UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 2016
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TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from _______ to ________
Commission File
number 000-30262
VISUALANT, INCORPORATED
(Exact name of registrant as specified in charter)
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Nevada
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90-0273142
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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500
Union Street, Suite 420, Seattle, Washington
USA
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98101
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(Address of principal executive offices)
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(Zip Code)
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206-903-1351
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(Registrant's telephone number, including area
code)
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N/A
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(Former name, address, and fiscal year, if changed since last
report)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
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No
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Indicate by checkmark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer (See the
definitions of “large accelerated filer,”
“accelerated filer,” “non-accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act).
Large accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes
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No
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The number of shares of common stock, $.001 par value, issued and
outstanding as of February 21, 2017: 3,750,962
shares
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TABLE OF CONTENTS
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Page Number
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PART I
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FINANCIAL INFORMATION
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3
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ITEM 1
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Financial Statements (unaudited except as noted)
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3
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Consolidated Balance Sheets as of December 31, 2016 and September
30, 2016 (audited)
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3
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Consolidated Statements of Operations for the three months
ended December 31, 2016 and 2015
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4
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Consolidated Statements of Cash Flows for the three months
ended December 31, 2016 and 2015
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5
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Notes to the Financial Statements
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6
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ITEM 2
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Management's Discussion and Analysis of Financial Condition and
Results of Operation
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24
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ITEM 3
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Quantitative and Qualitative Disclosures About Market
Risk
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34
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ITEM 4
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Controls and Procedures
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34
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PART II
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OTHER INFORMATION
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35
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ITEM 1A.
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Risk Factors
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35
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ITEM 2
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Unregistered Sales of Equity Securities and Use of
Proceeds
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44
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ITEM 5
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Other Information
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44
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ITEM 6
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Exhibits and Reports on Form 8-K
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44
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SIGNATURES
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46
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ITEM 1.
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FINANCIAL STATEMENTS
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VISUALANT, INCORPORATED AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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The accompanying notes are an integral part of these consolidated
financial statements.
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VISUALANT, INCORPORATED AND SUBSIDIARIES
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STATEMENTS OF OPERATIONS
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The
accompanying notes are an integral part of these consolidated
financial statements.
VISUALANT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated
financial statements.
VISUALANT, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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GOING CONCERN
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The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $2,107,561, $1,746,495 and
$2,631,037 for the three months ended December 31, 2016 and the
years ended September 30, 2016 and 2015, respectively. Net cash
used in operating activities was $(573,228), $(3,373,734) and
$(239,877) for the three months ended December 31, 2017 and the
years ended September 30, 2016 and 2015,
respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of December 31, 2016, the
Company’s accumulated deficit was $29,740,056. The
Company has limited capital resources, and operations to date have
been funded with the proceeds from private equity and debt
financings and loans from Ronald P. Erickson, our Chief Executive
Officer, or entities with which he is affiliated. These conditions
raise substantial doubt about our ability to continue as a going
concern. The audit report prepared by the Company’s
independent registered public accounting firm relating to our
financial statements for the year ended September 30, 2016 includes
an explanatory paragraph expressing the substantial doubt about the
Company’s ability to continue as a going
concern.
We
believe that our cash on hand will be sufficient to fund our
operations until February 28, 2017.
We
need additional financing to implement our business plan and to
service our ongoing operations and pay our current debts. There can
be no assurance that we will be able to secure any needed funding,
or that if such funding is available, the terms or conditions would
be acceptable to us. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
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2.
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ORGANIZATION
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Visualant, Incorporated (the “Company,”
“Visualant, Inc.” or “Visualant”) was
incorporated under the laws of the State of Nevada in 1998.
The Company has authorized 105,000,000 shares of capital stock, of
which 100,000,000 are shares of voting common stock, par value
$0.001 per share, and 5,000,000 are shares preferred stock, par
value $0.001 per share.
On July 21, 2015, the Company filed with the Nevada Secretary of
State an Amended and Restated Certificate of Designations,
Preferences and Rights for its Series A Convertible Preferred
Stock. Among other things, the Amended and Restated
Certificate
changed the conversion price and the stated
value from $0.10 (pre-reverse stock split) to $30.00
(post-reversestock split), and added a provision adjusting the
conversion price upon the occurrence of certain events. As a result
of the foregoing, the Company currently has 23,334 Series A
Preferred Stock issued and outstanding, with a conversion price of
$0.70 per share.
On
August 11, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series C Convertible Preferred Stock. The Certificate
designated 1,250,000 shares as Series C Convertible Preferred Stock
with a par value of $.001 per share. The Series C Convertible
Preferred Stock is convertible into common stock at $0.70 per
share, with certain adjustments as set forth in the Certificate. On
August 31, 2016, the Company filed with the State of Nevada a
Certificate of Correction to the Certificate of Designations of
Preferences, Powers, Rights and Limitations for the Series C
Convertible Preferred Stock to correct the number of authorized
shares. The Certificate authorized 1,785,715 shares of Series C
Preferred Stock with a par value of $.001 per share. The Series C
Convertible Preferred Stock is convertible into common stock at
$0.70 per share, with certain adjustments as set forth in the
Certificate. As a result of the foregoing, the Company currently
has 1,785,715 shares of Series C Preferred Stock issued and
outstanding, with a conversion price of $0.70 per
share.
On
November 8, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series D Convertible Preferred Stock. The Certificate
designated up to 3,906,250 shares with a par value of $.001 per
share. The Series D Convertible Preferred Stock is convertible into
common stock at $0.80 per share, with certain adjustments as set
forth in the Certificate. The Company has issued 375,000 shares of
Series D Convertible Preferred Stock through February 21, 2017, and
intends to issue up to 3,125,000 Series D Shares (and an equal
number of warrants) for gross proceeds of $2,500,000 pursuant on a
“best efforts” basis.
Since 2007 the Company has been focused primarily on the
development of a proprietary technology which is capable of
uniquely identifying and authenticating almost any substance using
light at the “photon” level to detect the unique
digital “signature” of the substance. The Company calls
this its “ChromaID™” technology.
In
2010, the Company acquired TransTech Systems, Inc. as an adjunct to
its business. TransTech is a distributor of products for employee
and personnel identification. TransTech currently provides
substantially all of the Company’s revenues.
The Company is in the process of commercializing
its ChromaID™ technology. To date, the Company has entered
into License Agreements with Sumitomo Precision Products Co., Ltd.
and Intellicheck, Inc. In addition, it has a strategic relationship
with
Xinova.,
formerly
Invention Development Management Company, a subsidiary of
Intellectual Ventures.
The
Company believes that its commercialization success is dependent
upon its ability to significantly increase the number of customers
that are purchasing and using its products. To date the Company has
generated minimal revenue from sales of its ChromaID products. The
Company is currently not profitable. Even if the Company succeeds
in introducing the ChromaID technology and related products to its
target markets, the Company may not be able to generate sufficient
revenue to achieve or sustain profitability.
ChromaID was invented by scientists from the University of
Washington under contract with Visualant. The Company has pursued
an intellectual property strategy and have been granted ten
patents. The Company also has 20 patents pending. The Company
possess all right, title and interest to the issued patents. Ten of
the pending patents are licensed exclusively to the Company in
perpetuity by the Company’s strategic partner,
Xinova
In June
2015, the Company effected a 1-for-150 reverse stock split of our
common stock. All warrant, option, share and per share information
in this Form 10-Q gives retroactive effect to the 1-for-150 reverse
split with all numbers rounded up to the nearest whole
share.
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3.
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SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING
STANDARDS
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Basis of Presentation
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The accompanying unaudited
consolidated financial statements include the accounts of the
Company. Intercompany accounts and transactions have been
eliminated. The preparation of these unaudited condensed
consolidated financial statements were prepared in conformity with
U.S. generally accepted accounting principles
(“GAAP”).
Principles of Consolidation
– The consolidated financial statements
include the accounts of the Company and its wholly owned and
majority-owned subsidiaries, TransTech Systems, Inc. Inter-Company
items and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
– The Company classifies highly liquid
temporary investments with an original maturity of three months or
less when purchased as cash equivalents. The Company maintains cash
balances at various financial institutions. Balances at US banks
are insured by the Federal Deposit Insurance Corporation up to
$250,000. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk for
cash on deposit.
Accounts Receivable and Allowance for Doubtful Accounts
– Accounts receivable consist
primarily of amounts due to the Company from normal business
activities. The Company maintains an allowance for doubtful
accounts to reflect the expected non-collection of accounts
receivable based on past collection history and specific risks
identified within the portfolio. If the financial condition of the
customers were to deteriorate resulting in an impairment of their
ability to make payments, or if payments from customers are
significantly delayed, additional allowances might be
required.
Inventories
– Inventories
consist primarily of printers and consumable supplies, including
ribbons and cards, badge accessories, capture devices, and access
control components held for resale and are stated at the lower of
cost or market on the first-in, first-out (“FIFO”)
method. Inventories are considered available for resale
when drop shipped and invoiced directly to a customer from a
vendor, or when physically received by TransTech at a warehouse
location. The Company records a provision for excess and
obsolete inventory whenever an impairment has been identified.
There is a $25,000 reserve for impaired inventory as of December
31, 2016 and September 30, 2016, respectively.
Equipment
– Equipment
consists of machinery, leasehold improvements, furniture and
fixtures and software, which are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives or lease
period of the relevant asset, generally 2-10 years, except for
leasehold improvements which are depreciated over 5-20
years.
Intangible Assets/ Intellectual Property
– The Company amortizes the intangible
assets and intellectual property acquired in connection with the
acquisition of TransTech, over sixty months on a straight - line
basis, which was the time frame that the management of the Company
was able to project forward for future revenue, either under
agreement or through expected continued business
activities. Intangible assets and intellectual property
acquired from RATLab LLC and Javelin are recorded likewise. The
Company performs annual assessments and has determined that no
impairment is necessary. On June 7, 2011, the Company closed the
acquisition of all Visualant related assets of the RATLab LLC,
namely the rights to the medical field of use of the Chroma ID
technology. On July 31, 2012, the Company closed the acquisition of
all rights to the ChromaID technology in the environmental field of
use from Javelin LLC.
Goodwill
– Goodwill is
the excess of cost of an acquired entity over the fair value of
amounts assigned to assets acquired and liabilities assumed in a
business combination. With the adoption of ASC 350, goodwill is not
amortized, rather it is tested for impairment annually, and will be
tested for impairment between annual tests if an event occurs or
circumstances change that would indicate the carrying amount may be
impaired. Impairment testing for goodwill is done at a reporting
unit level. Reporting units are one level below the business
segment level, but are combined when reporting units within the
same segment have similar economic characteristics. Under the
criteria set forth by ASC 350, the Company has one reporting unit
based on the current structure. An impairment loss generally
would be recognized when the carrying amount of the reporting
unit’s net assets exceeds the estimated fair value of the
reporting unit. The Company determined that its goodwill
related to the 2010 acquisition of TransTech Systems was impaired
and recorded an impairment of $483,645 as selling, general and
administrative expenses during the three months ended December 31,
2016.
Long-Lived Assets
– The
Company reviews its long-lived assets for impairment annually or
when changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets under certain
circumstances are reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide
any future service potential to the Company are recorded at the
lower of carrying amount or fair value (less the projected cost
associated with selling the asset). To the extent carrying values
exceed fair values, an impairment loss is recognized in operating
results.
Fair Value Measurements and Financial Instruments
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ASC Topic 820,
Fair Value Measurement and Disclosures
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defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. This topic also establishes a fair
value hierarchy, which requires classification based on observable
and unobservable inputs when measuring fair value. The
fair value hierarchy distinguishes between assumptions based on
market data (observable inputs) and an entity’s own
assumptions (unobservable inputs). The hierarchy
consists of three levels:
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Level 1
– Quoted prices in active markets for identical assets and
liabilities;
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Level 2
– Inputs other than level one inputs that are either directly
or indirectly observable; and.
Level 3
- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
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The
recorded value of other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts
receivable, other current assets, and accounts payable and accrued
expenses approximate the fair value of the respective assets and
liabilities at December 31, 2016 and 2015 based upon the short-term
nature of the assets and liabilities.
Derivative financial instruments -
The Company evaluates all
of its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative
financial instruments, the Company uses a Black-Scholes-Merton
option pricing model to value the derivative instruments at
inception and on subsequent valuation dates. The classification of
derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of
each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on
whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet
date.
Revenue Recognition
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Visualant and TransTech revenue are derived from products and
services. Revenue is considered realized when the products or
services have been provided to the customer, the work has been
accepted by the customer and collectability is reasonably
assured. Furthermore, if an actual measurement of revenue cannot be
determined, the Company defers all revenue recognition until such
time that an actual measurement can be determined. If during the
course of a contract management determines that losses are expected
to be incurred, such costs are charged to operations in the period
such losses are determined. Revenues are deferred when cash has
been received from the customer but the revenue has not been
earned.
Stock Based Compensation
– The Company has share-based compensation
plans under which employees, consultants, suppliers and directors
may be granted restricted stock, as well as options to purchase
shares of Company common stock at the fair market value at the time
of grant. Stock-based compensation cost is measuredby the Company
at the grant date, based on the fair value of the award, over the
requisite service period. For options issued to employees, the
Company recognizes stock compensation costs utilizing the fair
value methodology over the related period of
benefit. Grants of stock options and stock to
non-employees and other parties are accounted for in accordance
with the ASC 505.
Convertible Securities
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Based upon ASC 815-15, we have
adopted a sequencing approach regarding the application of ASC
815-40 to convertible securities issued subsequent to September 30,
2015. We will evaluate our contracts based upon the earliest
issuance date. In the event partial reclassification of contracts
subject to ASC 815-40-25 is necessary, due to our inability to
demonstrate we have sufficient shares authorized and unissued,
shares will be allocated on the basis of issuance date, with the
earliest issuance date receiving first allocation of shares. If a
reclassification of an instrument were required, it would result in
the instrument issued latest being reclassified first.
Net Loss per Share
–
Under the provisions of ASC 260, “Earnings Per Share,”
basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that would then share in the income of the
Company, subject to anti-dilution limitations. The common stock
equivalents have not been included as they are anti-dilutive. As of
December 31, 2016, there were options outstanding for the purchase
of 50,908 common shares, warrants for the purchase of 4,494,080
common shares,
2,184,048 shares of our common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock and up to 332,940 shares of our common
stock issuable upon the exercise of placement agent warrants.
As of December 31, 2015, there were
options outstanding for the purchase of 56,641 common shares,
warrants for the purchase of 893,244 common shares,
11,667 shares of our common stock issuable upon the conversion
of Series A Convertible Preferred Stock, up to 34,031 shares of our
common stock issuable upon the exercise of placement agent warrants
and an unknown number of shares
related to the conversion of $479,000 in convertible promissory
notes which could potentially dilute future earnings per
share.
Dividend Policy
– The
Company has never paid any cash dividends and intends, for the
foreseeable future, to retain any future earnings for the
development of our business. Our future dividend policy will be
determined by the board of directors on the basis of various
factors, including our results of operations, financial condition,
capital requirements and investment
opportunities.
Use of Estimates
– The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards
are currently under study by standard setting organizations and
various regulatory agencies. Due to the tentative and preliminary
nature of those proposed standards, management has not determined
whether implementation of such proposed standards would be material
to the Company’s consolidated financial
statements.
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4.
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DEVELOPMENT OF OUR CHROMAID™ TECHNOLOGY
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The Company is focused primarily on the development of a
proprietary technology which is capable of uniquely identifying and
authenticating almost any substance using light to create, record
and detect the unique digital “signature” of the
substance. The Company calls this its “ChromaID™”
technology.
The Company’s ChromaID™ Technology
The Company has developed a proprietary technology to uniquely
identify and authenticate almost any substance. This patented
technology utilizes light at the photon (elementary particle of
light) level through a series of emitters and detectors to generate
a unique signature or “fingerprint” from a scan of
almost any solid, liquid or gaseous material. This signature of
reflected or transmitted light is digitized, creating a unique
ChromaID signature. Each ChromaID signature is comprised of from
hundreds or thousands of specific data points.
The ChromaID technology looks beyond visible light frequencies to
areas of near infra-red and ultraviolet light that are outside the
humanly visible light spectrum. The data obtained allows the
Company to create a very specific and unique ChromaID signature of
the substance for a myriad of authentication and verification
applications.
Traditional light-based identification technology, called
spectrophotometry, has relied upon a complex system of prisms,
mirrors and visible light. Spectrophotometers typically have a
higher cost and utilize a form factor more suited to a laboratory
setting and require trained laboratory personnel to interpret the
information. The ChromaID technology uses lower cost LEDs and
photodiodes and specific frequencies of light resulting in a more
accurate, portable and easy-to-use solution for a wide variety of
applications. The ChromaID technology not only has significant cost
advantages as compared to spectrophotometry, it is also completely
flexible is size, shape and configuration. The ChromaID scan head
can range in size from endoscopic to a scale that could be the size
of a large ceiling-mounted florescent light fixture.
In
normal operation, a ChromaID master or reference scan is generated
and stored in a database. The Visualant scan head can then scan
similar materials to identify, authenticate or diagnose them by
comparing the new ChromaID digital signature scan to that of the
original or reference ChromaID signature or scan
result.
The following summarizes the Company’s plans for its
Company’s proprietary ChromaID technology. Based on the
Company’s anticipated expenditures on this technology, the
expected efforts of its management and its relationship with Xinova
and the Company’s other strategic partner, Sumitomo Precision
Products, Ltd., the Company expects its ChromaID technology to
provide an increasing portion of its revenues in future years from
product sales, licenses, royalties and other revenue streams., as
discussed further below.
ChromaID: A Foundational Platform Technology
The Company’s ChromaID technology provides a platform upon
which a myriad of applications can be developed. As a platform
technology, it is analogous to a smartphone, upon which an enormous
number of previously unforeseen applications have been developed.
The ChromaID technology is an enabling technology that brings the
science of light and photonics to low cost, real world
commercialization opportunities across multiple industries. The
technology is foundational and as such, the basis upon which the
Company believes a significant business can be built.
As with other foundational technologies, a single application may
reach across multiple industries. The ChromaID technology can, for
example effectively differentiate and identify different brands of
clear vodkas that appear identical to the human eye. By extension
this same technology can identify pure water from water with
contaminants present. It can provide real time detection of liquid
medicines such as morphine that have been adulterated or
compromised. It can detect if jet fuel has water contamination
present. It could determine when it is time to change oil in a deep
fat fryer. These are but a few of the potential applications of the
ChromaID technology based upon extensions of its ability to
identify different clear liquids.
The cornerstone of a company with a foundational platform
technology is its intellectual property. ChromaID was invented by
scientists from the University of Washington under contract with
Visualant. The Company has pursued an intellectual property
strategy and has been granted nine patents. The Company currently
has 20 patents pending. The Company possesses all right, title and
interest to the issued patents. Ten of the pending patents are
licensed exclusively to us in perpetuity by our strategic partner,
Xinova.
Xinova Relationship
In November 2013, the Company entered into a strategic relationship
with Xinova, formerly Invention Development Management Company, a
subsidiary of Intellectual Ventures, a private intellectual
property fund. Xinova has worked to expand the reach and the
potential application of the ChromaID technology and has filed ten
patents base on the ChromaID technology, which it has licensed to
us.
Products
The Company first delivered product, the ChromaID Lab Kit, scans
and identifies solid surfaces. The Company is marketing this
product to customers who are considering licensing the technology.
Target markets include, but are not limited to, commercial paint
manufacturers, pharmaceutical equipment manufacturers, process
control companies, currency paper and ink manufacturers, security
cards, cosmetic companies, scanner manufactures and food processing
companies.
The Company’s second product, the ChromaID Liquid Lab Kit,
scans and identifies liquids. This product is currently in
prototype form. Similar to the Company’s first product, it
will be marketed to customers who are considering licensing the
technology. Rather than use an LED emitter to reflect light off of
a surface that is captured by a photodiode to generate a ChromaID
signature the liquid analysis product shines light through the
liquid (transmissive) with the LEDs positioned on one side of the
liquid sample and the photo detectors on the opposite side. This
device is in a functional state in our laboratory and the Company
anticipates having a Liquid ChromaID Lab Kit available for
customers by the Company during the fall of 2015. Target markets
include, but are not limited to, water companies, petrochemical
companies, pharmaceutical companies, and numerous consumer
applications.
The ChromaID Lab Kits allows potential licensors of our technology
to work with our technology and develop solutions for their
particular application. Our contractual arrangements with Xinova
are described in greater detail below.
The
Company’s next planned product should be an exemplar product
is a prototype that will be produced to address several markets.
The primary purpose of this prototype will be to demonstrate the
technology to prospective business partners, and will consist of a
small, hand held, battery powered, Bluetooth enabled scanning
device. The scanner should wirelessly connect to a smart phone or
tablet to transfer the scanned data. The smart phone application
will include two or three industry specific but generic
applications that allow for the demonstration of the scanning and
matching of the ChromaID signatures. The applications will focus on
drug identification, food safety and liquid detection.
The
prototype device will lend itself to consumer applications and can
be a consumer product as well.
Research and Development
The Company’s research and development efforts are primarily
focused improving the core foundational ChromaID technology and
developing new and unique applications for the technology. As part
of this effort, the Company typically conduct testing to ensure
that ChromaID application methods are compatible with the
customer’s requirements, and that they can be implemented in
a cost effective manner. The Company is also actively involved in
identifying new application methods. Visualant’s team has
considerable experience working with the application of light-based
technologies and their application to various industries. The
Company believes that its continued development of new and enhanced
technologies relating to our core business is essential to its
future success. The Company spent $325,803 and $362,661 during the
years ended September 30, 2016 and 2015, respectively, on research
and development activities.
The Company’s Patents
The Company believes that it’s ten patents, 20 patent
applications, and two registered trademarks, and our trade secrets,
copyrights and other intellectual property rights are important
assets. The Company’s patents will expire at various times
between 2027 and 2033. The duration of the Company’s
trademark registrations varies from country to country. However,
trademarks are generally valid and may be renewed indefinitely as
long as they are in use and/or their registrations are properly
maintained.
The patents that have been granted to Visualant
include:
On August 9, 2011, the Company was issued US Patent No. 7,996,173
B2 entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, the Company was issued US Patent No.
8,076,630 B2 entitled “System and Method of Evaluating an
Object Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The patent expires November 7,
2028.
On December 20, 2011, the Company was issued US Patent No.
8,081,304 B2 entitled “Method, Apparatus and Article to
Facilitate Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 28, 2030.
On October 9, 2012, the Company was issued US Patent No. 8,285,510
B2 entitled “Method, Apparatus, and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 31, 2027.
On February 5, 2013, the Company was issued US Patent No. 8,368,878
B2 entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On November 12, 2013, the Company was issued US Patent No.
8,583,394 B2 entitled “Method, Apparatus and Article to
Facilitate Distributed Evaluation of Objects Using Electromagnetic
Energy by the United States Office of Patents and Trademarks. The
patent expires July 31, 2027.
On
November 21, 2014, the Company was issued US Patent No. 8,888,207
B2 entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks.
The
patent expires February 7, 2033.
On
March 23, 2015, the Company was issued US Patent No. 8,988,666 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks.
The patent expires July 31,
2027.
On May
26, 2015, the Company was issued patent US Patent No. 9,041,920 B2
entitled “Device for Evaluation of Fluids using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks.
The patent
expires March 12, 2033.
On
April 19, 2016, the Company was issued patent US Patent No.
9,316,581 B2 entitled “Method, Apparatus, and Article to
Facilitate Evaluation of Substances Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks.
The patent expires March
12, 2033.
The Company pursues a patent strategy to expand its unique
intellectual property in the United States and other
countries.
Services and License Agreement with Xinova
In November 2013, the Company entered into a strategic relationship
with Xinova, formerly Invention Development Management Company, a
subsidiary of Intellectual Ventures, a private intellectual
property fund. Xinova has worked to expand the reach and the
potential application of the ChromaID technology and has filed ten
patents base on the ChromaID technology, which it has licensed to
us.
The agreement requires Xinova to identify and engage inventors to
develop new applications of Visualant’s ChromaID™
technology, present the developments to us for approval, and file
at least 10 patent applications to protect the developments. Xinova
is responsible for the development and patent costs. The Company
provided the Chroma ID Lab Kits to Xinova at no cost and are
providing ongoing technical support. In addition, to provide time
for this accelerated expansion of its intellectual property the
Company delayed the selling of the ChromaID Lab Kits for 140 days
except for certain select accounts. The Company continued its
business development efforts during this period and have worked
with Xinova and their global business development resources to
secure potential customers and licensees for the ChromaID
technology. The Company shipped 20
ChromaID Lab Kits to
inventors in the Xinova network during December 2013 and January
2014.
The Company has received a worldwide, nontransferable, exclusive
license to the intellectual property developed under the Xinova
agreement during the term of the agreement, and solely within the
identification, authentication and diagnostics field of use, to (a)
make, have made, use, import, sell and offer for sale products and
services; (b) make improvements; and (c) grant sublicenses of any
and all of the foregoing rights (including the right to grant
further sublicenses).
The Company received a nonexclusive and nontransferable option to
acquire a worldwide, nontransferable, nonexclusive license to the
useful intellectual property held by Xinova within the
identification, authentication and diagnostics field of use to (a)
make, have made, use, import, sell and offer to sell products and
services and (b) grant sublicenses to any and all of the foregoing
rights. The option to acquire this license may be exercised for up
to two years from the effective date of the Agreement.
Xinova is providing global business development services to us for
geographies not being pursued by Visualant. Also, Xinova has
introduced the Company to potential customers, licensees and
distributors for the purpose of identifying and pursuing a license,
sale or distribution arrangement or other monetization
event.
The Company granted to Xinova a nonexclusive, worldwide, fully
paid, nontransferable, sublicenseable, perpetual license to our
intellectual property solely outside the identification,
authentication and diagnostics field of use to (a) make, have made,
use, import, sell and offer for sale products and services and (b)
grant sublicenses of any and all of the foregoing rights (including
the right to grant further sublicenses).
The Company granted to Xinova a nonexclusive, worldwide, fully paid
up, royalty-free, nontransferable, non-sublicenseable, perpetual
license to access and use the Company’s technology solely for
the purpose of marketing the aforementioned sublicenses of our
intellectual property to third parties outside the designated
fields of use.
In connection with the original license agreement, the Company
issued a warrant to purchase 97,169 shares of common stock to
Xinova as consideration for the exclusive intellectual property
license and application development services. The warrant has a
current exercise price of $0.70 per share and expires November 10,
2018. The per share price is subject to adjustment based on any
issuances below $0.70 per share except as described in the
warrant.
The Company agreed to pay Xinova a percentage of license revenue
for the global development business services and a percentage of
revenue received from any company introduced to us by Xinova. The
Company also have also agreed to pay Xinova a royalty when the
Company receives royalty product revenue from an Xinova-introduced
company. Xinova has agreed to pay the Company a license fee for the
nonexclusive license of the Company’s intellectual
property.
The term of both the exclusive intellectual property license and
the nonexclusive intellectual property license commences on the
effective date of November 11, 2013, and terminates when all claims
of the patents expire or are held in valid or unenforceable by a
court of competent jurisdiction from which no appeal can be
taken.
The term of the Agreement commences on the effective date until
either party terminates the Agreement at any time following the
fifth anniversary of the effective date by providing at least
ninety days’ prior written notice to the other
party.
5.
AGREEMENTS WITH SUMITOMO PRECISION PRODUCTS CO., LTD.
In May
2012, the Company entered into a Joint Research and Product
Development Agreement (the “Joint Development
Agreement”) with Sumitomo Precision Products Co., Ltd., a
publicly-traded Japanese corporation, for the commercialization of
our ChromaID technology. In March 2013, the Company entered into an
amendment to this agreement, which extended the Joint Development
Agreement from March 31, 2013 to December 31, 2013. The extension
provided for continuing work between Sumitomo and Visualant focused
on advancing the ChromaID technology and market research aimed at
identifying the most significant markets for the ChromaID
technology. This agreement expired December 31, 2013. This
collaborative work supported the development of the ChromaID Lab
Kit. The current version of the technology was introduced to the
marketplace as a part of our ChromaID Lab Kit during the fourth
quarter of 2013.
The
Company also entered into a License Agreement with Sumitomo in May
2012 which provides for an exclusive license for the then-extant
ChromaID technology. The territories covered by this license
include Japan, China, Taiwan, Korea and the entirety of Southeast
Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam,
Singapore and the Philippines). On May 21, 2015, the Company
entered into an amendment to the License Agreement, which,
effective as of June 18, 2014, which eliminated the Sumitomo
exclusivity and provides that if the Company sells products in
certain territories – Japan, China, Taiwan, Korea and the
entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia,
Laos, Vietnam, Singapore and the Philippines) – the Company
will pay Sumitomo a royalty rate of 2% of net sales (excluding
non-recurring engineering revenues) over the remaining term of the
five-year License Agreement (through May 2017).
6.
ACCOUNTS RECEIVABLE/CUSTOMER CONCENTRATION
Accounts receivable were $635,471 and $808,955, net of allowance,
as of December 31, 2016 and September 30, 2016, respectively. The
Company had no customers in excess of 10% of the Company’s
consolidated revenues for the three months ended December 31, 2016.
The Company had one customer (31.9%) with accounts receivable in
excess of 10% as of December 31, 2016. The customer has not made a
payment on the account since December 31, 2016 and the Company
reserved $120,000 during the three months ended December 31, 2016
as selling, general and administrative expenses. The Company
intends to aggressively pursue collection of the
balance.
7.
INVENTORIES
Inventories were $210,717 and $295,218 as of December 31, 2016 and
September 30, 2016, respectively. Inventories consist primarily of
printers and consumable supplies, including ribbons and cards,
badge accessories, capture devices, and access control components
held for resale. There is a $25,000 reserve for impaired inventory
as of December 31, 2016 and September 30, 2016,
respectively.
8.
NOTES RECEIVABLE
On
November 1, 2016, the Company purchased an Original Issue Discount
Convertible Promissory Note from BioMedx, Inc. The Company paid
$260,000 for the Note with a principal amount of $286,000. The Note
matures one year from issuance and bears interest at 5%. The
principal and interest can be converted to Biologic common stock at
the option of the Company. The Company received 150,000 shares of
Pulse Biologics common stock as partial consideration for
purchasing the Note. In addition, if BioMedx does not repay the
Promissory Note, the Company will have the right to convert the
Promissory Note into 51% of the ownership of BioMedx.
In
addition, the Company and Pulse Biologics agreed to negotiate in
good faith to enter into a joint development agreement and
subsequent merger transaction prior to December 31,
2017.
BioMedx
is an early stage company that owns a royalty bearing license, for
medical applications, to certain technology developed by Pulse
Evolution. The Company’s management concluded BioMedx’s
ability to repay Promissory Note is contingent on BioMedx obtaining
additional financing. In addition, BioMedx will require additional
financing to commercialize the licensed technology. Due to the
inherent uncertainty involved in these activities, the
Company’s management has determined the value of the
Promissory Note and BioMedx common stock is zero at December 31,
2016 and recorded a reserve for the full value.
9.
FIXED ASSETS
Fixed assets, net of accumulated depreciation, was $276,213 and
$285,415 as of December 31, 2016 and September 30, 2016,
respectively. Accumulated depreciation was $805,251 and $796,481 as
of December 31, 2016 and September 30, 2016, respectively. Total
depreciation expense, was $9,700 and $18,097 for the three months
ended December 31, 2016 and 2015, respectively. All equipment is
used for selling, general and administrative purposes and
accordingly all depreciation is classified in selling, general and
administrative expenses.
Property and equipment as of December 31, 2016 was comprised of the
following:
|
|
Estimated
|
December
31, 2016
|
||
|
|
Useful
Lives
|
Purchased
|
Capital
Leases
|
Total
|
|
Machinery
and equipment
|
2-10
years
|
$
252,204
|
$
69,581
|
$
321,785
|
|
Leasehold
improvements
|
5-20
years
|
548,612
|
-
|
548,612
|
|
Furniture
and fixtures
|
3-10
years
|
73,977
|
101,260
|
175,237
|
|
Software
and websites
|
3-
7 years
|
35,830
|
-
|
35,830
|
|
Less:
accumulated depreciation
|
|
(634,410
)
|
(170,841
)
|
(805,251
)
|
|
|
$
276,213
|
$
-
|
$
276,213
|
|
Intangible assets as of December 31, 2016 and September 30, 2016
consisted of the following:
|
|
Estimated
|
December
31,
|
September
30,
|
|
|
Useful
Lives
|
2016
|
2016
|
|
|
|
|
|
|
Customer
contracts
|
5
years
|
$
983,645
|
$
983,645
|
|
Technology
|
5
years
|
712,500
|
712,500
|
|
Less:
accumulated amortization
|
|
(1,665,520
)
|
(1,652,395
)
|
|
Intangible
assets, net
|
|
$
30,625
|
$
43,750
|
Total amortization expense was $13,125 and $35,625 for the three
months ended December 31, 2016 and 2015, respectively.
