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 March 31, 2018
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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 810, 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 check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule
12b-2
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer (Do not check if a smaller reporting company)
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Smaller
reporting company
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Emerging
growth company
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
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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 May 9, 2018: 7,439,726 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 March 31, 2018 and September 30,
2017 (audited)
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3
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Consolidated Statements of Operations for the three and six
months ended March 31, 2018 and 2017
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4
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Consolidated Statements of Cash Flows for the six months ended
March 31, 2018 and 2017
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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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18
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ITEM 3
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Quantitative and Qualitative Disclosures About Market
Risk
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24
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ITEM 4
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Controls and Procedures
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24
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PART II
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OTHER INFORMATION
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25
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ITEM 1A.
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Risk Factors
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25
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ITEM 2
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Unregistered Sales of Equity Securities and Use of
Proceeds
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34
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ITEM
3
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Defaults
upon Senior Securities
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34
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ITEM
4
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Mine
Safety Disclosures
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34
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ITEM 5
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Other Information
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34
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ITEM 6
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Exhibits
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34
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SIGNATURES
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37
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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.
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VISUALANT, INCORPORATED AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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The accompanying notes are an integral part of these consolidated
financial statements.
VISUALANT, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Visualant, Inc. (“the Company”,
“us,” “we,” or “our”) in
accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial reporting and rules and
regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted. In the opinion of our management, all
adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position,
results of operations, and cash flows for the fiscal periods
presented have been included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended September 30, 2017,
filed with the Securities and Exchange Commission
(“SEC”) on December 29, 2017. The results of operations
for the six months ended March 31, 2018 are not necessarily
indicative of the results expected for the full fiscal year, or for
any other fiscal period.
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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 $(1,827,419), $(3,901,232) and
$(1,746,495) for the six months ended March 31, 2018 and for the
years ended September 30, 2017 and 2016, respectively. Net cash
used in operating activities was $(442,518), $(1,264,324) and
$(2,746,333) for the six months ended March 31, 2018 and for the
years ended September 30, 2017 and 2016, respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of March 31, 2018, the Company’s
accumulated deficit was $33,361,146. 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, the Company’s Chairman of the Board,
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, 2017 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 May 31, 2018.
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.
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
electromagnetic energy to detect the unique digital
“signature” of the substance. The Company calls this
its technology “ChromaID™” and
“Bio-RFID.” .
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™ and Bio-RFID™ technology. To date, the
Company has entered into License Agreements with Sumitomo Precision
Products Co., Ltd. and Intellicheck, Inc. In addition, it has a
technology license agreement with Allied Inventors
, formerly
Xinova
and 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
and Bio-RFID products. The Company is currently not profitable.
Even if the Company succeeds in introducing the ChromaID and
Bio-RFID 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. Bio-RFID was invented by
individuals working for the Company. The Company actively pursues a
robust intellectual property strategy and has been granted twelve
patents. The Company also 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 the Company in
perpetuity by the Company’s strategic partner, Allied
Inventors.
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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 $35,000 reserve for impaired inventory as of March 31,
2018 and September 30, 2017, 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 2-3
years.
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 $983,645 as selling, general and
administrative expenses during the year ended September 30,
2017.
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 as of March 31, 2018 and September 30, 2017 are 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
–
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 measured by 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
March 31, 2018, there were options outstanding for the purchase of
4,736 common shares, warrants for the purchase of 11,837,422 common
shares, 2,825,053 shares of the Company’s common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock. In addition, the Company has an
unknown number of shares issuable upon conversion of convertible
debentures of $2,390,066. All of which could potentially dilute
future earnings per share.
As of March 31, 2017, there were options outstanding for the
purchase of 50,908 common shares, warrants for the purchase of
5,110,812 common shares,
2,467,910 shares of our common
stock issuable upon the conversion of Series A, Series C and Series
D Convertible Preferred Stock.
In
addition, the Company had an unknown number of shares issuable upon
conversion of convertible debentures of $175,000. All of 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.
Accounts receivable were $556,996 and $693,320, net of allowance,
as of March 31, 2018 and September 30, 2017, respectively. The
Company had one customer in excess of 10% (36.2%) of the
Company’s consolidated revenues for the six months ended
March 31, 2018. The Company had one customer (71.5%) with accounts
receivable in excess of 10% as of March 31, 2018. The Company has a
total allowance for bad debt in the amount of $60,000 as of March
31, 2018.
5.
INVENTORIES
Inventories were $204,293 and $225,909 as of March 31, 2018 and
September 30, 2017, 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 was a $35,000 reserve for impaired inventory
as of March 31, 2018 and September 30, 2017,
respectively.
6. NOTES RECEIVABLE FROM BIOMEDX, INC
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
matured one year from issuance and bears interest at 5%. The
principal and interest was convertible into BioMedx common stock at
the option of the Company. The Company received 150,000 shares of
BioMedx common stock as partial consideration for purchasing the
Note. In addition, if BioMedx does not repay the Promissory Note,
the Company would have the right to convert the Promissory Note
into 51% of the ownership of BioMedx.
Due to
the uncertainty involved with a start-up company, The
Company’s management determined that the value of the
Promissory Note and BioMedx common stock was zero at December 31,
2016 and recorded an impairment reserve for the full value as of
December 31, 2016. During the year ended September 30, 2017,
BioMedx paid the Company $290,608 in full satisfaction of the Note.
The Company recorded the gain as a reduction in SG&A expense
during the year ended September 30, 2017. In addition, the Company
has not valued the 150,000 shares of BioMedx common
stock.
7. FIXED ASSETS
Fixed assets, net of accumulated depreciation, was $102,742 and
$133,204 as of March 31, 2018 and September 30, 2017, respectively.
Accumulated depreciation was $640,736 and $662,855 as of March 31,
2018 and September 30, 2017, respectively. Total depreciation
expense was $30,462 and $17,399 for the six months ended March 31,
2018 and 2017, 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 March 31, 2018 was comprised of the
following:
8.
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 $983,645 during the year ended September 30,
2017.
9.
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.
There
was no derivative liability as of
March 31, 2018
and
September 30, 2017.
For the year ended
September 30, 2017, the Company recorded non-cash loss of $217,828
related to the “change in fair value of derivative”
expense related to its derivative instruments. The Company early
adopted ASU 2017-11 and has reclassified its financial instrument
with down round features to equity in the amount of $410,524 at
September 30, 2017.
