Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 2015
o TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transaction period from ________ to ________
Commission File number 0-25541
VISUALANT, INC.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
|
Nevada
|
90-0273142
|
|
(State or other jurisdiction of incorporation
|
(I.R.S. Employer
|
|
or organization)
|
Identification No.)
|
|
500 Union Street, Suite 420
|
|
|
Seattle, Washington
|
98101
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
Issuer's telephone number, including area code
|
206-903-1351
|
|
Securities registered pursuant to Section 12 (b) of the Exchange Act:
|
|
|
Common
|
OTCQB
|
|
(Title of each class)
|
(Name of each exchange on which registered)
|
|
Securities registered pursuant to Section 12 (g) of the Exchange Act:
|
|
|
None
|
|
|
(Title of Class)
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes ý No
1
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. ý Yes o No
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
Non-accelerated filer
|
o
|
Smaller reporting company
|
ý
|
|
(Do not check if a smaller reporting company)
|
|||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
As of March 31, 2015 (the last business day of our most recently completed second fiscal quarter), based upon the last reported trade on that date, the aggregate market value of the voting and non-voting common equity held by non-affiliates (for this purpose, all outstanding and issued common stock minus stock held by the officers, directors and known holders of 10% or more of the Company’s common stock) was $8,339,737.
As of November 4, 2015, the Company had 1,156,831 shares of common stock outstanding.
2
|
TABLE OF CONTENTS
|
|
Page
|
||
|
PART 1
|
||
|
ITEM 1.
|
Description of Business
|
4 |
|
ITEM 1A.
|
Risk Factors
|
12 |
|
ITEM 1B
|
Unresolved Staff Comments
|
21 |
|
ITEM 2.
|
Properties
|
21 |
|
ITEM 3.
|
Legal Proceedings
|
21 |
|
ITEM 4.
|
Mine Safety Disclosures
|
21 |
|
PART II
|
||
|
ITEM 5.
|
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
22 |
|
ITEM 6.
|
Selected Financial Data
|
25 |
|
ITEM 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
26 |
|
ITEM 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
30 |
|
ITEM 8.
|
Financial Statements and Supplementary Data
|
30 |
|
ITEM 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
30 |
|
ITEM 9A.
|
Controls and Procedures
|
30 |
|
ITEM 9B.
|
Other Information
|
31 |
|
PART III
|
||
|
ITEM 10.
|
Directors, Executive Officers and Corporate Governance
|
32 |
|
ITEM 11.
|
Executive Compensation
|
34 |
|
ITEM 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
40 |
|
ITEM 13.
|
Certain Relationships and Related Transactions, and Director Independence
|
42 |
|
ITEM 14.
|
Principal Accounting Fees and Services
|
44 |
|
PART IV
|
||
|
ITEM 15.
|
Exhibits, Financial Statement Schedules
|
46 |
|
SIGNATURES
|
50 |
3
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion, in addition to the other information contained in this report, should be considered carefully in evaluating us and our prospects. This report (including without limitation the following factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") regarding us and our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as revenue projections, projected profitability, growth strategies, development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.
Forward-looking statements in this report reflect the good faith judgment of our management and these statements are based on facts and factors as we currently understand 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 in “Risk Factors” and in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which 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.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND AND CAPITAL STRUCTURE
Visualant, Incorporated (the “Company,” “Visualant, Inc.” or “Visualant”) was incorporated under the laws of the State of Nevada in 1998. We have authorized 105,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares preferred stock, par value $0.001 per share.
As of November 3, 2015, there were 1,156,831 shares of our common stock issued and outstanding, outstanding stock options grants for the purchase of 57,407 shares of common stock at an $18.43 average exercise price and outstanding warrants for the purchase of 899,750 shares of common stock at a $3.19 average exercise price. We also may be obligated to issue up to 34,871 additional placement agent warrants at $2.50 per share related to the funding which closed June 14, 2013, all of which have the potential to add additional shares to the total number of shares of common stock issued and outstanding.
In addition, there are 11,667 shares of common stock reserved for issuance upon conversion of Series A Convertible Preferred stock and an unknown number of shares related to the conversion of notes payable.
On May 6, 2015, our stockholders approved a reverse stock split of our common stock, in a ratio to be determined by our board of directors, of not less than 1-for-50 nor more than 1-for-150. On June 9, 2015, our Board of Directors determined that the ratio of the reverse split would be 1-for-150, and the reverse split became effective on June 17, 2015. All warrant, option, share and per share information in this prospectus gives retroactive effect to the 1-for-150 reverse split with all numbers rounded up to the nearest whole share.
BUSINESS
We are focused primarily on the development of a proprietary technology which is capable of uniquely identifying and authenticating almost any substance using light to create, record and detect the unique digital “signature” of the substance. We call this our “ChromaID™” technology.
Our ChromaID™ Technology
We have developed a proprietary technology to uniquely identify and authenticate almost any substance. This patented technology utilizes light at the photon (elementary particle of light) level through a series of emitters and detectors to generate a unique signature or “fingerprint” from a scan of almost any solid, liquid or gaseous material. This signature of reflected or transmitted light is digitized, creating a unique ChromaID signature. Each ChromaID signature is comprised of from hundreds to thousands of specific data points.
4
The ChromaID technology looks beyond visible light frequencies to areas of near infra-red and ultraviolet light that are outside the humanly visible light spectrum. The data obtained allows us to create a very specific and unique ChromaID signature of the substance for a myriad of authentication and verification applications.
Traditional light-based identification technology, called spectrophotometry, has relied upon a complex system of prisms, mirrors and visible light. Spectrophotometers typically have a higher cost and utilize a form factor more suited to a laboratory setting and require trained laboratory personnel to interpret the information. The ChromaID technology uses lower cost LEDs and photodiodes and specific frequencies of light resulting in a more accurate, portable and easy-to-use solution for a wide variety of applications. The ChromaID technology not only has significant cost advantages as compared to spectrophotometry, it is also completely flexible is size, shape and configuration. The ChromaID scan head can range in size from endoscopic to a scale that could be the size of a large ceiling-mounted florescent light fixture.
In normal operation, a ChromaID master or reference scan is generated and stored in a database. The Visualant scan head can then scan similar materials to identify, authenticate or diagnose them by comparing the new ChromaID digital signature scan to that of the original or reference ChromaID signature or scan result.
ChromaID was invented by scientists from the University of Washington under contract with Visualant. We have pursued an aggressive intellectual property strategy and have been granted nine patents. We also have 21 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, Intellectual Ventures through its subsidiary IDMC.
In 2010, we acquired TransTech Systems, Inc. (“TransTech”) as an adjunct to our business. TransTech is a distributor of products for employee and personnel identification. TransTech currently provides substantially all of our revenues. We intend, however, to further develop and market our ChromaID technology.
The following summarizes our plans for our proprietary ChromaID technology. Based on our anticipated expenditures on this technology, the expected efforts of our management and our relationship with Intellectual Ventures and its subsidiary, IDMC, and our other strategic partner, Sumitomo Precision Products, Ltd., we expect our ChromaID technology to provide an increasing portion of our revenues in future years from product sales, licenses, royalties and other revenue streams., as discussed further below.
ChromaID: A Foundational Platform Technology
Our ChromaID technology provides a platform upon which a myriad of applications can be developed. As a platform technology, it is analogous to a smartphone, upon which an enormous number of previously unforeseen applications have been developed. The ChromaID technology is an enabling technology that brings the science of light and photonics to low cost, real world commercialization opportunities across multiple industries. The technology is foundational and as such, the basis upon which we believe a significant business can be built.
As with other foundational technologies, a single application may reach across multiple industries. The ChromaID technology can, for example effectively differentiate and identify different brands of clear vodkas that appear identical to the human eye. By extension this same technology can identify pure water from water with contaminants present. It can provide real time detection of liquid medicines such as morphine that have been adulterated or compromised. It can detect if jet fuel has water contamination present. It could determine when it is time to change oil in a deep fat fryer. These are but a few of the potential applications of the ChromaID technology based upon extensions of its ability to identify different clear liquids.
The cornerstone of a company with a foundational platform technology is its intellectual property. ChromaID was invented by scientists from the University of Washington under contract with Visualant. We have pursued an aggressive intellectual property strategy and have been granted nine patents. We currently have 21 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, the IDMC subsidiary of Intellectual Ventures.
At the Photonics West trade show held in San Francisco in February 2013, we were honored to receive a PRISM award from the Society of Photo-Optical Instrumentation Engineers International, better known as SPIE. The PRISM awards recognizes photonic products that break with conventional ideas, solve problems, and improve life through the application of light-based technologies.
IDMC Relationship
In November 2013, we entered into a strategic relationship with Invention Development Management Company, a subsidiary of Intellectual Ventures, a private intellectual property fund with over $5 billion under management. Intellectual Ventures 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. IDMC 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. In connection with IDMC’s work to expand our intellectual property portfolio, we agreed to curtail outbound marketing activities of our technology through the fourth calendar quarter of 2014.
5
Initial testing in our laboratories and the work of the IDMC inventors have shown that the ChromaID technology has a number of broad and useful applications a few of which include:
|
|
·
|
Milk identification for quality, protein and fat content and impurities
|
|
|
·
|
Identification of liquids for counterfeits or contaminants
|
|
|
·
|
Detecting adulterants in food and food products compromising its quality
|
|
|
·
|
Color grading of diamonds
|
|
|
·
|
Identifying real cosmetics versus counterfeit cosmetics
|
|
|
·
|
Identifying counterfeit medications versus real medications
|
|
|
·
|
Identifying regular flour versus gluten free flour
|
|
|
·
|
Authenticating secure identification cards
|
Products
Our first delivered product, the ChromaID Lab Kit, scans and identifies solid surfaces. We are marketing this product to customers who are considering licensing the technology. Target markets include, but are not limited to, commercial paint manufacturers, pharmaceutical equipment manufacturers, process control companies, currency paper and ink manufacturers, security cards, cosmetic companies, scanner manufactures and food processing companies.
Our second product, the ChromaID Liquid Lab Kit, scans and identifies liquids. This product is currently in prototype form. Similar to our first product, it will be marketed to customers who are considering licensing the technology. Rather than use an LED emitter to reflect light off of a surface that is captured by a photodiode to generate a ChromaID signature the liquid analysis product shines light through the liquid (transmissive) with the LEDs positioned on one side of the liquid sample and the photo detectors on the opposite side. This device is in a functional state in our laboratory and we anticipate having a Liquid ChromaID Lab Kit available for customers by the Company during the fall of 2015. Target markets include, but are not limited to, water companies, petrochemical companies, pharmaceutical companies, and numerous consumer applications.
The ChromaID Lab Kits allows potential licensors of our technology to work with our technology and develop solutions for their particular application. Our contractual arrangements with IDMC are described in greater detail below.
Our Commercialization Plans for the ChromaID Technology
We shipped our first ChromaID product, the ChromaID Lab Kits, to our strategic partner IDMC during the last calendar quarter of 2013 and first calendar quarter of 2014, after we completed final assembly and testing. As part of our agreement with IDMC, we curtailed our ChromaID marketing efforts through the fourth calendar quarter of 2014 while IDMC worked to expand our intellectual property portfolio. Thereafter, we began to actively market the ChromaID Lab Kits to interested and qualified customers. Some ChromaID Lab Kits are provided free of charge to potential customers. Others are sold for a modest price. To date, we have achieved limited revenue from the sale of our ChromaID Lab Kits.
The Lab Kit includes the following:
ChromaID Scanner. A small device made with electronic and optical components and firmware which pulses light onto a flat material and records and digitizes the light that is reflected back from that material. The device is the size of a typical flashlight (5.5” long and 1.25” diameter). However, the technology can be incorporated into almost any size, shape and configuration.
ChromaID Lab Software. A software application that runs on a Windows PC. The software allows for configuration of the scanner, controls the behavior of the ChromaID Scanner, displays a graph of the captured ChromaID signature profile, stores the ChromaID signature in a database and uses algorithms to compare the accuracy of the match of the unknown scan to the known ChromaID signature profile. This software is intended for lab and experimental use only and is not required for commercialized product applications.
Software Development Toolkit. A collection of software applications, API (an abbreviation of application program interface – a set of routines, protocols, and tools for building software applications) definitions and file descriptions that allow a customer to extract the raw data from the ChromaID signatures and run their own software routines against that raw data.
The ChromaID Lab Kit allows customers to experiment with and evaluate the ChromaID technology and determine if it is appropriate for their specific applications. The primary electronic and optical parts of the ChromaID scanner, called the “scan head,” could be supplied to customers to integrate into their own products. A set of ChromaID Developer Tools are also available. These allow customers to develop their own applications and products based on the ChromaID technology.
6
ChromaID signatures must be stored, managed, and readily accessible for comparison, matching and authentication purposes. The database can be owned and operated by the end customer, but in the case of thousands of ChromaID signatures, database management may be outsourced to us or a third party provider. These database services could be made available on a per-access transaction basis or on a monthly or annual subscription basis. The actual storage location of the database can be cloud-based, on a stand-alone scanning device or on a mobile device via a Bluetooth connection depending on the requirements of access, size of the database and security as defined by the customer. As a result, large databases can be accessed by cell phone or other mobile technologies using either local storage or cloud based storage.
Based on the commercialization plans outlined above, our business model anticipates deriving revenue from several sources:
|
|
·
|
Sales of the ChromaID Lab Kit and ChromaID Liquid Lab Kit
|
|
|
·
|
Non Recurring Engineering (NRE) fees to assist customers with scan integration into their products
|
|
|
·
|
Licensing of the ChromaID technology
|
|
|
·
|
Royalties per unit generated from the sales of scan heads
|
|
|
·
|
Per click transaction revenue from accessing the unique ChromaID signatures
|
|
|
·
|
Developing custom product applications for customers
|
|
|
·
|
ChromaID database administration and management services
|
Our Acceleration of Business Development in the United States and Around the World
We are coordinating our internal business development, sales and marketing efforts with those of our strategic partners IDMC, and Sumitomo Precision Products to leverage market data and information in order to focus on specific target vertical markets which have the greatest potential for early adoption. The ChromaID Lab Kit provides a means for us to demonstrate the technology to customers in these markets. It also allows customers to experiment with developing unique applications for their particular use. Our Business Development team is pursuing license opportunities with customers in our target markets.
There is no requirement for FDA or other government approval for the current applications of our ChromaID technology. Over time, as we explore the application of our ChromaID technology for medical diagnostics and other applications, we expect that there will be requirements for FDA and other government approvals before applications using the technology in medical and other regulated fields can enter the marketplace.
Research and Development
Our research and development efforts are primarily focused improving the core foundational ChromaID technology and developing new and unique applications for the technology. As part of this effort, we typically conduct testing to ensure that ChromaID application methods are compatible with the customer’s requirements, and that they can be implemented in a cost effective manner. We are also actively involved in identifying new application methods. Our team has considerable experience working with the application of light-based technologies and their application to various industries. We believe that its continued development of new and enhanced technologies relating to our core business is essential to our future success. We spent $362,661 and $670,742 for the years ended September 30, 2015 and 2014, respectively, on development activities. Our research and development efforts are supported internally, through its relationship with IDMC and through contractors led by Dr. Tom Furness and his team at RATLab LLC.
Our Patents
We believe that our nine patents, 21 patent applications, and two registered trademarks, and our trade secrets, copyrights and other intellectual property rights are important assets for us. Our patents will expire at various times between 2027 and 2033. The duration of our trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
The patents that have been granted to Visualant include:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy,” by the United States Office of Patents and Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2 entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires November 7, 2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 28, 2030.
7
On October 9, 2012, we were issued US Patent No. 8,285,510 B2 entitled “Method, Apparatus, and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On November 21, 2014, we were issued US Patent No. 8,888,207 B2 entitled “Systems, Methods, and Articles Related to Machine-Readable Indicia and Symbols” by the United States Office of Patents and Trademarks. The patent expires February 7, 2033.
On March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On May 26, 2015, we were patent US Patent No. 9,041,920 B2 entitled “Device for Evaluation of Fluids using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires March 12, 2033.
We pursue an aggressive patent strategy to expand our unique intellectual property in the United States and other countries.
Services and License Agreement Invention Development Management Company, L.L.C.
In November 2013, we entered into a Services and License Agreement with Invention Development Management Company. IDMC is a subsidiary of Intellectual Ventures, which collaborates with inventors and partners with pioneering companies and invests both expertise and capital in the process of invention. On November 19, 2014, we amended the Services and License Agreement with IDMC. This amendment exclusively licenses 10 filed patents to us
The agreement requires IDMC to identify and engage inventors to develop new applications of our ChromaID™ technology, present the developments to us for approval, and file at least 10 patent applications to protect the developments. IDMC is responsible for the development and patent costs. We provided the Chroma ID Lab Kits to IDMC at no cost and are providing ongoing technical support. In addition, to provide time for this accelerated expansion of its intellectual property we delayed the selling of the ChromaID Lab Kits for 140 days except for certain select accounts. We have continued our business development efforts during this period and have worked with IDMC and their global business development resources to secure potential customers and licensees for the ChromaID technology. We shipped 20 ChromaID Lab Kits to inventors in the IDMC network during December 2013 and January 2014. As part of our agreement with IDMC, we curtailed our ChromaID marketing efforts through the fourth calendar quarter of 2014 while IDMC worked to expand our intellectual property portfolio. Thereafter, we began to actively market the ChromaID Lab Kits to interested and qualified customers.
We have received a worldwide, nontransferable, exclusive license to the intellectual property developed under the IDMC agreement during the term of the agreement, and solely within the identification, authentication and diagnostics field of use, to (a) make, have made, use, import, sell and offer for sale products and services; (b) make improvements; and (c) grant sublicenses of any and all of the foregoing rights (including the right to grant further sublicenses).
We received a nonexclusive and nontransferable option to acquire a worldwide, nontransferable, nonexclusive license to the useful intellectual property held by IDMC within the identification, authentication and diagnostics field of use to (a) make, have made, use, import, sell and offer to sell products and services and (b) grant sublicenses to any and all of the foregoing rights. The option to acquire this license may be exercised for up to two years from the effective date of the Agreement.
IDMC is providing global business development services to us for geographies not being pursued by Visualant. Also, IDMC has introduced us to potential customers, licensees and distributors for the purpose of identifying and pursuing a license, sale or distribution arrangement or other monetization event.
We granted to IDMC a nonexclusive, worldwide, fully paid, nontransferable, sublicenseable, perpetual license to our intellectual property solely outside the identification, authentication and diagnostics field of use to (a) make, have made, use, import, sell and offer for sale products and services and (b) grant sublicenses of any and all of the foregoing rights (including the right to grant further sublicenses).
8
We granted to IDMC a nonexclusive, worldwide, fully paid up, royalty-free, nontransferable, non-sublicenseable, perpetual license to access and use our technology solely for the purpose of marketing the aforementioned sublicenses of our intellectual property to third parties outside the designated fields of use.
In connection with the original license agreement, we issued a warrant to purchase 97,169 shares of common stock to IDMC as consideration for the exclusive intellectual property license and application development services. The warrant has a current exercise price of $2.50 per share and expires November 10, 2018. The per share price is subject to adjustment based on any issuances below $2.50 per share except as described in the warrant.
We agreed to pay IDMC a percentage of license revenue for the global development business services and a percentage of revenue received from any company introduce to us by IDMC. We also have also agreed to pay IDMC a royalty when we receive royalty product revenue from an IDMC-introduced company. IDMC has agreed to pay us a license fee for the nonexclusive license of our intellectual property.
The term of both the exclusive intellectual property license and the nonexclusive intellectual property license commences on the effective date of November 11, 2013, and terminates when all claims of the patents expire or are held in valid or unenforceable by a court of competent jurisdiction from which no appeal can be taken.
The term of the Agreement commences on the effective date until either party terminates the Agreement at any time following the fifth anniversary of the effective date by providing at least ninety days’ prior written notice to the other party.
TransTech Systems, Inc.
Our wholly owned subsidiary, TransTech Systems, Inc., is a distributor of products, including systems solutions, components and consumables, for employee and personnel identification in government and the private sector, document authentication, access control, and radio frequency identification. TransTech provides these products and services, along with marketing and business development assistance to value-added resellers and system integrators throughout North America.
We expect our ownership of TransTech to accelerate our market entry and penetration through well-operated and positioned dealers of security and authentication systems, thus creating a natural distribution channel for products featuring our proprietary ChromaID technology. TransTech currently provides substantially all of our revenues. Its management team functions independently from Visualant’s and its operations require a minimal commitment of our management time and other resources. Our acquisition of TransTech in June 2010 and its operations are described in greater detail below.
Agreements with Sumitomo Precision Products Co., Ltd.
In May 2012, we entered into a Joint Research and Product Development Agreement with Sumitomo Precision Products Co., Ltd., a publicly-traded Japanese corporation, for the commercialization of our ChromaID technology. In March 2013, we entered into an amendment to this agreement, which extended the Joint Development Agreement from March 31, 2013 to December 31, 2013. The extension provided for continuing work between Sumitomo and Visualant focused upon advancing the ChromaID technology and market research aimed at identifying the most significant markets for the ChromaID technology. This collaborative work supported the development of the ChromaID Lab Kit. This agreement expired December 31, 2013. The current version of the technology was introduced to the marketplace as a part of our ChromaID Lab Kit during the fourth quarter of 2013. Sumitomo invested $2,250,000 in exchange for 115,385 shares of restricted shares of common stock priced at $19.50 per share that was funded on June 21, 2012.
We also entered into a License Agreement with Sumitomo in May 2012, under which Sumitomo paid the Company an initial payment of $1 million. The License Agreement granted Sumitomo an exclusive license for the then extant ChromaID technology. The territories covered by this license include Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines). The Sumitomo License fee was recorded as revenue over the life the Joint Research and Product Development Agreement and was fully recorded as of May 31, 2013. On May 21, 2015, we entered into an amendment to the License Agreement, which, effective as of June 18, 2014, eliminated the Sumitomo exclusivity and provides that if we sell products in certain territories – Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines) – the Company will pay Sumitomo a royalty rate of 2% of net sales (excluding non-recurring engineering revenues) over the remaining term of the five-year License Agreement (through May 2017).
Potential Markets and Customers
Our plan is to develop markets and customers who have a need to authenticate, detect, identify, verify or diagnose materials or substances which may include, but are not limited to, commercial paint manufacturers, pharmaceutical equipment manufacturers, process control companies, water purification and quality companies, currency paper and ink manufacturers, security card manufacturers, cosmetic companies and food processing companies.
9
Market opportunities include identification, detection, or diagnosis of:
|
|
·
|
Pharmaceuticals – pill counting and verification
|
|
|
·
|
Food safety – testing for contaminants and quality
|
|
|
·
|
Gemstones – diamond color grading
|
|
|
·
|
Liquid analysis – water purity
|
|
|
·
|
Law enforcement - illicit drug identification for law enforcement applications
|
|
|
·
|
Paint – color matching
|
|
|
·
|
ID badges – counterfeit ID detection
|
|
|
·
|
Secure packaging - Container seals and packaging materials with invisible markings
|
|
|
·
|
Cosmetics – matching skin tones to correct products
|
|
|
·
|
Documents and Currency– detect counterfeit paper and inks
|
|
|
·
|
Medical - Noninvasive skin analysis for discovery of diseases or medical conditions
|
Our Strategy
To date, the substantial portion of our non-TransTech revenue has been generated from the development license with Sumitomo Precision Products and sales of our ChromaID Lab Kits. We expect to continue to grow revenues from sales of our Lab Kits, non-recurring engineering fees, licenses, per unit royalties and subscriptions, as well as “per click” revenues. Key aspects of our strategy include:
Customize and Refine our Solutions to Meet Potential Customers’ Needs
We are continuously improving and expanding our potential product offerings by testing the incorporation of our technologies into different media, such as the new ChromaID Liquid Lab Kit that is in the prototype stage. Each vertical market has specific requirements for their potential product application that will involve determining the range of LEDs and photodiodes that will provide optimum performance and the associated form factor required for their product. Our goal is to develop a cost-effective scanning system for each potential industry and customer that can be incorporated into that potential customer’s products that they will then take to market.
Continue to Expand Applications for ChromaID Technology
While we have basic proof of concepts for applications in several large markets to date, we plan to continue our ongoing effort to expand proof-of-concept testing in other vertical markets that have yet to be tested. We have also identified and are further examining opportunities to collaborate with companies and universities to develop new applications for the ChromaID technology. We believe the strength of our solutions is based on the unique and proprietary ChromaID signature that is created from every scan.
Target Potential High-Volume Markets
We will continue to focus our efforts on target vertical markets that are characterized by a high level of vulnerability to counterfeiting, product tampering, piracy, fraud, identity theft, contamination and adulteration. We believe the ChromaID technology can be a lower cost, real time, flexible form factor solution in the following areas: access control, quality and process control, food safety, water quality, law enforcement support, standardization and medical diagnostics. Our current target markets include pharmaceuticals, food quality and safety, gemstone grading, water purity, law enforcement, paint color matching, identity cards, chemical identification, cosmetics, currency, process control and healthcare. If and when we have significantly penetrated these markets, we intend to expand into additional related high volume markets.
Pursue Strategic Acquisitions and Alliances
We intend to pursue strategic acquisitions of companies and technologies that strengthen and complement our core technologies, improve our competitive positioning, allow us to penetrate new markets, and grow our customer base. We also intend to work in collaboration with potential strategic partners in order to continue to market and sell new product lines derived from, but not limited to, ChromaID technology.
Target Additional Markets
In fourth fiscal quarter of 2014, we began introducing our technology and services in Europe, the United States and Asia. Several potential customers are currently analyzing our technology. At the present time, we are focusing our efforts on the pharmaceutical industry, the food safety industry, law enforcement and homeland security. In the future, we plan to expand our focus to include identification cards and other secure documents, industrial materials, agrochemicals, pharmaceuticals, consumer products, cosmetics, currency and medical diagnostics.
10
Industry Background
Visualant’s ChromaID is a part of the broad industry built upon photonics or light-based technology. Photonics science includes the generation, emission, transmission, modulation, signal processing, switching, amplification, and detection/sensing of light. Though covering all light's technical applications over the whole spectrum, most photonic applications are in the range of visible and near-infrared light. The term photonics developed as an outgrowth of the first practical semiconductor light emitters invented in the early 1960s and optical fibers developed in the 1970s.
Photonics came into common use in the 1980s as fiber-optic data transmission was adopted by telecommunications network operators. At that time, the term was used widely at Bell Laboratories. Its use was confirmed when the IEEE Lasers and Electro-Optics Society established an archival journal named Photonics Technology Letters at the end of the 1980s.
Photonics covers a huge range of science and technology applications, including laser manufacturing, biological and chemical sensing, medical diagnostics and therapy, display technology, and optical computing.
Applications of photonics includes all areas from everyday life to the most advanced science, e.g. light detection, telecommunications, information processing, lighting, metrology, spectroscopy, holography, medicine (surgery, vision correction, endoscopy, health monitoring), military technology, laser material processing, visual art, biophotonics, agriculture and robotics.
The world photonics market, according to the World Photonics Report of 2013 was a $350 billion market and will grow to a $650 billion market by 2020.
Our business model is focused on the use of structured light - a disruptive conceptual breakthrough in photonics. Light-emitting diodes (LEDs) shine a single wavelength of pulsed light in increasing steps of intensity onto a subject. Photodiodes capture the light that is returned via reflection or re emission of that light. The photodiode produces an analog signal that is then converted into a 24 bit digital data point for each pulse of light. A typical scan is comprised of hundreds of pulses of light across a number of specific frequency LED’s creating a unique ChromaID signature for the subject being scanned. In a typical application a “reference” or “master” ChromaID signature is captured and stored in a database for that specific subject. When an unknown substance is scanned to produce its own ChromaID signature, (the “discovery scan”), the unknown substance’s ChromaID signature is compared to that of the known (or “reference”) ChromaID signature. Algorithms are used to compare the two sets of data and determine if the “discovery” signature is the same as the “reference” ChromaID signature. This accuracy threshold can be adjusted from 51 % to 99.995 % accuracy based on the requirements for each specific application of the ChromaID technology. Historically, a number of the applications for ChromaID technology were performed by spectrophotometers. The sales of spectrophotometers by companies such as Ocean Optics, Perkin Elmer, Fisher Thermo Scientific and Agilent are multibillion dollar businesses. Spectrophotometers combine broad-spectrum light; a diffraction grating to split it; and a linear array for graphical presentation in software. They tend to be bulky, fragile, and expensive; scanning and analysis are complex. We believe our ChromaID technology uses lower cost components, provides more accurate data, has a very flexible form factor and the information it provides can be easily understood. The use of structured light by our ChromaID technology provides a platform for the development of a myriad of applications in the categories of identification, authentication and diagnostics.
We believe that the ChromaID technology is analogous to a smartphone, upon which an enormous number of previously unforeseen applications have been developed. The ChromaID technology may be considered an enabling technology that brings the science of light and photonics to low cost, real world commercialization opportunities across multiple industries. ChromaID is a sensor technology which, with its low cost, small form factor, and ease of connectivity can be an enabling technology for the broad Internet of Things and integrated into many aspects of everyday life providing useful information relating health, life and safety. The technology is foundational and as such, the basis upon which we believe a significant business can be built.
THE COMPANY’S COMMON STOCK
Our common stock trades on the OTCQB Exchange under the symbol “VSUL.”
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to our need for additional financing, the sale of significant numbers of our shares and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in Part I, Item 1A.
CORPORATE INFORMATION
We were incorporated under the laws of the State of Nevada on October 8, 1998. Our executive offices are located at 500 Union Street, Suite 420, Seattle, WA 98101. Our telephone number is (206) 903-1351 and its principal website address is located at www.visualant.net. The information on our website is not incorporated as a part of this Form 10-K.
EMPLOYEES
As of November 3, 2015, we had fifteen full-time employees. Our senior management is located in the Seattle, Washington office.
11
WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION REPORTS
We file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.visualant.net that provides additional information about our Company and links to documents we file with the SEC. The Company's charters for the Audit Committee, the Compensation Committee, and the Nominating Committee; and the Code of Conduct & Ethics are also available on our website. The information on our website is not part of this Form 10-K.
ITEM 1A. RISK FACTORS
There are certain inherent risks which will have an effect on the Company’s development in the future and the most significant risks and uncertainties known and identified by our management are described below.
Risks Relating to the Commercialization of Our Products
We may not be able to generate sufficient revenue from the commercialization of our ChromaID technology and related products to achieve or sustain profitability.
We are in the process of commercializing our ChromaID™ technology. To date, we have entered into one License Agreement with Sumitomo Precision Products Co., Ltd. and have a strategic relationship with IDMC. Failure to sell our ChromaID products, grant additional licenses and obtain royalties or develop other revenue streams will have a material adverse effect on our business, financial condition and results of operations.
We believe that our commercialization success is dependent upon our ability to significantly increase the number of customers that are using our products. To date, we have generated minimal revenue from sales of our ChromaID products. In addition, demand for our ChromaID products may not increase as quickly as planned and we may 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 are in the early stages of commercialization and our ChromaID technology and related products may never achieve significant commercial market acceptance.
Our success depends on our ability to develop and market products that are recognized as accurate and cost-effective. Many of our potential customers may be reluctant to use our new technology. Market acceptance will depend on many factors, including our ability to convince potential customers that our ChromaID technology and related products are an attractive alternative to existing light-based technologies. We will need to demonstrate that our products provide accurate and cost-effective alternatives to existing light-based authentication technologies. Compared to most competing technologies, our technology is relatively new, and most potential customers have limited knowledge of, or experience with, our products. Prior to implementing our ChromaID technology and related products, potential customers are required to devote significant time and effort to testing and validating our products. In addition, during the implementation phase, customers may be required to devote significant time and effort to training their personnel on appropriate practices to ensure accurate results from our technology and products. Any failure of our ChromaID technology or related products to meet customer expectations could result in customers choosing to retain their existing testing methods or to adopt systems other than ours.
Many factors influence the perception of a system including its use by leaders in the industry. If we are unable to induce industry leaders in our target markets to implement and use our ChromaID technology and related products, acceptance and adoption of our products could be slowed. In addition, if our products fail to gain significant acceptance in the marketplace and we are unable to expand our customer base, we may never generate sufficient revenue to achieve or sustain profitability.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We commenced our formal commercial launch in the fourth fiscal quarter of 2014 and anticipate growth in our business operations. Since our inception in 1998, we have increased our number of employees to 15 as of September 30, 2015 and we expect to increase our number of employees further as our business grows. This future growth could create strain on our organizational, administrative and operational infrastructure, including quality control, customer service and sales and marketing. Our ability to manage our growth properly will require us to continue to improve our operational, financial, and management controls, as well as our reporting systems and procedures. If our current infrastructure is unable to handle our growth, we may need to expand our infrastructure and staff and implement new reporting systems. The time and resources required to implement such expansion and systems could adversely affect our operations. Our expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, and integrate additional employees. Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.
12
Risks Relating to our Business and Financial Condition
We have a history of operating losses and there can be no assurance that we can achieve or maintain profitability.
We have experienced net losses since inception. As of September 30, 2015, we had an accumulated deficit of $24.2 million and net losses in the amount of $2,631,000 and $1,017,000 for the years ended September 30, 2015 and 2014, 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 limited 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.
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 at least the end of December 2015. 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 or eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected.
Our services and license agreement with Invention Development Management Company, LLC is important to our business strategy and operations.
In November 2013, we entered into a Services and License Agreement with Invention Development Management Company. IDMC is a subsidiary of Intellectual Ventures, which collaborates with inventors, partners with companies and invests both expertise and capital in the process of invention. This agreement was amended in November 2014 to license ten patents filed by IDMC related to the ChromaID technology to us.
The amended agreement with IDMC covers a number of areas that are important to our operations, including the following:
|
|
·
|
The agreement requires IDMC 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 IDMC within that same field of use; and
|
|
|
·
|
We granted to IDMC certain licenses to our intellectual property outside the identification, authentication and diagnostics field of use.
|
Failure to operate in accordance with the IDMC 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.
We need to continue as a going concern if our business is to succeed.
13
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, 2015 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.
We have obligations to repay approximately $2,191,656 in various loans in the near future, and if we do not satisfy these obligations, the lenders may have the right to demand payment in full or exercise other remedies.
We have a $199,935 Business Loan Agreement with Umpqua Bank (the “Umpqua Loan”), which currently matures on December 31, 2015 and provides for interest at 3.25% per year. Related to the Umpqua Loan, we entered into a demand promissory note for $200,000 on January 10, 2014 with an entity with which Ronald P. Erickson, our Chief Executive Officer, is affiliated. This demand promissory note will be effective in case of a default by us under the Umpqua Loan.
We also have two other demand promissory notes payable to entities affiliated with Mr. Erickson, totaling $600,000. Each of these notes were issued between January and July 2014, provide for interest of 3% per year and now mature on December 31, 2015. They also provide for a second lien on our assets if not repaid by December 31, 2015 or converted into convertible debentures or equity on terms acceptable to the Mr. Erickson. Mr. Erickson and/or entities with which he is affiliated also have advanced $708,500 and have unreimbursed expenses and compensation of approximately $344,221. We owe Mr. Erickson, or entities with which he is affiliated, $1,652,721 as of September 30, 2015.
We also have a convertible note payable to Vis Vires Group, Inc. totaling $84,000 to fund short-term working capital. The Vis Vires Note accrues interest at a rate of 8% per annum, becomes due on May 12, 2016 and is convertible into common stock on February 5, 2016. The Vis Vires Note is convertible at 65% of the average of the lowest three day trading price in the 10 days prior to conversion.
We also have convertible notes payable to investors totaling $255,000 to fund short-term working capital. These notes accrue interest at a rate of 8% per annum, become due during September and October 2016 and are convertible into common stock as part of our next financing, at a conversion price equal to the price of the common stock sold in that financing.
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.
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, 2015, our management identified material weaknesses in our internal control over financial reporting. If these weaknesses continue, investors could lose confidence in the accuracy and completeness of our financial reports and other disclosures.
In addition, our management has concluded that our disclosure controls and procedures were not effective due to the lack of an audit committee “financial expert.” These material weaknesses, if not remediated, create an increased risk of misstatement of the Company’s financial results, which, if material, may require future restatement thereof. A failure to implement improved internal controls, or difficulties encountered in their implementation or execution, could cause future delays in our reporting obligations and could have a negative effect on us and the trading price of our common stock.
If the company were to dissolve or wind-up, 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 you to receive any liquidation distribution with respect to any common stock you hold.
14
If components used in our finished products become unavailable, or third-party manufacturers otherwise experience delays, we may incur delays in shipment to our customers, which would damage our business.
We depend on third-party suppliers for substantially all of our components and products. We purchase these products and components from third-party suppliers that serve the advanced lighting systems market and we believe that alternative sources of supply are readily available for most products and components. However, consolidation could result in one or more current suppliers being acquired by a competitor, rendering us unable to continue purchasing necessary amounts of key components at competitive prices. In addition, for certain of our customized components, arrangements for additional or replacement suppliers will take time and result in delays. We purchase products and components pursuant to purchase orders placed from time to time in the ordinary course of business. This means we are vulnerable to unanticipated price increases and product shortages. Any interruption or delay in the supply of components and products, or our inability to obtain components and products from alternate sources at acceptable prices in a timely manner, could harm our business, financial condition and results of operations.
While we believe alternative manufacturers for these products are available, we have selected these particular manufacturers based on their ability to consistently produce these products per our specifications ensuring the best quality product at the most cost effective price. We depend on our third-party manufacturers to satisfy performance and quality specifications and to dedicate sufficient production capacity within scheduled delivery times. Accordingly, the loss of all or one of these manufacturers or delays in obtaining shipments could have a material adverse effect on our operations until such time as an alternative manufacturer could be found.
We are dependent on key personnel.
Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace, including Ronald P. Erickson, our Chief Executive Officer. We do not maintain key person life insurance covering any of our officers. Our success will depend on the performance of our officers, our ability to retain and motivate our officers, our ability to integrate new officers into our operations, and the ability of all personnel to work together effectively as a team. Our officers do not currently have employment agreements. Our failure to retain and recruit officers and other key personnel could have a material adverse effect on our business, financial condition and results of operations. Our success also depends on our continued ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, manufacturing, administrative and sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. In particular, we may encounter difficulties in recruiting and retaining a sufficient number of qualified technical personnel, which could harm our ability to develop new products and adversely impact our relationships with existing and future customers. The inability to attract and retain necessary technical, managerial, manufacturing, administrative and sales and marketing personnel could harm our ability to obtain new customers and develop new products and could adversely affect our business and operating results.
We have limited insurance which may not cover claims by third parties against us or our officers and directors.
We have limited directors’ and officers’ liability insurance and commercial liability insurance policies. Claims by third parties against us may exceed policy amounts and we may not have amounts to cover these claims. Any significant claims would have a material adverse effect on our business, financial condition and results of operations. In addition, our limited directors’ and officers’ liability insurance may affect our ability to attract and retain directors and officers.
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.
We rely on a combination of patent, trademark, and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. Obtaining and maintaining a strong patent position is important to our business. Patent law relating to the scope of claims in the technology fields in which we operate is complex and uncertain, so we cannot be assured that we will be able to obtain or maintain patent rights, or that the patent rights we may obtain will be valuable, provide an effective barrier to competitors or otherwise provide competitive advantages. Others have filed, and in the future are likely to file, patent applications that are similar or identical to ours or those of our licensors. To determine the priority of inventions, or demonstrate that we did not derive our invention from another, we may have to participate in interference or derivation proceedings in the USPTO or in court that could result in substantial costs in legal fees and could substantially affect the scope of our patent protection. We cannot be assured our patent applications will prevail over those filed by others. Also, our intellectual property rights may be subject to other challenges by third parties. Patents we obtain could be challenged in litigation or in administrative proceedings such as ex parte reexam, inter partes review, or post grant review in the United States or opposition proceedings in Europe or other jurisdictions.
15
There can be no assurance that:
|
•
|
any of our existing patents will continue to be held valid, if challenged;
|
|
•
|
patents will be issued for any of our pending applications;
|
|
•
|
any claims allowed from existing or pending patents will have sufficient scope or strength to protect us;
|
|
•
|
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
|
|
•
|
any of our products or technologies will not infringe on the patents of other companies.
|
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 73% of TransTech’s revenue. TransTech buys, packages and distributes products from these vendors after issuing purchase orders. Any loss of any of these vendors would have a material adverse effect on our business, financial condition and results of operations.
We currently have a very small sales and marketing organization. If we are unable to secure a sales and marketing partner or establish satisfactory sales and marketing capabilities, we may not be able to successfully commercialize our ChromaID technology.
We currently have one full-time sales and business development manager for the ChromaID technology. This individual oversees sales of our products and IP licensing and manages critical customer and partner relationships. In addition, he manages and coordinates the business development resources at our strategic partners IDMC and Sumitomo Precision Products as they relate to our ChromaID technology. We also work with third party entities that are focused in specific market verticals where they have business relationships that can be leveraged. Our subsidiary, TransTech Systems, has six sales and marketing employees on staff to support the ongoing sales efforts of that business. In order to commercialize products that are approved for commercial sales, we sell directly to our customers, collaborate with third parties that have such commercial infrastructure and work with our strategic business partners to generate sales. If we are not successful entering into appropriate collaboration arrangements, or recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing our ChromaID technology, which would adversely affect our business, operating results and financial condition.
16
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 will have to 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:
|
•
|
our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
|
|
•
|
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
|
|
•
|
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
|
Government regulatory approval may be necessary before some of our products can be sold and there is no assurance such approval will be granted.
Although we do not need regulatory approval for our current applications, our ChromaID technology may have a number of potential applications in fields of use which will require prior governmental regulatory approval before the technology can be introduced to the marketplace. For example, we are exploring the use of our ChromaID technology for certain medical diagnostic applications. There is no assurance that we will be successful in developing medical applications for our ChromaID technology. If we were to be successful in developing medical applications of our technology, prior approval by the FDA and other governmental regulatory bodies may be required before the technology could be introduced into the marketplace. There is no assurance that such regulatory approval would be obtained for a medical diagnostic or other applications requiring such approval.
We may engage in acquisitions, mergers, strategic alliances, joint ventures and divestures that could result in final results that are different than expected.
In the normal course of business, we engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, joint ventures and divestitures. Such transactions are accompanied by a number of risks, including the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets, the possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition, and various potential difficulties involved in integrating acquired businesses into our operations.
From time to time, we have also engaged in discussions with candidates regarding the potential acquisitions of our product lines, technologies and businesses. If a divestiture such as this does occur, we cannot be certain that our business, operating results and financial condition will not be materially and adversely affected. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to any purchaser; identify and separate the intellectual property to be divested from the intellectual property that we wish to retain; reduce fixed costs previously associated with the divested assets or business; and collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or divestiture transaction, our financial position, results of operations, cash flows and stock price could be negatively impacted.
Our growth strategy depends in part on our ability to execute successful strategic acquisitions. We have made strategic acquisitions in the past and may do so in the future, and if the acquired companies do not perform as expected, this could adversely affect our operating results, financial condition and existing business.
We may continue to expand our business through strategic acquisitions. The success of any acquisition will depend on, among other things:
|
•
|
the availability of suitable candidates;
|
|
•
|
higher than anticipated acquisition costs and expenses;
|
|
•
|
competition from other companies for the purchase of available candidates;
|
|
•
|
our ability to value those candidates accurately and negotiate favorable terms for those acquisitions;
|
|
•
|
the availability of funds to finance acquisitions and obtaining any consents necessary under our credit facility;
|
|
•
|
the ability to establish new informational, operational and financial systems to meet the needs of our business;
|
|
•
|
the ability to achieve anticipated synergies, including with respect to complementary products or services; and
|
|
•
|
the availability of management resources to oversee the integration and operation of the acquired businesses.
|
17
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 intend to apply for listing on The NASDAQ Capital Market in connection with our proposed public offering. If our securities are approved for listing on The NASDAQ Capital Market, we will appoint an additional independent director to serve as Audit Committee Chairman. This director will be an “audit committee financial expert” as defined by the SEC. However, we cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters in the future. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.
The Capital Source credit facility contains covenants that may limit our flexibility in operating our business and failure to comply with any of these covenants could have a material adverse effect on our business.
In December 8, 2009, we entered into the Capital Source credit facility. These Capital Source credit facility contains covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
|
•
|
sell, transfer, lease or dispose of certain assets;
|
|
•
|
engage in certain mergers and consolidations;
|
|
•
|
incur debt or encumber or permit liens on certain assets, except in the limited circumstances permitted under the loan and security agreements;
|
|
•
|
make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, our common stock; and
|
|
•
|
enter into certain transactions with affiliates.
|
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 the IDMC warrant and Series A, B, C and D warrants may require further adjustment.
In connection with the June 2013 Special Situations financing described below under “Liquidity and Capital Resources”, we issued Series A Warrants to purchase a total of 348,685 shares of common stock with a current exercise price of $2.50 per share, and Series B Warrants to purchase a total of 348,685 shares of common stock with a current exercise price of $2.50 per share, the IDMC warrant to purchase 97,169 shares of common stock with a current exercise price of $2.50 per share, Series C Warrants to purchase 23,334 shares of common stock with a current exercise price of $2.50 per share and Series D Warrants to purchase 23,334 shares of common stock at an exercise price of current exercise price of $2.50 per share (collectively, the “Special Situations Warrants”). The Special Situations Warrants contain an adjustment provision that would require an adjustment in the exercise price of the Special Situations Warrants if we issue common stock, warrants or equity below the price that is reflected in the Special Situations Warrants (currently $2.50 per share). If we issue any additional shares of common stock, warrants or other equity securities at a price below the exercise prices of the Special Situations Warrants, it would result in a reduction in the exercise price of the Special Situations Warrants. A downward adjustment in the exercise price of the Special Situations Warrants could also affect the market price of the common stock.
18
Risks Relating to Our Stock
The price of our common stock is volatile, which may cause investment losses for our stockholders.
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:
|
•
|
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;
|
|
|
•
|
Issuance of convertible or equity securities and related warrants for general or merger and acquisition purposes;
|
|
|
•
|
Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes;
|
|
|
•
|
Sale of a significant number of shares of our common stock by stockholders;
|
|
|
•
|
General market and economic conditions;
|
|
|
•
|
Quarterly variations in our operating results;
|
|
|
•
|
Investor and public relation activities;
|
|
|
•
|
Announcements of technological innovations;
|
|
|
•
|
New product introductions by us or our competitors;
|
|
|
•
|
Competitive activities; and
|
|
|
•
|
Additions or departures of key personnel.
|
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.
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 November 3, 2015, there were 1,155,991 shares of our common stock issued and outstanding, outstanding stock options grants for the purchase of 57,407 shares of common stock at an $18.43 average exercise price and outstanding warrants for the purchase of 899,750 shares of common stock at a $3.19 average exercise price. We may be obligated to issue up to 34,871 additional placement agent warrants at $2.50 per share related to the funding which closed June 14, 2013 which have the potential to add additional shares to the total number of shares of common stock issued and outstanding.
In addition, there are 11,667 shares of common stock reserved for issuance upon conversion of Series A Convertible Preferred stock and an unknown number of shares related to the conversion of notes payable.
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 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.
19
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).
20
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Corporate Offices
Our executive office is located at 500 Union Street, Suite 420, Seattle, Washington, USA, 98101. We lease 2,244 square feet and our net monthly payment is $2,535. We lease this office on a month to month basis. We believe our facilities are adequate for our foreseeable needs.
TransTech Facilities
TransTech is located at 12142 NE Sky Lane, Suite 130, Aurora, OR 97002. TransTech leases a total of approximately 9,750 square feet of office and warehouse space for its administrative offices, product inventory and shipping operations. In March 2011, the lease was extended for a five year term at a monthly rental of $4,751. There are two additional five year renewals available with a set accelerating increase of 10% per 5 year term.
ITEM 3. LEGAL PROCEEDINGS
We may from time to time become a party to various legal proceedings arising in the ordinary course of our business. We are currently not a party to any pending legal proceeding that is not ordinary routine litigation incidental to our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Authorized Capital Stock
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 of voting preferred stock, par value $0.001 per share.
Voting Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock with a par value of $0.001.
On July 21, 2015, we filed with the Nevada Secretary of State an Amended and Restated Certificate of Designations, Preferences and Rights for our Series A Convertible Preferred Stock. Among other things, the Amended and Restated Certificate changed the conversion price and the stated value of the Series A Preferred from $0.10 (pre reverse stock split) to $30.00 (post-reverse stock split), and added a provision adjusting the conversion price upon the occurrence of certain events.
Under the Amended and Restated Certificate, we have 11,667 shares of Series A Preferred authorized, all of which are outstanding. Each holder of outstanding shares of Series A Preferred is entitled to the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred held by such holder are then convertible as of the applicable record date. We cannot amend, alter or repeal any preferences, rights, or other terms of the Series A Preferred so as to adversely affect the Series A Preferred, without the written consent or affirmative vote of the holders of at least 66% of the then outstanding shares of Series A Preferred, voting as a separate voting group, given by written consent or by vote at a meeting called for such purpose for which notice shall have been duly given to the holders of the Series A Preferred.
During the year ended September 30, 2015, we sold 11,667 Series A Preferred Stock to two investors totaling $350,000. These shares are expected to be convertible into 11,667 shares of common stock at $30.00 per share, subject to adjustment, for a period of five years. The Series A Preferred Stock has voting rights and may not be redeemed without the consent of the holder. We also issued (i) a Series C five-year Warrant for 23,334 shares of common stock at an exercise price of $30.00 per share, which is callable at $60.00 per share; and (ii) a Series D five-year Warrant for 23,334 shares of common stock at an exercise price of $45.00 per share, which is callable at $90.00 per share. The Series A Preferred Stock and Series C and D Warrants had registration rights.
On July 20, 2015, the two investors entered into an Amendment to Series A Preferred Stock Terms whereby they agreed to the terms of the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock and waived all registration rights.
On August 14, 2015, the warrant exercise price was adjusted to $2.50 per share due to the issuance of common stock at that price.
Common Stock
We are authorized to issue up to 100,000,000 shares of common stock with a par value of $0.001. As of November 3, 2015, we had 1,156,831 shares of common stock issued and outstanding, held by 33 shareholders of record. The number of shareholders, 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 shareholders for a vote, and no cumulative voting for directors is permitted. Shareholders do not have any preemptive rights to acquire additional securities issued by us. As of November 3, 2015, there were options outstanding for the purchase of 57,407 shares of common stock and warrants for the purchase of 899,750 shares of common stock. In addition, 11,667 shares of our common stock are issuable upon the conversion of Series A Convertible Preferred Stock, up to 34,871 shares of our common stock are issuable upon the exercise of placement agent warrants and an unknown number of shares are issuable upon conversion of $339,000 in convertible promissory notes, all of which could potentially dilute future earnings per share.
American Stock Transfer and Trust Company is the transfer agent and registrar for our Common Stock.
Stock Incentive Plan
On April 29, 2011, our 2011 Stock Incentive Plan was approved at the Annual Stockholder Meeting. We were authorized to issue options for, and has reserved for issuance, up to 46,667 shares of common stock under the 2011 Stock Incentive Plan. On March 21, 2013, an amendment to the Stock Option Plan was approved by our stockholders, increasing the number of shares reserved for issuance under the Plan to 93,333 shares.
22
Anti-Takeover Provisions
Nevada Revised Statutes
Acquisition of Controlling Interest Statutes. Nevada's "acquisition of controlling interest" statutes contain provisions governing the acquisition of a controlling interest in certain Nevada corporations. These "control share" laws provide generally that any person who acquires a "controlling interest" in certain Nevada corporations may be denied certain voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights. These statutes provide that a person acquires a "controlling interest" whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the Nevada Revised Statutes, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become "control shares" to which the voting restrictions described above apply. Our articles of incorporation and bylaws currently contain no provisions relating to these statutes, and unless our articles of incorporation or bylaws in effect on the tenth day after the acquisition of a controlling interest were to provide otherwise, these laws would apply to us if we were to (i) have 200 or more stockholders of record (at least 100 of which have addresses in the State of Nevada appearing on our stock ledger) and (ii) do business in the State of Nevada directly or through an affiliated corporation. As of July 17, 2014 we have less than 200 record stockholders. If these laws were to apply to us, they might discourage companies or persons interested in acquiring a significant interest in or control of the company, regardless of whether such acquisition may be in the interest of our stockholders.
Combinations with Interested Stockholders Statutes. Nevada's "combinations with interested stockholders" statutes prohibit certain business "combinations" between certain Nevada corporations and any person deemed to be an "interested stockholder" for two years after the such person first becomes an "interested stockholder" unless (i) the corporation's board of directors approves the combination (or the transaction by which such person becomes an "interested stockholder") in advance, or (ii) the combination is approved by the board of directors and sixty percent of the corporation's voting power not beneficially owned by the interested stockholder, its affiliates and associates. Furthermore, in the absence of prior approval certain restrictions may apply even after such two-year period. For purposes of these statutes, an "interested stockholder" is any person who is (x) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (y) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term "combination" is sufficiently broad to cover most significant transactions between the corporation and an "interested stockholder". Subject to certain timing requirements set forth in the statutes, a corporation may elect not to be governed by these statutes. We have not included any such provision in our articles of incorporation.
The effect of these statutes may be to potentially discourage parties interested in taking control of us from doing so if it cannot obtain the approval of our Board of Directors.
Articles of Incorporation and Bylaws Provisions
Our articles of incorporation, as amended and restated, and our bylaws, as amended and restated, contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change in control, including changes a stockholder might consider favorable. In particular, our articles of incorporation and bylaws, among other things:
• permit our Board of Directors to alter our bylaws without stockholder approval;
• provide that vacancies on our Board of Directors may be filled by a majority of directors in office, although less than a quorum;
• authorize the issuance of preferred stock, which can be created and issued by our Board of Directors without prior stockholder approval, with rights senior to our common stock, which may render more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise; and
• establish advance notice procedures with respect to stockholder proposals relating to the nomination of candidates for election as directors and other business to be brought before stockholder meetings, which notice must contain information specified in our bylaws.
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);
23
• 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).
Such provisions may have the effect of discouraging a third-party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.
However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management.
Market Price of and Dividends on Common Equity and Related Stockholder Matters
Our common stock is currently quoted on the OTCQB under the symbol "VSUL". In connection with our proposed public offering, we intend to apply for listing of our common stock and warrants on The NASDAQ Capital Market under the symbols "VSUL" and “VSULW”, respectively. No assurance can be given that our application will be approved. The following table sets forth the range of the high and low sale prices of the common stock for the periods indicated. The quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions. Consequently, the information provided below may not be indicative of our common stock price under different conditions.
Trades in our common stock may be subject to Rule 15g-9 of the Exchange Act, which imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, broker/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction before the sale.
|
Period Ended
|
High
|
Low
|
||||||
|
Year Ending September 30, 2015
|
||||||||
|
September 30, 2015
|
$ | 8.00 | $ | 2.80 | ||||
|
June 30, 2015
|
$ | 13.50 | $ | 6.00 | ||||
|
March 31, 2015
|
$ | 13.50 | $ | 7.50 | ||||
|
December 31, 2014
|
$ | 18.00 | $ | 7.50 | ||||
|
Year Ending September 30, 2014
|
||||||||
|
September 30, 2014
|
$ | 13.50 | $ | 9.00 | ||||
|
June 30, 2014
|
$ | 15.00 | $ | 9.00 | ||||
|
March 31, 2014
|
$ | 16.50 | $ | 10.50 | ||||
|
December 31, 2013
|
$ | 19.50 | $ | 9.00 | ||||
As of October 30, 2015, the high and low sales price of our common stock was $7.50 per share and $7.50 per share, respectively. As of November 3, 2015, there were 1,1,56,831 shares of common stock outstanding held by approximately 33 stockholders of record. This number does not include approximately 2,300 beneficial owners whose shares are held in the names of various security brokers, dealers and registered clearing agencies.
Transfer Agent
Our transfer agent is American Stock Transfer & Trust Company located at 6201 15th Avenue, Brooklyn, New York 11219, and their telephone number is (800) 937-5449.
NASDAQ Capital Market Listing
Our common stock is quoted on the OTCQB Marketplace, operated by OTC Markets Group, under the symbol "VSUL". We have applied for listing of our common stock and warrants on The NASDAQ Capital Market under the symbols "VSUL" and “VSULW”, respectively. No assurance can be given that our application will be approved.
24
Dividend Policy
We have not previously declared or paid any cash dividends on our common stock and do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. We currently intend to use all of our available funds to finance the growth and development of our business. We can give no assurances that we will ever have excess funds available to pay dividends. In addition, our articles of incorporation restrict our ability to pay any dividends on our common stock without the approval of 66% of our then outstanding Series A Preferred Stock.
Recent Sales of Unregistered Securities
During the three months ended September 30, 2015, we had the following sales of unregistered sales of equity securities.
On August 3, 10, 13 and 14, 2015, we issued a total of 23,010 shares of common stock to KBM Worldwide, Inc. related to the conversion of $64,000 of debt and interest of $2,560 pursuant to a Securities Purchase Agreement dated January 27, 2015. The shares were issued at an average of $2.785 per share, with a low price of $2.50 per share.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of September 30, 2015 related to the equity compensation plan in effect at that time.
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Number of securities
|
||||||||||||
|
remaining available
|
||||||||||||
|
Number of securities
|
Weighted-average
|
for future issuance
|
||||||||||
|
to be issued upon
|
exercise price of
|
under equity compensation
|
||||||||||
|
exercise of outstanding
|
outstanding options,
|
plan (excluding securities
|
||||||||||
|
Plan Category
|
options, warrants and rights
|
warrants and rights
|
reflected in column (a))
|
|||||||||
|
Equity compensation plan
|
||||||||||||
|
approved by shareholders
|
57,407 | 18.425 | 20,926 | |||||||||
|
Equity compensation plans
|
||||||||||||
|
not approved by shareholders
|
- | - | - | |||||||||
|
Total
|
57,407 | 18.425 | 20,926 | |||||||||
ITEM 6. SELECTED FINANCIAL DATA
Summary Financial Information
In the following table, we provide you with our selected consolidated historical financial and other data. We have prepared the consolidated selected financial information using our consolidated financial statements for the years ended September 30, 2015 and 2014. When you read this selected consolidated historical financial and other data, it is important that you read along with it the historical financial statements and related notes in our consolidated financial statements included in this report, as well as Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
Years Ended September 30,
|
||||||||||||||||||||
|
2015
|
2014
|
2013
|
2012
|
2011
|
||||||||||||||||
|
STATEMENT OF OPERATIONS DATA:
|
||||||||||||||||||||
|
Net revenue
|
$ | 6,291 | $ | 7,983 | $ | 8,573 | $ | 7,924 | $ | 9,136 | ||||||||||
|
Cost of goods sold
|
5,274 | 6,694 | 6,717 | 6,344 | 7,570 | |||||||||||||||
|
Gross profit
|
1,017 | 1,289 | 1,856 | 1,580 | 1,566 | |||||||||||||||
|
Research and development expenses
|
363 | 670 | 1,169 | 177 | 134 | |||||||||||||||
|
General and administrative expenses
|
2,984 | 3,180 | 4,581 | 3,625 | 3,691 | |||||||||||||||
|
Operating (loss)
|
(2,330 | ) | (2,561 | ) | (3,894 | ) | (2,222 | ) | (2,259 | ) | ||||||||||
|
Other expense
|
(271 | ) | 1,538 | (2,741 | ) | (533 | ) | (146 | ) | |||||||||||
|
Net profit (loss)
|
(2,601 | ) | (1,023 | ) | $ | (6,635 | ) | $ | (2,755 | ) | $ | (2,405 | ) | |||||||
|
Income taxes current benefit
|
30 | (6 | ) | $ | (30 | ) | $ | (29 | ) | $ | (9 | ) | ||||||||
|
Net profit (loss)
|
(2,631 | ) | (1,017 | ) | (6,605 | ) | (2,726 | ) | (2,396 | ) | ||||||||||
|
Noncontrolling interest
|
- | - | $ | 17 | $ | 6 | $ | 14 | ||||||||||||
|
Net profit (loss) attributable to Visualant, Inc. and Subsidiaries common shareholders
|
$ | (2,631 | ) | $ | (1,017 | ) | $ | (6,622 | ) | $ | (2,732 | ) | $ | (2,410 | ) | |||||
|
Net (loss) per share
|
$ | (2.33 | ) | $ | (0.92 | ) | $ | (8.06 | ) | $ | (6.24 | ) | $ | (8.42 | ) | |||||
|
Weighted average number of shares
|
1,131,622 | 1,108,964 | 819,563 | 437,049 | 284,552 | |||||||||||||||
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are focused primarily on the development of a proprietary technology which is capable of uniquely identifying and authenticating almost any substance using light to create, record and detect the unique digital “signature” of the substance. We call this our “ChromaID™” technology.
Our ChromaID™ Technology
We have developed a proprietary technology to uniquely identify and authenticate almost any substance. This patented technology utilizes light at the photon (elementary particle of light) level through a series of emitters and detectors to generate a unique signature or “fingerprint” from a scan of almost any solid, liquid or gaseous material. This signature of reflected or transmitted light is digitized, creating a unique ChromaID signature. Each ChromaID signature is comprised of hundreds or thousands of specific data points.
The ChromaID technology looks beyond visible light frequencies to areas of near infra-red and ultraviolet light that are outside the humanly visible light spectrum. The data obtained allows us to create a very specific and unique ChromaID signature of the substance for a myriad of authentication and verification applications.
Traditional light-based identification technology, called spectrophotometry, has relied upon a complex system of prisms, mirrors and visible light. Spectrophotometers typically have a higher cost and utilize a form factor more suited to a laboratory setting and require trained laboratory personnel to interpret the information. The ChromaID technology uses lower cost LEDs and photodiodes and specific frequencies of light resulting in a more accurate, portable and easy-to-use solution for a wide variety of applications. The ChromaID technology not only has significant cost advantages as compared to spectrophotometry, it is also completely flexible is size, shape and configuration. The ChromaID scan head can range in size from endoscopic to a scale that could be the size of a large ceiling-mounted florescent light fixture.
In normal operation, a ChromaID master or reference scan is generated and stored in a database. The Visualant scan head can then scan similar materials to identify, authenticate or diagnose them by comparing the new ChromaID digital signature scan to that of the original or reference ChromaID signature or scan result.
ChromaID was invented by scientists from the University of Washington under contract with Visualant. We have pursued an aggressive intellectual property strategy and have been granted nine patents. We also have 21 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, Intellectual Ventures through its subsidiary IDMC.
In 2010, we acquired TransTech as an adjunct to our business. TransTech is a distributor of products for employee and personnel identification. TransTech currently provides substantially all of our revenues. We intend, however, to further develop and market our ChromaID technology.
26
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from year-to-year.
(dollars in thousands)
|
Years Ended September 30,
|
|||||||||||||||||
|
2015
|
2014
|
$ Variance
|
% Variance
|
||||||||||||||
|
Revenue
|
$ | 6,291 | $ | 7,983 | $ | (1,692 | ) | -21.2 | % | ||||||||
|
Cost of sales
|
5,274 | 6,694 | (1,420 | ) | 21.2 | % | |||||||||||
|
Gross profit
|
1,017 | 1,289 | (272 | ) | -21.1 | % | |||||||||||
|
Research and development expenses
|
363 | 670 | (307 | ) | 45.8 | % | |||||||||||
|
Selling, general and administrative expenses
|
2,984 | 3,180 | (196 | ) | 6.2 | % | |||||||||||
|
Operating loss
|
(2,330 | ) | (2,561 | ) | 231 | 9.0 | % | ||||||||||
|
Other income (expense):
|
|||||||||||||||||
|
Interest expense
|
(170 | ) | (105 | ) | (65 | ) | -61.9 | % | |||||||||
|
Other income
|
41 | 38 | 3 | 7.9 | % | ||||||||||||
|
Loss on conversion of debt
|
(34 | ) | - | (34 | ) | -100.0 | % | ||||||||||
|
(Loss) gain on change- derivative liability warrants
|
(108 | ) | 1,605 | (1,713 | ) | -100.0 | % | ||||||||||
|
Total other (expense) income
|
(271 | ) | 1,538 | (1,809 | ) | -117.6 | % | ||||||||||
|
Loss before income taxes
|
(2,601 | ) | (1,023 | ) | (1,578 | ) | -154.3 | % | |||||||||
|
Income taxes - current (provision) benefit
|
30 | (6 | ) | 36 | -600.0 | % | |||||||||||
|
Net loss
|
(2,631 | ) | (1,017 | ) | (1,614 | ) | -158.7 | % | |||||||||
|
Noncontrolling interest
|
- | - | - | 0.0 | % | ||||||||||||
|
Net loss attributable to Visualant, Inc. common shareholders
|
$ | (2,631 | ) | $ | (1,017 | ) | $ | (1,614 | ) | -158.7 | % | ||||||
YEAR ENDED SEPTEMBER 30, 2015 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2014
Sales
Net revenue for the year ended September 30, 2015 decreased $1,692,000 to $6,291,000 as compared to $7,983,000 for the year ended September 30, 2014. The decrease was due to lower sales at TransTech of $1,692,000 resulting from a reduction in sales from the products of one large vendor.
Cost of Sales
Cost of sales for the year ended September 30, 2015 decreased $1,420,000 to $5,274,000 as compared to $6,694,000 for the year ended September 30, 2014. The decrease was due to lower sales.
Gross profit was $1,017,000 for the year ended September 30, 2015 as compared to $1,289,000 for the year ended September 30, 2014. Gross profit was 16.2% for the year ended September 30, 2015 as compared to 16.1% for the year ended September 30, 2014.
Research and Development Expenses
Research and development expenses for the year ended September 30, 2015 decreased $307,000 to $363,000 as compared to $670,000 for the year ended September 30, 2014. The decrease was due to reduced expenditures for suppliers related to the commercialization of our ChromaID technology and the effect of the Services and License Agreement with IDMC, which reduced cash expenditures.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended September 30, 2015 decreased $196,000 to $2,984,000 as compared to $3,180,000 for the year ended September 30, 2014.
The decrease primarily was due to lower expenses at TransTech ($127,000), reduced corporate development ($65,000), reduced amortization ($66,000), and a decrease in other general expenses ($72,000), offset by increased stock based compensation expenses ($134,000). As part of the selling, general and administrative expenses for the year ended September 30, 2015, we incurred investor relation expenses of $39,000 and business development expenses of $105,000.
Other Income (Expense)
Other expense for the year ended September 30, 2015 was $271,000 as compared to other income of $1,538,000 for the year ended September 30, 2014. The other expense for the year ended September 30, 2015 included other income of $41,000, offset by loss on change - derivative liability of $108,000, interest expense of $170,000. The loss on change derivative liability warrants related to derivative instruments included in the June 2013 private placement, the November 2013 IDMC Services and License Agreement, our convertible notes payable and the issuance of Series A Convertible Preferred Stock.
27
The income for the year ended September 30, 2014 included gain on change - derivative liability of $1,605,000 and other income of $38,000, offset by interest expense of $104,000. The gain on change- derivative liability warrants relates to derivative instruments included in the June 2013 Private Placement and the November 2013 IDMC Services and License Agreement.
Net Loss
Net loss for the year ended September 30, 2015 was $2,631,000 as compared to a net loss of $1,017,000 for the year ended September 30, 2015. The increase was primarily due to an increase in loss on change - derivative liability of $1,713,000. The net loss for the year ended September 30, 2015, included non-cash expenses of $706,000, including (i) loss on change- derivative liability warrants of $108,000, (ii) other of $42,000, offset by (iii) depreciation and amortization of $353,000; (iv) stock based compensation of $65,000; and (v) share and warrant issuances of $138,000. TransTech’s net loss from operations was $194,000 for the year ended September 30, 2015 as compared to a net loss of $64,000 for the year ended September 30, 2014.
The net loss for the year ended September 30, 2014 included non-cash income of $819,000, including (i) depreciation and amortization of $418,000; (ii) stock based compensation of $88,000; and (iii) share and warrant issuances of $308,000, offset by (i) gain on change- derivative liability warrants of $1,605,000; and (ii) other of $28,000. TransTech net loss from operations was $64,000 for the year ended September 30, 2014 as compared to a net loss of $406,000 for the year ended September 30, 2013.
We expect losses to continue as we commercialize our ChromaID™ technology.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
We had cash of $828,000 and net working capital deficit of approximately $4,186,000 (excluding the derivative liability- warrants of $2,705,000) as of September 30, 2015. We expect losses to continue as we commercialize our ChromaID™ technology. Our cash used in operations for the years ended September 30, 2015 and 2014 was ($240,000) and $(1,379,000), respectively. We believe that our cash on hand will be sufficient to fund our operations through at least the end of December 2015
The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended September 30, 2015 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 or eliminate the development of business opportunities and our operations and financial condition may be materially adversely affected.
As of November 3, 2015, we received commitments from debtors to convert $1,000,000 into our common stock as part of our proposed listing on The NASDAQ Capital Market. These conversions are expected to increase stockholder’s equity by $1,000,000.
On April 24, 2015, we filed a registration statement on Form S-1 to register $10 million of Company securities in a public offering. We have applied for listing of the Company’s common stock and the warrants on The NASDAQ Capital Market. The proposed offering has been delayed, and there can be no assurance that it will be completed.
On June 14, 2013, the Company entered into a Purchase Agreement, Warrants, and Registration Rights Agreement with Special Situations Technology Funds and 40 other accredited investors, pursuant to which the Company issued 348,685 shares of common stock at $15.00 per share for a total of $5,230,000, which amount includes the conversion of $500,000 in outstanding debt of the Company owed to one of its officers.
28
In connection with the Special Situations transaction, in June 2013 we issued Series A Warrants to purchase a total of 348,685 shares of common stock with a current exercise price of $2.50 per share, and Series B Warrants to purchase a total of 348,685 shares of common stock with a current exercise price of $2.50 per share, the IDMC warrant to purchase 97,169 shares of common stock with a current exercise price of $2.50 per share, Series C Warrants to purchase 23,334 shares of common stock with a current exercise price of $2.50 per share and Series D Warrants to purchase 23,334 shares of common stock at an exercise price of current exercise price of $2.50 per share (collectively, the “Special Situations Warrants”). The Special Situations Warrants contain an adjustment provision that would require an adjustment in the exercise price of the Special Situations Warrants if we issue common stock, warrants or equity below the price that is reflected in the Special Situations Warrants. If we issue any additional shares of common stock, warrants or other equity securities at a price below the exercise prices of the Special Situations Warrants, it would result in a reduction in the exercise price of the Special Situations Warrants.
We have financed our corporate operations and our technology development through the issuance of convertible debentures, the sale common stock, issuance of common stock in conjunction with an equity line of credit, and loans by our Chief Executive Officer.
We finance our TransTech operations from operations and a Secured Credit Facility with Capital Source Business Finance Group. On December 9, 2008, TransTech entered into a $1,000,000 secured credit facility with Capital Source to fund its operations. On June 12, 2015, the secured credit facility was renewed for an additional six months, with a floor for prime interest of 4.5% (currently 4.5%) plus 2.5%. The eligible borrowing is based on 80% of eligible trade accounts receivable, not to exceed $1,000,000. The secured credit facility is collateralized by the assets of TransTech, with a guarantee by Visualant, including a security interest in all assets of Visualant. Availability under this Secured Credit ranges from $0 to $175,000 ($24,000 as of September 30, 2015) on a daily basis. The remaining balance on the accounts receivable line of $364,757 as of September 30, 2015 must be repaid by the time the secured credit facility expires on December 12, 2015, or we renew by automatic extension for the next successive six-month term.
Operating Activities
Net cash used in operating activities for the year September 30, 2015 was $240,000. This amount was primarily related to a net loss of $2,631,000, offset by non-cash other expense of $706,000, decrease in accounts receivable of $167,000, a decrease in inventory of $195,000 and an increase accounts payable and accrued expenses of $1,290,000.
Investing Activities
Net cash provided by investing activities for the year ended September 30, 2015 was $21,000. This amount was primarily related to the investment of proceeds from the sale of equipment of $21,000.
Financing Activities
Net cash provided by financing activities for the year ended September 30, 2015 was $230,000. This amount was primarily related to proceeds from the sale of preferred stock of $350,000 and proceeds from convertible note of $173,000, offset by repayment of line of credit of $124,000, repayment of convertible note of $167,000 and repayment of capital leases of $3,000.
Our contractual cash obligations as of September 30, 2015 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
|
$ | 26,330 | $ | 26,330 | $ | - | $ | - | $ | - | ||||||||||
|
Convertible notes payable
|
109,000 | 109,000 | - | - | - | |||||||||||||||
|
Notes payable
|
1,164,692 | 1,164,692 | - | - | - | |||||||||||||||
|
Capital expenditures
|
100,000 | 20,000 | 40,000 | 40,000 | - | |||||||||||||||
| $ | 1,400,022 | $ | 1,320,022 | $ | 40,000 | $ | 40,000 | $ | - | |||||||||||
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 2 to the financial statements set forth in this report), the following policies involve a higher degree of judgment and/or complexity:
29
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. We record a provision for excess and obsolete inventory whenever an impairment has been identified. There is a $20,000 and $10,000 reserve for impaired inventory as of September 30, 2015 and 2014, respectively.
Fair Value Measurements and Financial Instruments – ASC Topic 820, Fair Value Measurement and Disclosures, 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).
Revenue Recognition – Visualant and TransTech revenue are derived from other products and services. Revenue is considered realized when the 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, we defer 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 – We have share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares of our common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by us at the grant date, based on the fair value of the award, over the requisite service period. For options issued to employees, we recognize 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to our consolidated financial statements beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of September 30, 2015 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.
30
Management identified the following material weakness during its assessment of internal controls over financial reporting:
Audit Committee: While we have an audit committee, we lack a financial expert. During 2015, 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. In addition, this Director is expected to strengthen our governance processes. We are using external service providers to ensure compliance with the Securities and Exchange Commission requirements until we appoint the Audit Committee Chairman.
b) Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2015, 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.
ITEM 9B. OTHER INFORMATION
There were no disclosures of any information required to be filed on Form 8-K during the three months ended September 30, 2015 that were not filed.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The following table sets forth certain information about our current directors and executive officers:
|
|
Name
|
Age
|
Director/ Executive Officer
|
|
Directors-
|
||
|
Ronald P. Erickson
|
71
|
Chairman of the Board, Chief Executive Officer and President (1)
|
|
Jon Pepper
|
64
|
Director (2)
|
|
Ichiro Takesako
|
56
|
Director
|
|
Executive Officers-
|
||
|
Mark E. Scott
|
62
|
Chief Financial Officer and Secretary
|
|
Todd Martin Sames
|
61
|
Executive Vice President of Business Development
|
|
(1) Chairman of the Nomination and Governance Committee.
|
|
(2) Chairman of the Audit and Compensation Committees.
|
All directors hold office until their successors are duly appointed or until their earlier resignation or removal.
Ronald P. 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.
A senior executive with more than 30 years of experience in the high technology, telecommunications, micro-computer, and digital media industries, Mr. Erickson was the founder of Visualant. He is formerly Chairman, CEO and Co-Founder of Blue Frog Media, a mobile media and entertainment company; Chairman and CEO of eCharge Corporation, an Internet-based transaction procession company, Chairman, CEO and Co-founder of GlobalTel Resources, a provider of telecommunications services; Chairman, Interim President and CEO of Egghead Software, Inc. a software reseller where he was an original investor; Chairman and CEO of NBI, Inc.; and Co-founder of MicroRim, Inc. the database software developer. Earlier, Mr. Erickson practiced law in Seattle and worked in public policy in Washington, DC and New York, NY. Additionally, Mr. Erickson has been an angel investor and board member of a number of public and private technology companies. In addition to his business activities, Mr. Erickson serves on the Board of Trustees of Central Washington University where he received his BA degree. He also holds a MA from the University of Wyoming and a JD from the University of California, Davis. He is licensed to practice law in the State of Washington.
Mr. Erickson is our founder and was appointed as a director because of his extensive experience in developing technology companies.
Ichiro Takesako has served as a director since December 28, 2012. Mr. Takesako has held executive positions with Sumitomo Precision Products Co., Ltd or Sumitomo since 1983. Mr. Takesako graduated from Waseda University, Tokyo, Japan where he majored in Social Science and graduated with a Degree of Bachelor of Social Science.
In the past few years, Mr. Takesako has held the following executive position in Sumitomo and its affiliates:
|
June 2008:
|
appointed as General Manager of Sales and Marketing Department of Micro Technology Division
|
|
April 2009:
|
appointed as General Manager of Overseas Business Department of Micro Technology Division, in charge of M&A activity of certain business segment and assets of Aviza Technology, Inc.
|
|
July 2010:
|
appointed as Executive Director of SPP Process Technology Systems, 100% owned subsidiary of Sumitomo Precision Products then, stationed in Newport, Wales
|
|
August 2011:
|
appointed as General Manager, Corporate Strategic Planning Group
|
|
January 2013:
|
appointed as Chief Executive Officer of M2M Technologies, Inc., a company invested by Sumitomo Precision products
|
|
April 2013:
|
appointed as General Manager of Business Development Department, in parallel of CEO of M2M Technologies, Inc.
|
|
April 2014:
|
relieved from General Manager of Business Development Department and is responsible for M2M Technologies Inc. as its CEO
|
Mr. Takesako was appointed as a Director based on his position with Sumitomo and Sumitomo's significant partnership with the Company.
32
Jon Pepper has served as an independent director since April 2006. Mr. Pepper founded Pepcom in 1980, and continues as the founding partner of Pepcom, an industry leader at producing press-only technology showcase events around the country. Prior to that, Mr. Pepper started the DigitalFocus newsletter, a ground-breaking newsletter on digital imaging that was distributed to leading influencers worldwide. Mr. Pepper has been closely involved with the high technology revolution since the beginning of the personal computer era. He was formerly a well-regarded journalist and columnist; his work on technology subjects appeared in The New York Times, Fortune, PC Magazine, Men's Journal, Working Woman, PC Week, Popular Science and many other well-known publications. Pepper was educated at Union College in Schenectady, New York and the Royal Academy of Fine Arts in Copenhagen.
Other Executive Officers
Mark E. Scott been our Chief Financial Officer, Secretary and Treasurer since May 2010. Mr. Scott has significant financial, capital market and relations experience in public microcap companies. He currently serves as Consulting Chief Financial Officer of GrowLife, Inc., a publicly traded cultivation services provider, since July 2014. Mr. Scott also served as a member of the Board of Directors and Secretary and Chairman of the Audit Committee of GrowLife from June 2014 to October 2015.
Mr. Scott was Chief Financial Officer of U.S. Rare Earths, Inc., a consulting position he held from December 2011 to April 2014, and Chief Financial Officer of Sonora Resources Corporation, a consulting position he held from June 2011 to August 2014. Mr. Scott was Chief Financial Officer, Secretary and Treasurer of WestMountain Gold from February 2011 to December 2013 and was a consultant to that company from December 2010 to February 2011. Mr. Scott previously served as Chief Financial Officer and Secretary of IA Global, Inc. from October 2003 to June 2011. Previously, he held executive financial positions with Digital Lightwave; Network Access Solutions; and Teltronics, Inc. He has also held senior financial positions at Protel, Inc., Crystals International, Inc., Ranks Hovis McDougall, LLP and Brittania Sportswear, and worked at Arthur Andersen. Mr. Scott is also a certified public accountant and received a Bachelor of Arts in Accounting from the University of Washington.
Todd Martin Sames joined the Company as Vice President, Business Development in September 2012. Mr. Sames was appointed Executive Vice President, Business Development in March 2015. Mr. Sames is responsible for global business development and sales of the ChromaID technology, customer relations and creating new licensing agreements resulting in the commercialization of Visualant’s technology across a wide range of applications with device and equipment manufacturers in several business verticals.
Mr. Sames brings over 25 years of successful emerging technology sales and sales management experience in the areas of enterprise software, audio and video conferencing and networking solutions to corporate clients. From 2010 to 2012, Mr. Sames held a Business Unit Director position at INX, focused on unified communications and collaboration solutions for Fortune 1000 clients. From 2007 to 2010, Mr. Sames held a Regional Management position at BT Conferencing, Video. Prior to that, Mr. Sames was the original corporate sales resource for then start-up Portable Software, now Concur Technologies.
During his tenure at Egghead Software, Mr. Sames was the Midwest Regional Manager for Corporate Sales based in Chicago and ultimately Director of Corporate Relationships overseeing corporate purchasing contracts, special projects and innovative new corporate service programs. Mr. Sames has a Bachelor of Arts Degree from the University of Puget Sound and additional certifications in communications technology from Cisco Systems, Polycom, TANDBERG and other technology systems providers.
Family Relationships
There are no family relationships among our directors and executive officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
|
•
|
Had any petition under the federal bankruptcy laws or any state insolvency law filed by or against, or had a receiver, fiscal agent, or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
|
|
•
|
Been convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|||
|
•
|
Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
|
|||
33
|
◦
|
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
|
|||
|
◦
|
Engaging in any type of business practice; or
|
|||
|
◦
|
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
|
|||
|
•
|
Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (i) above, or to be associated with persons engaged in any such activity;
|
|||
|
•
|
Been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated; or
|
|||
|
•
|
Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.
|
|||
Board Committees
The Board has three standing committees to facilitate and assist the Board in the execution of its responsibilities. The committees are currently the Audit Committee, the Nominations and Governance Committee, and the Compensation Committee. The Committees were formed in July 2010. The Audit and Compensation Committees are comprised solely of non-employee, independent directors. The Nominations and Governance Committee has one management director, Ronald Erickson, as Chairman. Charters for each committee are available on our website at www.visualant.net. The discussion below describes current membership for each of the standing Board committees.
|
Audit
|
Compensation
|
Nominations and Governance
|
||
|
Jon Pepper (Chairman)
|
Jon Pepper (Chairman)
|
Ron Erickson (Chairman)
|
||
|
Jon Pepper
|
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee during the fiscal year ended September 30, 2015 served as an officer, former officer, or employee of the Company or participated in a related party transaction that would be required to be disclosed in this prospectus. Further, during this period, no executive officer of the Company served as:
|
•
|
a member of the Compensation Committee or equivalent of any other entity, one of whose executive officers served as one of our directors or was an immediate family member of a director, or served on our Compensation Committee; or
|
|
|
•
|
a director of any other entity, one of whose executive officers or their immediate family member served on our Compensation Committee.
|
Code of Ethics
We have adopted conduct and ethics standards titled the code of ethics, which is available at www.visualant.net. These standards were adopted by our Board of Directors to promote transparency and integrity. The standards apply to our Board of Directors, executives and employees. Waivers of the requirements of our code of ethics or associated polices with respect to members of our Board of Directors or executive officers are subject to approval of the full board.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
34
Overview of Compensation Program
This Compensation Discussion and Analysis describes the material elements of compensation awarded to, earned by or paid to each of our executive officers named in the Compensation Table on page 37 under “Remuneration of Executive Officers” (the “Named Executive Officers”) who served during the year ended September 30, 2015. This compensation discussion primarily focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. We also describe compensation actions taken after the last completed fiscal year to the extent that it enhances the understanding of our executive compensation disclosure. The principles and guidelines discussed herein would also apply to any additional executive officers that the Company may hire in the future.
The Compensation Committee of the Board has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in accordance with the Compensation Committee’s charter. The members of the Compensation Committee are Jon Pepper. We expect to appoint an additional independent Director to serve on the Compensation Committee by early 2016.
Compensation Philosophy and Objectives
The major compensation objectives for the Company’s executive officers are as follows:
|
•
|
to attract and retain highly qualified individuals capable of making significant contributions to our long-term success;
|
|
|
•
|
to motivate and reward named executive officers whose knowledge, skills, and performance are critical to our success;
|
|
|
•
|
to closely align the interests of our named executive officers and other key employees with those of its shareholders; and
|
|
|
•
|
to utilize incentive based compensation to reinforce performance objectives and reward superior performance.
|
Role of Chief Executive Officer in Compensation Decisions
The Board approves all compensation for the chief executive officer. The Compensation Committee makes recommendations on the compensation for the chief executive officer and approves all compensation decisions, including equity awards, for our executive officers. Our chief executive officer makes recommendations regarding the base salary and non-equity compensation of other executive officers that are approved by the Compensation Committee in its discretion.
Setting Executive Compensation
The Compensation Committee believes that compensation for the Company’s executive officers must be managed to what we can afford and in a way that allows for us to meet our goals for overall performance. During 2015 and 2014, the Compensation Committee and the Board compensated its Chief Executive Officer with an annual salary of $180,000 (all accrued, not paid)effective June 1, 2012. During 2015 and 2014, the Committee compensated its Chief Financial Officer with an annual salary of $120,000 ($80,000 paid and $40,000 accrued) effective June 1, 2012. This compensation reflected the financial condition of the Company. Other Named Executive Officers were paid by us or TransTech during 2015. The Compensation Committee does not use a peer group of publicly-traded and privately-held companies in structuring the compensation packages.
Executive Compensation Components for the Year Ended September 30, 2015
The Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the year that ended on September 30, 2015. The Compensation Committee believes that in order to attract and retain highly effective people it must maintain a flexible compensation structure. For the year that ended on September 30, 2015, the principal components of compensation for named executive officers were base salary.
Base Salary
Base salary is intended to ensure that our employees are fairly and equitably compensated. Generally, base salary is used to appropriately recognize and reward the experience and skills that employees bring to the Company and provides motivation for career development and enhancement. Base salary ensures that all employees continue to receive a basic level of compensation that reflects any acquired skills which are competently demonstrated and are consistently used at work.
Base salaries for the Company’s named executive officers are initially established based on their prior experience, the scope of their responsibilities and the applicable competitive market compensation paid by other companies for similar positions. Mr. Erickson and Mr. Scott were compensated as described above based on the financial condition of the Company.
Performance-Based Incentive Compensation
The Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is consistent with the enhancement of stockholder value. All of the Company’s Named Executive Officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any performance-based incentive compensation to the Named Executive Officers during the year ended September 30, 2015 based on the financial condition of the Company except for Jeffrey Kruse. Mr. Kruse was paid $3,000 and $4,500 for achieving profitability at TransTech during the years ended September 30, 2015 and 2014, respectively.
35
Ownership Guidelines
The Compensation Committee does not require our executive officers to hold a minimum number of our shares. However, to directly align the interests of executive officers with the interests of the stockholders, the Compensation Committee encourages each executive officer to maintain an ownership interest in the Company.
Stock Option Program
Stock options are an integral part of our executive compensation program. They are intended to encourage ownership and retention of the Company’s common stock by named executive officers and employees, as well as non-employee members of the Board. Through stock options, the objective of aligning employees’ long-term interest with those of stockholders may be met by providing employees with the opportunity to build a meaningful stake in the Company.
The Stock Option Program assists us by:
- enhancing the link between the creation of stockholder value and long-term executive incentive compensation;
- providing an opportunity for increased equity ownership by executive officers; and
- maintaining competitive levels of total compensation.
Stock option award levels are determined by the Compensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are generally awarded stock options, at the discretion of the Compensation Committee, at the next regularly scheduled Compensation Committee meeting on or following their hire or promotion date. In addition, such executives are eligible to receive additional stock options on a discretionary basis after performance criteria are achieved.
Options are awarded at the closing price of our common stock on the date of the grant or last trading day prior to the date of the grant. The Compensation Committee’s policy is not to grant options with an exercise price that is less than the closing price of our common stock on the grant date.
Generally, the majority of the options granted by the Compensation Committee vest quarterly over two to three years or annually over five years of the 5-10-year option term. Vesting and exercise rights cease upon termination of employment and/or service, except in the case of death (subject to a one year limitation), disability or retirement. Stock options vest immediately upon termination of employment without cause or an involuntary termination following a change of control. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.
The Named Executive Officers received stock grants and option awards during the year ended September 30, 2015 as outlined below.
Retirement and Other Benefits
We have no other retirement, savings, long-term stock award or other type of plans for the Named Executive Officers.
Perquisites and Other Personal Benefits
During the year ended September 30, 2015, we provided the Named Executive Officers with medical insurance. No other personal benefits were provided to these individuals. The committee expects to review the levels of perquisites and other personal benefits provided to Named Executive Officers annually.
There are no employment agreements.
Tax and Accounting Implications
Deductibility of Executive Compensation
Subject to certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") generally denies a deduction to any publicly held corporation for compensation paid to its chief executive officer and its three other highest paid executive officers (other than the principal financial officer) to the extent that any such individual's compensation exceeds $1 million. “Performance-based compensation” (as defined for purposes of Section 162(m)) is not taken into account for purposes of calculating the $1 million compensation limit, provided certain disclosure, shareholder approval and other requirements are met.
36
We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exceptions to Section 162(m). However, we may authorize compensation payments that do not comply with the exceptions to Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer's performance
Accounting for Stock-Based Compensation
Beginning on January 1, 2006, we began accounting for stock-based payments including its Stock Option Program in accordance with the requirements of ASC 718, “Compensation-Stock Compensation.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee, composed entirely of independent directors in accordance with the applicable laws and regulations, sets and administers policies that govern the Company's executive compensation programs, and incentive and stock programs. The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
THE COMPENSATION COMMITTEE
Jon Pepper, Chairman
EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table provides information concerning remuneration of the chief executive officer, the chief financial officer and another named executive officer for the fiscal years ended September, 2015 and 2014:
Summary Compensation Table
|
All
|
||||||||||||||||||||||||||||
|
Stock
|
Option
|
Other
|
||||||||||||||||||||||||||
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Total
|
|||||||||||||||||||||||
|
Name
|
Principal Position
|
($)
|
($)
|
($) (6)
|
($) (6)
|
($)
|
($)
|
|||||||||||||||||||||
|
Salary-
|
||||||||||||||||||||||||||||
|
Ronald P. Erickson (1)
|
Chief Executive Officer
|
9/30/2015
|
$ | 180,000 | $ | - | $ | - | $ | - | $ | - | $ | 180,000 | ||||||||||||||
|
9/30/2014
|
$ | 180,000 | $ | - | $ | - | $ | - | $ | - | $ | 180,000 | ||||||||||||||||
|
Mark E. Scott (2)
|
Chief Financial Officer
|
9/30/2015
|
$ | 120,000 | $ | - | $ | 20,010 | $ | - | $ | - | $ | 140,010 | ||||||||||||||
|
Secretary
|
9/30/2014
|
$ | 120,000 | $ | - | $ | - | $ | - | $ | - | $ | 120,000 | |||||||||||||||
|
Richard Mander, Ph.D. (3)
|
Chief Technology Officer
|
9/30/2015
|
$ | 20,834 | $ | - | $ | - | $ | - | $ | 1,250 | $ | 22,084 | ||||||||||||||
|
9/30/2014
|
$ | 187,500 | $ | - | $ | - | $ | - | $ | 12,000 | $ | 199,500 | ||||||||||||||||
|
Todd Martin Sames (4)
|
Vice President of Business
|
9/30/2015
|
$ | 120,000 | $ | - | $ | 15,000 | $ | - | $ | - | $ | 135,000 | ||||||||||||||
| Development |
9/30/2014
|
$ | 120,000 | $ | - | $ | - | $ | 13,500 | $ | - | $ | 133,500 | |||||||||||||||
|
Jeffrey Kruse (5)
|
President of TransTech
|
9/30/2015
|
$ | 162,000 | $ | 3,000 | $ | 15,000 | $ | - | $ | 5,760 | $ | 185,760 | ||||||||||||||
| Systems, Inc. |
9/30/2014
|
$ | 162,000 | $ | 4,500 | $ | - | $ | - | $ | 6,780 | $ | 173,280 | |||||||||||||||
(1) During the years ended September 30, 2015 and 2014, Mr. Erickson was paid a monthly salary of $15,000. As of September 30, 2015 and 2014, Mr. Erickson had accrued but unpaid salary of $180,000 and $105,000, respectively, which is expected to be paid during the year ended September 30, 2016. This accrual was based on the tight cash flow of the Company and agreed to by Mr. Erickson, but there was no formal deferral agreement. There was no accrued interest paid on the unpaid salary.
(2) During the year ended September 30, 2014 and 2013, Mr. Scott was paid a monthly salary of $10,000. As of September 30, 2015, Mr. Scott had accrued but unpaid salary of $40,000 which is expected to be paid during the year ended September 30, 2016. This accrual was based on the tight cash flow of the Company and agreed to by Mr. Scott, but there was no formal deferral agreement. The 2015 stock award amount for Mr. Scott reflects 1,334 shares of restricted common stock issued by us on January 23, 2015. The restricted common stock was issued at the grant date market value of $15.00 per share.
(3) Mr. Mander was paid a monthly salary of $12,500 from October 1, 2013 to December 31, 2013. From January 1, 2014 to September 30, 2014, Mr. Mander was paid a monthly salary of $16,667. Mr. Mander was paid $1,000 per month for medical expenses. On November 7, 2014, the Company accepted the resignation of Mr. Mander as Chief Technology Officer. Mr. Mander’s stock option grants expired March 31, 2015 in connection with his resignation.
37
(4) During the year ended September 30, 2014 and 2013 Mr. Sames was paid a monthly salary of $10,000. As of September 30, 2015, Mr. Sames had accrued but unpaid salary of $40,000 which is expected to be paid during the year ended September 30, 2016. This accrual was based on the tight cash flow of the Company and agreed to by Mr. Sames, but there was no formal deferral agreement. The 2015 stock award amount for Mr. Sames reflects 1,000 shares of restricted common stock issued by us on January 23, 2015. The restricted common stock was issued at the grant date market value of $15.00 per share. The 2014 stock option grant amount for Mr. Sames reflects 2,000 shares issued by us on April 2, 2014. The grant was issued at the grant date market value of $15.00 per share and vested by April 1, 2017.
(5) Mr. Kruse was appointed as President of TransTech in July 2013. As President, Mr. Kruse was paid at the monthly rate of $13,500 from July 2013 to September 30, 2015. As of September 30, 2015, Mr. Kruse had accrued but unpaid salary of $21,000 which is expected to be paid during the year ended September 30, 2016. This accrual was based on the tight cash flow of the Company and agreed to by Mr. Kruse, but there was no formal deferral agreement. Mr. Kruse was paid bonuses of $3,000 and $4,500 for achieving profitability at TransTech during quarters in the years ended September 30, 2015 and 2014, respectively. The 2015 stock award amount for Mr. Kruse reflects 1,000 shares of restricted common stock issued by us on January 23, 2015. The restricted common stock was issued at the grant date market value of $15.00 per share. Mr. Kruse also was eligible to participate in the TransTech 401k plan. Mr. Kruse has assumed the part time position of General Manager of TransTech effective September 30, 2015. Mr. Kruse is no longer considered a 16 (b) officer of Visualant or TransTech.
(6) These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
Grants of Stock Based Awards in Fiscal Year Then Ended September 30, 2015
The Compensation Committee approved the following performance-based incentive compensation to the Named Executive Officers during 2015:
|
All Other
|
|
|||||||||||||||||||||||||||||||||||||||||
|
All Other
|
Option Awards;
|
|
||||||||||||||||||||||||||||||||||||||||
| Estimated Future Payouts Under | Estimated Future Payouts Under |
Stock Awards;
|
Number of
|
|
||||||||||||||||||||||||||||||||||||||
| Non-Equity Incentive Plan | Equity Incentive Plan |
Number of
|
Securities
|
Exercise or
|
Grant Date
|
|||||||||||||||||||||||||||||||||||||
|
Awards
|
Awards |
Shares of
|
Underlying
|
Base Price of
|
Fair Value of
|
|||||||||||||||||||||||||||||||||||||
|
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Stock or Units
|
Options
|
Option Awards
|
Stock and
|
||||||||||||||||||||||||||||||||
|
Name
|
Date
|
($)
|
($)
|
($)
|
(#) | (#) | (#) | (#) | (#) |
($/Sh) (4)
|
Option Awards
|
|||||||||||||||||||||||||||||||
|
Ronald P. Erickson
|
$ | - | $ | - | $ | - | - | - | - | - | - | $ | - | $ | - | |||||||||||||||||||||||||||
|
Mark E. Scott (1)
|
$ | - | $ | - | $ | - | - | - | - | 1,334 | - | $ | - | $ | - | |||||||||||||||||||||||||||
|
Richard Mander, Ph.D.
|
$ | - | $ | - | $ | - | - | - | - | - | - | $ | - | $ | - | |||||||||||||||||||||||||||
|
Todd Martin Sames (2)
|
$ | - | $ | - | $ | - | - | - | - | 1,000 | 6,668 | $ | 15.000 | $ | - | |||||||||||||||||||||||||||
|
Jeffrey Kruse (3)
|
$ | - | $ | - | $ | - | - | - | - | 1,000 | 3,335 | $ | 15.000 | $ | - | |||||||||||||||||||||||||||
(1) The 2015 stock award amount for Mr. Scott reflects 1,334 shares of restricted common stock issued by us on January 23, 2015. The restricted common stock was issued at the grant date market value of $15.00 per share.
(2) The 2015 stock award amount for Mr. Sames reflects 1,000 shares of restricted common stock issued by us on January 23, 2015. The restricted common stock was issued at the grant date market value of $15.00 per share. The 2015 stock option grant for Mr. Sames reflects 6,668 shares at an exercise price of $15.00 per share. The grant vests quarterly over three years after being earned and expires January 22, 2020. As of September 30, 2015, the stock option grant was not earned.
(3) The 2015 stock award amount for Mr. Kruse reflects 1,000 shares of restricted common stock issued by us on January 23, 2015. The restricted common stock was issued at the grant date market value of $15.00 per share. The 2015 stock option grant for Mr. Kruse reflects 3,334 shares at an exercise price of $15.00 per share. The grant vests quarterly over three years after being earned and expires January 22, 2020. As of September 30, 2015, the stock option grant was not earned.
(4) These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
38
Outstanding Equity Awards as of Fiscal Year Then Ended September 30, 2015
|
Option Awards
|
|||||||||||||
|
Number of
|
Number of
|
||||||||||||
|
Securities
|
Securities
|
||||||||||||
|
Underlying
|
Underlying
|
||||||||||||
|
Unexercised
|
Unexercised
|
Option
|
|||||||||||
|
Options
|
Options
|
Exercise
|
Option
|
||||||||||
|
Exercisable
|
Unexerciseable
|
Price
|
Expiration
|
||||||||||
|
Name
|
(#) | (#) |
($) (6)
|
Date
|
|||||||||
|
Ronald P. Erickson (1)
|
13,334 | - | $ | 22.50 |
5/9/2020
|
||||||||
| 6,667 | - | $ | 19.50 |
6/5/2022
|
|||||||||
|
Mark E. Scott (2)
|
5,668 | - | $ | 19.50 |
6/5/2022
|
||||||||
|
Richard Mander, Ph.D. (3)
|
- | - | $ | - | |||||||||
| - | - | $ | - | ||||||||||
|
Todd Martin Sames (4)
|
6,667 | - | $ | 19.50 |
9/4/2017
|
||||||||
| 1,111 | 889 | $ | 15.00 |
4/1/2019
|
|||||||||
| - | 6,668 | $ | 15.00 |
1/22/2020
|
|||||||||
|
Jeffrey Kruse (5)
|
2,000 | - | $ | 13.50 |
6/7/2020
|
||||||||
| 4,001 | 1,334 | $ | 15.00 |
8/26/2018
|
|||||||||
| - | 3,334 | $ | 15.00 |
1/22/2020
|
|||||||||
|
|
(1)
|
Mr. Erickson’s stock option grants consist of (i) 20,000 shares which vested quarterly over two years from May 10, 2010; and (ii) 6,667 shares which vested quarterly over one year from June 5, 2012.
|
|
|
(2)
|
Mr. Scott’s stock option grants consist of (i) 3,334 shares which vested March 21, 2013; and (ii) 3,334 shares which vested quarterly over one year from June 5, 2012.
|
|
|
(3)
|
Mr. Mander’s stock option grants consist of (i) 6,667 shares which vest quarterly over three years from June 26, 2012; and (ii) 3,334 shares which vest quarterly over three years from August 27, 2013. Mr. Mander’s stock option grants expired March 31, 2015.
|
|
|
(4)
|
Mr. Sames’ stock options grants consist of (i) 6,667 shares which vest quarterly over three years from September 5, 2012; and (ii) 2,000 shares which vest quarterly over three years from April 1, 2014. The 2015 stock option grant for Mr. Sames reflects 6,668 shares at an exercise price of $15.00 per share. The grant vests quarterly over three years after being earned and expires January 22, 2020. As of September 30, 2015, the stock option grant was not earned.
|
|
|
(5)
|
Mr. Kruse’s stock options grants consist of (i) 2,000 shares which vested 25% at six months and 25% annually thereafter from June 8, 2010; (ii) 667 shares which vested quarterly over three years from November 29, 2011; (ii) 2,000 shares which vest quarterly over three years from April 1, 2014; and (iii) 5,334 shares which vest quarterly over three years from August 27, 2013. The 2015 stock option grant for Mr. Kruse reflects 3,334 shares at an exercise price of $15.00 per share. The grant vests quarterly over three years after being earned and expires January 22, 2020. As of September 30, 2015, the stock option grant was not earned.
|
|
|
(6)
|
These amounts reflect the grant date market value as required by Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC Topic 718.
|
Option Exercises and Stock Vested
Our Named Executive Officers did not exercise any stock options during the year ended September, 2015 and 2014.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
39
Employment Agreements
We do not have employment agreements with our Named Executive Officers.
Potential Payments upon Termination or Change in Control
We do not have any potential payments upon termination or change in control with our Names Executive Officers.
DIRECTOR COMPENSATION
We primarily use stock options grants to incentive compensation to attract and retain qualified candidates to serve on the Board. This compensation reflected the financial condition of the Company. In setting director compensation, we consider the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by our members of the Board. During year then ended September 30, 2015, Ronald Erickson did not receive any compensation for his service as a director. The compensation disclosed in the Summary Compensation Table on page 37 represents the total compensation.
Director Summary Compensation Table
The table below summarizes the compensation paid by us to non-employee directors during the year ended September 30, 2014.
|
Stock
|
Option
|
Other
|
||||||||||||||
|
Name
|
Awards
|
Awards
|
Compensation
|
Total
|
||||||||||||
|
Marco Hegyi (1)
|
$ | 40,005 | $ | - | $ | - | $ | 40,005 | ||||||||
|
Jon Pepper
|
30,000 | - | - | 30,000 | ||||||||||||
|
Ichiro Takesako (2)
|
- | - | - | - | ||||||||||||
|
Total
|
$ | 70,005 | $ | - | $ | - | $ | 70,005 | ||||||||
|
|
(1)
|
Mr. Hegyi’s stock award amount reflects 2,667 restricted shares issued at the grant date market value of $15.00 per share. Mr. Hegyi resigned as a director in February 2015.
|
|
|
(2)
|
Mr. Pepper’s stock award amount reflects 2,000 restricted shares issued at the grant date market value of $15.00 per share.
|
|
|
(3)
|
These amounts reflect the grant date market value as required by Regulation S-K Item 402(r)(2), computed in accordance with FASB ASC Topic 718.
|
Compensation Paid to Board Members
Our independent non-employee directors are not compensated in cash. The only compensation has been in the form of stock awards (see Director Compensation Table). There is no formal stock compensation plan for independent non-employee directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership of our common stock as of November 3, 2015 by:
|
•
|
each director and nominee for director;
|
|
|
•
|
each person known by us to own beneficially 5% or more of our common stock;
|
|
|
•
|
each executive officer named in the summary compensation table elsewhere in this report; and
|
|
|
•
|
all of our current directors and executive officers as a group.
|
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power,” which includes the power to vote or to direct the voting of such security, or has or shares “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Under these rules more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
40
Unless otherwise indicated below, each beneficial owner named in the table has sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The address for each person shown in the table is c/o Visualant, Inc. 500 Union Street, Suite 420, Seattle Washington, unless otherwise indicated.
|
Shares Beneficially Owned
|
||||||||
|
Amount
|
Percentage
|
|||||||
|
Directors and Officers-
|
||||||||
|
Ronald P. Erickson (1)
|
175,524 | 14.1 | % | |||||
|
Mark E. Scott (2)
|
17,459 | 1.5 | % | |||||
|
Jon Pepper
|
13,000 | 1.1 | % | |||||
|
Richard Mander (3)
|
- | * | ||||||
|
Todd Martin Sames (4)
|
9,445 | * | ||||||
|
Jeffrey Kruse (5)
|
8,335 | * | ||||||
|
Sumitomo Precision Products Co., Ltd./ Ichiro Takesako
|
115,385 | 10.0 | % | |||||
|
Total Directors and Officers (7 in total)
|
339,148 | 26.7 | % | |||||
* Less than 1%.
(1) Includes 86,668 shares of shares of common stock beneficially owned and stock option grants to purchase 20,001 shares of our common stock that are exercisable within 60 days, and also includes 66,667 Series A and B Warrants to purchase shares of our common stock that are exercisable within 60 days.
(2) Includes 10,457 shares of shares of common stock beneficially owned and stock option grants totaling 5,668 shares that Mr. Scott has the right to acquire in 60 days, and also includes 1,334 Series A and B Warrants to purchase shares of our common stock that are exercisable within 60 days.
(3) Includes stock option grants for 10,000 shares which Mr. Mander forfeited on March 31, 2015 in connection with his resignation.
(4) Includes 1,667 shares of shares of common stock beneficially owned and stock option grants totaling 7,778 shares that Mr. Sames has the right to acquire in 60 days.
(5) Includes 2,334 shares of shares of common stock beneficially owned and stock option grants totaling 6,001 shares that Mr. Kruse has the right to acquire in 60 days.
|
Shares Beneficially Owned
|
||||||||
|
Number
|
Percentage
|
|||||||
|
Greater Than 5% Ownership
|
||||||||
|
Sumitomo Precision Products Co., Ltd./ Ichiro Takesako (1)
|
115,385 | 10.0 | % | |||||
|
Special Situations Technology Funds, L.P./ Adam Stettner (2)
|
318,000 | 23.2 | % | |||||
|
Invention Development Management Company, L.L.C. (3)
|
97,169 | 7.8 | % | |||||
(1) Reflects the shares beneficially owned by Sumitomo Precision Products Co., Ltd as stated in a Schedule 13D filed with the SEC on June 23, 2012, and which has subsequently confirmed the ownership related to the private placement which closed June 14, 2013. Their address is 1-10 Fuso-cho, Amagasaki, Hyogo, Japan.
(2) Reflects the shares beneficially owned by Special Situations Technology Funds, L.P. This total includes 106,000 shares and a total of 212,000 Series A and B Warrants to purchase shares of our common stock. The address of Special Situations Technology Funds, L.P. is 527 Madison Avenue, Suite 2600, New York City, New York.
(3) Reflects a warrant to purchase 97,169 shares of our common stock that are exercisable within 60 days. The address for Invention Development Management Company, L.L.C. is 3150 139th Avenue SE, Building 4, Bellevue, Washington.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Related party transactions for the year ended September 30, 2015 are detailed below and in the Footnotes to Form 10K.
Review and Approval of Related Person Transactions
We have operated under a Code of Conduct for many years. Our Code of Conduct requires all employees, officers and directors, without exception, to avoid the engagement in activities or relationships that conflict, or would be perceived to conflict, with the Company’s interests or adversely affect its reputation. It is understood, however, that certain relationships or transactions may arise that would be deemed acceptable and appropriate upon full disclosure of the transaction, following review and approval to ensure there is a legitimate business reason for the transaction and that the terms of the transaction are no less favorable to the Company than could be obtained from an unrelated person.
The Audit Committee is responsible for reviewing and approving all transactions with related persons. The Company has not adopted a written policy for reviewing related person transactions. The Company reviews all relationships and transactions in which the Company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. As required under SEC rules, transactions that are determined to be directly or indirectly material to the Company or a related person are disclosed.
Director Independence
The Board has affirmatively determined that Mr. Pepper is an independent director. For purposes of making that determination, the Board used NASDAQ’s Listing Rules even though the Company is not currently listed on NASDAQ.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since October 1, 2013, we have engaged in the following reportable transactions with our directors, executive officers, holders of more than 5% of our voting securities and affiliates, or immediately family members of our directors, executive officers and holders of more than 5% of our voting securities.
Policies and Procedures for Related Person Transactions
We have operated under a Code of Conduct and Ethics since December 28, 2012. Our Code of Conduct and Ethics requires all employees, officers and directors, without exception, to avoid the engagement in activities or relationships that conflict, or would be perceived to conflict, with our interests.
Prior to the adoption of our related person transaction policy, there was a legitimate business reason for all the related person transactions described above and we believe that, where applicable, the terms of the transactions are no less favorable to us than could be obtained from an unrelated person.
Our Audit Committee reviews all relationships and transactions in which we and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest.
As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed.
Services and License Agreement Invention Development Management Company, L.L.C.
In November 2013, we entered into a Services and License Agreement with IDMC. IDMC is a subsidiary of Intellectual Ventures, which collaborates with inventors and partners with pioneering companies and invests both expertise and capital in the process of invention. On November 19, 2014, we amended the Services and License Agreement with IDMC. This amendment exclusively licenses 10 filed patents to us.
The agreement requires IDMC to identify and engage inventors to develop new applications of our ChromaID™ technology, present the developments to us for approval, and file at least 10 patent applications to protect the developments. IDMC is responsible for the development and patent costs. We provided the Chroma ID Lab Kits to IDMC at no cost and are providing ongoing technical support. In addition, to provide time for this accelerated expansion of its intellectual property we delayed the selling of the ChromaID Lab Kits for 140 days except for certain select accounts. We have continued our business development efforts during this period and have worked with IDMC and their global business development resources to secure potential customers and licensees for the ChromaID technology. We shipped 20 ChromaID Lab Kits to inventors in the IDMC network during December 2013 and January 2014. As part of our agreement with IDMC, we curtailed our ChromaID marketing efforts through the fourth calendar quarter of 2014 while IDMC worked to expand our intellectual property portfolio. Thereafter, we began to actively market the ChromaID Lab Kits to interested and qualified customers.
We have received a worldwide, nontransferable, exclusive license to the intellectual property developed under the IDMC agreement during the term of the agreement, and solely within the identification, authentication and diagnostics field of use, to (a) make, have made, use, import, sell and offer for sale products and services; (b) make improvements; and (c) grant sublicenses of any and all of the foregoing rights (including the right to grant further sublicenses).
42
We received a nonexclusive and nontransferable option to acquire a worldwide, nontransferable, nonexclusive license to the useful intellectual property held by IDMC within the identification, authentication and diagnostics field of use to (a) make, have made, use, import, sell and offer to sell products and services and (b) grant sublicenses to any and all of the foregoing rights. The option to acquire this license may be exercised for up to two years from the effective date of the Agreement.
IDMC is providing global business development services to us for geographies not being pursued by Visualant. Also, IDMC has introduced us to potential customers, licensees and distributors for the purpose of identifying and pursuing a license, sale or distribution arrangement or other monetization event.
We granted to IDMC a nonexclusive, worldwide, fully paid, nontransferable, sublicenseable, perpetual license to our intellectual property solely outside the identification, authentication and diagnostics field of use to (a) make, have made, use, import, sell and offer for sale products and services and (b) grant sublicenses of any and all of the foregoing rights (including the right to grant further sublicenses).
We granted to IDMC a nonexclusive, worldwide, fully paid up, royalty-free, nontransferable, non-sublicenseable, perpetual license to access and use our technology solely for the purpose of marketing the aforementioned sublicenses of our intellectual property to third parties outside the designated fields of use.
In connection with the original license agreement, we issued a warrant to purchase 97,169 shares of common stock to IDMC as consideration for the exclusive intellectual property license and application development services. The warrant has a current exercise price of $2.50 per share and expires November 10, 2018. The per share price is subject to adjustment based on any issuances below $2.50 per share except as described in the warrant.
We agreed to pay IDMC a percentage of license revenue for the global development business services and a percentage of revenue received from any company introduce to us by IDMC. We also have also agreed to pay IDMC a royalty when we receive royalty product revenue from an IDMC-introduced company. IDMC has agreed to pay us a license fee for the nonexclusive license of our intellectual property.
The term of both the exclusive intellectual property license and the nonexclusive intellectual property license commences on the effective date of November 11, 2013, and terminates when all claims of the patents expire or are held in valid or unenforceable by a court of competent jurisdiction from which no appeal can be taken.
The term of the Agreement commences on the effective date until either party terminates the Agreement at any time following the fifth anniversary of the effective date by providing at least ninety days’ prior written notice to the other party.
Purchase Agreement with Special Situations and forty other Accredited Investors which closed June 14, 2013
On June 14, 2013, we entered into a Purchase Agreement, Warrants, and Registration Rights Agreement with Special Situations Technology Funds and forty other accredited investors, pursuant to which we issued 348,685 shares of common stock at $15.00 per share for a total of $5,230,000, which amount includes the conversion of $500,000 in outstanding debt of the Company owed to one of its officers. As part of the transaction, which closed on June 14, 2013, we issued to the investors (i) five year Series A Warrants to purchase a total of 348,685 shares of common stock at $22.50 per share; and (ii) five year Series B Warrants to purchase a total of 348,685 shares of common stock at $30.00 per share. We also issued 34,871 placement agent warrants exercisable at $15.00 per share to GVC Capital, with an obligation to issue up to 34,871 additional placement agent warrants exercisable at $22.50 per share. The placement agent warrants shall issue only upon the exercise of the Series A Warrants by the investors, and are issuable ratably based upon the number of Warrants exercised by the investors. The placement agent warrants have a term of five years from the date of closing of the transaction. The transaction was entered into to strengthen our balance sheet, complete the purchase of our TransTech subsidiary, and provide working capital to support the rapid movement of our ChromaID technology into the marketplace. On August 14, 2015, the warrant exercise price was adjusted to $2.50 per share due the issuance of common stock at this price.
Agreements with Sumitomo Precision Products Co., Ltd.
In May 2012, we entered into a Joint Research and Product Development Agreement with Sumitomo Precision Products Co., Ltd., a publicly-traded Japanese corporation, for the commercialization of our ChromaID technology. In March 2013, we entered into an amendment to this agreement, which extended the Joint Development Agreement from March 31, 2013 to December 31, 2013. The extension provided for continuing work between Sumitomo and Visualant focused upon advancing the ChromaID technology and market research aimed at identifying the most significant markets for the ChromaID technology. This collaborative work supported the development of the ChromaID Lab Kit. This agreement expired December 31, 2013. The current version of the technology was introduced to the marketplace as a part of our ChromaID Lab Kit during the fourth quarter of 2013. Sumitomo invested $2,250,000 in exchange for 115,385 shares of restricted shares of common stock priced at $19.50 per share that was funded on June 21, 2012.
43
We also entered into a License Agreement with Sumitomo in May 2012, under which Sumitomo paid the Company an initial payment of $1 million. The License Agreement granted Sumitomo an exclusive license for the then extant ChromaID technology. The territories covered by this license include Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines). The Sumitomo License fee was recorded as revenue over the life the Joint Research and Product Development Agreement and was fully recorded as of May 31, 2013. On May 21, 2015, we entered into an amendment to the License Agreement, which, effective as of June 18, 2014, eliminated the Sumitomo exclusivity and provides that if we sell products in certain territories – Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines) – the Company will pay Sumitomo a royalty rate of 2% of net sales (excluding non-recurring engineering revenues) over the remaining term of the five-year License Agreement (through May 2017).
Related Party Transactions with Ronald P. Erickson
Entities affiliated with Mr. Erickson have made advances and loans to us in the total principal amount of $960,000 on or before the date hereof at an average annual interest rate of 4.2%. In addition, Mr. Erickson and/or entities with which Mr. Erickson is affiliated also have unreimbursed 2013 expenses and unpaid salary and interest from 2013 on the outstanding principal amount of the Loans totaling approximately $65,000 as of June 14, 2013. Mr. Erickson and related entities converted $500,000 of the advances and loans as part of the private placement which closed June 14, 2013. The remaining amounts were paid to Mr. Erickson and related entities prior to June 30, 2013.
We have a $199,935 Business Loan Agreement with Umpqua Bank (the “Umpqua Loan”), which currently matures on December 31, 2015 and provides for interest at 3.25% per year. Related to the Umpqua Loan, we entered into a demand promissory note for $200,000 on January 10, 2014 with an entity with which Ronald P. Erickson, our Chief Executive Officer, is affiliated. This demand promissory note will be effective in case of a default by us under the Umpqua Loan.
We also have two other demand promissory notes payable to entities affiliated with Mr. Erickson, totaling $600,000. Each of these notes were issued between January and July 2014, provide for interest of 3% per year and now mature on December 31, 2015. They also provide for a second lien on our assets if not repaid by December 31, 2015 or converted into convertible debentures or equity on terms acceptable to the Mr. Erickson. Mr. Erickson and/or entities with which he is affiliated also have advanced $708,500 and have unreimbursed expenses and compensation of approximately $344,221. We owe Mr. Erickson, or entities with which he is affiliated, $1,652,721 as of September 30, 2015.
On January 26, 2015, Mr. Erickson cancelled 6,667 in previous issued stock option at $22.50 per share.
Related Party Transaction with Mark E. Scott
Mr. Mark E. Scott, our Chief Financial Offer, invested $10,000 in the private placement which closed June 14, 2013.
On January 26, 2015, Mr. Scott cancelled 1,000 in previous issued stock option at $19.50 per share.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Committee Pre-Approval Policy
The Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit the Company's financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee’s responsibilities under the Exchange Act. During the year ended September 30, 2015, the Audit Committee pre-approved all audit and permissible non-audit services provided by our independent auditors.
Service Fees Paid to the Independent Registered Public Accounting Firm
The Audit Committee engaged PMB Helin Donovan LLP to perform an annual audit of the Company’s financial statements for the fiscal years ended September 30, 2015 and 2014. The following is the breakdown of aggregate fees paid to the auditors for the Company for the last two fiscal years:
44
|
Year Ended
|
Year Ended
|
|||||||
|
September 30, 2015
|
September 30, 2014
|
|||||||
|
Audit fees
|
$ | 33,388 | $ | 34,533 | ||||
|
Audit related fees
|
22,500 | 12,000 | ||||||
|
Tax fees
|
- | - | ||||||
|
All other fees
|
7,220 | 3,000 | ||||||
| $ | 63,108 | $ | 49,533 | |||||
- “Audit Fees” are fees paid for professional services for the audit of our financial statements.
- “Audit-Related fees” are fees paid for professional services not included in the first two categories, specifically, SAS 100 reviews, SEC filings and consents, and accounting consultations on matters addressed during the audit or interim reviews, and review work related to quarterly filings.
- “Tax Fees” are fees primarily for tax compliance in connection with filing US income tax returns.
- “All other fees for 2015 related to the review of registration statements on Form S-1.
SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our executive officers, directors and 10% stockholders are required under Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Copies of these reports must also be furnished to us.
Based solely on a review of copies of reports furnished to us, as of September 30, 2015 our executive officers, directors and 10% holders complied with all filing requirements.
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a)
|
FINANCIAL STATEMENTS:
|
The company’s financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1 of this Form 10-K, and are hereby incorporated by reference. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Title of Document
|
Page
|
|
|
Report of PMB Helin Donovan, LLP
|
F-1
|
|
|
Consolidated Balance Sheets as of September 30, 2015 and 2014
|
F-2
|
|
|
Consolidated Statements of Operations for the years ended September 30, 2015 and 2014
|
F-3
|
|
|
Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the years ended September 30, 2015 and 2014
|
F-4
|
|
|
Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2014
|
F-5
|
|
|
Notes to the Financial Statements
|
F-6
|
|
(b)
|
Exhibits
|
|
Exhibit No.
|
Description
|
|
3.1
|
Restatement of the Articles of Incorporation dated September 13, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K/A2, filed September 17, 2013)
|
|
3.2
|
Certificate of Designation, Preferences and Rights for the Company’s Series A Convertible Preferred Stock (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 27, 2015)
|
|
3.3
|
Amended and Restated Bylaws (incorporated by reference to the Company’s Form 8-K, filed August 17, 2012)
|
|
3.4
|
Certificate of Amendment to the Restatement of the Articles of Incorporation dated June 11, 2015 (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 17, 2015)
|
|
3.5
|
Amended and Restated Certificate of Designations, Preferences and Rights of the Company’s Series A Convertible Preferred Stock dated July 21, 2015 Report on Form 8-K, filed July 29, 2015) (incorporated by reference to the Company’s Current
|
|
|
|
|
4.1
|
2011 Stock Incentive Plan (incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, filed January 11, 2013)
|
|
10.1
|
Financial Consulting Agreement effective October 5, 2011 by and between Visualant, Incorporated and D. Weckstein & Co. Inc. (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed August 16, 2013)
|
|
10.2
|
License Agreement dated May 31, 2012 by and between Visualant, Incorporated and Sumitomo Precision Products Co., Ltd. (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 4, 2012)
|
|
10.3
|
Joint Research and Product Development Agreement dated May 31, 2012 by and between Visualant, Incorporated and Sumitomo Precision Products Co. (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed October 7, 2013)
|
|
10.4
|
Lease dated July 11, 2012 by and between Visualant, Inc. and Harbor Properties Inc. (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed September 16, 2013)
|
|
10.5
|
Amendment to Joint Research and Product Development Agreement dated March 29, 2013 by and between Visualant, Incorporated and Sumitomo Precision Products Co. (incorporated by reference to the Company’s Registration Statement on Form S1/A, filed September 16, 2013)
|
46
|
10.6
|
Stock Purchase Agreement dated May 31, 2012 by and between Visualant, Incorporated and Sumitomo Precision Products Co., Ltd. (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 4, 2012)
|
|
10.7
|
Form of Purchase Agreement by and between Visualant, Incorporated and investors (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 18, 2013)
|
|
10.8
|
Form of Series A and Series B Warrant by and between Visualant, Incorporated and investors (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 18, 2013)
|
|
10.9
|
Form of Registration Rights Agreement by and between Visualant, Incorporated and investors (incorporated by reference to the Company’s Current Report on Form 8-K, filed June 18, 2013)
|
|
10.10
|
Security Agreement dated June 12, 2013 by and between Visualant, Incorporated and BFI Business Finance (incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed August 15, 2013)
|
|
10.11
|
General Continuing Guaranty dated June 12, 2013 by and between TransTech Systems Inc., Visualant, Incorporated and BFI Business Finance (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed October 7, 2013)
|
|
10.12
|
Third Modification to Loan and Security Agreement dated June 12, 2013 by and between TransTech Systems Inc. and BFI Business Finance (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed October 7, 2013)
|
|
10.13
|
Amendment No. 1 to Lease dated June 14, 2013 by and between Visualant, Inc. and Logan Building (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed August 16, 2013)
|
|
10.14
|
Form of Placement Agent Warrant by and between Visualant, Incorporated and placement agents (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed October 7, 2013)
|
|
10.15
|
Warrant to Purchase Common Stock dated November 11, 2013 by and between Visualant, Incorporated and Invention Development Management Company, L.L.C. (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 21, 2013)
|
|
10.16
|
Services and License Agreement dated November 11, 2013 by and between Visualant, Incorporated and Invention Development Management Company, L.L.C (incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed January 24, 2014)
|
|
10.17
|
Demand Promissory Note dated January 10, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 15, 2014)
|
|
10.18
|
Secured Promissory Note dated March 19, 2014 by and between TransTech System, Inc. and BFI Finance (incorporated by reference to the Company’s Quarterly Report Form 10-Q, filed May 14, 2014)
|
|
10.19
|
Letter Agreement dated March 19, 2014 by and between TransTech System, Inc. and BFI Finance (incorporated by reference to the Company’s Quarterly Report Form 10-Q, filed May 14, 2014)
|
|
10.20
|
Demand Promissory Note dated March 31, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 3, 2014)
|
|
10.21
|
Amendment to Demand Promissory Note dated March 31, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 3, 2014)
|
|
10.22
|
Financial Public Relations Agreement dated June 9, 2014 by and between Visualant, Incorporated and Dynasty Wealth, Inc. (incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed August 14, 2014)
|
|
10.23
|
Second Amendment to Office Lease dated June 18, 2014 by and between Visualant, Incorporated and Logan Building LLC (incorporated by reference to the Company’s Annual Report on Form 10-K, filed January 13, 2015)
|
|
10.24
|
Demand Promissory Note dated July 17, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 18, 2014, and incorporated by reference.
|
47
|
10.25
|
Amendment to Demand Promissory Note dated July 17, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 18, 2014)
|
|
10.26
|
Amendment 2 to Demand Promissory Note dated July 17, 2014 by and between Visualant, Incorporated and J3E2A2Z LP(incorporated by reference to the Company’s Current Report on Form 8-K, filed July 18, 2014)
|
|
10.27
|
Addendum to Letter dated August 27, 2014 by and between Visualant, Incorporated and D. Weckstein Co., Inc. (incorporated by reference to the Company’s Annual Report on Form 10-K, filed January 13, 2015)
|
|
10.28
|
Amendment to Services and License Agreement dated November 18, 2014 by and between Visualant, Inc. and Invention Development Management Company, LLC (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 25, 2014)
|
|
10.29
|
Third Amendment to Office Lease dated December 18, 2014 by and between Visualant, Incorporated and Logan Building LLC (incorporated by reference to the Company’s Annual Report on Form 10-K, filed January 13, 2015)
|
|
10.30
|
Amendment to Demand Promissory Note dated December 31, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 2, 2015)
|
|
10.31
|
Amendment 2 to Demand Promissory Note dated December 31, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 2, 2015)
|
|
10.32
|
Amendment 3 to Demand Promissory Note dated December 31, 2014 by and between Visualant, Incorporated and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 2, 2015)
|
|
10.33
|
Form of Purchase Agreement related to Series A Preferred Stock offering by and between Visualant, Incorporated and investors (incorporated by reference to the Company’s Registration Statement on Form S-1, filed April 24, 2015)
|
|
|
|
|
10.34
|
Form of Series C Warrant between Visualant, Incorporated and investors (incorporated by reference to the Company’s Registration Statement on Form S-1, filed April 24, 2015)
|
|
|
|
|
10.35
|
Form of Series D Warrant between Visualant, Incorporated and investors (incorporated by reference to the Company’s Registration Statement on Form S-1, filed April 24, 2015)
|
|
|
|
|
10.36
|
Form of Registration Rights Agreement related to preferred stock by and between Visualant, Incorporated and investors (incorporated by reference to the Company’s Registration Statement on Form S-1, filed April 24, 2015)
|
|
|
|
|
10.37
|
Amendment 2 to Demand Promissory Note dated March 31, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 3, 2015)
|
|
10.38
|
Amendment 3 to Demand Promissory Note dated March 31, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 3, 2015)
|
|
10.39
|
Amendment 4 to Demand Promissory Note dated March 31, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed April 3, 2015)
|
|
10.40
|
Amendment to License Agreement received May 21, 2015, effective June 18, 2014 by and between Visualant, Incorporated and Sumitomo Precision Products Co., Ltd. (incorporated by reference to the Company’s Current Report on Form 8-K, filed May 27, 2015)
|
|
|
|
|
10.41
|
Amendment 3 to Demand Promissory Note dated July 15, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 17, 2015)
|
|
10.42
|
Amendment 4 to Demand Promissory Note dated July 15, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 17, 2015)
|
|
10.43
|
Amendment 5 to Demand Promissory Note dated July 15, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 17, 2015)
|
|
10.44
|
Form of Amendment to Series A Preferred Stock Terms (incorporated by reference to the Company’s Current Report on Form 8-K, filed July 29, 2015)
|
|
10.45
|
Amendment 5 to Demand Promissory Note dated September 30, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed October 2, 2015)
|
48
|
10.46
|
Amendment 5 to Demand Promissory Note dated September 30, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed October 2, 2015)
|
|
10.47
|
Amendment 6 to Demand Promissory Note dated September 30, 2015 by and between Visualant, Inc. and J3E2A2Z LP (incorporated by reference to the Company’s Current Report on Form 8-K, filed October 2, 2015)
|
|
14.1
|
Code of Conduct and Ethics dated November 30, 2012 (incorporated by reference to the Company’s Current Report on Form 8-K, filed January 3, 2013)
|
|
|
|
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T. (1)
|
(1) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
49
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Visualant, Inc.:
We have audited the accompanying consolidated balance sheets of Visualant, Inc. (the “Company”) as of September 30, 2015 and 2014 and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the years ended September 30, 2015 and 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Visualant, Inc. as of September 30, 2015 and 2014, and the results of its operations and its cash flows for the years ended September 30, 2015 and 2014 in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has sustained a net loss from operations and has an accumulated deficit since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
PMB Helin Donovan, LLP
/s/ PMB Helin Donovan, LLP
November 4, 2015
Seattle, Washington
|
F-1
|
VISUALANT, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2015
|
September 30, 2014
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$ | 82,266 | $ | 70,386 | ||||
|
Accounts receivable, net of allowance of $40,000 and $39,000, respectively
|
619,849 | 815,460 | ||||||
|
Prepaid expenses
|
27,774 | 25,067 | ||||||
|
Inventories, net
|
217,824 | 412,831 | ||||||
|
Refundable tax assets
|
- | 29,590 | ||||||
|
Total current assets
|
947,713 | 1,353,334 | ||||||
|
EQUIPMENT, NET
|
366,250 | 447,236 | ||||||
|
OTHER ASSETS
|
||||||||
|
Intangible assets, net
|
158,000 | 431,653 | ||||||
|
Goodwill
|
983,645 | 983,645 | ||||||
|
Other assets
|
5,070 | 5,070 | ||||||
|
TOTAL ASSETS
|
$ | 2,460,678 | $ | 3,220,938 | ||||
|
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Accounts payable - trade
|
$ | 2,520,223 | $ | 2,234,123 | ||||
|
Accounts payable - related parties
|
73,455 | 66,729 | ||||||
|
Accrued expenses
|
4,068 | 31,369 | ||||||
|
Accrued expenses - related parties
|
1,256,861 | 260,687 | ||||||
|
Derivative liability - warrants
|
2,704,840 | 2,579,157 | ||||||
|
Convertible notes payable
|
109,000 | 166,500 | ||||||
|
Notes payable - current portion of long term debt
|
1,164,692 | 1,290,960 | ||||||
|
Deferred revenue
|
5,833 | - | ||||||
|
Total current liabilities
|
7,838,972 | 6,629,525 | ||||||
|
COMMITMENTS AND CONTINGENCIES
|
- | - | ||||||
|
STOCKHOLDERS' DEFICIT
|
||||||||
|
Series A Convertible Preferred stock - $0.001 par value, 5,000,000 shares authorized,
|
||||||||
|
11,667 and 0 shares issued and outstanding at 9/30/2015 and 9/30/2014, respectively
|
12 | - | ||||||
|
Common stock - $0.001 par value, 100,000,000 shares authorized, 1,155,991
|
||||||||
|
and 1,121,150 shares issued and outstanding at 9/30/2015 and 9/30/2014, respectively
|
1,156 | 1,121 | ||||||
|
Additional paid in capital
|
18,786,694 | 18,125,411 | ||||||
|
Accumulated deficit
|
(24,166,156 | ) | (21,535,119 | ) | ||||
|
Total stockholders' deficit
|
(5,378,294 | ) | (3,408,587 | ) | ||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 2,460,678 | $ | 3,220,938 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
|
VISUALANT, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended,
|
||||||||
|
September 30, 2015
|
September 30, 2014
|
|||||||
|
REVENUE
|
$ | 6,290,794 | $ | 7,983,352 | ||||
|
COST OF SALES
|
5,274,334 | 6,694,274 | ||||||
|
GROSS PROFIT
|
1,016,460 | 1,289,078 | ||||||
|
RESEARCH AND DEVELOPMENT EXPENSES
|
362,661 | 670,742 | ||||||
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
2,983,751 | 3,179,699 | ||||||
|
OPERATING LOSS
|
(2,329,952 | ) | (2,561,363 | ) | ||||
|
OTHER INCOME (EXPENSE):
|
||||||||
|
Interest expense
|
(170,157 | ) | (104,818 | ) | ||||
|
Other income
|
40,653 | 38,534 | ||||||
|
Loss on conversion of debt
|
(34,035 | ) | - | |||||
|
(Loss) gain on change - derivative liability warrants
|
(107,956 | ) | 1,604,843 | |||||
|
Total other (expense) income
|
(271,495 | ) | 1,538,559 | |||||
|
LOSS BEFORE INCOME TAXES
|
(2,601,447 | ) | (1,022,804 | ) | ||||
|
Income taxes - current provision (benefit)
|
29,590 | (5,513 | ) | |||||
| . | ||||||||
|
NET LOSS
|
(2,631,037 | ) | (1,017,291 | ) | ||||
|
NONCONTROLLING INTEREST
|
- | - | ||||||
|
NET LOSS ATTRIBUTABLE TO VISUALANT, INC. AND SUBSIDIARIES
|
||||||||
|
COMMON SHAREHOLDERS
|
$ | (2,631,037 | ) | $ | (1,017,291 | ) | ||
|
Basic and diluted loss per common share attributable to Visualant,
|
||||||||
|
Inc. and subsidiaries common shareholders-
|
||||||||
|
Basic and diluted loss per share
|
$ | (2.33 | ) | $ | (0.92 | ) | ||
|
Weighted average shares of common stock outstanding- basic and diluted
|
1,131,622 | 1,108,964 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
|
VISUALANT, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
Additional
|
Total
|
||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
Paid in
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||||||
|
Amount
|
Amount
|
Amount
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
||||||||||||||||||||||
|
Balance as of September 30, 2013
|
- | - | 1,101,817 | 1,101 | 17,729,731 | (20,537,825 | ) | (2,806,993 | ) | |||||||||||||||||||
|
Stock compensation expense - employee options
|
- | - | - | - | 87,550 | - | 87,550 | |||||||||||||||||||||
|
Issuance of common stock for services
|
- | - | 8,667 | 9 | 90,991 | - | 91,000 | |||||||||||||||||||||
|
Issuance of common stock for debt conversion
|
- | - | 10,667 | 11 | 159,989 | - | 160,000 | |||||||||||||||||||||
|
Issuance of warrants for services
|
- | - | - | - | 57,150 | - | 57,150 | |||||||||||||||||||||
|
Sale of noncontrolling interest
|
- | - | - | - | - | 19,987 | 19,987 | |||||||||||||||||||||
|
Net loss
|
- | - | - | - | - | (1,017,281 | ) | (1,017,281 | ) | |||||||||||||||||||
|
Comprehensive loss
|
(1,017,281 | ) | ||||||||||||||||||||||||||
|
Balance as of September 30, 2014
|
- | - | 1,121,150 | 1,121 | 18,125,411 | (21,535,119 | ) | (3,408,587 | ) | |||||||||||||||||||
|
Stock compensation expense - employee options
|
- | - | - | - | 65,463 | - | 65,463 | |||||||||||||||||||||
|
Issuance of preferred stock
|
11,667 | 12 | - | - | 233,310 | - | 233,322 | |||||||||||||||||||||
|
Issuance of common stock for services
|
- | - | 9,169 | 9 | 137,491 | - | 137,500 | |||||||||||||||||||||
|
Issuance of common stock for debt conversion
|
- | - | 24,710 | 25 | 91,781 | - | 91,806 | |||||||||||||||||||||
|
Reversal of derivative liability for debt repayment
|
- | - | - | - | 98,940 | - | 98,940 | |||||||||||||||||||||
|
Effect of reverse stock split
|
- | - | 962 | 1 | 263 | - | 264 | |||||||||||||||||||||
|
Loss on conversion of debt
|
- | - | - | - | 34,035 | - | 34,035 | |||||||||||||||||||||
|
Net loss
|
- | - | - | - | - | (2,631,037 | ) | (2,631,037 | ) | |||||||||||||||||||
|
Comprehensive loss
|
(2,631,037 | ) | ||||||||||||||||||||||||||
|
Balance as of September 30, 2015
|
11,667 | 12 | 1,155,991 | $ | 1,156 | $ | 18,786,694 | $ | (24,166,156 | ) | $ | (5,378,294 | ) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
|
VISUALANT, INCORPORATED AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Months Ended,
|
||||||||
|
September 30, 2015
|
September 30, 2014
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (2,631,037 | ) | $ | (1,017,281 | ) | ||
|
Adjustments to reconcile net loss to net cash (used in)
|
||||||||
|
operating activities
|
||||||||
|
Depreciation and amortization
|
353,229 | 418,271 | ||||||
|
Issuance of capital stock for services and expenses
|
137,500 | 91,000 | ||||||
|
Issuance of warrants for services and expenses
|
- | 57,150 | ||||||
|
Issuance of capital stock for accrued liabilities
|
- | 160,000 | ||||||
|
Stock based compensation
|
65,463 | 87,550 | ||||||
|
(Gain) on sale of assets
|
(20,042 | ) | (28,363 | ) | ||||
|
Loss (gain) on change - derivative liability warrants
|
107,956 | (1,604,843 | ) | |||||
|
Provision for losses on accounts receivable
|
28,266 | 36 | ||||||
|
Loss on conversion of debt
|
34,035 | - | ||||||
|
Changes in operating assets and liabilities:
|
- | |||||||
|
Accounts receivable
|
167,345 | 191,578 | ||||||
|
Prepaid expenses
|
(2,707 | ) | 31,464 | |||||
|
Inventory
|
195,007 | 87,959 | ||||||
|
Other assets
|
- | 1,091 | ||||||
|
Accounts payable - trade and accrued expenses
|
1,289,685 | 144,808 | ||||||
|
Income tax receivable
|
29,590 | 183 | ||||||
|
Deferred revenue
|
5,833 | - | ||||||
|
CASH (USED IN) OPERATING ACTIVITIES
|
(239,877 | ) | (1,379,397 | ) | ||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Proceeds from sale of equipment
|
21,452 | 29,300 | ||||||
|
NET CASH PROVIDED BY INVESTING ACTIVITIES:
|
21,452 | 29,300 | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Repayments from line of credit
|
(123,633 | ) | (260,925 | ) | ||||
|
Proceeds from sale of preferred stock
|
350,000 | - | ||||||
|
Proceeds from notes payable
|
- | 200,000 | ||||||
|
Proceeds from notes payable- related party
|
- | 600,000 | ||||||
|
Repayment of convertible notes
|
(166,500 | ) | - | |||||
|
Proceeds from convertible notes payable
|
173,000 | 166,500 | ||||||
|
Repayments of capital leases
|
(2,562 | ) | (3,138 | ) | ||||
|
Change in controlling interest
|
- | (29,083 | ) | |||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
230,305 | 673,354 | ||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
11,880 | (676,743 | ) | |||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
70,386 | 747,129 | ||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | 82,266 | $ | 70,386 | ||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Interest paid
|
$ | 114,907 | $ | 52,755 | ||||
|
Taxes paid
|
$ | - | $ | - | ||||
|
Non-cash investing and financing activities:
|
||||||||
|
Loss (gain) on change - derivative liability warrants
|
$ | 17,727 | $ | - | ||||
|
Issuance of common stock for debt conversion
|
$ | 91,806 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VISUALANT, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION
|
Visualant, Incorporated (the “Company,” “Visualant, Inc.” or “Visualant”) was incorporated under the laws of the State of Nevada in 1998. The Company has authorized 105,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares preferred stock, par value $0.001 per share. On July 21, 2015, the Company filed with the Secretary of State of Nevada an Amended and Restated Certificate of Designations, Preferences and Rights for our Series A Convertible Preferred Stock.
Since 2007 the Company has been focused primarily on the development of a proprietary technology which is capable of uniquely identifying and authenticating almost any substance using light at the “photon” level to detect the unique digital “signature” of the substance. The Company calls this its “ChromaID™” technology.
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct to its business. TransTech is a distributor of products for employee and personnel identification. TransTech currently provides substantially all of the Company’s revenues.
The Company is in the process of commercializing its ChromaID™ technology. To date, the Company has entered into one License Agreement with Sumitomo Precision Products Co., Ltd. and has a strategic relationship with Invention Development Management Company, L.L.C. (“IDMC”).
The Company believes that its commercialization success is dependent upon its ability to significantly increase the number of customers that are purchasing and using its products. To date the Company has generated minimal revenue from sales of its ChromaID products. The Company is currently not profitable. Even if the Company succeeds in introducing the ChromaID technology and related products to its target markets, the Company may not be able to generate sufficient revenue to achieve or sustain profitability.
ChromaID was invented by scientists from the University of Washington under contract with Visualant. The Company has pursued an aggressive intellectual property strategy and have been granted eight patents. The Company also has 22 patents pending. The Company possess all right, title and interest to the issued patents. Ten of the pending patents are licensed exclusively to the Company in perpetuity by the Company’s strategic partner, Intellectual Ventures through its subsidiary IDMC.
On May 6, 2015, the Company’s stockholders approved a reverse split of our common stock, in a ratio to be determined by the Company’s Board of Directors, of not less than 1-for-50 nor more than 1-for-150. On June 9, 2015, the Company’s Board of Directors determined that the ratio of the reverse split would be 1-for-150. All warrant, option, share and per share information in this Form 10-K gives retroactive effect for a 1-for-150 split with all numbers rounded up to the nearest whole share.
|
2.
|
GOING CONCERN
|
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $2,631,037 and $1,017,291 for the years ended September 30, 2015 and 2014, respectively. Net cash used in operating activities was $(239,877) and $(1,379,397) for the years ended September 30, 2015 and 2014, respectively.
The Company anticipates that it will record losses from operations for the foreseeable future. As of September 30, 2015, the Company’s accumulated deficit was $24,166,156. The Company has limited capital resources, and operations to date have been funded with the proceeds from private equity and debt financings and loans from Ronald P. Erickson, our Chief Executive Officer, or entities with which he is affiliated. These conditions raise substantial doubt about our ability to continue as a going concern. The audit report prepared by the Company’s independent registered public accounting firm relating to our financial statements for the year ended September 30, 2015 includes an explanatory paragraph expressing the substantial doubt about the Company’s ability to continue as a going concern.
Continuation of the Company as a going concern is dependent upon obtaining additional working capital. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
|
3.
|
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS
|
Basis of Presentation – 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.
F-6
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 $20,000 and $10,000 reserve for impaired inventory as of September 30, 2015 and 2014, respectively.
Equipment – Equipment consists of machinery, leasehold improvements, furniture and fixtures and software, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 2-10 years, except for leasehold improvements which are depreciated over 5-20 years.
Intangible Assets/ Intellectual Property – The Company amortized the intangible assets and intellectual property acquired in connection with the acquisition of TransTech, over sixty months on a straight - line basis, which was the time frame that the management of the Company was able to project forward for future revenue, either under agreement or through expected continued business activities. Intangible assets and intellectual property acquired from RATLab LLC and Javelin are recorded likewise. The Company performs annual assessments and has determined that no impairment is necessary. On June 7, 2011, the Company closed the acquisition of all Visualant related assets of the RATLab LLC, namely the rights to the medical field of use of the Chroma ID technology. On July 31, 2012, the Company closed the acquisition of all rights to the ChromaID technology in the environmental field of use from Javelin LLC.
Goodwill – Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. With the adoption of ASC 350, goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but are combined when reporting units within the same segment have similar economic characteristics. Under the criteria set forth by ASC 350, the Company has one reporting unit based on the current structure. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company performs annual assessments and has determined that no impairment is necessary.
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 – ASC Topic 820, Fair Value Measurement and Disclosures, 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:
|
Level 1 – Quoted prices in active markets for identical assets and liabilities;
|
|
Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and
|
|
Level 3 – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
F-7
Derivative Instruments – Warrants with the June 2013 Private Placement
Liabilities measured at fair value on a recurring basis are summarized as follows:
|
Carrying
|
||||||||||||||||
|
Fair Value Measurements Using Inputs
|
Amount at
|
|||||||||||||||
|
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
September 30, 2015
|
||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative Instruments - Warrants
|
$ | - | $ | 2,196,716 | $ | - | $ | 2,196,716 | ||||||||
|
Total
|
$ | - | $ | 2,196,716 | $ | - | $ | 2,196,716 | ||||||||
|
September 30, 2015
|
||||
|
Market price and estimated fair value of common stock:
|
$ | 5.600 | ||
|
Exercise price
|
2.50 | |||
|
Expected term (years)
|
0.25 | |||
|
Dividend yield
|
- | |||
|
Expected volatility
|
105.1 | % | ||
|
Risk-free interest rate
|
0.001 | % | ||
The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants.
The Company issued warrants to purchase 697,370 shares of common stock in connection with our June 2013 private placement of 348,685 shares of common stock. The exercise price of these warrants is $2.50 per share. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. These warrants were issued with a down-round provision whereby the exercise price would be adjusted downward in the event that additional shares of our common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued at a price less than the exercise price. Therefore, the fair value of these warrants were recorded as a liability in the consolidated balance sheet and are marked to market each reporting period until they are exercised or expire or otherwise extinguished.
The proceeds from the private placement were allocated between the shares of common stock and the warrants issued in connection with the private placement based upon their estimated fair values as of the closing date at June 14, 2013, resulting in the aggregate amount of $2,494,710 allocated to stockholders’ equity and $2,735,290 allocated to the warrant derivative. The Company recognized $1,448,710 of other expense resulting from the increase in the fair value of the warrant liability at September 30, 2013. During the year ended September 30, 2014, the Company recognized $2,092,000 of other income resulting from the decrease in the fair value of the warrant liability at September 30, 2014. During the year ended September 30, 2015, the Company recognized $104,716 of other expense resulting from the decrease in the fair value of the warrant liability at September 30, 2015.
Liabilities measured at fair value on a recurring basis are summarized as follows:
|
Carrying
|
||||||||||||||||
|
Fair Value Measurements Using Inputs
|
Amount at
|
|||||||||||||||
|
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
September 30, 2015
|
||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative Instruments - Warrants
|
$ | - | $ | 306,082 | $ | - | $ | 306,082 | ||||||||
|
Total
|
$ | - | $ | 306,082 | $ | - | $ | 306,082 | ||||||||
The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants.
F-8
|
September 30, 2015
|
||||
|
Market price and estimated fair value of common stock:
|
$ | 5.60 | ||
|
Exercise price
|
2.50 | |||
|
Expected term (years)
|
0.25 | |||
|
Dividend yield
|
- | |||
|
Expected volatility
|
105.1 | % | ||
|
Risk-free interest rate
|
0.001 | % | ||
The Company issued a warrant to purchase 97,169 shares of common stock in connection with the November 2013 IDMC Services and License Agreement. The warrant price of $30.00 per share expires November 10, 2018 and the per share price is subject to adjustment. This warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. This warrant was issued with a down-round provision whereby the exercise price would be adjusted downward in the event that additional shares of our common stock or securities exercisable, convertible or exchangeable for our common stock were issued at a price less than the exercise price. Therefore, the fair value of these warrants was recorded as a liability in the consolidated balance sheet and are marked to market each reporting period until they are exercised or expire or otherwise extinguished. During the year ended September 30, 2014, the Company recognized $320,657 of other expense related to the IDMC warrant. During the year ended September 30, 2015, the Company recognized $14,574 of other income related to the IDMC warrant.
Derivative Instrument – Convertible Note Payable KBM Worldwide, Inc.
The Company entered into a Convertible Note Payable with KBM Worldwide, Inc. on August 25, 2014 for $103,500. The Note was paid off on March 2, 2015. The Company entered into a Convertible Note Payable with KBM on September 24, 2014 for $63,000. The Note was repaid March 27, 2015. The Company entered into a Convertible Note Payable with KBM on January 27, 2015 for $64,000. The KBM Note accrued interest at a rate of 8% per annum and becomes due on October 27, 2015 and was convertible into common stock on July 26, 2015. On August 3, 10, 13 and 14, 2015, the Company issued a total of 23,010 shares of common stock to KBM Worldwide, Inc. related to the conversion of $64,000 of debt and interest of $2,560 pursuant to a Securities Purchase Agreement dated January 27, 2015. The shares were issued at an average of $2.785 per share, with a low price of $2.50 per share.
During the year ended September 30, 2014, the Company recognized $166,500 of other expense related to the KBM Note. During the year ended September 30, 2015, the Company recognized $29,529 of other income and allocated $98,940 to stockholder’s equity related to the KBM Note. The Company recorded accrued interest of $898 as of June 30, 2015. The Company recorded on a loss on conversion of $34,035 and allocated $34,035 to stockholder’s equity.
Derivative Instrument – Series A Convertible Preferred Stock
|
Carrying
|
||||||||||||||||
|
Fair Value Measurements Using Inputs
|
Amount at
|
|||||||||||||||
|
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
September 30, 2015
|
||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative Instruments - Warrants
|
$ | - | $ | 147,004 | $ | - | $ | 147,004 | ||||||||
|
Total
|
$ | - | $ | 147,004 | $ | - | $ | 147,004 | ||||||||
Liabilities measured at fair value on a recurring basis are summarized as follows:
|
September 30, 2015
|
||||
|
Market price and estimated fair value of common stock:
|
$ | 5.60 | ||
|
Exercise price
|
2.50 | |||
|
Expected term (years)
|
0.25 | |||
|
Dividend yield
|
- | |||
|
Expected volatility
|
105.1 | % | ||
|
Risk-free interest rate
|
0.001 | % | ||
F-9
The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the Series A Convertible Preferred Stock.
The Company issued 11,667 shares of Series A Convertible Preferred Stock with attached warrants during the year ended September 30, 2015. The Company allocated $233,322 to stockholders equity and $116,678 to the derivative warrant liability. The warrants were issued with a down round provision. During the year ended September 30, 2015, the Company recognized $30,338 of other expense related to the warrant liability.
Derivative Instrument – Convertible Note Payable Vis Vires Group, Inc.
|
Carrying
|
||||||||||||||||
|
Fair Value Measurements Using Inputs
|
Amount at
|
|||||||||||||||
|
Financial Instruments
|
Level 1
|
Level 2
|
Level 3
|
September 30, 2015
|
||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative Instruments - Convertible Promissory Note
|
$ | - | $ | 55,038 | $ | - | $ | 55,038 | ||||||||
|
Total
|
$ | - | $ | 55,038 | $ | - | $ | 55,038 | ||||||||
Liabilities measured at fair value on a recurring basis are summarized as follows:
|
September 30, 2015
|
||||
|
Market price and estimated fair value of common stock:
|
$ | 5.60 | ||
|
Exercise price
|
3.64 | |||
|
Expected term (years)
|
0.375 | |||
|
Dividend yield
|
- | |||
|
Expected volatility
|
105.1 | % | ||
|
Risk-free interest rate
|
0.75 | % | ||
The Company entered into a Convertible Note Payable with Vis Vires Group, Inc. on August 10, 2015 for $84,000 to fund short-term working capital. The Vis Vires Note accrues interest at a rate of 8% per annum and becomes due on May 12, 2016 and is convertible into common stock on February 5, 2016. The Vis Vires Note is convertible at 65% of the average of the lowest three day trading price in the 10 days prior to conversion. The Company recorded accrued interest of $405 as of September 30, 2015.
During the year ended September 30, 2015, the Company recognized $55,038 of other expense related to the Vis Vires Note.
The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities at September 30, 2015 and 2014 based upon the short-term nature of the assets and liabilities.
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 – 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.
F-10
Income Taxes – