on stock price and trading volume. Equity issuance, conversion rights, options and warrants could materially dilute existing holders. The company had 5.92 million options outstanding; an increase in the plan authorization from 7 million to 14 million shares was subject to shareholder approval.
- Management concluded disclosure controls and internal control over financial reporting were not effective as of December 31, 2012, citing a material weakness and the absence of an audit committee financial expert. Management said it expected to appoint an independent director with that expertise.
- The filing reports no pending legal proceedings expected to have a material adverse effect. It provides no quantified earnings or revenue guidance. It describes commercialization priorities, including completing development work with SPP, expanding markets and developing products and licensing opportunities.
Important facts for investors to verify
- Confirm the registrant identity: the supplied metadata says USBC, Inc., while this filing is for Visualant, Inc.
- Reconcile financing cash flow: the cash-flow statement shows $22,669 provided, while MD&A describes approximately $23,000 used.
- Confirm the timing, funding source and payment status of warrant-repurchase and AIR-note installments, alongside the Gingo debt maturity and other current liabilities.
- Assess the practical availability and dilution cost of the Ascendiant equity line and other potential share issuances, including post-quarter conversions.
- Review progress in SPP commercialization and whether the SPP license and development arrangements can generate recurring revenue sufficient to reduce losses and cash burn.
- Track remediation of the disclosed material weakness and the company’s ability to raise working capital and address the going-concern uncertainty.