The fair value of the TransTech intellectual property acquired was
$983,645, estimated by using a discounted cash flow approach based
on future economic benefits associated with agreements with
customers, or through expected continued business activities with
its customers. In summary, the estimate was based on a projected
income approach and related discounted cash flows over five years,
with applicable risk factors assigned to assumptions in the
forecasted results. The TransTech intellectual property was fully
amortized as of December 31, 2016.
The fair value of the RATLab intellectual property associated with
the assets acquired was $450,000 estimated by using a discounted
cash flow approach based on future economic benefits. In summary,
the estimate was based on a projected income approach and related
discounted cash flows over five years, with applicable risk factors
assigned to assumptions in the forecasted results. The RATLab
intellectual property was fully amortized as of December 31,
2016.
The fair value of the Javelin intellectual property acquired was
$262,500 estimated by using a discounted cash flow approach based
on future economic benefits associated with the assets acquired. In
summary, the estimate was based on a projected income approach and
related discounted cash flows over five years, with applicable risk
factors assigned to assumptions in the forecasted
results.
11.
GOODWILL
The Company’s TransTech business is very capital intensive.
The Company reviewed TransTech’s operations based on its
overall financial constraints and determined the value has been
impaired. The company recorded an impairment of goodwill associated
with TransTech of $483,645 during the three months December 31,
2016.
12.
ACCOUNTS PAYABLE
Accounts payable were $2,098,895 and $1,984,326 as of December
31, 2016 and 2015, respectively. Such liabilities consisted of
amounts due to vendors for inventory purchases and technology
development, external audit, legal and other expenses incurred by
the Company. The Company had one vendor (11.1%) with accounts
payable in excess of 10% of its accounts payable as of December 31,
2016. The Company does expect to have vendors with accounts payable
balances of 10% of total accounts payable in the foreseeable
future.
13.
DERIVATIVE INSTRUMENTS
In
April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to
its own stock for the purpose of evaluating the first criteria of
the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15,
2008. The adoption of these requirements can affect the accounting
for warrants and many convertible instruments with provisions that
protect holders from a decline in the stock price (or
“down-round” provisions). For example, warrants or
conversion features with such provisions are no longer recorded in
equity. Down-round provisions reduce the exercise price of a
warrant or convertible instrument if a company either issues equity
shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that
have a lower exercise price.
Derivative
liability as of December 31, 2016 is as follows:
|
|
|
|
|
Carrying
|
|
|
Fair Value
Measurements Using Inputs
|
Amount at
|
||
|
Financial
Instruments
|
Level
1
|
Level
2
|
Level
3
|
December
31, 2016
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Instruments
|
$
-
|
$
562,714
|
$
-
|
$
562,714
|
|
|
|
|
|
|
|
Total
|
$
-
|
$
562,714
|
$
-
|
$
562,714
|
Derivative
liability as of September 30, 2016 is as
follows:
|
The
risk-free rate of return reflects the interest rate for the United
States Treasury Note with similar time-to-maturity to that of the
warrants, historical volatility was 130% and the stock price was
$0.70 at December 31, 2016.
Derivative Instruments – Warrants with the June 2013 Private
Placement
|
|
|
The
Company issued warrants to purchase 697,370 shares of common stock
in connection with our June 2013 private placement of 348,685
shares of common stock. The per share price is subject
to adjustment.
In August
2016 the exercise price was reset to $0.70 per share.
These warrants were not issued with
the intent of effectively hedging any future cash flow, fair value
of any asset, liability or any net investment in a foreign
operation. These warrants were issued with a down-round
provision whereby the exercise price would be adjusted downward in
the event that additional shares of our common stock or securities
exercisable, convertible or exchangeable for the Company’s
common stock were issued at a price less than the exercise
price. Therefore, the fair value of these warrants were
recorded as a liability in the consolidated balance sheet and are
marked to market each reporting period until they are exercised or
expire or otherwise extinguished.
The
proceeds from the private placement were allocated between the
shares of common stock and the warrants issued in connection with
the private placement based upon their estimated fair values as of
the closing date at June 14, 2013, resulting in the aggregate
amount of $2,494,710 allocated to stockholders’ equity and
$2,735,290 allocated to the warrant derivative. The
Company recognized $1,448,710 of other expense resulting from the
increase in the fair value of the warrant liability at September
30, 2013. During the year ended September 30, 2014, the Company
recognized $2,092,000 of other income resulting from the decrease
in the fair value of the warrant liability at September 30, 2014.
During the year ended September 30, 2015, the Company recognized
$104,716 of other expense resulting from the decrease in the fair
value of the warrant liability at September 30, 2015. During the
year ended September 30, 2016, the Company recognized $2,085,536 of
other income resulting from the decrease in the fair value of the
warrant liability at September 30, 2016. During the three months
December 31, 2016, the Company recognized $67,170 of other expense
resulting from the increase in the fair value of the warrant
liability at December 31, 2016.
|
Derivative Instruments – Warrant with the November 2013
Xinova
Services and License
Agreement
|
The
Company issued a warrant to purchase 97,169 shares of common stock
in connection with the
November 2013 Xinova Services and
License Agreement. The warrant price of $30.00 per share expires
November 10, 2018 and the per share price is subject to
adjustment.
In August
2016 the exercise price was reset to $0.70 per share.
This warrant was not issued with the
intent of effectively hedging any future cash flow, fair value of
any asset, liability or any net investment in a foreign
operation. This warrant was issued with a down-round
provision whereby the exercise price would be adjusted downward in
the event that additional shares of our common stock or securities
exercisable, convertible or exchangeable for our common stock were
issued at a price less than the exercise
price. Therefore, the fair value of these warrants was
recorded as a liability in the consolidated balance sheet and are
marked to market each reporting period until they are exercised or
expire or otherwise extinguished. During the year ended September
30, 2014, the Company recognized $320,657 of other expense related
to the Xinova warrant. During the year ended September 30, 2015,
the Company recognized $14,574 of other income related to the
Xinova warrant. During the year ended September 30, 2016, the
Company recognized $
286,260
of
other income from the increase in the fair value of the warrant
liability at September 30, 2016. During the quarter ended December
31, 2016, the Company recognized $13,118 of other expense resulting
from the increase in the fair value of the warrant liability at
December 31, 2016.
Derivative Instrument – Series A Convertible Preferred
Stock
The
Company issued 11,667
shares of Series
A Convertible Preferred Stock with attached warrants during the
year ended September 30, 2015. The Company allocated $233,322 to
stockholder’s equity and $116,678 to the derivative warrant
liability. The warrants were issued with a down round provision.
The warrants have a term of five years, 23,334 are exercisable at
$30 per common share and 23,334 are exercisable at $45 per common
share. On August 4, 2016 the exercise price was adjusted to $0.70
per share.
During the year ended September 30, 2015, the
Company recognized $30,338 of other expense related to the warrant
liability. During the year ended September 30, 2016, the Company
recognized $
132,724
of other
income resulting from the increase in the fair value of the warrant
liability at September 30, 2016. During the three months December
31, 2016, the Company recognized $9,520 of other expense resulting
from the increase in the fair value of the warrant liability at
December 31, 2016.
14.
CONVERTIBLE NOTES PAYABLE
Convertible notes payable as of December 31, 2016 and September 30,
2016 consisted of the following:
The Company entered into Convertible Promissory Notes totaling
$710,000 with accredited investors during September 2015 to
February 2016 to fund short-term working capital. The Notes accrue
interest at a rate of 8% per annum and become due September 2016 to
February 2017 and are convertible into common stock at the same
price of our next financing. On November 31, 2016 holders of
$695,000 of the Convertible Promissory Notes converted to 944,948
shares of common stock and five year warrants to purchase common
stock at a price of $1.00 per share.
The
Company recorded accrued interest of $14,687
during the three months ended December 31,
2016.
On September 30, 2016, the Company entered into a $175,000
Convertible Promissory Note with Clayton A. Struve, an accredited
investor and affiliate of the Company, to fund short-term working
capital. The Convertible Promissory Note accrues interest at a rate
of 10% per annum and becomes due on March 30, 2017. The Note holder
can convert to common stock at $0.70 per share. During the three
months ended December 31, 2016 the Company recorded interest of
$5,367 related to the convertible note.
The Company entered into two Convertible Promissory Notes totaling
$330,000 with accredited investors during on November 1, 2016. The
Notes accrue interest at a rate of 10% per annum and become due May
1,2017 and are convertible into Preferred stock at a conversion
price of $0.80 per share and a five-year warrant to purchase a
share of common stock at $1.00 per share. The company first
allocated the value received the warrants based on the Black
Scholes value assuming a 1 year life, 130% volatility and .7% risk
free interest rate. The remaining value was below the fair market
value on the date of issuance and as a result the company recorded
and beneficial conversion dividend of $326,687 at the time
issuance.
The
Company recorded
accrued interest of $5,683 as of December 31,
2016.
|
15.
|
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
|
Notes payable, capitalized leases and long term debt as of December
31, 2016 and September 30, 2016 consisted of the
following:
Capital Source Business Finance Group
The
Company finances its TransTech operations from operations and a
Secured Credit Facility with Capital Source
Business
Finance
Group. On December 9, 2008,
TransTech entered into a $1,000,000 secured credit facility with
Capital Source
to fund
its operations. On December 12, 2016, the secured
credit facility was renewed for an additional six months, with a
floor for prime interest of 4.5% (currently 4.5%) plus 2.5%. The
eligible borrowing is based on 80% of eligible trade accounts
receivable, not to exceed $1,000,000. The secured credit facility
is collateralized by the assets of TransTech, with a guarantee by
Visualant, including a security interest in all assets of
Visualant. Availability under this Secured Credit ranges from $0 to
$175,000 ($10,000 as of September 30, 2016) on a daily basis. The
remaining balance on the accounts receivable line of $300,136 as of
September 30, 2016 must be repaid by the time the secured credit
facility expires on June 12, 2017, or we renew by automatic
extension for the next successive six-month term.
Note Payable to Umpqua Bank
The Company has a $199,935 Business Loan Agreement with Umpqua Bank
(the “Umpqua Loan”), which matures on December 31, 2017
and provides for interest at 3.25% per year.
Related to this
Umpqua Loan, the Company entered into a demand promissory note for
$200,000 on January 10, 2014 with an entity affiliated with Ronald
P. Erickson, our Chief Executive Officer. This demand promissory
note will be effective in case of a default by the Company under
the Umpqua Loan.
The Company recorded
accrued interest of $17,852 as of December 31,
2016.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
The Company also has two other demand promissory notes payable to
entities affiliated with Mr. Erickson, totaling $600,000. Each of
these notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. The Company
recorded accrued interest of $44,704 as of December 31,
2016.
|
16.
|
EQUITY
|
Authorized
Capital Stock
The
Company has authorized 105,000,000 shares of capital stock, of
which 100,000,000 are shares of voting common stock, par value
$0.001 per share, and 5,000,000 are shares of voting preferred
stock, par value $0.001 per share.
Voting
Preferred Stock
The
Company is authorized to issue up to 5,000,000 shares of preferred
stock with a par value of $0.001.
Series A Convertible Preferred Stock
On July 21, 2015, the Company filed with the Nevada Secretary of
State an Amended and Restated Certificate of Designations,
Preferences and Rights for its Series A Convertible Preferred
Stock. Among other things, the Amended and Restated
Certificate
changed the conversion price and the stated
value from $0.10 (pre-reverse stock split) to $30.00 (post-reverse
stock split), and added a provision adjusting the conversion price
upon the occurrence of certain events. As a result of the
foregoing, the Company currently have 23,334 Series A Preferred
Stock issued and outstanding, with a conversion price of $0.70 per
share.
Under
the Amended and Restated Certificate, the Company has 23,334 shares
of Series A Preferred authorized, all of which are outstanding.
Each holder of outstanding shares of Series A Preferred is entitled
to the number of votes equal to the number of whole shares of
common stock into which the shares of Series A Preferred held by
such holder are then convertible as of the applicable record date.
The Company cannot amend, alter or repeal any preferences, rights,
or other terms of the Series A Preferred so as to adversely affect
the Series A Preferred, without the written consent or affirmative
vote of the holders of at least 66% of the then outstanding shares
of Series A Preferred, voting as a separate voting
group.
During
the year ended September 30, 2015, the Company sold 11,667 Series A
Preferred Stock to two investors for total consideration of
$350,000. These shares are were convertible into 11,667 shares of
common stock at $30.00 per share, subject to adjustment, for a
period of five years. The Series A Preferred Stock has
voting rights and may not be redeemed without the consent of the
holder.
The
Company also issued to these investors (i) a Series C five-year
Warrant for 23,334 shares of common stock at an exercise price of
$30.00 per share, which is callable at $60.00 per share; and (ii) a
Series D five-year Warrant for 23,334 shares of common stock at an
exercise price of $45.00 per share, which is callable at $90.00 per
share. The Series A Preferred Stock and Series C and D Warrants had
registration rights.
On July 20, 2015, the two investors entered into an Amendment to
Series A Preferred Stock Terms whereby they agreed to the terms of
the
Amended and Restated Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock and
waived all registration rights.
On
August 4, 2016, the conversion price of the
Series A Preferred Stock
was adjusted to
$0.70 per share due to the Company’s issuance of common stock
at that price.
On
March 8, 2016, the Company received approval from the State of
Nevada for a Correction to the Company’s Amended and Restated
Certificate of Designations, Preferences and Rights of its Series A
Convertible Preferred Stock. The Amended and Restated Certificate
filed July 21, 2015 changed the conversion price and the stated
value from $0.10 (pre-reverse stock split) to $30.00
(post-reversestock split), and added a provision adjusting the
conversion price upon the occurrence of certain events. On February
19, 2016, the holders of Series A Convertible Preferred Stock
entered into Amendment 2 of Series A Preferred Stock Terms and
increased the number of Preferred Stock Shares to properly account
for the reverse stock split. As a result of the foregoing, we
currently have 23,334 Series A Preferred Stock issued and
outstanding, with a conversion price of $0.70 per
share.
Series C Convertible Preferred Stock
On August 5, 2016, the Company closed a Series C Preferred Stock
and Warrant Purchase Agreement with an accredited investor for the
purchase of $1,250,000 of preferred stock with a conversion price
of $0.70 per share. The Series C Convertible Preferred Stock has a
yield of 8% and an ownership blocker of 4.99%. In addition, the
investor received 100% warrant coverage with five-year warrants
with an exercise price of $0.70. Shares issuable upon the
conversion of the Series C Convertible Preferred Stock and the
shares issuable upon exercise of the warrants were included in a
registration statement filed by the Company.
On
August 11, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series C Convertible Preferred Stock. The Certificate
designated 1,785,715 shares as Series C Convertible Preferred Stock
with a par value of $.001 per share. The Series C Convertible
Preferred Stock is convertible into common stock at $0.70 per
share, with certain adjustments as set forth in the Certificate. On
August 31, 2016, the Company filed with the State of Nevada a
Certificate of Correction to the Certificate of Designations of
Preferences, Powers, Rights and Limitations for the Series C
Convertible Preferred Stock to correct the number of authorized
shares. The Certificate authorized 1,785,715 shares of Series C
Preferred Stock with a par value of $.001 per share. The Series C
Convertible Preferred Stock is convertible into common stock at
$0.70 per share, with certain adjustments as set forth in the
Certificate. As a result of the foregoing, the Company currently
has 1,785,715 shares of Series C Preferred Stock issued and
outstanding, with a conversion price of $0.70 per
share.
To
determine the effective conversion price, a portion of the proceeds
received by the Company upon issuance of the Series C Preferred
Stock was first allocated to the freestanding warrants issued as
part of this transaction. Given that the warrants will not
subsequently be measured at fair value, the Company determined that
the warrants should receive an allocation of the proceeds based on
their relative fair value. This is based on the understanding that
the FASB staff and the SEC staff believe that a freestanding
instrument issued in a basket transaction should be initially
measured at fair value if it is required to be subsequently
measured at fair value pursuant to US generally accepted accounting
principles (“GAAP”), with the residual proceeds from
the transaction allocated to any remaining instruments based on
their relative fair values. As such, the warrants were allocated a
fair value of approximately $514,706 upon issuance, with the
remaining $735,294 of proceeds allocated to the Series C Preferred
Stock.
Proportionately,
this allocation resulted in approximately 59% of the face amount of
the Series C Preferred Stock issuance remaining, which applied to
the stated conversion price of $0.70 resulted in an effective
conversion price of approximately $0.41.
Having
determined the effective conversion price, the Company then
compared this to the fair value of the underlying Common Stock as
of the commitment date, which was approximately $1.06 per share,
and concluded that the conversion feature did have an intrinsic
value of $0.65 per share. As such, the Company concluded that the
Series C Preferred Stock did contain a beneficial conversion
feature and an accounting entry and additional financial statement
disclosure was required.
Because
the Company’s preferred stock is perpetual, with no stated
maturity date, and the conversions may occur any time from
inception, the dividend is recognized immediately when a beneficial
conversion exists at issuance. During the year ending September 30,
2016, the Company recognized preferred stock dividends of $1.16
million on Series C preferred stock related to the beneficial
conversion feature arising from a common stock effective conversion
rate of $0.41 versus a current market price of $1.06 per common
share.
Series D Convertible Preferred Stock
On
November 14, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to certain accredited
investors for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated November 10,
2016.
On
December 19, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to an accredited
investor for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated December 14,
2016.
The
initial conversion price of the Series D Shares is $0.80 per share,
subject to certain adjustments. The initial exercise price of the
warrant is $1.00 per share, also subject to certain
adjustments.
As part
of the Purchase Agreement, the Company has agreed to register the
shares of common stock sold in the private placement and the shares
of common stock issuable upon exercise of the warrant for resale or
other disposition.
On
November 8, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series D Convertible Preferred Stock. The Certificate
designated up to 3,906,250 shares with a par value of $.001 per
share. The Series D Convertible Preferred Stock is convertible into
common stock at $0.80 per share, with certain adjustments as set
forth in the Certificate. The Company has issued 375,000 shares of
Series D Convertible Preferred Stock through February 21, 2017, and
intends to issue up to 3,125,000 Series D Shares (and an equal
number of warrants) for gross proceeds of $2,500,000 pursuant on a
“best efforts” basis.
To
determine the effective conversion price, a portion of the proceeds
received by the Company upon issuance of the Series D Preferred
Stock was first allocated to the freestanding warrants issued as
part of this transaction. Given that the warrants are subject to
repricing in the event of a future financing below $0.80 per share,
the Company determined that the warrants should receive an
allocation of the proceeds based on their relative fair
value.
As
such, the warrants associated with the November 14, 2016 issuance
were allocated a fair value of approximately $56,539 upon issuance,
with the remaining $63,539 of net proceeds allocated to the Series
D Preferred Stock. Proportionately, this allocation resulted in
approximately 53% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.34. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$1.14 per share, and concluded that the conversion feature did have
an intrinsic value of $0.80 per share. As such, the Company
concluded that the Series D Preferred Stock did contain a
beneficial conversion feature of $150,211 which was recorded as a
beneficial conversion in stockholders’ equity.
The
warrants associated with the December 19, 2016 issuance were
allocated a fair value of approximately $60,357 upon issuance, with
the remaining $69,643 of net proceeds allocated to the Series D
Preferred Stock. Proportionately, this allocation resulted in
approximately 54% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.37. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$0.81 per share, and concluded that the conversion feature did have
an intrinsic value of $0.44 per share. As such, the Company
concluded that the Series C Preferred Stock did contain a
beneficial conversion feature of 82,232 which was recorded as a
beneficial conversion in stockholders’ equity.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
The following equity issuances occurred during the three months
ended December 31, 2016:
On October 21, 2015, the Company entered into a Public Relations
Agreement with Financial Genetics LLC for public relation services.
On October 18, 2016, the Company entered into an Amendment to
Public Relations Agreement with Financial Genetics LLC. Under the
Agreements, Financial Genetics was issued 168,910 shares of our
common stock during the three months ended December 31, 2016. The
Company expensed $136,833 during the three months ended December
31, 2016.
On October 6, 2016, the Company entered into a Services Agreement
with Redwood Investment Group LLC for financial services. Under the
Agreement, Redwood was issued 100,000 shares of our common stock.
The Company expensed $70,000 during the three months ended December
31, 2016.
The Company entered into Convertible Promissory Notes totaling
$710,000 with accredited investors during September 2015 to
February 2016 to fund short-term working capital. The Notes accrued
interest at a rate of 8% per annum and became due September 2016 to
February 2017 and were convertible into common stock as part of our
next financing. On November 30, 2016, the Company converted
$695,000 of the /Convertible Promissory Notes and interest of
$54,078 into 936,348 shares of comment stock at $0.80 per share.
The Company also issued warrants to purchase 936,348 shares of the
Company’s common stock. The five year warrants are
exerciseable at $1.00 per share, subject to
adjustment.
On December 22, 2016, a supplier converted accounts payable
totaling $6,880 into 8,600 shares of common stock valued at $0.80
per share.
On May 6, 2015, the Company’s stockholders approved a reverse
split of our common stock, in a ratio to be determined by the
Company’s Board of Directors, of not less than 1-for-50 nor
more than 1-for-150. On June 9, 2015, the Company’s Board of
Directors determined that the ratio of the reverse split would be
1-for-150. All warrant, option, share and per share information in
this Form 10-Q gives retroactive effect for a 1-for-150 split with
all numbers rounded up to the nearest whole share.
Warrants to Purchase Common Stock
The following warrants were issued during the three months ended
December 31, 2016:
The Company entered into Convertible Promissory Notes totaling
$710,000 with accredited investors during September 2015 to
February 2016 to fund short-term working capital. The Notes accrued
interest at a rate of 8% per annum and became due September 2016 to
February 2017 and were convertible into common stock as part of our
next financing. On November 30, 2016, the Company converted
$695,000 of the /Convertible Promissory Notes and interest of
$54,078 into 936,348 shares of comment stock at $0.80 per share.
The Company also issued warrants to purchase 936,348 shares of the
Company’s common stock. The five year warrants are
exercisable at $1.00 per share, subject to adjustment.
On
November 14, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to certain accredited
investors for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated November 10,
2016.
On
December 19, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to an accredited
investor for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated December 14,
2016.
The
initial conversion price of the Series D Shares is $0.80 per share,
subject to certain adjustments. The initial exercise price of the
warrant is $1.00 per share, also subject to certain
adjustments.
During
the three months ended December 31, 2016, the Company revised five
year placement agent warrants to purchase 312,500 shares of common
stock. The price was reduced from $1.00 to $0.70 per share and the
exercise price is now subject to adjustment. The Company recorded
250,000 shares during the year ended September 30, 2016 the fair
value of these warrants is $104,125 at December 31,
2016.
A
summary of the warrants outstanding as of
December 31, 2016
were as
follows:
A summary of the
status of the warrants outstanding as of
December 31, 2016
is presented
below:
The significant
weighted average assumptions relating to the valuation of the
Company’s warrants for the period ended
December 31, 2016
were as
follows:
There were vested warrants of 4,827,020 as of December 31, 2016
with an aggregate intrinsic value of $0.
|
17.
|
STOCK OPTIONS
|
Description of Stock Option Plan
On April 29, 2011, the Company’s 2011 Stock Incentive Plan
was approved at the Annual Stockholder Meeting. The Company was
authorized to issue options for, and has reserved for issuance, up
to 46,667 shares of common stock under the 2011 Stock
Incentive Plan. On March 21, 2013, an amendment to the Stock Option
Plan was approved by the stockholders of the Company, increasing
the number of shares reserved for issuance under the Plan to 93,333
shares.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
The Company had no stock option transactions during the three
months ended December 31, 2016:
There are currently 50,908 options to purchase common stock at an
average exercise price of $18.05 per share outstanding as of
December 31, 2016 under the 2011 Stock Incentive Plan. The Company
recorded $10,887 and $11,837 of compensation expense, net of
related tax effects, relative to stock options for the three months
ended December 31, 2016 and 2015 in accordance with ASC 505. Net
loss per share (basic and diluted) associated with this expense was
approximately ($0.00) and ($0.01) per share, respectively. As of
December 31, 2016, there is approximately $102,276 of total
unrecognized costs related to employee granted stock options that
are not vested. These costs are expected to be recognized over a
period of approximately 2.78 years.
Stock option activity for the three months ended December 31, 2016
and the years ended September 30, 2016 and 2015 was as
follows:
The
following table summarizes information about stock options
outstanding and exercisable as of December 31,
2016:
|
|
|
Weighted
|
Weighted
|
|
Weighted
|
|
|
|
Average
|
Average
|
|
Average
|
|
Range
of
|
Number
|
Remaining
Life
|
Exercise
Price
|
Number
|
Exercise
Price
|
|
Exercise
Prices
|
Outstanding
|
In
Years
|
Exerciseable
|
Exerciseable
|
Exerciseable
|
|
13.500
|
3,334
|
1.75
|
$
13.50
|
3,334
|
$
13.50
|
|
15.000
|
20,906
|
2.58
|
15.00
|
9,514
|
15.00
|
|
19.500
|
13,334
|
2.67
|
19.50
|
13,334
|
19.50
|
|
22.500
|
13,334
|
3.38
|
22.50
|
13,334
|
22.50
|
|
|
50,908
|
2.87
|
$
18.04
|
39,516
|
$
18.92
|
There were exercisable options of 50,908 as of December 31, 2016
with an aggregate intrinsic value of $0.
|
18.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Note 13 for Notes Payable to Ronald P. Erickson, our Chief
Executive Officer Chief and/or entities in which Mr. Erickson has a
beneficial interest.
Note Payable to Umpqua Bank
The Company has a $199,935 Business Loan Agreement with Umpqua Bank
(the “Umpqua Loan”), which matures on December 31, 2017
and provides for interest at 3.25% per year.
Related to this
Umpqua Loan, the Company entered into a demand promissory note for
$200,000 on January 10, 2014 with an entity affiliated with Ronald
P. Erickson, our Chief Executive Officer. This demand promissory
note will be effective in case of a default by the Company under
the Umpqua Loan.
The Company recorded
accrued interest of $17,852 as of December 31,
2016.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
The Company also has two other demand promissory notes payable to
entities affiliated with Mr. Erickson, totaling $600,000. Each of
these notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. The Company
recorded accrued interest of $44,704 as of December 31,
2016.
Other Amounts Due to Mr. Erickson
Mr. Erickson and/or entities with which he is affiliated also have
advanced $529,833 and have unreimbursed expenses and compensation
of approximately $430,056. The Company owes Mr. Erickson, or
entities with which he is affiliated, $1,559,889 as of December 31,
2016.
|
19.
|
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
|
Legal Proceedings
The
Company may from time to time become a party to various legal
proceedings arising in the ordinary course of our business. The
Company is currently not a party to any pending legal proceeding
that is not ordinary routine litigation incidental to our
business.
Properties and
Operating Leases
The Company is obligated under various non-cancelable operating
leases for its various facilities and certain
equipment.
Corporate Offices
The Company’s executive office is located at 500 Union
Street, Suite 420, Seattle, Washington, USA, 98101. The Company
leases 1,014 square feet and its net monthly payment is $2,535. The
Company leases this office on a month to month basis.
TransTech Facilities
TransTech is located at 12142 NE Sky Lane, Suite 130, Aurora, OR
97002. TransTech leases a total of approximately 9,750 square feet
of office and warehouse space for its administrative offices,
product inventory and shipping operations. The Company leases this
office on a month to month basis at $6,942 per month.
The aggregate future minimum lease payments under operating leases
as of December 31, 2016 were $10,030.
20.
SUBSEQUENT EVENTS
The Company evaluates subsequent events, for the purpose of
adjustment or disclosure, up through the date the financial
statements are available. Subsequent to December 31, 2016, there
were the following material transactions that require
disclosure:
Extension of Related Party Notes
On
January 9, 2017, the Company entered into amendments to two demand
promissory notes, totaling $600,000, and a note payable for
$200,000 related to the Umpqua Bank Business Loan Agreement with
Mr. Erickson, our Chief Executive Officer and/or entities in which
Mr. Erickson has a beneficial interest. The amendments extend the
due date from December 31, 2016 to March 31, 2017 and continue to
provide for interest of 3% per annum and a second lien on company
assets if not repaid by March 31, 2017 or converted into
convertible debentures or equity on terms acceptable to the
Holder.
Issuance of Equity
On October 21, 2015, the Company entered into a Public Relations
Agreement with Financial Genetics LLC for public relation services.
On October 18, 2016, the Company entered into an Amendment to
Public Relations Agreement with Financial Genetics LLC. Under the
Agreements, Financial Genetics was issued 80,952 shares of our
common stock and expensed $66,666 subsequent to the three months
ended December 31, 2016.
On October 6, 2015, the Company entered into a Services Agreement
with Redwood Investment Group LLC for financial services. Under the
Agreement, Redwood was issued 100,000 shares of our common stock
and expensed $70,000 subsequent to the three months ended December
31, 2016.
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
Forward-looking statements in this report reflect the good-faith
judgment of our management and the statements are based on facts
and factors as we currently know them. Forward-looking statements
are subject to risks and uncertainties and actual results and
outcomes may differ materially from the results and outcomes
discussed in the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes
include, but are not limited to, those discussed below as well as
those discussed elsewhere in this report (including in Part II,
Item 1A (Risk Factors)). Readers are urged not to place undue
reliance on these forward-looking statements because they speak
only as of the date of this report. We undertake no obligation to
revise or update any forward-looking statements in order to reflect
any event or circumstance that may arise after the date of this
report.
BACKGROUND AND CAPITAL STRUCTURE
Visualant, Incorporated (the “Company,”
“Visualant, Inc.” or “Visualant”) was
incorporated under the laws of the State of Nevada in 1998.
We have authorized 105,000,000 shares of capital stock, of which
100,000,000 are shares of voting common stock, par value $0.001 per
share, and 5,000,000 are shares preferred stock, par value $0.001
per share.
As of December 31, 2016, we had 3,570,010 shares of common stock
issued and outstanding, held by 54 stockholders of record. The
number of stockholders, including beneficial owners holding shares
through nominee names, is approximately 2,300. Each share of common
stock entitles its holder to one vote on each matter submitted to
the stockholders for a vote, and no cumulative voting for directors
is permitted. Stockholders do not have any preemptive
rights to acquire additional securities issued by us. As
of December 31, 2016, there were options outstanding for the
purchase of 50,908 common shares, warrants for the purchase of
4,494,080 common shares,
2,184,048 shares of our common
stock issuable upon the conversion of Series A, Series C and Series
D Convertible Preferred Stock and up to 332,940 shares of our
common stock issuable upon the exercise of placement agent
warrants.
In June
2015, we effected a 1-for-150 reverse stock split of our common
stock. All warrant, option, share and per share information in this
Form 10-Q gives retroactive effect to the 1-for-150 reverse split
with all numbers rounded up to the nearest whole
share.
BUSINESS
We are focused primarily on the development of a proprietary
technology which is capable of uniquely identifying and
authenticating almost any substance using light to create, record
and detect the unique digital “signature” of the
substance. We call this our “ChromaID™”
technology.
Our ChromaID™ Technology
We have developed a proprietary technology to uniquely identify and
authenticate almost any substance. This patented technology
utilizes light at the photon (elementary particle of light) level
through a series of emitters and detectors to generate a unique
signature or “fingerprint” from a scan of almost any
solid, liquid or gaseous material. This signature of reflected or
transmitted light is digitized, creating a unique ChromaID
signature. Each ChromaID signature is comprised of from hundreds to
thousands of specific data points.
The ChromaID technology looks beyond visible light frequencies to
areas of near infra-red and ultraviolet light that are outside the
humanly visible light spectrum. The data obtained allows us to
create a very specific and unique ChromaID signature of the
substance for a myriad of authentication and verification
applications.
Traditional light-based identification technology, called
spectrophotometry, has relied upon a complex system of prisms,
mirrors and visible light. Spectrophotometers typically have a
higher cost and utilize a form factor more suited to a laboratory
setting and require trained laboratory personnel to interpret the
information. The ChromaID technology uses lower cost LEDs and
photodiodes and specific frequencies of light resulting in a more
accurate, portable and easy-to-use solution for a wide variety of
applications. The ChromaID technology not only has significant cost
advantages as compared to spectrophotometry, it is also completely
flexible is size, shape and configuration. The ChromaID scan head
can range in size from endoscopic to a scale that could be the size
of a large ceiling-mounted florescent light fixture.
In
normal operation, a ChromaID master or reference scan is generated
and stored in a database. The Visualant scan head can then scan
similar materials to identify, authenticate or diagnose them by
comparing the new ChromaID digital signature scan to that of the
original or reference ChromaID signature or scan
result.
ChromaID was invented by scientists from the University of
Washington under contract with Visualant. We have pursued an
intellectual property strategy and have been granted ten patents.
We also have 20 patents pending. We possess all right, title and
interest to the issued patents. Ten of the pending patents are
licensed exclusively to us in perpetuity by Xinova.
In 2010, we acquired TransTech Systems, Inc.
(“TransTech”) as an adjunct to our business. TransTech
is a distributor of products for employee and personnel
identification. TransTech currently provides substantially all of
our revenues. We intend, however, to further develop and market our
ChromaID technology.
The following summarizes our plans for our proprietary ChromaID
technology. Based on our anticipated expenditures on this
technology, the expected efforts of our management and our
relationship with Xinova, and our other strategic partner, Sumitomo
Precision Products, Ltd., we expect our ChromaID technology to
provide an increasing portion of our revenues in future years from
product sales, licenses, royalties and other revenue streams., as
discussed further below.
ChromaID: A Foundational Platform Technology
Our ChromaID technology provides a platform upon which a myriad of
applications can be developed. As a platform technology, it is
analogous to a smartphone, upon which an enormous number of
previously unforeseen applications have been developed. The
ChromaID technology is an enabling technology that brings the
science of light and photonics to low cost, real world
commercialization opportunities across multiple industries. The
technology is foundational and as such, the basis upon which we
believe a significant business can be built.
As with other foundational technologies, a single application may
reach across multiple industries. The ChromaID technology can, for
example effectively differentiate and identify different brands of
clear vodkas that appear identical to the human eye. By extension
this same technology can identify pure water from water with
contaminants present. It can provide real time detection of liquid
medicines such as morphine that have been adulterated or
compromised. It can detect if jet fuel has water contamination
present. It could determine when it is time to change oil in a deep
fat fryer. These are but a few of the potential applications of the
ChromaID technology based upon extensions of its ability to
identify different clear liquids.
The cornerstone of a company with a foundational platform
technology is its intellectual property. ChromaID was invented by
scientists from the University of Washington under contract with
Visualant. We have pursued an intellectual property strategy and
have been granted ten patents. We currently have 20 patents
pending. We possess all right, title and interest to the issued
patents. Ten of the pending patents are licensed exclusively to us
in perpetuity by our strategic partner Xinova.
At the Photonics West trade show held in San Francisco in February
2013, we were honored to receive a PRISM award from the Society of
Photo-Optical Instrumentation Engineers International, better known
as SPIE. The PRISM awards recognizes photonic products that break
with conventional ideas, solve problems, and improve life through
the application of light-based technologies.
Xinova Relationship
In November 2013, we entered into a strategic relationship with
Xinova, formerly Invention Development Management Company, a
subsidiary of Intellectual Ventures, a private intellectual
property fund with over $5 billion under management.
Xinova
owns over 40,000 IP assets and has
broad global relationships for the invention of technology, the
filing of patents and the licensing of intellectual property.
Xinova has worked to expand the reach and the potential application
of the ChromaID technology and has filed ten patents base on the
ChromaID technology, which it has licensed to
us.
Initial testing in our laboratories and the work of the Xinova
inventors have shown that the ChromaID technology has a number of
broad and useful applications a few of which include:
●
Milk
identification for quality, protein and fat content and
impurities
●
Identification
of liquids for counterfeits or contaminants
●
Detecting
adulterants in food and food products compromising its
quality
●
Color
grading of diamonds
●
Identifying
real cosmetics versus counterfeit cosmetics
●
Identifying
counterfeit medications versus real medications
●
Identifying
regular flour versus gluten free flour
●
Authenticating
secure identification cards
Products
Our first delivered product, the ChromaID Lab Kit, scans and
identifies solid surfaces. We are marketing this product to
customers who are considering licensing the technology. Target
markets include, but are not limited to, commercial paint
manufacturers, pharmaceutical equipment manufacturers, process
control companies, currency paper and ink manufacturers, security
cards, cosmetic companies, scanner manufactures and food processing
companies.
Our second product, the ChromaID Liquid Lab Kit, scans and
identifies liquids. This product is currently in prototype form.
Similar to our first product, it will be marketed to customers who
are considering licensing the technology. Rather than use an LED
emitter to reflect light off of a surface that is captured by a
photodiode to generate a ChromaID signature the liquid analysis
product shines light through the liquid (transmissive) with the
LEDs positioned on one side of the liquid sample and the photo
detectors on the opposite side. This device is in a functional
state in our laboratory and we anticipate having a Liquid ChromaID
Lab Kit available for customers by the Company during the fall of
2015. Target markets include, but are not limited to, water
companies, petrochemical companies, pharmaceutical companies, and
numerous consumer applications.
The ChromaID Lab Kits allows potential licensors of our technology
to work with our technology and develop solutions for their
particular application. Our contractual arrangements with Xinova
are described in greater detail below.
Our
next planned product should be an exemplar product is a prototype
that will be produced to address several markets. The primary
purpose of this prototype will be to demonstrate the technology to
prospective business partners, and will consist of a small, hand
held, battery powered, Bluetooth enabled scanning device. The
scanner shouldwirelessly connect to a smart phone or tablet to
transfer the scanned data. The smart phone application will include
two or three industry specific but generic applications that allow
for the demonstration of the scanning and matching of the ChromaID
signatures. The applications will focus on drug identification,
food safety and liquid detection.
The
prototype device will lend itself to consumer applications and can
be a consumer product as well.
Our Commercialization Plans for the ChromaID
Technology
We shipped our first ChromaID product, the ChromaID Lab Kits, to
our strategic partner Xinova during the last calendar quarter of
2013 and first calendar quarter of 2014, after we completed final
assembly and testing. Some ChromaID Lab Kits are provided free of
charge to potential customers. Others are sold for a modest price.
To date, we have achieved limited revenue from the sale of our
ChromaID Lab Kits.
The Lab Kit includes the following:
ChromaID
Scanner
. A small device made
with electronic and optical components and firmware which pulses
light onto a flat material and records and digitizes the light that
is reflected back from that material. The device is the size of a
typical flashlight (5.5” long and 1.25” diameter).
However, the technology can be incorporated into almost any size,
shape and configuration.
ChromaID Lab
Software
. A software
application that runs on a Windows PC. The software allows for
configuration of the scanner, controls the behavior of the ChromaID
Scanner, displays a graph of the captured ChromaID signature
profile, stores the ChromaID signature in a database and uses
algorithms to compare the accuracy of the match of the unknown scan
to the known ChromaID signature profile. This software is intended
for lab and experimental use only and is not required for
commercialized product applications.
Software Development
Toolkit
. A collection of
software applications, API (an abbreviation of application program
interface – a set of routines, protocols, and tools for
building software applications) definitions and file descriptions
that allow a customer to extract the raw data from the ChromaID
signatures and run their own software routines against that raw
data.
The ChromaID Lab Kit allows customers to experiment with and
evaluate the ChromaID technology and determine if it is appropriate
for their specific applications. The primary electronic and optical
parts of the ChromaID scanner, called the “scan head,”
could be supplied to customers to integrate into their own
products. A set of ChromaID Developer Tools are also available.
These allow customers to develop their own applications and
products based on the ChromaID technology.
ChromaID signatures must be stored, managed, and readily accessible
for comparison, matching and authentication purposes. The database
can be owned and operated by the end customer, but in the case of
thousands of ChromaID signatures, database management may be
outsourced to us or a third party provider. These database services
could be made available on a per-access transaction basis or on a
monthly or annual subscription basis. The actual storage location
of the database can be cloud-based, on a stand-alone scanning
device or on a mobile device via a Bluetooth connection depending
on the requirements of access, size of the database and security as
defined by the customer. As a result, large databases can be
accessed by cell phone or other mobile technologies using either
local storage or cloud based storage.
Based on the commercialization plans outlined above, our business
model anticipates deriving revenue from several
sources:
●
Sales
of the ChromaID Lab Kit and ChromaID Liquid Lab Kit
●
Non
Recurring Engineering (NRE) fees to assist customers with scan
integration into their products
●
Licensing
of the ChromaID technology
●
Royalties
per unit generated from the sales of scan heads
●
Multi-unit
sales of the above referenced exemplar product for as yet to be
determined consumer product applications
●
Per
click transaction revenue from accessing the unique ChromaID
signatures
●
Developing
custom product applications for customers
●
ChromaID
database administration and management services
Our Acceleration of Business Development in the United States and
Around the World
We are coordinating our internal business
development, sales and marketing efforts with those of our
strategic partners Xinova, and Sumitomo Precision Products to
leverage market data and information in order to focus on specific
target vertical markets which have the greatest potential for early
adoption. The ChromaID Lab Kit provides a means for us to
demonstrate the technology to customers in these markets. It also
allows customers to experiment with developing unique applications
for their particular use. Our Business Development team is pursuing
license opportunities with customers in our target markets. As an
example,
in March 2016 we entered into a Collaboration
Agreement and License with Intellicheck Mobilisa. The agreement
provides Intellicheck with exclusive rights to our ChromaID
technology in the areas of homeland security, law enforcement and
crime prevention.
There is no requirement for FDA or other government approval for
the current applications of our ChromaID technology. Over time, as
we explore the application of our ChromaID technology for medical
diagnostics and other applications, we expect that there will be
requirements for FDA and other government approvals before
applications using the technology in medical and other regulated
fields can enter the marketplace.
Research and Development
Our research and development efforts are primarily focused
improving the core foundational ChromaID technology and developing
new and unique applications for the technology. As part of this
effort, we typically conduct testing to ensure that ChromaID
application methods are compatible with the customer’s
requirements, and that they can be implemented in a cost effective
manner. We are also actively involved in identifying new
application methods. Our team has considerable experience working
with the application of light-based technologies and their
application to various industries. We believe that its continued
development of new and enhanced technologies relating to our core
business is essential to our future success. We spent $325,803 and
$362,661 during the years ended September 30, 2016 and 2015,
respectively, on development activities.
Our Patents
We believe that our ten patents, 20 patent applications, and two
registered trademarks, and our trade secrets, copyrights and other
intellectual property rights are important assets for us. Our
patents will expire at various times between 2027 and 2033. The
duration of our trademark registrations varies from country to
country. However, trademarks are generally valid and may be renewed
indefinitely as long as they are in use and/or their registrations
are properly maintained.
The patents that have been granted to Visualant
include:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires November 7,
2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 28, 2030.
On October 9, 2012, we were issued US Patent No. 8,285,510 B2
entitled “Method, Apparatus, and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On
November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks.
The
patent expires February 7, 2033.
On
March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Objects Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks.
The
patent expires July 31, 2027.
On May
26, 2015, we were patent US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks.
The patent expires March
12, 2033.
On
April 19, 2016, we were issued patent US Patent No. 9,316,581 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks.
The patent expires March 12,
2033.
We pursue a patent strategy to expand our unique intellectual
property in the United States and other countries.
Services and License Agreement Invention Development Management
Company, L.L.C.
In November 2013, we entered into a strategic relationship with
Xinova, formerly Invention Development Management Company, a
subsidiary of Intellectual Ventures, a private intellectual
property fund with over $5 billion under management.
Xinova
owns over 40,000 IP assets and has
broad global relationships for the invention of technology, the
filing of patents and the licensing of intellectual property.
Xinova has worked to expand the reach and the potential application
of the ChromaID technology and has filed ten patents base on the
ChromaID technology, which it has licensed to
us.
The agreement requires Xinova to identify and engage inventors to
develop new applications of our ChromaID™ technology, present
the developments to us for approval, and file at least 10 patent
applications to protect the developments. Xinova is responsible for
the development and patent costs. We provided the Chroma ID Lab
Kits to Xinova at no cost and are providing ongoing technical
support. In addition, to provide time for this accelerated
expansion of its intellectual property we delayed the selling of
the ChromaID Lab Kits for 140 days except for certain select
accounts. We have continued our business development efforts during
this period and have worked with Xinova and their global business
development resources to secure potential customers and licensees
for the ChromaID technology. We shipped 20
ChromaID Lab Kits
to inventors in the Xinova network during December 2013 and January
2014. As part of our agreement with Xinova, we curtailed our
ChromaID marketing efforts through the fourth calendar quarter of
2014 while Xinova worked to expand our intellectual property
portfolio.
Thereafter,
we began to actively market the ChromaID Lab Kits to interested and
qualified customers.
We have received a worldwide, nontransferable, exclusive license to
the intellectual property developed under the Xinova agreement
during the term of the agreement, and solely within the
identification, authentication and diagnostics field of use, to (a)
make, have made, use, import, sell and offer for sale products and
services; (b) make improvements; and (c) grant sublicenses of any
and all of the foregoing rights (including the right to grant
further sublicenses).
We received a nonexclusive and nontransferable option to acquire a
worldwide, nontransferable, nonexclusive license to the useful
intellectual property held by Xinova within the identification,
authentication and diagnostics field of use to (a) make, have made,
use, import, sell and offer to sell products and services and (b)
grant sublicenses to any and all of the foregoing rights. The
option to acquire this license may be exercised for up to two years
from the effective date of the Agreement.
Xinova is providing global business development services to us for
geographies not being pursued by Visualant. Also, Xinova has
introduced us to potential customers, licensees and distributors
for the purpose of identifying and pursuing a license, sale or
distribution arrangement or other monetization event.
We granted to Xinova a nonexclusive, worldwide, fully paid,
nontransferable, sublicenseable, perpetual license to our
intellectual property solely outside the identification,
authentication and diagnostics field of use to (a) make, have made,
use, import, sell and offer for sale products and services and (b)
grant sublicenses of any and all of the foregoing rights (including
the right to grant further sublicenses).
We granted to Xinova a nonexclusive, worldwide, fully paid up,
royalty-free, nontransferable, non-sublicenseable, perpetual
license to access and use our technology solely for the purpose of
marketing the aforementioned sublicenses of our intellectual
property to third parties outside the designated fields of
use.
In connection with the original license agreement, we issued a
warrant to purchase 97,169 shares of common stock to Xinova as
consideration for the exclusive intellectual property license and
application development services. The warrant has a current
exercise price of $0.70 per share and expires November 10, 2018.
The per share price is subject to adjustment based on any issuances
below $0.70 per share except as described in the
warrant.
We agreed to pay Xinova a percentage of license revenue for the
global development business services and a percentage of revenue
received from any company introduce to us by Xinova. We also have
also agreed to pay Xinova a royalty when we receive royalty product
revenue from an Xinova-introduced company. Xinova has agreed to pay
us a license fee for the nonexclusive license of our intellectual
property.
The term of both the exclusive intellectual property license and
the nonexclusive intellectual property license commences on the
effective date of November 11, 2013, and terminates when all claims
of the patents expire or are held in valid or unenforceable by a
court of competent jurisdiction from which no appeal can be
taken.
The term of the Agreement commences on the effective date until
either party terminates the Agreement at any time following the
fifth anniversary of the effective date by providing at least
ninety days’ prior written notice to the other
party.
TransTech Systems, Inc.
Our wholly owned subsidiary, TransTech Systems, Inc., is a
distributor of products, including systems solutions, components
and consumables, for employee and personnel identification in
government and the private sector, document authentication, access
control, and radio frequency identification. TransTech provides
these products and services, along with marketing and business
development assistance to value-added resellers and system
integrators throughout North America.
We expect our ownership of TransTech to accelerate our market entry
and penetration through well-operated and positioned dealers of
security and authentication systems, thus creating a natural
distribution channel for products featuring our proprietary
ChromaID technology. TransTech currently provides substantially all
of our revenues. Its management team functions independently from
Visualant’s and its operations require a minimal commitment
of our management time and other resources. Our acquisition of
TransTech in June 2010 and its operations are described in greater
detail below.
Agreements with Sumitomo Precision Products Co., Ltd.
In May 2012, we entered into a Joint Research and Product
Development Agreement with Sumitomo
Precision
Products Co., Ltd., a publicly-traded Japanese corporation, for the
commercialization of our ChromaID technology. In March 2013, we
entered into an amendment to this agreement, which extended the
Joint Development Agreement from March 31, 2013 to December 31,
2013. The extension provided for continuing work between Sumitomo
and Visualant focused upon advancing the ChromaID technology and
market research aimed at identifying the most significant markets
for the ChromaID technology. This collaborative work supported the
development of the ChromaID Lab Kit. This agreement expired
December 31, 2013. The current version of the technology was
introduced to the marketplace as a part of our ChromaID Lab Kit
during the fourth quarter of 2013. Sumitomo invested $2,250,000 in
exchange for 115,385 shares of restricted shares of common stock
priced at $19.50 per share that was funded on June 21,
2012.
We also entered into a License Agreement with Sumitomo in May 2012,
under which Sumitomo paid the Company an initial payment of $1
million. The License Agreement granted Sumitomo an exclusive
license for the then extant ChromaID technology. The territories
covered by this license include Japan, China, Taiwan, Korea and the
entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia,
Laos, Vietnam, Singapore and the Philippines). The Sumitomo License
fee was recorded as revenue over the life the Joint Research and
Product Development Agreement and was fully recorded as of May 31,
2013. On May 21, 2015, we entered into an amendment to the License
Agreement, which, effective as of June 18, 2014, eliminated the
Sumitomo exclusivity and provides that if we sell products in
certain territories – Japan, China, Taiwan, Korea and the
entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia,
Laos, Vietnam, Singapore and the Philippines) – the Company
will pay Sumitomo a royalty rate of 2% of net sales (excluding
non-recurring engineering revenues) over the remaining term of the
five-year License Agreement (through May 2017).
Potential Markets and Customers
Our plan is to develop markets and customers who have a need to
authenticate, detect, identify, verify or diagnose materials or
substances which may include, but are not limited to, commercial
paint manufacturers, pharmaceutical equipment manufacturers,
process control companies, water purification and quality
companies, currency paper and ink manufacturers, security card
manufacturers, cosmetic companies and food processing
companies.
Market opportunities include identification, detection, or
diagnosis of:
●
Pharmaceuticals
– pill counting and verification
●
Food
safety – testing for contaminants and quality
●
Gemstones
– diamond color grading
●
Liquid
analysis – water purity
●
Law
enforcement - illicit drug identification for law enforcement
applications
●
Paint
– color matching
●
ID
badges – counterfeit ID detection
●
Secure
packaging - Container seals and packaging materials with invisible
markings
●
Cosmetics
– matching skin tones to correct products
●
Documents
and Currency– detect counterfeit paper and inks
●
Medical
- Noninvasive skin analysis for discovery of diseases or medical
conditions
Our Strategy
To date, the substantial portion of our non-TransTech revenue has
been generated from the development license with Sumitomo Precision
Products and sales of our ChromaID Lab Kits. We expect to continue
to grow revenues from sales of our Lab Kits, non-recurring
engineering fees, licenses, per unit royalties and subscriptions,
as well as “per click” revenues. Key aspects of our
strategy include:
Customize and Refine our Solutions to Meet Potential
Customers’ Needs
We are continuously improving and expanding our potential product
offerings by testing the incorporation of our technologies into
different media, such as the new ChromaID Liquid Lab Kit that is in
the prototype stage. Each vertical market has specific requirements
for their potential product application that will involve
determining the range of LEDs and photodiodes that will provide
optimum performance and the associated form factor required for
their product. Our goal is to develop a cost-effective scanning
system for each potential industry and customer that can be
incorporated into that potential customer’s products that
they will then take to market.
Continue to Expand Applications for ChromaID
Technology
While we have basic proof of concepts for applications in several
large markets to date, we plan to continue our ongoing effort to
expand proof-of-concept testing in other vertical markets that have
yet to be tested
.
We have also identified and are further examining
opportunities to collaborate with companies and universities to
develop new applications for the ChromaID technology. We believe
the strength of our solutions is based on the unique and
proprietary ChromaID signature that is created from every
scan.
Target Potential High-Volume Markets
We will continue to focus our efforts on target vertical markets
that are characterized by a high level of vulnerability to
counterfeiting, product tampering, piracy, fraud, identity theft,
contamination and adulteration. We believe the ChromaID technology
can be a lower cost, real time, flexible form factor solution in
the following areas: access control, quality and process control,
food safety, water quality, law enforcement support,
standardization and medical diagnostics. Our current target markets
include pharmaceuticals, food quality and safety, gemstone grading,
water purity, law enforcement, paint color matching, identity
cards, chemical identification, cosmetics, currency, process
control and healthcare. If and when we have significantly
penetrated these markets, we intend to expand into additional
related high volume markets.
Pursue Strategic Acquisitions and Alliances
We intend to pursue strategic acquisitions of companies and
technologies that strengthen and complement our core technologies,
improve our competitive positioning, allow us to penetrate new
markets, and grow our customer base. We also intend to work in
collaboration with potential strategic partners in order to
continue to market and sell new product lines derived from, but not
limited to, ChromaID technology.
Target Additional Markets
In fourth fiscal quarter of 2014, we began introducing our
technology and services in Europe, the United States and Asia.
Several potential customers are currently analyzing our technology.
At the present time, we are focusing our efforts on the
pharmaceutical industry, the food safety industry, law enforcement
and homeland security. In the future, we plan to expand our focus
to include identification cards and other secure documents,
industrial materials, agrochemicals, pharmaceuticals, consumer
products, cosmetics, currency and medical diagnostics.
Industry Background
Visualant’s
ChromaID is a part of the broad industry built upon photonics or
light-based technology. Photonics science includes the generation,
emission, transmission, modulation, signal processing, switching,
amplification, and detection/sensing of light. Though covering all
light's technical applications over the whole spectrum, most
photonic applications are in the range of visible and near-infrared
light. The term photonics developed as an outgrowth of the first
practical semiconductor light emitters invented in the early 1960s
and optical fibers developed in the 1970s.
Photonics
came into common use in the 1980s as fiber-optic data transmission
was adopted by telecommunications network operators. At that time,
the term was used widely at Bell Laboratories. Its use was
confirmed when the IEEE Lasers and Electro-Optics Society
established an archival journal named Photonics Technology Letters
at the end of the 1980s.
Photonics
covers a huge range of science and technology applications,
including laser manufacturing, biological and chemical sensing,
medical diagnostics and therapy, display technology, and optical
computing.
Applications
of photonics includes all areas from everyday life to the most
advanced science, e.g. light detection, telecommunications,
information processing, lighting, metrology, spectroscopy,
holography, medicine (surgery, vision correction, endoscopy, health
monitoring), military technology, laser material processing, visual
art, biophotonics, agriculture and robotics.
The
world photonics market, according to the
World Photonics Report of 2013
was a
$350 billion market and will grow to a $650 billion market by
2020.
Our
business model is focused on the use of structured light - a
disruptive conceptual breakthrough in photonics. Light-emitting
diodes (LEDs) shine a single wavelength of pulsed light in
increasing steps of intensity onto a subject. Photodiodes capture
the light that is returned via reflection or re emission of that
light. The photodiode produces an analog signal that is then
converted into a 24 bit digital data point for each pulse of light.
A typical scan is comprised of hundreds of pulses of light across a
number of specific frequency LED’s creating a unique ChromaID
signature for the subject being scanned. In a typical application,
a “reference” or “master” ChromaID
signature is captured and stored in a database for that specific
subject. When an unknown substance is scanned to produce its own
ChromaID signature, (the “discovery scan”), the unknown
substance’s ChromaID signature is compared to that of the
known (or “reference”) ChromaID signature. Algorithms
are used to compare the two sets of data and determine if the
“discovery” signature is the same as the
“reference” ChromaID signature. This accuracy threshold
can be adjusted from 51 % to 99.995 % accuracy based on the
requirements for each specific application of the ChromaID
technology. Historically, a number of the applications for ChromaID
technology were performed by spectrophotometers. The sales of
spectrophotometers by companies such as Ocean Optics, Perkin Elmer,
Fisher Thermo Scientific and Agilent are multibillion dollar
businesses. Spectrophotometers combine broad-spectrum light; a
diffraction grating to split it; and a linear array for graphical
presentation in software. They tend to be bulky, fragile, and
expensive; scanning and analysis are complex. We believe our
ChromaID technology uses lower cost components, provides more
accurate data, has a very flexible form factor and the information
it provides can be easily understood. The use of structured light
by our ChromaID technology provides a platform for the development
of a myriad of applications in the categories of identification,
authentication and diagnostics.
We
believe that the ChromaID technology is analogous to a smartphone,
upon which an enormous number of previously unforeseen applications
have been developed. The ChromaID technology may be considered an
enabling technology that brings the science of light and photonics
to low cost, real world commercialization opportunities across
multiple industries. ChromaID is a sensor technology which, with
its low cost, small form factor, and ease of connectivity can be an
enabling technology for the broad Internet of Things and integrated
into many aspects of everyday life providing useful information
relating health, life and safety. The technology is foundational
and as such, the basis upon which we believe a significant business
can be built.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol
“VSUL.”
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional
financing, the sale of significant numbers of our shares and a
volatile market price for our common stock. These risks and
uncertainties are discussed in more detail below in Part II, Item
1A.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of
operations information and presentation of that data as a
percentage of change from period-to-period.
(dollars in thousands)
THREE MONTHS ENDED DECEMBER 31, 2016 COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 2015
Sales
Net revenue for the three months ended December 31, 2016 decreased
$136,000 to 1,149,000 as compared to $1,285,000 for the three
months ended December 31, 2015. The decrease was due to lower sales
at TransTech resulting from a reduction in product
sales.
Cost of Sales
Cost of sales for the for the three months ended December 31, 2016
decreased $128,000 to $959,000 as compared to $1,087,000 for the
year ended September 30, 2015. The decrease was due to lower sales
TransTech resulting from a reduction in product sales.
Gross profit was $190,000 for the three months ended December 31,
2016 as compared to $198,000 for the three months ended December
31, 2015. Gross profit was 16.6% for the three months ended
December 31, 2016 as compared to 15.4% for the three months ended
December 31, 2015.
Research and Development Expenses
Research and development expenses for the three months ended
December 31, 2016 decreased $51,000 to $41,000 as compared to
$92,000 for the three months ended December 31, 2015. The decrease
was due to reduced expenditures for the RATLab and suppliers
related to the commercialization of our ChromaID technology.
The
RATLab is no longer providing us with
services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months
ended December 31, 2016 increased $1,055,000 to $1,791,000 as
compared to $736,000 for the three months ended December 31,
2015.
The increase primarily was due to (i) increased business
development, investor relation expenses and consulting expenses of
$125,000; (ii) a reserve for accounts receivable at TransTech of
$120,000; (iii) an impairment of goodwill of $484,000; (iv)
increased legal expenses of $27,000; (v) the impairment of an
investment in a note receivable from BioMedx of $250,000 and an
increase in other expenses of $22,000. As part of the selling,
general and administrative expenses for the three months ended
December 31, 2016, we incurred investor relation expenses and
business development expenses of $282,000.
We are in dispute with a TransTech customer and reserved $120,000
during the three months ended December 31, 2016 as selling, general
and administrative expenses. We determined that our goodwill
related to the 2010 acquisition of TransTech Systems was impaired
and recorded an impairment of $483,645 as selling, general and
administrative expenses during the three months ended December 31,
2016.
On November 2, 2016, Pulse Biologics, Inc. (BioMedx)
issued an Original Issue Discount Convertible Promissory Note to
us. Pursuant to the Note, we loaned $260,000 with a principal
amount of $286,000 to Pulse Biologics, Inc. The Note matures one
year from issuance and bears interest at 5%. The principal and
interest can be converted to Biologic common stock at our option.
We impaired the investment in a note
receivable from BioMedx of $250,000 during the three months ended
December 31, 2016 until the note is repaid
’’
.
Other Income (Expense)
Other expense for the three months ended December 31, 2016 was
$466,000 as compared to other expense of $1,382,000 for the three
months ended December 31, 2015. The other expense for the three
months ended December 31, 2016 included change in the value of
derivatives of $418,000, interest expenses of $52,000. Offset by
other income of $4,000. The loss on the value of the derivative
instruments is a result of the decline of the derivative liability
as our underlying stock price has declined.
The other expense for the three months ended December 31, 2015
included other income of $2,000, offset by loss on change -
derivative liability of $1,345,000, and interest expense of
$39,000. The loss on change derivative liability warrants related
to derivative instruments included in the June 2013 private
placement, the November 2013 Xinova Services and License Agreement,
our convertible notes payable and the issuance of Series A
Convertible Preferred Stock.
Net Loss
Net loss for the three months ended December 31, 2016 was
$2,108,000 as compared to $2,012,000 for the three months ended
December 31, 2015.
The net loss for the three months ended December 31, 2016
,
included
non-cash expense of
$1,328,000, including (i) loss on change- derivative liability
warrants of $417,000;(ii) other of $10,000, (iii) depreciation and
amortization of $22,000;(iv) stock based compensation of
$11,000;(v) issuance of capital stock for services and expenses of
$207,000; (vi) conversion of interest of $56,000; (vii) provision
for losses on accounts receivable of $121,000; and (viii)
impairment of goodwill of $484,000. TransTech’s net loss from
operations was $101,000 for the three months ended December 31,
2016 as compared to a net loss of $86,000 for the three months
ended December 31, 2015. The loss from operations excluded the
provision for losses on accounts receivable of $121,000 and the
impairment of goodwill of $484,000.
Net loss for the three months ended
December 31,
2015
included non-cash other expense of $1,516,000
including (i) depreciation and amortization of $54,000; (ii)
issuance of capital stock for services and expenses of $104,000;
(iii) stock based compensation of $12,000; and (iv) loss on change
– derivative liability warrants of
$1,346,000.
We expect losses to continue as we commercialize our
ChromaID™ technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations, and
otherwise operate on an ongoing basis. Significant factors in the
management of liquidity are funds generated by operations, levels
of accounts receivable and accounts payable and capital
expenditures.
We had cash of $181,000 and net working capital deficit of
approximately $3,893,000 (excluding the derivative liability-
warrants of $563,000 as of December 31, 2016. We expect
losses to continue as we commercialize our ChromaID™
technology. Our cash used in operations for years ended September
30, 2016 and 2015 was $3,373,000 and $240,000, respectively.
We believe
that our cash on hand will be sufficient to fund our operations
through February 28, 2017.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2016 contains an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon raising capital
from financing transactions.
We need additional financing to implement our business plan and to
service our ongoing operations and pay our current debts. There can
be no assurance that we will be able to secure any needed funding,
or that if such funding is available, the terms or conditions would
be acceptable to us. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
We have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale common stock, issuance of
common stock in conjunction with an equity line of credit, loans by
our Chief Executive Officer and the exercise of
warrants.
We
intend to issue up to 3,125,000 Series D Shares (and an equal
number of warrants) for gross proceeds of $2,500,000 pursuant on a
“best efforts” basis, but there can be no assurance
that we will be able to sell that number of shares, if
any.
We finance our TransTech operations from operations and a Secured
Credit Facility with Capital Source
Business
Finance
Group. On December 9, 2008,
TransTech entered into a $1,000,000 secured credit facility with
Capital Source
to fund
its operations. On December 12, 2016, the secured credit
facility was renewed for an additional six months, with a floor for
prime interest of 4.5% (currently 4.5%) plus 2.5%. The eligible
borrowing is based on 80% of eligible trade accounts receivable,
not to exceed $1,000,000. The secured credit facility is
collateralized by the assets of TransTech, with a guarantee by
Visualant, including a security interest in all assets of
Visualant. Availability under this Secured Credit ranges from $0 to
$175,000 ($10,000 as of September 30, 2016) on a daily basis. The
remaining balance on the accounts receivable line of $300,136 as of
September 30, 2016 must be repaid by the time the secured credit
facility expires on June 12, 2017, or we renew by automatic
extension for the next successive six-month
term.
Operating Activities
Net cash used in operating activities for the three months ended
December 31, 2016 was $573,000. This amount was primarily related
to a net loss of $2,108,000, offset by a decrease in accounts
receivable of $52,000, a decrease in inventory of $85,000, an
increase in accounts payable and accrued expenses of $67,000, other
items of $3,000 and non-cash items of $1,328,000. The non-cash
items of $1,328,000 includes (i) loss on change- derivative
liability warrants of $417,000; (ii) other of $10,000, (iii)
depreciation and amortization of $22,000; (iv) stock based
compensation of $11,000; (v) issuance of capital stock for services
and expenses of $207,000; (vi) conversion of interest of $56,000;
(vii) provision for losses on accounts receivable of $121,000; and
(viii) impairment of goodwill of $484,000.
On
November 1, 2016, we purchased an Original Issue Discount
Convertible Promissory Note from BioMedx, Inc. We paid $260,000 for
the Note with a principal amount of $286,000. The Note matures one
year from issuance and bears interest at 5%. The principal and
interest can be converted to Biologic common stock at the option of
the Company. We received 150,000 shares of Pulse Biologics common
stock as partial consideration for purchasing the Note. In
addition, if BioMedx does not repay the Promissory Note, we will
have the right to convert the Promissory Note into 51% of the
ownership of BioMedx.
BioMedx
is an early stage company that owns a royalty bearing license, for
medical applications, to certain technology developed
by
Pulse Evolution. Our management concluded BioMedx’s ability
to repay Promissory Note is contingent on BioMedx obtaining
additional financing. In addition, BioMedx will require additional
financing to commercialize the licensed technology. Due to the
inherent uncertainty involved in these activities, our management
has determined the value of the Promissory Note and BioMedx common
stock is zero at December 31, 2016 and recorded a reserve for the
full value.
Financing Activities
Net cash provided by financing activities for the three months
ended December 31, 2016 was $565,000. This amount was primarily
related to (i) proceeds from convertible notes of $300,000;(ii)
proceeds from the sale of common and preferred stock of
$300,000, offset by (iii)
repayment
from line of credit of $35,000.
Our contractual cash obligations as of December 31, 2016 are
summarized in the table below:
|
|
|
Less
Than
|
|
|
Greater
Than
|
|
Contractual
Cash Obligations
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
|
Operating
leases
|
$
10,030
|
$
10,030
|
$
-
|
$
-
|
$
-
|
|
Convertible
notes payable
|
555,000
|
555,000
|
-
|
-
|
-
|
|
Notes
payable
|
1,100,071
|
1,100,071
|
-
|
-
|
-
|
|
Capital
expenditures
|
100,000
|
20,000
|
40,000
|
40,000
|
-
|
|
|
$
1,765,101
|
$
1,685,101
|
$
40,000
|
$
40,000
|
$
-
|
Off-Balance
Sheet Arrangements
We do
not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely
to have a current or future material effect on our financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources.
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
This item is not applicable.
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
a) Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation, under the supervision and with the
participation of our management, of the effectiveness of the design
and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended (“Exchange Act”), means controls
and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our principal
executive and principal financial officers concluded as of
December 31, 2016
that our
disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weaknesses in our
internal controls over financial reporting discussed immediately
below.
Identified Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Audit Committee
:
While we have
an audit committee, we lack a financial expert. During 2017, the
Board expects to appoint an additional independent Director to
serve as Audit Committee Chairman who is an “audit
committee financial expert” as defined by the Securities and
Exchange Commission (“SEC”) and as adopted under the
Sarbanes-Oxley Act of 2002.
Financial Reporting
: There were
several delinquent SEC filings from October 1, 2016 to February 9,
2017. In addition, we believe there is a lack of segregation of
duties over financial reporting and issues with the proper
recording of certain equity transactions. The Company is working to
resolve these issues and is using consultants to ensure accurate
financial reporting.
b) Changes in Internal Control over Financial
Reporting
During
the three months ended
December 31,
2016
, there were no changes in our internal controls over
financial reporting during this fiscal quarter that materially
affected, or is reasonably likely to have a materially affect, on
our internal control over financial reporting.
PART II. OTHER
INFORMATION
|
ITEM 1A.
|
RISK FACTORS
|
There are certain inherent risks which will have an effect on the
Company’s development in the future and
the most
significant risks and uncertainties known and identified by our
management are described below.
We need additional financing to support our technology development
and ongoing operations, pay our debts and maintain ownership of our
intellectual properties.
We are currently operating at a loss. We believe that our cash on
hand will be sufficient to fund our operations through February 28,
2017.
We need additional
financing to implement our business plan and to service our ongoing
operations, pay our current debts (described below) and maintain
ownership of our intellectual property. There can be no assurance
that we will be able to secure any needed funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing when it is
needed, we will need to restructure our operations and/or divest
all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
We are
currently attempting to raise up to $2,500,000 in gross proceeds
through the sale of up to 3,125,000 shares of Series D Preferred
Stock (and an equal number of warrants) on a “best
efforts” basis. There can there can be no assurance that we
will be able to sell that number of shares, if any. Furthermore, we
do not currently have a sufficient number of shares of Preferred
Stock authorized under our Articles of Incorporation to cover this
sale and we will be required to amend the Articles of Incorporation
in order to complete the full offering
We need to continue as a going concern if our business is to
succeed.
Because of our recurring losses and negative cash flows from
operations, the audit report of our independent registered public
accountants on our consolidated financial statements for the year
ended September 30, 2016 contains an explanatory paragraph stating
that there is substantial doubt about our ability to continue as a
going concern. Factors identified in the report include our
historical net losses, negative working capital, and the need for
additional financing to implement our business plan and service our
debt repayments. If we are not able to attain profitability in the
near future our financial condition could deteriorate further,
which would have a material adverse impact on our business and
prospects and result in a significant or complete loss of your
investment. Further, we may be unable to pay our debt obligations
as they become due, which include obligations to secured
creditors.
If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As of December 31, 2016, we have obligations to repay approximately
$2,314,824 in various loans in the near future, and if we do not
satisfy these obligations, the lenders may have the right to demand
payment in full or exercise other remedies.
We have a $199,935 Business Loan Agreement with Umpqua Bank (the
“Umpqua Loan”), which matures on December 31, 2017 and
provides for interest at 3.25% per year.
Related to this
Umpqua Loan, we entered into a demand promissory note for $200,000
on January 10, 2014 with an entity affiliated with Ronald P.
Erickson, our Chief Executive Officer. This demand promissory note
will be effective in case of a default by us under the Umpqua Loan.
We recorded accrued interest of
$17,852 as of December 31, 2016.
We also have two other demand promissory notes payable to entities
affiliated with Mr. Erickson, totaling $600,000. Each of these
notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. We recorded accrued
interest of $44,704 as of December 31, 2016.
Mr. Erickson and/or entities with which he is affiliated also have
advanced $529,833 and have unreimbursed expenses and compensation
of approximately $430,056. We owe Mr. Erickson, or entities with
which he is affiliated, $1,559,889 as of December 31,
2016.
We have $555,000 in convertible notes payable.
We require additional financing, to service and/or repay these debt
obligations. If we raise additional capital through borrowing or
other debt financing, we may incur substantial interest expense. If
and when we raise more equity capital in the future, it will result
in substantial dilution to our current stockholders.
We have a history of operating losses and there can be no assurance
that we can achieve or maintain profitability.
We have experienced net losses since inception. As of September 30,
2016, we had an accumulated deficit of $27.1 million and net losses
in the amount of $1,746,000 and $2,631,000 for the years ended
September 30, 2016 and 2015, respectively. There can be no
assurance that we will achieve or maintain
profitability.
If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer.
Our
ChromaID business has produced minimal revenues, and may not
produce significant revenues in the near term, or at all, which
would harm our ability to continue our operations or obtain
additional financing and require us to reduce or discontinue our
operations. You must consider our business and prospects in light
of the risks and difficulties we will encounter as business with an
early-stage technology in a new and rapidly evolving industry. We
may not be able to successfully address these risks and
difficulties, which could significantly harm our business,
operating results and financial condition.
If the company were to dissolve or wind-up operations, holders of
our common stock would not receive a liquidation
preference.
If we were to wind-up or dissolve our company and liquidate and
distribute our assets, our common stockholders would share in our
assets only after we satisfy any amounts we owe to our creditors
and preferred equity holders. If our liquidation or
dissolution were attributable to our inability to profitably
operate our business, then it is likely that we would have material
liabilities at the time of liquidation or
dissolution. Accordingly, it is very unlikely that
sufficient assets will remain available after the payment of our
creditors and preferred equity holders to enable common
stockholders to receive any liquidation distribution with respect
to any common stock.
We may not be able to generate sufficient revenue from the
commercialization of our ChromaID technology and related products
to achieve or sustain profitability.
We are in the early stages of commercializing our ChromaID™
technology. To date, we have entered into one License
Agreement with Sumitomo Precision Products Co., Ltd. and have a
strategic relationship with Xinova. More recently, we have entered
into a
Collaboration Agreement and License
with
Intellicheck Mobilisa, Inc. None of these relationships have
generated any significant revenue. Failure to sell our
ChromaID products, grant additional licenses and obtain royalties
or develop other revenue streams will have a material adverse
effect on our business, financial condition and results of
operations.
To date, we have generated minimal revenue from
sales of our ChromaID products. We believe that our
commercialization success is dependent upon our ability to
significantly increase the number of customers that are using our
products
.
In addition, demand for our ChromaID products may
not materialize, or increase as quickly as planned, and we may
therefore be unable to increase our revenue levels as expected. We
are currently not profitable
.
Even if we succeed in introducing the ChromaID
technology and related products to our target markets, we may not
be able to generate sufficient revenue to achieve or sustain
profitability.
We currently rely upon external resources for engineering and
product development services. If we are unable to secure an
engineering or product development partner or establish
satisfactory engineering and product development capabilities, we
may not be able to successfully commercialize our ChromaID
technology
.
Our
success depends upon our ability to develop products that are
accurate and provide solutions for our customers. Achieving the
desired results for our customers requires solving engineering
issues in concert with them. Any failure of our ChromaID technology
or related products to meet customer expectations could result in
customers choosing to retain their existing testing methods or to
adopt systems other than ours.
We do
not currently have internal resources which can work on engineering
and product development matters. We have used third parties in the
past and will continue to do so. Historically, our primary
third-party research, partner was RATLab LLC, a Seattle based
private research organization. As we move toward commercialization
of our ChromaID technology, the RATLab is no longer providing us
with these services. We are in the process of identifying a
engineering and product development partner to work with us on
engineering and product development issues. These resources are not
always readily available and the absence of their availability
could inhibit our research and development efforts and our
responsiveness to our customers. We have had internal engineering
and product development resources in the Company and plan to
re-establish those resources in the future. Our inability to secure
those resources could impact our ability to provide engineering and
product development services and could have an impact on our
customers’ willingness to use our ChromaID
technology.
We are in the early stages of commercialization and our ChromaID
technology and related products may never achieve significant
commercial market acceptance.
Our
success depends on our ability to develop and market products that
are recognized as accurate and cost-effective. Many of our
potential customers may be reluctant to use our new technology.
Market acceptance will depend on many factors, including our
ability to convince potential customers that our ChromaID
technology and related products are an attractive alternative to
existing light-based technologies. We will need to demonstrate that
our products provide accurate and cost-effective alternatives to
existing light-based authentication technologies. Compared to most
competing technologies, our technology is relatively new, and most
potential customers have limited knowledge of, or experience with,
our products. Prior to implementing our ChromaID technology and
related products, potential customers are required to devote
significant time and effort to testing and validating our products.
In addition, during the implementation phase, customers may be
required to devote significant time and effort to training their
personnel on appropriate practices to ensure accurate results from
our technology and products. Any failure of our ChromaID technology
or related products to meet customer expectations could result in
customers choosing to retain their existing testing methods or to
adopt systems other than ours.
Many factors influence the perception of a system including its use
by leaders in the industry. If we are unable to induce industry
leaders in our target markets to implement and use our ChromaID
technology and related products, acceptance and adoption of our
products could be slowed. In addition, if our products fail to gain
significant acceptance in the marketplace and we are unable to
expand our customer base, we may never generate sufficient revenue
to achieve or sustain profitability.
Our management has concluded that we have material weaknesses in
our internal controls over financial reporting and that our
disclosure controls and procedures are not effective.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of a company's annual or interim financial statements will not be
prevented or detected on a timely basis. During the audit of our
financial statements for the year ended September 30, 2016, our
management identified material weaknesses in our internal control
over financial reporting. If these weaknesses continue, investors
could lose confidence in the accuracy and completeness of our
financial reports and other disclosures.
In addition, our management has concluded that our disclosure
controls and procedures were not effective due to the lack of an
audit committee “financial expert.”
These material
weaknesses, if not remediated, create an increased risk of
misstatement of the Company’s financial results, which, if
material, may require future restatement thereof. A failure to
implement improved internal controls, or difficulties encountered
in their implementation or execution, could cause future delays in
our reporting obligations and could have a negative effect on us
and the trading price of our common stock.
If our development and license agreement with Intellicheck is
terminated for any reason it may have a material adverse effect on
our business strategy and our results of operations may
suffer.
In March 2016, we entered into a Collaboration Agreement and
License with Intellicheck Mobilisa, Inc. that provides Intellicheck
exclusive rights to our ChromaID technology for threat assessment
and document verification in the areas of homeland security, law
enforcement and crime prevention.
We are working with Intellicheck to develop solutions for threat
assessment and document verification solutions for markets in the
United States and abroad. Documents that can potentially be
verified include driver’s licenses, access control cards,
commercial instruments, currency, birth certificates and other
so-called “breeder” documents which can allow the
holder to obtain a passport and various other
documents.
Failure to operate in accordance with the Intellicheck agreement,
or an early termination or cancellation of this agreement for any
reason, would have a material adverse effect on our ability to
execute our business strategy and our results of operations
and
financial condition may
be materially adversely affected
.
Our services and license agreement with Xinova is important to our
business strategy and operations.
In November 2013, we entered into a strategic relationship with
Xinova, formerly Invention Development Management Company, a
subsidiary of Intellectual Ventures, a private intellectual
property fund with over $5 billion under management.
Xinova
owns over 40,000 IP assets and has
broad global relationships for the invention of technology, the
filing of patents and the licensing of intellectual property.
Xinova has worked to expand the reach and the potential application
of the ChromaID technology and has filed ten patents base on the
ChromaID technology, which it has licensed to
us.
The amended agreement with Xinova covers a number of areas that are
important to our operations, including the following:
●
The
agreement requires Xinova to identify and engage inventors to
develop new applications of our ChromaID technology, present the
developments to us for approval, and file at least ten patent
applications to protect the developments;
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We
received a worldwide, nontransferable, exclusive license to the
licensed intellectual property developed under this agreement
within the identification, authentication and diagnostics field of
use;
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We
received a nonexclusive and nontransferable option to acquire a
worldwide, nontransferable, nonexclusive license to intellectual
property held by Xinova within that same field of use;
and
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We
granted to Xinova certain licenses to our intellectual property
outside the identification, authentication and diagnostics field of
use.
Failure to operate in accordance with the Xinova agreement, or an
early termination or cancellation of this agreement for any
reason,
would
have a material adverse effect on ability to execute our business
strategy and on our results of operations and
business.
If components used in our finished products become unavailable, or
third-party manufacturers otherwise experience delays, we may incur
delays in shipment to our customers, which would damage our
business.
We
depend on third-party suppliers for substantially all of our
components and products. We purchase these products and components
from third-party suppliers that serve the advanced lighting systems
market and we believe that alternative sources of supply are
readily available for most products and components. However,
consolidation could result in one or more current suppliers being
acquired by a competitor, rendering us unable to continue
purchasing necessary amounts of key components at competitive
prices. In addition, for certain of our customized components,
arrangements for additional or replacement suppliers will take time
and result in delays. We purchase products and components pursuant
to purchase orders placed from time to time in the ordinary course
of business. This means we are vulnerable to unanticipated price
increases and product shortages. Any interruption or delay in the
supply of components and products, or our inability to obtain
components and products from alternate sources at acceptable prices
in a timely manner, could harm our business, financial condition
and results of operations.
While we believe alternative manufacturers for these products are
available, we have selected these particular manufacturers based on
their ability to consistently produce these products per our
specifications ensuring the best quality product at the most cost
effective price. We depend on our third-party manufacturers to
satisfy performance and quality specifications and to dedicate
sufficient production capacity within scheduled delivery times.
Accordingly, the loss of all or one of these manufacturers or
delays in obtaining shipments could have a material adverse effect
on our operations until such time as an alternative manufacturer
could be found.
We are dependent on key personnel.
Our success depends to a significant degree upon the continued
contributions of key management and other personnel, some of whom
could be difficult to replace, including Ronald P. Erickson, our
Chief Executive Officer. We do not maintain key person life
insurance covering any of our officers. Our success will depend on
the performance of our officers, our ability to retain and motivate
our officers, our ability to integrate new officers into our
operations, and the ability of all personnel to work together
effectively as a team. Our officers do not currently
have employment agreements. Our failure to retain and
recruit officers and other key personnel could have a material
adverse effect on our business, financial condition and results of
operations.
Our success also
depends on our continued ability to identify, attract, hire, train,
retain and motivate highly skilled technical, managerial,
manufacturing, administrative and sales and marketing personnel.
Competition for these individuals is intense, and we may not be
able to successfully recruit, assimilate or retain sufficiently
qualified personnel. In particular, we may encounter difficulties
in recruiting and retaining a sufficient number of qualified
technical personnel, which could harm our ability to develop new
products and adversely impact our relationships with existing and
future customers. The inability to attract and retain necessary
technical, managerial, manufacturing, administrative and sales and
marketing personnel could harm our ability to obtain new customers
and develop new products and could adversely affect our business
and operating results.
We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and trade secret
laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights.
Obtaining and
maintaining a strong patent position is important to our business.
Patent law relating to the scope of claims in the technology fields
in which we operate is complex and uncertain, so we cannot be
assured that we will be able to obtain or maintain patent rights,
or that the patent rights we may obtain will be valuable, provide
an effective barrier to competitors or otherwise provide
competitive advantages. Others have filed, and in the future are
likely to file, patent applications that are similar or identical
to ours or those of our licensors. To determine the priority of
inventions, or demonstrate that we did not derive our invention
from another, we may have to participate in interference or
derivation proceedings in the USPTO or in court that could result
in substantial costs in legal fees and could substantially affect
the scope of our patent protection. We cannot be assured our patent
applications will prevail over those filed by others. Also, our
intellectual property rights may be subject to other challenges by
third parties. Patents we obtain could be challenged in litigation
or in administrative proceedings such as
ex parte
reexam,
inter partes
review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
There can be no assurance that:
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any of our existing patents will continue to be held valid, if
challenged;
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patents will be issued for any of our pending
applications;
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any claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
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our patents will be issued in the primary countries where our
products are sold in order to protect our rights
and potential commercial advantage; or
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any of our products or technologies will not infringe on the
patents of other companies.
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If we are enjoined from selling our products, or if we are required
to develop new technologies or pay significant monetary damages or
are required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining
and maintaining a patent portfolio entails significant expense and
resources. Part of the expense includes periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or
inadvertently, our competitive position could suffer.
Legal
actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We may receive notices that claim we have infringed upon
the intellectual property of others. Even if these claims are not
valid, they could subject us to significant costs. Any such claims,
with or without merit, could be time-consuming to defend, result in
costly litigation, divert our attention and resources, cause
product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all.
We have engaged in litigation and litigation may be necessary in
the future to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims
of infringement or invalidity by others. A successful claim of
intellectual property infringement against us and our failure or
inability to license the infringed technology or develop or license
technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating
results.
Our TransTech vendor base is concentrated.
Evolis, Fargo, Ultra Electronics - Magicard Division and NiSCA, are
major vendors of TransTech whose products account for approximately
61% of TransTech’s revenue. TransTech buys, packages and
distributes products from these vendors after issuing purchase
orders. Any loss of any of these vendors would have a material
adverse effect on our business, financial condition and results of
operations.
We currently have a very small sales and marketing organization. If
we are unable to secure a sales and marketing partner or establish
satisfactory sales and marketing capabilities, we may not be able
to successfully commercialize our ChromaID technology.
We currently have one full-time sales and business
development manager for the ChromaID technology. This individual
oversees sales of our products and IP licensing and manages
critical customer and partner relationships. In addition,
he
manages and
coordinates the business development resources at our strategic
partners Xinova and Sumitomo Precision Products as they relate
to our ChromaID technology.
We also
work with third party entities that are focused in specific market
verticals where they have business relationships that can be
leveraged. Our subsidiary, TransTech Systems, has six sales and
marketing employees on staff to support the ongoing sales efforts
of that business. In order to commercialize products that are
approved for commercial sales, we sell directly to our customers,
collaborate with third parties that have such commercial
infrastructure and work with our strategic business partners to
generate sales. If we are not successful entering into appropriate
collaboration arrangements, or recruiting sales and marketing
personnel or in building a sales and marketing infrastructure, we
will have difficulty successfully commercializing our ChromaID
technology, which would adversely affect our business, operating
results and financial condition.
We
may not be able to enter into collaboration agreements on terms
acceptable to us or at all. In addition, even if we enter into such
relationships, we may have limited or no control over the sales,
marketing and distribution activities of these third parties. Our
future revenues may depend heavily on the success of the efforts of
these third parties. If we elect to establish a sales and marketing
infrastructure we may not realize a positive return on this
investment. In addition, we must compete with established and
well-funded pharmaceutical and biotechnology companies to recruit,
hire, train and retain sales and marketing personnel. Factors that
may inhibit our efforts to commercialize ChromaID without strategic
partners or licensees include:
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our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
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Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Although we do not need regulatory approval for our current
applications, our ChromaID technology may have a number of
potential applications in fields of use which will require prior
governmental regulatory approval before the technology can be
introduced to the marketplace. For example, we are exploring the
use of our ChromaID technology for certain medical diagnostic
applications. There is no assurance that we will be
successful in developing medical applications for our ChromaID
technology. If we were to be successful in developing medical
applications of our technology, prior approval by the FDA and other
governmental regulatory bodies may be required before the
technology could be introduced into the marketplace. There is
no assurance that such regulatory approval would be obtained for a
medical diagnostic or other applications requiring such
approval.
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected
.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities,
incurrence
of debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our growth strategy depends in part on our ability to execute
successful strategic acquisitions. We have made strategic
acquisitions in the past and may do so in the future, and if the
acquired companies do not perform as expected, this could adversely
affect our operating results, financial condition and existing
business.
We
may continue to expand our business through strategic acquisitions.
The success of any acquisition will depend on, among other
things:
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the
availability of suitable candidates;
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higher
than anticipated acquisition costs and expenses;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate
favorable terms for those acquisitions;
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the
availability of funds to finance acquisitions and obtaining any
consents necessary under our credit facility;
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the
ability to establish new informational, operational and financial
systems to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
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We
may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
Our management has concluded that our disclosure controls and
procedures were not effective due to the lack of an audit committee
“financial expert.” We expect to appoint an additional
independent director to serve as Audit Committee Chairman. This
director will be an “audit committee financial expert”
as defined by the SEC. However, we cannot assure you that we will
be able to fully comply with these laws, rules, and regulations
that address corporate governance, internal control reporting, and
similar matters in the future. Failure to comply with these laws,
rules and regulations could materially adversely affect our
reputation, financial condition, and the value of our
securities.
The Capital
Source credit facility contains
covenants that may limit our flexibility in operating our business
and failure to comply with any of these covenants could have a
material adverse effect on our business
.
In December 8, 2009, we entered into the Capital Source credit
facility. These Capital Source credit facility contains covenants
that limit our ability to engage in specified types of
transactions. These covenants limit our ability to, among other
things:
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sell,
transfer, lease or dispose of certain assets;
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engage
in certain mergers and consolidations;
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incur
debt or encumber or permit liens on certain assets, except in the
limited circumstances permitted under the loan and security
agreements;
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make
certain restricted payments, including paying dividends on, or
repurchasing or making distributions with respect to, our common
stock; and
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enter
into certain transactions with affiliates.
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A breach of any of the covenants under the Capital Source credit
facility could result in a default under the Capital Source credit
facility. Upon the occurrence of an event of default under the
Capital Source credit facility, the lenders could elect to declare
all amounts outstanding to be immediately due and payable and
terminate all commitments to extend further credit. If we are
unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure such
indebtedness.
The exercise prices of certain warrants and the Series A and C
Preferred Shares may require further adjustment.
In the
future, if we sell our common stock at a price below $0.70 per
share, the exercise prices of certain warrants and Series A, Series
C and Series D Preferred Shares may require further adjustment
from $0.70 per share.
Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders
.
The market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions,
equity investments and divestitures,
strategic relationships, addition or loss of significant customers
and contracts, capital expenditure
commitments and litigation;
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Issuance of convertible or equity securities and related warrants
for general or merger and acquisition purposes;
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Issuance or repayment of debt, accounts payable or convertible debt
for general or merger and acquisition
purposes;
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Sale of a significant number of shares of our common stock by
stockholders;
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General market and economic conditions;
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Quarterly variations in our operating results;
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Investor and public relation activities;
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Announcements of technological innovations;
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New product introductions by us or our competitors;
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Competitive activities; and
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Additions or departures of key personnel.
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These broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers of our common stock may be restricted under the
securities or securities regulations laws promulgated by various
states and foreign jurisdictions, commonly referred to as "blue
sky" laws. Absent compliance with such individual state laws, our
common stock may not be traded in such jurisdictions. Because the
securities held by many of our stockholders have not been
registered for resale underthe blue sky laws of any state, the
holders of such shares and persons who desire to purchase them
should be aware that there may be significant state blue sky law
restrictions upon the ability of investors to sell the securities
and of purchasers to purchase the securities. These restrictions
may prohibit the secondary trading of our common stock. Investors
should consider the secondary market for our securities to be a
limited one.
Two
individual investors could have significant influence over matters
submitted to stockholders for approval
.
As of December 31, 2016, two individuals in the aggregate, assuming
the exercise of all warrants to purchase common stock, hold shares
representing approximately 80% of our common stock on a
fully-converted basis and could be considered a control group for
purposes of SEC rules. However, the agreement with one of these
individuals limits his ownership to 4.99% individually. Beneficial
ownership includes shares over which an individual or entity has
investment or voting power and includes shares that could be issued
upon the exercise of options and warrants within 60 days after the
date of determination. If these persons were to choose to act
together, they would be able to significantly influence all matters
submitted to our stockholders for approval, as well as our
officers, directors, management and affairs. For example, these
persons, if they choose to act together, could significantly
influence the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of us on terms that other stockholders may
desire.
The sale of a significant number of our shares of common stock
could depress the price of our common stock.
Sales or issuances of a large number of shares of common stock in
the public market or the perception that sales may occur could
cause the market price of our common stock to decline. As of
December 31, 2016, we had 3,570,010 shares of common stock issued
and outstanding, held by 54 stockholders of record. The number of
stockholders, including beneficial owners holding shares through
nominee names, is approximately 2,300. Each share of common stock
entitles its holder to one vote on each matter submitted to the
stockholders for a vote, and no cumulative voting for directors is
permitted. Stockholders do not have any preemptive
rights to acquire additional securities issued by us. As
of December 31, 2016, there were options outstanding for the
purchase of 50,908 common shares, warrants for the purchase of
4,494,080 common shares,
2,184,048 shares of our common
stock issuable upon the conversion of Series A, Series C and Series
D Convertible Preferred Stock and up to 332,940 shares of our
common stock issuable upon the exercise of placement agent
warrants,
all of which could
potentially dilute future earnings per share.
Significant shares of common stock are held by our principal
stockholders, other company insiders and other large stockholders.
As “affiliates” of Visualant, as defined under
Securities and Exchange Commission Rule 144 under the Securities
Act of 1933, our principal stockholders, other of our insiders and
other large stockholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible
preferred stock could result in further dilution to common stock
holders and may affect the market price of the common
stock.
Future issuance of
additional shares of
common stock and/or preferred stock could dilute existing
stockholders.
We have and may
issue preferred stock that could have rights that are preferential
to the rights of common stock that could discourage potentially
beneficially transactions to our common
stockholders.
Pursuant to our certificate of incorporation, we currently have
authorized 100,000,000 shares of common stock and 5,000,000 shares
of preferred stock. To the extent that common shares are available
for issuance, subject to compliance with applicable stock exchange
listing rules, our board of directors has the ability to issue
additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient.
The issuance of any additional securities could, among other
things, result in substantial dilution of the percentage ownership
of our stockholders at the time of issuance, result in substantial
dilution of our earnings per share and adversely affect the
prevailing market price for our common stock.
An issuance of additional shares of preferred stock could result in
a class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
Future capital raises may dilute our existing stockholders’
ownership and/or have other adverse effects on our
operations.
If we
raise additional capital by issuing equity securities, our existing
stockholders’ percentage ownership will be reduced and these
stockholders may experience substantial dilution. We may also issue
equity securities that provide for rights, preferences and
privileges senior to those of our common stock. If we raise
additional funds by issuing debt securities, these debt securities
would have rights senior to those of our common stock and the terms
of the debt securities issued could impose significant restrictions
on our operations, including liens on our assets. If we raise
additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or
candidate products, or to grant licenses on terms that are not
favorable to us.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have never declared or paid cash dividends on our capital stock.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business, and we do
not anticipate paying any cash dividends on our capital stock in
the foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our certificate of incorporation, as amended, our bylaws and Nevada
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
Our articles of incorporation allow for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock; our Series A Preferred Stock contains
provisions that restrict our ability to take certain actions
without the consent of at least 66% of the Series A Preferred Stock
then outstanding.
Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our Board
of Directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
In addition, our articles of incorporation restrict our ability to
take certain actions without the approval of at least 66% of the
Series A Preferred Stock then outstanding. These actions include,
among other things;
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authorizing, creating,
designating, establishing or issuing an increased number of shares
of Series A Preferred Stock or any other class or series of capital
stock ranking senior to or on a parity with the Series A Preferred
Stock;
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adopting a plan for the
liquidation, dissolution or winding up the affairs of our company
or any recapitalization plan (whether by merger, consolidation or
otherwise);
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amending, altering or
repealing, whether by merger, consolidation or otherwise, our
articles of incorporation or bylaws in a manner that would
adversely affect any right, preference, privilege or voting power
of the Series A Preferred Stock; and
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declaring or paying any
dividend (with certain exceptions) or directly or indirectly
purchase, redeem, repurchase or otherwise acquire any shares of our
capital stock, stock options or convertible securities (with
certain exceptions).
ITEM 2.
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
During the three months ended December 31, 2016, we had the
following issuances of unregistered sales of equity
securities:
On October 21, 2015, we entered into a Public Relations Agreement
with Financial Genetics LLC for public relation services. On
October 18, 2016, we entered into an Amendment to Public Relations
Agreement with Financial Genetics LLC. Under the Agreements,
Financial Genetics was issued 168,910 shares of our common stock
during the three months ended December 31, 2016.
On October 6, 2016, we entered into a Services Agreement with
Redwood Investment Group LLC for financial services. Under the
Agreement, Redwood was issued 100,000 shares of our common stock
during the three months ended December 31, 2016.
We entered into Convertible Promissory Notes totaling $710,000 with
accredited investors during September 2015 to February 2016 to fund
short-term working capital. The Notes accrued interest at a rate of
8% per annum and became due September 2016 to February 2017 and
were convertible into common stock as part of our next financing.
On November 30, 2016, we converted $695,000 of the Convertible
Promissory Notes and interest of $54,078 into 936,348 shares of
comment stock at $0.80 per share. We also issued warrants to
purchase 936,348 shares of the Company’s common stock. The
five year warrants are exerciseable at $1.00 per share, subject to
adjustment.
On December 22, 2016, a supplier converted accounts payable
totaling $6,880 into 8,600 shares of common stock valued at $0.80
per share.
ITEM 5.
OTHER INFORMATION
This item is not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be filed herewith by Item 601 of
Regulation S-K, as described in the following index of exhibits,
are attached hereto unless otherwise indicated as being
incorporated by reference, as follows:
(a) Exhibits
|
3.1
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Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock (incorporated by reference to the Company’s Current Report on Form 8-K, filed on February 10, 2017) |
|
|
|
|
10.1
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Form of 10% Convertible Redeemable Note due
May 1, 2017
(incorporated by reference to the
Company’s Current Report on Form 8-K, filed November 7,
2016)
|
|
|
|
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10.2
|
Form of Securities Purchase Agreement by and between Visualant, Incorporated and an accredited investor and an affiliate (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 7, 2016) |
|
10.3
|
Form of Original Issue Discount Convertible Promissory Note issued by Pulse Biologics due October 31, 2017 (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 7, 2016) |
|
|
|
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10.4
|
Amendment 8 to Demand Promissory Note dated June 30, 2016 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 14, 2016) |
|
|
|
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10.5
|
Amendment 9 to Demand Promissory Note dated June 30, 2016 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 14, 2016) |
|
|
|
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10.6
|
Amendment 11 to Demand Promissory Note dated June 30, 2016 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 14, 2016) |
|
|
|
| 10.7 | Preferred Stock and Warrant Purchase Agreement by and between Visualant, Incorporated and Clayton Struve (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 18, 2016) |
|
|
|
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10.8
|
Registration Rights Agreement by and between Visualant, Inc and Clayton Struve (incorporated by reference to the Company’s Current Report on Form 8-K, filed on November 18, 2016) |
|
|
|
|
10.9
|
Series F Warrant to Purchase Common Stock (incorporated by reference to the Company’s Current Report on Form 8- K, filed on November 18, 2016) |
|
|
|
|
10.10
|
Preferred Stock and Warrant Purchase Agreement by and between Visualant, Incorporated and Clayton Struve (incorporated by reference to the Company’s Current Report on Form 8-K, filed on December 23, 2016) |
|
|
|
|
10.11
|
Registration Rights Agreement by and between Visualant, Inc and Clayton Struve (incorporated by reference to the Company’s Current Report on Form 8-K, filed on December 23, 2016) |
|
|
|
|
10.12
|
Series F Warrant to Purchase Common Stock (incorporated by reference to the Company’s Current Report on Form 8-K, filed on December 23, 2016) |
|
|
|
| Amendment to Public Relations Agreement dated October 18, 2016 by and between Visualant, Incorporated and Financial Genetics LLC. Attached herewith. | |
|
|
|
| Services Agreement dated September 15, 2016 by and between Visualant, Incorporated and R edwood Investment Group LLC . Attached herewith. | |
|
|
|
| Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. Attached herewith. | |
|
|
|
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| Section 906 Certifications. Attached herewith. | |
|
|
|
| Section 906 Certifications. Attached herewith. | |
|
|
|
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T. (1) |
(1) Pursuant to Rule 406T of Regulation S-T, these interactive data
files are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933 or Section 18 of the Securities Exchange Act of 1934 and
otherwise are not subject to liability.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VISUALANT, INCORPORATED
(Registrant)
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Date: February 21, 2017
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By:
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/s/ Ronald P. Erickson
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Ronald P. Erickson
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Chief Executive Officer, President, and Director
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(Principal Executive Officer)
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Date: February 21, 2017
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By:
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/s/ Jeff T. Wilson
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Jeff T. Wilson
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|
|
|
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Chief Financial Officer, Secretary and Treasurer
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(Principal Financial and Accounting Officer)
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46