10. CONVERTIBLE NOTES PAYABLE
Convertible notes payable as of March 31, 2018 and September 30,
2017 consisted of the following:
Convertible Promissory Note dated September 30, 2016
On September 30, 2016, the Company entered into a $210,000
Convertible Promissory Note with Clayton A. Struve, an accredited
investor 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 year ended
September 30, 2017, the Company recorded interest of $21,000
related to the convertible note. This note was extended in the
Securities Purchase Agreement, General Security Agreement and
Subordination Agreement dated August 14, 2017 with a maturity date
of August 13, 2018. The Company recorded accrued interest of
$31,741 as of March 31, 2018.
Securities Purchase Agreement dated August 14, 2017
On August 14, 2017, the Company issued a senior convertible
exchangeable debenture with a principal amount of $360,000 and a
common stock purchase warrant to purchase 1,440,000 shares of
common stock in a private placement to Clayton Struve for gross
proceeds of $300,000 pursuant to a Securities Purchase Agreement
dated August14, 2017. The debenture accrues interest at 20% per
annum and matures August 13, 2018. The convertible debenture
contains a beneficial conversion valued at $110,629. The warrants
were valued at $111,429. Because the note is immediately
convertible, the warrants and beneficial conversion were expensed
as interest.
On the same date, the Company entered into a General Security
Agreement with the investor, pursuant to which the Company has
agreed to grant a security interest to the investor in
substantially all the Company’s assets, effective upon the
filing of a UCC-3 termination statement to terminate the security
interest held by Capital Source Business Finance Group in the
assets of the Company. In addition, an entity affiliated with
Ronald P. Erickson, the Company’s Chief Executive Officer,
entered into a Subordination Agreement with the investor pursuant
to which all debt owed by the Company to such entity is
subordinated to amounts owed by the Company to the investor under
the Debenture (including amounts that become owing under any
Debentures issued to the investor in the future).
The initial conversion price of the Debenture is $0.25 per share,
subject to certain adjustments. The initial exercise price of the
Warrant is $0.25 per share, also subject to certain
adjustments.
As part of the Purchase Agreement, the Company granted the investor
“piggyback” registration rights to register the shares
of common stock issuable upon the conversion of the Debenture and
the exercise of the Warrant with the Securities and Exchange
Commission for resale or other disposition.
The Debenture and the Warrant were issued in a transaction that was
not registered under the Securities Act of 1933, as amended (the
“Act”) in reliance upon applicable exemptions from
registration under Section 4(a)(2) of the Act and Rule 506 of SEC
Regulation D under the Act.
In connection with the private placement, the placement agent for
the Debenture and the Warrant received a cash fee of $30,000 and
the Company expects to issue warrants to purchase shares of the
Company’s common stock to the placement agent based on 10% of
proceeds.
Under the terms of the Purchase Agreement, the investor may
purchase up to an aggregate of $1,000,000 principal amount of
Debentures (before a 20% original issue discount) (and Warrants to
purchase up to an aggregate of 250,000 shares of common stock).
These securities are being offered on a “best efforts”
basis by the placement agent.
During the year ended September 30, 2017, $156,941 was recorded as
interest expense related to debt discounts, beneficial conversions
and warrants associated with Convertible Promissory
Notes.
On December 12, 2017, the Company closed an additional $250,000 and
issued a senior convertible exchangeable debenture with a principal
amount of $300,000 and a common stock purchase warrant to purchase
1,200,000 shares of common stock in a private placement dated
December 12, 2017 to an accredited investor pursuant to a
Securities Purchase Agreement dated August 14, 2017. The
convertible debenture contains a beneficial conversion valued at
$93,174. The warrants were valued at $123,600. Because the note is
immediately convertible, the warrants and beneficial conversion
were expensed as interest.
On March 2, 2018, the Company received gross proceeds of $280,000
in exchange for issuing a senior convertible redeemable debenture
with a principal amount of $336,000 and a warrant to purchase
1,344,000 shares of common stock in a private placement dated
February 28, 2018 to an accredited investor pursuant to a
Securities Purchase Agreement dated August 14, 2017. The
convertible debenture contains a beneficial conversion valued at
$252,932. The warrants were valued at $348,096. Because the note is
immediately convertible, the warrants and beneficial conversion
were expensed as interest.
In connection with the February 28, 2018 private placement, the
placement agent for the debenture and the warrant received a cash
fee of $28,000 and the Company issued warrants to purchase shares
of the Company’s common stock to the placement agent or its
affiliates based on 10% of proceeds.
Convertible Redeemable Promissory Notes with Ronald P. Erickson and
J3E2A2Z
The
Company entered into a Note and Account Payable Conversion
Agreement pursuant to which (a) all $664,233 currently owing under
the J3E2A2Z Notes was converted to a Convertible Redeemable
Promissory Note in the principal amount of $664,233, and (b) all
$519,833 of the J3E2A2Z Account Payable was converted into a
Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. See Note 10 and 11 for additional details. The
warrants were valued at $110,545. Because the note is immediately
convertible, the warrants and beneficial conversion were expensed
as interest. The Company recorded accrued interest of $5,836 as of
March 31, 2018.
|
11.
|
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
|
Notes payable, capitalized leases and long-term debt as of March
31, 2018 and September 30, 2017 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.
Originally entered into on December 9, 2008, TransTech obtained an
initial $1,000,000 secured credit facility with Capital Source to
fund its operations. On June 6, 2017, TransTech entered into the
Fourth Modification to the Loan and Security Agreement. This
secured credit facility was renewed until June 12, 2018 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, and is now not to exceed $500,000. 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. The remaining balance on the accounts receivable line
of $175,062 ($253,000 available) as of March 31, 2018 must be
repaid by the time the secured credit facility expires on June 12,
2018, or the Company renews by automatic extension for the next
successive one year term.
Note Payable to Umpqua Bank
The Company has a $199,935 Business Loan Agreement with Umpqua
Bank. On March 26, 2018, the Umpqua Loan maturity was extended to
March 31, 2019 and provides for interest at 4.75% 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 Chairman of the Board. 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 $25,332 as of March 31,
2018.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
On
January 25, 2018, the Company entered into amendments to two demand
promissory notes, totaling $600,000 with Mr. Erickson, the
Company’s Chief Executive Officer and/or entities in which
Mr. Erickson has a beneficial interest. The amendments extend the
due date from December 31, 2017 to March 31, 2018 and continue to
provide for interest of 3% per annum and a third lien on company
assets if not repaid by March 31, 2018 or converted into
convertible debentures or equity on terms acceptable to the Holder.
On March 16, 2018, the demand promissory notes and accrued interest
were converted into convertible notes payable.
See Note 10 for additional
details.
|
12.
|
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 preferred stock, par
value $0.001 per share.
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 six months ended
March 31, 2018:
A supplier converted accounts payable totaling $48,300 into 230,000
shares of common stock.
The Company issued 329,240 shares of common stock to two Names
Executive Officers employees and three consultants and for services
during 2017 and 2018. The Company expensed $70,640 during the six
months ended March 31, 2018.
Warrants to Purchase Common Stock
The following warrants were issued during the six months ended
March 31, 2018:
On December 15, 2017, the Company received $250,000 and issued a
senior convertible exchangeable debenture with a principal amount
of $300,000 and a five year common stock purchase warrant to
purchase 1,200,000 shares of common stock in a private placement
dated December 12, 2017 to an accredited investor pursuant to a
Securities Purchase Agreement dated August 14, 2017. See Note 10
for additional details. The initial exercise price of the warrants
described above is $0.25 per share, also subject to certain
adjustments.
On March 2, 2018, the Company received gross proceeds of $280,000
in exchange for issuing a senior convertible redeemable debenture
with a principal amount of $336,000 and a five year warrant to
purchase 1,344,000 shares of common stock in a private placement
dated February 28, 2018 to an accredited investor pursuant to a
Securities Purchase Agreement dated August 14, 2017 See Note 10 for
additional details. The initial exercise price of the warrants
described above is $0.25 per share, also subject to certain
adjustments.
The
Company entered into a Note and Account Payable Conversion
Agreement pursuant to which (a) all $664,233 currently owing under
the J3E2A2Z Notes was converted to a Convertible Redeemable
Promissory Note in the principal amount of $664,233, and (b) all
$519,833 of the J3E2A2Z Account Payable was converted into a
Convertible Redeemable Promissory Note in the principal amount of
$519,833 together with a warrant to purchase up to 1,039,666 shares
of common stock of the Company for a period of five years.
The initial exercise price of the
warrants described above is $0.50 per share, also subject to
certain adjustments. See Note 10 and 11 for additional
details.
In
addition, effective as of January 31, 2018, Erickson was issued a
warrant to purchase up to 855,000 shares of common stock of the
Company for a period of five years.
The initial exercise price of the warrants
described above is $0.50 per share, also subject to certain
adjustments. See Note 10 and 11 for additional
details.
During the six months ended March 31, 2108, The Company issued
placement agent warrants related to the issuance of senior
convertible redeemable debentures and Series D Preferred Stock to
purchase up to 473,400 shares of common stock
for a period
of five years.
The initial exercise
price of the warrants described above is $0.25 per share, also
subject to certain adjustments.
A
summary of the warrants outstanding as of
March 31, 2018
were as
follows:
A
summary of the status of the warrants outstanding as of
March 31, 2018
is presented
below:
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the six months ended
March 31, 2018
were as
follows:
Assumptions
|
Dividend yield
|
0%
|
|
Expected life
|
2-5 years
|
|
Expected volatility
|
125%
|
|
Risk free interest rate
|
2.14%-2.65%
|
There were vested warrants of 11,837,422 as of March 31, 2018 with
an aggregate intrinsic value of $0.
|
13.
|
STOCK OPTIONS
|
Description of Stock Option 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 the following stock option transactions during the
six months ended March 31, 2018.
A former employee forfeited stock option grants for 10,668 shares
of common stock at $14.719 per share.
There are currently 4,736 options to purchase common stock at an
average exercise price of $14.577 per share outstanding as of March
31, 2018 under the 2011 Stock Incentive Plan. The Company recorded
$7,334 and $21,774 of compensation expense, net of related tax
effects, relative to stock options for the six months ended March
31, 2018 and 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 March 31, 2018, there is
approximately $2,722 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 1.38
years.
Stock option activity for the six months ended March 31, 2018 and
for the years ended September 30, 2017 and 2016 was as
follows:
|
|
Weighted
Average
|
||
|
|
Options
|
Exercise
Price
|
$
|
|
Outstanding
as of September 30, 2015
|
57,407
|
18.425
|
1,057,725
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(6,499
)
|
(21.403
)
|
(139,098
)
|
|
Outstanding
as of September 30, 2016
|
50,908
|
18.045
|
918,627
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(35,504
)
|
(19.507
)
|
(692,568
)
|
|
Outstanding
as of September 30, 2017
|
15,404
|
$
14.675
|
$
226,059
|
|
Granted
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Forfeitures
|
(10,668
)
|
14.719
|
(157,020
)
|
|
Outstanding
as of March 31, 2018
|
4,736
|
$
14.577
|
$
69,039
|
The
following table summarizes information about stock options
outstanding and exercisable as of March 31,
2018:
|
|
|
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
|
1,334
|
2.25
|
$
13.500
|
1,334
|
$
13.50
|
|
15.000
|
3,402
|
1.04
|
15.000
|
2,068
|
15.00
|
|
|
4,736
|
1.38
|
$
14.577
|
3,402
|
$
14.41
|
There is no aggregate intrinsic value of the exercisable options as
of March 31, 2018.
|
14.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Note 10 and 11 for Convertible Notes Payable and Notes Payable
with Ronald P. Erickson, our Chairman 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. On March 26, 2018, the Umpqua Loan maturity was extended to
March 31, 2019 and provides for interest at 4.75% 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 Chairman of the Board. 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 $25,332 as of March 31,
2018.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
On
January 25, 2018, the Company entered into amendments to two demand
promissory notes, totaling $600,000 with Mr. Erickson, the
Company’s Chief Executive Officer and/or entities in which
Mr. Erickson has a beneficial interest. The amendments extend the
due date from December 31, 2017 to March 31, 2018 and continue to
provide for interest of 3% per annum and a third lien on company
assets if not repaid by March 31, 2018 or converted into
convertible debentures or equity on terms acceptable to the Holder.
On March 16, 2018, the demand promissory notes and accrued interest
were converted into convertible notes payable.
See Note 10 for additional
details.
Other Amounts Due to Mr. Erickson
Mr. Erickson and/or entities with which he is affiliated also have
advanced $24,500 and have unreimbursed expenses and compensation of
approximately $493,476. The Company owes Mr. Erickson, or entities
with which he is affiliated, $517,916 as of March 31,
2018.
|
15.
|
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 the following non-cancelable
operating leases for its various facilities and certain
equipment.
|
Years
Ended March 31,
|
Total
|
|
2019
|
$
86,190
|
|
2020
|
117,169
|
|
2021
|
41,414
|
|
2022
|
-
|
|
2023
|
-
|
|
Beyond
|
-
|
|
Total
|
$
244,773
|
Corporate Offices
On April 13, 2017, the Company leased its executive office located
at 500 Union Street, Suite 810, Seattle, Washington, USA, 98101.
The Company leases 943 square feet and the net monthly payment is
$2,672. The monthly payment increases approximately 3% each year
and the lease expires on May 31, 2022.
TransTech Facilities
TransTech is located at 12142 NE Sky Lane, Suite 130, Aurora, OR
97002. TransTech leases a total of approximately 6,340 square feet
of office and warehouse space for its administrative offices,
product inventory and shipping operations. Effective December 1,
2017, TransTech leases this office from December 1, 2017 at $4,465
per month. The monthly payment increases approximately 3% each year
and the lease expires on January 31, 2020. Until December 1, 2017,
TransTech leased this office on a month to month basis at $6,942
per month.
Consulting Agreement with Phillip A. Bosua
On July 7, 2017, the Company entered into a Consulting Agreement
with Phillip A. Bosua whereby Mr. Bosua can earn up to 200,000
shares of the Company’s company stock based on achieving
certain product development and funding milestones.
On March 1, 2018, the Company entered into a Consulting and
Services Agreement with Blaze, Inc. and Mr. Bosua. The Consulting
Agreement supersedes the Consulting Relationship Letter dated July
6, 2017 between the Company and Mr. Bosua. Under the terms of the
Consulting Agreement, Blaze and Mr. Bosua are performing certain
development work
on behalf of
the Company related to potential products for the consumer
marketplace. The Consulting Agreement is deemed to be effective as
of the date of the July 7, 2017 Consulting Relationship Letter and
is effective until the completion of services or earlier
termination in accordance with the terms of the
Agreement.
Entry into Employment Agreement with Ronald P. Erickson, Chief
Executive Officer
On
August 4, 2017, the Board of Directors approved an Employment
Agreement with Ronald P. Erickson pursuant to which the Company
engaged Mr. Erickson as the Company’s Chief Executive Officer
through December 31, 2018.
Mr.
Erickson’s annual compensation is $180,000. Mr. Erickson is
also entitled to receive an annual bonus and equity awards
compensation as approved by the Board. The bonus should be paid no
later than 30 days following earning of the bonus.
Mr.
Erickson will be entitled to participate in all group employment
benefits that are offered by the Company to the Company’s
senior executives and management employees from time to time,
subject to the terms and conditions of such benefit plans,
including any eligibility requirements.
If the Company terminates Mr. Erickson’s employment at any
time prior to the expiration of the Term without Cause, as defined
in the Employment Agreement, or if Mr. Erickson terminates his
employment at any time for “Good Reason” or due to a
“Disability”, Mr. Erickson will be entitled to receive
(i) his Base Salary amount for one year; and (ii) medical benefits
for eighteen months.
16.
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 March 31, 2018, there were
the following material transactions that require
disclosure:
The Company issued 2,225,000 common shares valued at $0.25 related
to service awards. The Company issued stock option grants to two
employees to acquire 700,000 shares of the Company’s common
stock. The stock option grants vest annually over four years.
Finally, the Company issued a warrant to purchase 100,000 shares of
the common stock. The grant price of the five year warrant was
$0.25 per share.
Issuance of Twelfth Patent on ChromaID™
Technology
On
April 4, 2018, the Company was issued US Patent No. 9,869,636 B2,
entitled “Device For Evaluation Of Fluids Using
Electromagnetic Energy.” The patent expires approximately
April 2033. This patent pertains to the use of ChromaID technology
for evaluating and analyzing fluids such as those following through
an IV drip in a hospital or water, for example.
Merger with RAAI Lighting, Inc.
On
April 10, 2018, the Company entered into an Agreement and Plan of
Merger with 500 Union Corporation, a Delaware corporation and a
wholly owned subsidiary of the Company, and RAAI Lighting, Inc., a
Delaware corporation. Pursuant to the Merger Agreement, the Company
has agreed to acquire all the outstanding shares of RAAI’s
capital stock through a merger of Merger Sub with and into RAAI,
with RAAI surviving the Merger as a wholly owned subsidiary of the
Company. The Merger and the Merger Agreement were approved by (a)
the sole director and stockholder of RAAI and (b) the Board of
Directors of the Company (acting on behalf of the Company directly
and on behalf of the Company as the sole stockholder of Merger
Sub).
Under
the terms of the Merger Agreement, each share of RAAI common stock
issued and outstanding immediately before the Merger (1,000 shares)
will be cancelled and converted into the right to receive 2,000
shares of the Company’s common stock. As a result, the
Company will issue 2,000,000 shares of its common stock to Phillip
A. Bosua, formerly the sole stockholder of RAAI. The consideration
for the Merger was determined through arms-length bargaining by the
Company and RAAI. The shares issued to Mr. Bosua represent
approximately 27.7% of the Company’s issued and outstanding
common stock after the Merger. The shares issued to Mr. Bosua
represent approximately 9.0% of the Company’s fully diluted
common stock after the Merger. The Merger was structured to qualify
as a tax-free reorganization for U.S. federal income tax purposes.
The Company received intellectual property, copy rights and
trademarks related to RAAI. The Company did not acquire a business,
customer list or employees.
Appointment of Director
On
April 10, 2018, the Board increased the size of the Board from
three to four members and Phillip A. Bosua was appointed as a
member of the Board. Mr. Bosua’s term of office expire at the
next annual meeting of the Company’s
stockholders.
Appointment of Officers
On
April 10, 2018, the Company appointed Mr. Bosua as Chief Executive
Officer of the Company, replacing Ronald P. Erickson, who remains
Chairman of the Company. Mr. Erickson
has been a director and officer of
Visualant since April 2003. He was appointed as our CEO and
President in November 2009 and as Chairman of the Board in February
2015. Previously, Mr. Erickson was our President and Chief
Executive Officer from September 2003 through August 2004, and was
Chairman of the Board from August 2004 until May
2011.
Phillip
A. Bosua was appointed the Company’s CEO on April 10,
2018. Previously, Mr. Bosua served as the Company’s
Chief Product Officer since August 2017 and the Company entered
into a Consulting Agreement on July 7, 2017. From September 2012 to
February 2015, he was the founder and Chief Executive Officer of
LIFX Inc. (where he developed and marketed an
innovative“smart” light bulb) and from August 2015
until February 2016 was Vice President Consumer Products at Soraa
(which markets specialty LED light bulbs). From February 2016 to
July 2017, Mr. Bosua was the founder and CEO of RAAI, Inc. (where
he continued the development of his smart lighting
technology). From May 2008 to February 2013 he was the
Founder and CEO of LimeMouse Apps, a leading developer of
applications for the Apple App Store.
On
April 10, 2018, the Company entered into an Employment Agreement
with Mr. Bosua reflecting his appointment as Chief Executive
Officer. The Employment Agreement is for an initial term of 12
months (subject to earlier termination) and will be automatically
extended for additional 12-month terms unless either party
notifiesthe other party of its intention to terminate the
Employment Agreement. Mr. Bosua will be paid a base salary of
$225,000 per year and may be entitled to bonuses and equity awards
at the discretion of the Board or a committee of the Board. The
Employment Agreement provides for severance pay equal to 12 months
of base salary if Mr. Bosua is terminated without
“cause” or voluntarily terminates his employment for
“good reason.”
On
April 10, 2018, the Company entered into an Amended Employment
Agreement for Ronald P. Erickson which amends the Employment
Agreement dated July 1, 2017. The Agreement expires March 21,
2019.
Amendment of Equity Incentive Plan
On
April 10, 2018, the Board approved an amendment to its 2011 Stock
Incentive Plan increasing the number of shares of common stock
reserved under the Incentive Plan from 93,333 to
1,200,000.
Merger with Know Lab, Inc.
On May 1, 2018, Know Labs, Inc. – a Nevada corporation
incorporated on April 3, 2018, and our wholly-owned subsidiary
– merged with and into the Company pursuant to an Agreement
and Plan of Merger dated May 1, 2018. In connection with
the merger, our Articles of Incorporation were effectively amended
to change our name to “Know Labs, Inc.” by and through
the filing of Articles of Merger which are filed herewith as
Exhibit 3.1. This parent-subsidiary merger was approved
by us, the parent, in accordance with Nevada Revised Statutes
Section 92A.180. Stockholder approval was not
required. This amendment was filed with the Nevada
Secretary of State and became effective on May 1,
2018.
Corporate Name Change and Symbol Change
On May 1, 2018, the Company filed a corporate action with FINRA to
effectively change the Company’s OTC trading symbol and
change the Company’s name to “Know Labs, Inc.”
The Company’s Board of Directors approved the Symbol Change
on April 10, 2018, and in accordance with the Nevada Revised
Statutes, no shareholder approval was required. The Symbol Change
would change the Company’s current symbol from
“VSUL” to “KNWN,” or, if unavailable,
either “KNLB” or “KLBS,” pending
FINRA’s confirmation.
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.
BUSINESS
We are focused on the development, marketing and sales of a
proprietary technology which is capable of uniquely authenticating,
identifying or diagnosing almost any substance using
electromagnetic energy to create, record and detect the unique
“signature” of the substance. We call this our
“ChromaID™” and “Bio-RFID™”
technology.
Overview
For the
past several years we have focused on the development of our
proprietary ChromaID™ technology. Using light from low-cost
LEDs (light emitting diodes) we map the color of substances, fluids
and materials and with our proprietary processes we can
authenticate, identify and diagnose based upon the color that is
present. The color is both visible to us as humans but also outside
of the humanly visible color spectrum in the near infra-red and
near ultra-violet and beyond. Our ChromaID scanner sees what we
like to call “Nature’s Color Fingerprint.”
Everything in nature has a unique color identifier and with
ChromaID we can see it, and identify, authenticate and diagnose
based upon the color that is present. Our ChromaID scanner is
capable of uniquely identifying and authenticating almost any
substance or liquid using light to create, record and detect its
unique color signature. While we will continue to develop and
enhance our ChromaID technology and extend its capacity, we have
moved into the commercialization phase of our Company as we begin
to both work with partners and internally to create revenue
generating products for the marketplace.
Our ChromaID™ Technology
We have
developed a proprietary technology to uniquely identify,
authenticate or diagnose 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 and beyond 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, verification and
diagnostic 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 (shape and size) 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 electromagnetic frequencies 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. We call this the ChromaID Reference
Library. 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. Over time, we believe
the ChromaID Reference Libraries can become a significant asset of
the Company, providing valuable information in numerous fields of
use.
We have
pursued an active intellectual property strategy and have been
granted twelve 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 our
strategic partner, Allied Inventors, a spin off corporation from
Intellectual Ventures, the large intellectual property
fund.
Our Bio-RFID™ Technology
Working
in our lab over the past several months, we have developed
extensions and new inventions derived from our ChromaID technology
which we refer to as Bio-RFID technology. We are in the early
stages of the development of this technology. We are building the
internal and external development team necessary to rapidly
commercialize this newly discovered technology as well as secure,
through additional patent filings, the intellectual property
created with these new inventions.
ChromaID and Bio-RFID: Foundational Platform
Technologies
Our
ChromaID and Bio-RFID technologies provide a platform upon which a
myriad of applications can be developed. As platform technologies,
they are analogous to a smartphone, upon which an enormous number
of previously unforeseen applications have been developed. ChromaID
and Bio-RFID technologies are enabling technologies that bring the
science of electromagnetic energy to low cost, real world
commercialization opportunities across multiple industries. The
technologies are 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. We have pursued an active intellectual
property strategy and has been granted twelve patents. We currently
have 20 patents pending. We 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, Allied
Inventors.
We
believe that our twelve patents, 20 patent applications, three
registered trademarks, and our trade secrets, copyrights and other
intellectual property rights are important assets. 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
issued patents cover the fundamental aspects of the Visualant
ChromaID technology and a growing number of unique applications
ranging, to date, from invisible bar codes to tissue and liquid
analysis. We are filing patents on Bio-RFID technology and will
continue to expand the Company’s patent portfolio over time
through internal development efforts as well as through licensing
opportunities with third parties.
The
patents that have been issued to Visualant and their dates of
issuance are:
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. This patent describes using ChromaID to see what we call
invisible bar codes and other identifiers.
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 issued 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. This patent
describes a ChromaID fluid sampling devices.
On
April 19, 2016, we were issued 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. This patent describes an enhancement to the foundational
ChromaID technology.
On
April 18, 2017, we were issued US Patent No. 9,625,371 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Substances Using Electromagnetic Energy.” The patent expires
July 2027. This patent pertains to the use of ChromaID technology
for the identification and analysis of biological tissue. It has
many potential applications in medical, industrial and consumer
markets.
On
April 4, 2018, we were issued US Patent No. 9,869,636 B2, entitled
“Device For Evaluation Of Fluids Using Electromagnetic
Energy.” The patent expires approximately April 2033. This
patent pertains to the use of ChromaID technology for evaluating
and analyzing fluids such as those following through an IV drip in
a hospital or water, for example.
We
continue to pursue a patent strategy to expand its unique
intellectual property in the United States and other
countries.
Joint Development Agreements and Product Strategy
We are
currently undertaking internal development work on potential
products for the consumer marketplace. This development work was
being performed through our
Consulting
Agreement with Blaze Clinical, and Phillip A. Bosua, who served as
our Chief Product Officer
. As these products begin to take
form over the coming months, we will make appropriate product
announcements.
We also
will continue to engage with partners through licensing our
technology in various fields of use, entering in to joint venture
agreements to develop specific applications, and it certain
specific instances developing its own products for the
marketplace.
We have
deployed our ChromaID development kit to a number of potential
joint venture partners and customers around the world. There are
strong indications of interest in deploying our technology in a
wide variety of applications involving identification,
authentication and diagnostics. We are focusing our current efforts
on productizing our technology as it moves out of the research
laboratory and in to the marketplace.
Research and Development
Our research and development efforts are primarily focused
improving the core foundational ChromaID technology, extending its
capacity 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 current 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 incurred expenses of $241,020, $79,405 and
$325,803 for the six months ended March 31, 2018 and for the years
ended September 30, 2017 and 2016, respectively, on development
activities.
On July 6, 2017, we entered into a Consulting
Agreement with Phillip A. Bosua, our Chief Product
Officer.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol
“VSUL.” On May 1, 2018, we filed a corporate action
with FINRA to effectively change the Company’s OTC trading
symbol and change our name to “Know Labs, Inc.” Our
Board of Directors approved the Symbol Change on April 10, 2018,
and in accordance with the Nevada Revised Statutes, no shareholder
approval was required. The Symbol Change would change our current
symbol from “VSUL” to “KNWN,” or, if
unavailable, either “KNLB” or
“KLBS,”
as soon as it is approved by
FINRA.
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 ENDED MARCH 31, 2018 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2017
Sales
Net revenue for the three months ended March 31, 2018 decreased
$405,000 to $1,092,000 as compared to $1,497,000 for the three
months ended March 31, 2017. The decrease was due to a sale by
TransTech in the three months ended March 31, 2017 that was not
repeated in the three months ended March 31, 2018.
Cost of Sales
Cost of sales for the three months ended March 31, 2018 decreased
$327,000 to $865,000 as compared to $1,192,000 for the three months
ended March 31, 2017. The decrease was due to lower sales by
TransTech.
Gross profit was $227,000 for the three months ended March 31, 2018
as compared to $305,000 for the three months ended March 31, 2017.
Gross profit was 20.8% for the three months ended March 31, 2018 as
compared to 20.3% for the three months ended March 31, 2017. We
have focused TransTech on maximizing profits at the current sales
level.
Research and Development Expenses
Research and development expenses for the three months ended March
31, 2018 increased $147,000 to $154,000 as compared to $7,000 for
the three months ended March 31, 2017. The increase was due to
expenditures related to the Consulting and Services Agreement with
Phillip A. Bosua, our Chief Product Officer for product
development, including the development of our
Bio-RFID™ technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months
ended March 31, 2018 increased $17,000 to $578,000 as compared to
$561,000 for the three months ended March 31,
2017.
The decrease primarily was due to (i) decreased payroll expenses of
$16,000;offset by (ii) increased legal expenses of $18,000; and
(iii) increased other expenses of $15,000. As part of the selling,
general and administrative expenses for the three months ended
March 31, 2018, we did not record any investor relation expenses
and business development expenses.
Other Income (Expense)
Other expense for the three months ended March 31, 2018 was
$794,000 as compared to other expense of $782,000 for the three
months ended March 31, 2017. The other expense for the three months
ended March 31, 2018 included (i) interest expense of $793,000; and
(ii) other expense of $1,000. The interest expense related a senior
convertible exchangeable debentures issued on February 28, 2018 in
conjunction with a Securities Purchase Agreement dated August 14,
2017.
The other expense for the three months ended March 31, 2017
included (i) change in the value of derivatives of $805,000; (ii)
interest expense of $16,000; and offset by (iii) other income of
$39,000. The decrease on the value of the derivative instruments is
primarily a result of the issuance of additional warrants during
the quarter.
Net (Loss)
Net loss for the three months ended March 31, 2018 was $1,299,000
as compared to $1,045,000 for the three months ended March 31,
2017. The net loss for the three months ended March 31,
2018
, included
non-cash
expenses of non-cash items of $1,037,000. The non-cash items
include (i) depreciation and amortization of $16,000; (ii) stock
based compensation of $2,000; (iii) conversion of interest and
amortization of debt discount of $323,000;(iv) conversion of
accrued liabilities of $492,000; (v) issuance of warrants for debt
conversion of $110,000; (vi) other of $94,000. TransTech’s
net income from operations was $17,000 for the three months ended
March 31, 2018 as compared to a net income from operations of
$8,000 for the three months ended March 31,
2017.
We expect losses to continue as we
commercialize our
ChromaID and Bio-RFID
technology.
(dollars in thousands)
SIX MONTHS ENDED MARCH 31, 2018 COMPARED TO THE SIX MONTHS ENDED
MARCH 31, 2017
Sales
Net revenue for the six months ended March 31, 2018 decreased
$321,000 to $2,325,000 as compared to $2,646,000 for the six months
ended March 31, 2017. The decrease was due to lower sales by
TransTech.
Cost of Sales
Cost of sales for the six months ended March 31, 2018 decreased
$300,000 to $1,851,000 as compared to $2,151,000 for the six months
ended March 31, 2017. The decrease was due to lower sales by
TransTech.
Gross profit was 474,000 for the six months ended March 31, 2018 as
compared to $495,000 for the six months ended March 31, 2017. Gross
profit was 20.4% for the six months ended March 31, 2018 as
compared to 16.6% for the three and six months ended March 31,
2017. We have focused TransTech on maximizing profits at the
current sales level.
Research and Development Expenses
Research and development expenses for the six months ended March
31, 2018 increased $194,000 to $241,000 as compared to $47,000 for
the six months ended March 31, 2017. The increase was due to
expenditures related to the Consulting and Services Agreement with
Phillip A. Bosua, our Chief Product Officer for product
development, including the development of our
Bio-RFID™ technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for six months ended
March 31, 2018 decreased $826,000 to $992,000 as compared to
$1,818,000 for the six months ended March 31,
2017.
The decrease primarily was due to (i) decreased business
development and investor relation expenses of $384,000; (ii)
reduced marketing expenses of $45,000; (iii) decreased payroll
expenses of $56,000; (iv) decreased legal expenses of $22,000; (v)
and decreased bad debt losses on accounts and notes receivable of
$370,000;offset by (vi) increased other expenses of $51,000. As
part of the selling, general and administrative expenses for the
six months ended March 31, 2018, we incurred investor relation
expenses and business development expenses of $65,000.
Impairment of Goodwill
Our TransTech business is very capital intensive. We reviewed
TransTech’s operations based on its overall financial
constraints and determined the value has been impaired. We recorded
an impairment of goodwill associated with TransTech of $984,000
during the six months ended March 31, 2017.
Other Income (Expense)
Other expense for the six months ended March 31, 2018 was
$1,068,000 as compared to other expense of $1,248,000 for the six
months ended March 31, 2017. The other expense for the six months
ended March 31, 2018 included (i) interest expense of $1,086,000;
offset by (ii) other income of $18,000. The interest expense
related a senior convertible exchangeable debenture issued on
December 12, 2017 and February 28, 2018 in conjunction with a
Securities Purchase Agreement dated August 14, 2017.
The other expense for the three months ended March 31, 2017
included (i) change in the value of derivatives of $1,223,000; and
(ii) interest expenses of $68,000; and offset by (iii) other income
of $43,000. The decrease on the value of the derivative instruments
is primarily a result of the issuance of additional warrants during
the quarter.
Net (Loss)
Net loss for the six months ended March 31, 2018 was $1,827,000 as
compared to $3,602,000 for the six months ended March 31, 2017. The
net loss for the six months ended March 31, 2018
, included
non-cash expenses of non-cash items of
$1,272,000.
The non-cash items
include (i) depreciation and amortization of $30,000; (ii) stock
based compensation of $71,000; (iii) conversion of interest and
amortization of debt discount of $539,000;(iv) conversion of
accrued liabilities of $492,000; (v) issuance of warrants for debt
conversion of $110,000; and (vi) other of $30,000.TransTech’s
net income from operations was $38,000 for the six months ended
March 31, 2018 as compared to a net loss from operations of
($101,000) for the six months ended March 31,
2017.
We expect losses to continue as we commercialize our
ChromaID and Bio-RFID technology.
LIQUIDITY AND CAPITAL RESOURCES
We had cash overdraft of approximately $15,000 and net working
capital deficit of approximately $4,844,000 as of March 31,
2018. We have experienced net losses since inception and
we expect losses to continue as we commercialize our
ChromaID™ technology. As of March 31, 2018, we had an
accumulated deficit of $33,361,000 and net losses in the amount of
$1,827,000 $3,901,000 and $1,746,000 for the six months ended March
31, 2018 and years ended September 30, 2017 and 2016,
respectively.
We believe that our
cash on hand will be sufficient to fund our operations through May
31, 2018.
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2017 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 Chairman and the exercise of warrants.
We
finance our TransTech operations from operations and a Secured
Credit Facility with Capital Source Business Finance Group.
Originally entered into on December 9, 2008, TransTech obtained an
initial $1,000,000 secured credit facility with Capital Source to
fund its operations. On June 6, 2017, TransTech entered into the
Fourth Modification to the Loan and Security Agreement. This
secured credit facility was renewed until June 12, 2018 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, and is now not to exceed $500,000. 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. The remaining balance on the accounts receivable line
of $175,000 ($253,000 available) as of
March 31, 2018
must be repaid by the time
the secured credit facility expires on June 12, 2018, or the
Company renews by automatic extension for the next successive one
year term.
Operating Activities
Net cash used in operating activities for the six months ended
March 31, 2018 was $443,000. This amount was primarily related to
(i) a net loss of $1,827,000; (ii) a decrease in deferred revenue
of $59,000; offset by (ii) a decrease in accounts receivable of
$115,000; (iii) other of $56,000; and (iv) non-cash expenses of
$1,272,000. The non-cash items include (v) depreciation and
amortization of $30,000; (vi) stock based compensation of $71,000;
(vii) conversion of interest and amortization of debt discount of
$539,000; (viii) conversion of accrued liabilities of $492,000;
(ix) issuance of warrants for debt conversion of $110,000; and (x)
other of $30,000.
Financing Activities
Net cash provided by financing activities for the six months ended
March 31, 2018 was $339,000. This amount was primarily related to
(i) proceeds from convertible notes of $530,000; offset by (ii)
repayment of line of credit of $191,000.
Our contractual cash obligations as of March 31, 2018 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
|
$
244,773
|
$
86,190
|
$
117,169
|
$
41,414
|
$
-
|
|
Convertible
notes payable
|
2,390,066
|
2,390,066
|
-
|
-
|
-
|
|
Notes
payable
|
374,997
|
374,997
|
-
|
-
|
-
|
|
Capital
expenditures
|
100,000
|
20,000
|
40,000
|
40,000
|
-
|
|
|
$
3,109,836
|
$
2,871,253
|
$
157,169
|
$
81,414
|
$
-
|
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
thecompany'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
March 31, 2018
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:
Personnel:
We do not employ a full time Chief Financial
Officer. Our Chairman serves as interim Chief Financial Officer. We
utilize a consultant to assist with our financial
reporting.
Audit Committee
:
While we have
an audit committee, we lack a financial expert. During 2018, 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.
b) Changes in Internal Control over Financial
Reporting
During
the three months ended
March 31,
2018
, 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
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ITEM 1.
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LEGAL PROCEEDINGS
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From time to time, the Company may become subject to various legal
proceedings that are incidental to the ordinary conduct of its
business. Although the Company cannot accurately predict the amount
of any liability that may ultimately arise with respect to any of
these matters, it makes provision for potential liabilities when it
deems them probable and reasonably estimable. These provisions are
based on current information and legal advice and may be adjusted
from time to time according to developments.
We are currently not a party to any pending legal proceeding that
is not ordinary routine litigation incidental to our business. We
know of no material, existing or pending legal proceedings against
our Company, nor are we involved as a plaintiff in any material
proceeding or pending litigation. There are no proceedings in which
any director, officer or any affiliates, or any registered or
beneficial shareholder, is an adverse party or has a material
interest adverse to our interest.
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.
RISK FACTORS
An investment in our securities is speculative in nature, involves
a high degree of risk, and should not be made by an investor who
cannot bear the economic risk this investment for an indefinite
period of time and who cannot afford the potential loss of his or
her investment. Each prospective investor should carefully consider
the following risk factors associated with the Offering, as well as
other information contained elsewhere in this Memorandum before
making an investment.
Risks Relating to the Company Generally
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 May 31,
2018.
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.
There
can there can be no assurance that we will be able to sell that
number of shares, if any.
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, 2017 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 March 31, 2018, we owe approximately $3,283,000 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. On
December 19, 2017, the Umpqua Loan maturity was extended to March
31, 2019 and provides for interest at 4.00% 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 $25,332 as of March 31,2018.
On
March 16, 2018, we closed a Note and Account Payable Conversion
Agreement with J3E2A2Z, a Washington limited partnership, Ronald P.
Erickson, our Executive Chairman of the Board and a member of the
Board of Directors pursuant to which (a) all $664,233 currently
owing under the J3E2A2Z Notes was converted to a Convertible
Redeemable Promissory Note in the principal amount of $664,233, and
(b) all $519,833 of the J3E2A2Z Account Payable was converted into
a Convertible Redeemable Promissory Note in the principal amount of
$519,833.
Mr. Erickson and/or entities with which he is affiliated also have
unreimbursed expenses, interest and compensation of approximately
$517,976. We owe Mr. Erickson, or entities with which he is
affiliated, a total of $1,701,452 as of March 31,
2018.
We owe
$1,206,000 and interest of $31,471 under various convertible
promissory notes as of March 31,2018.
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 March 31,
2018, we had an accumulated deficit of $33,361,000 and net losses
in the amount of $1,827,000, $3,901,000 and $1,746,000 for the six
months ended March 31, 2018 and for the years ended September 30,
2017 and 2016, 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 and Bio-RFID technology and
related products to achieve or sustain profitability.
We are in the early stages of commercializing our ChromaID and
Bio-RFID technology. To date, we have entered into one
License Agreement with Sumitomo Precision Products Co., Ltd. and
have a strategic relationship with Allied Inventors. More recently,
we have entered into a
Collaboration Agreement and
License
with Intellicheck
Mobilisa, Inc. and BioMedx Inc. None of these relationships have
generated any significant revenue. Failure to develop and sell
products based upon our technology, 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 and Bio-RFID
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 and Bio-RFID technology
.
We have
historically relied upon external resources for engineering and
product development services. Today, we perform many of those
services internally, while utilizing external resources for certain
requirements. If we are unable to establish or secure satisfactory
engineering and product development capabilities, we may not be
able to successfully commercialize our ChromaID and Bio-RFID
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. Any failure of our ChromaID and Bio-RFID technology or
related products to meet customer expectations could result in
customers choosing to retain their existing testing methods or to
adopt solutions other than ours.
We
currently have internal resources which can work on engineering and
product development matters. We have used third parties in the past
to assist with this work and will continue to do so. 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. Our inability to secure those
resources could impact our ability to provide engineering and
product development services and could have an impact on the
product development of our ChromaID and Bio-RFID
technology.
We are in the early stages of commercialization and our ChromaID
and Bio-RFID 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 and
Bio-RFID 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
technology and related products, potential customers are required
to devote significant time and effort to testingand 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 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 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, 2017, 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.
Our services and license agreement with Allied Inventors is
important to our business strategy and operations.
In November 2013, we entered into a five-year strategic
relationship with Allied Inventors, formerly Xinova and Invention
Development Management Company, a former subsidiary of Intellectual
Ventures, a private intellectual property fund with over $5 billion
under management.
Allied Inventors
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. Allied
Inventors 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 Allied Inventors covers a number of
areas that are important to our operations, including the
following:
● The agreement requires Allied Inventors 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;
● 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;
● We received a nonexclusive and nontransferable option to
acquire a worldwide, nontransferable, nonexclusive license to
intellectual property held by Allied Inventors within that same
field of use; and
● We granted to Allied Inventors certain licenses to our
intellectual property outside the identification, authentication
and diagnostics field of use.
Failure to operate in accordance with the Allied Inventors
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
Chairman and Phillip A. Bosua, 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 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 beassured 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 parties
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 at
our TransTech Systems subsidiary. If we are unable to secure a
sales and marketing partner or establish satisfactory sales and
marketing capabilities at the Visualant parent Company level we may
not be able to successfully commercialize our ChromaID
technology.
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.
Our ChromaID and Bio-RFID 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
and Bio-RFID technology for certain medical diagnostic
applications. There is no assurance that we will be
successful in developing medical applications for our
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
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In December 8, 2009, we entered into the Capital Source credit
facility.
On June 6, 2017, TransTech entered into the Fourth
Modification to the Loan and Security Agreement.
This 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, C, and D
Preferred Shares may require further adjustment.
In the
future, if we sell our common stock at a price below $0.25 per
share, the exercise price
of 23,334
outstanding shares of Series A Preferred Stock, 1,785,715
outstanding shares of Series C Preferred Stock and 1,016,004
outstanding shares Series D Preferred Stock, would adjust below
$0.25 per share pursuant to the documents governing such
instruments. In addition, the conversion price of a Convertible
Note Payable of $870,000 and the exercise price of outstanding
warrants to purchase 6,244,216 shares of common stock would adjust
below $0.25 per share pursuant to the documents governing such
instruments.
Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders
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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 under the 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.
Three individual
investors could have significant influence over matters submitted
to stockholders for approval
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As of May 9, 2018, three 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 May 9,
2018, we had 7,439,726 shares of common stock issued and
outstanding, held by 68 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 May 9, 2018, there were options outstanding for the purchase of
704,736 common shares, warrants for the purchase of 12,037,422
common shares, and 2,825,053 shares of our common stock
issuable upon the conversion of Series A, Series C and Series D
Convertible Preferred Stock. In addition, we have an unknown number
of shares that are issuable upon conversion of convertible
debentures of $2,390,066. 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;
● 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;
● 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);
● 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
● 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 ended March 31, 2018, we had the following
unregistered sales of equity securities:
A supplier converted accounts payable totaling $48,300 into 230,000
shares of common stock.
We issued 329,240 shares of common stock to two Names Executive
Officers employees and three consultants and for services during
2017 and 2018.
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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There
have been no events which are required to be reported under this
item.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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N/A.
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ITEM 5.
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OTHER INFORMATION
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This item is not applicable.
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ITEM 6.
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EXHIBITS
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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
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Exhibit No.
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Description
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*Filed
Herewith. Pursuant to Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of
1933, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
SIGNATURES
In accordance with Section 13 or 15(d) 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: May 9, 2018
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By:
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/s/
Phillip A
Bosua
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Phillip A. Bosua
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Chief Executive Officer, and Director
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(Principal Executive Officer)
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Date: May 9, 2018
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By:
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/s/
Ronald
P. Erickson
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Ronald P. Erickson
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Interim Chief Financial Officer, and Treasurer
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(Principal Financial and Accounting Officer)
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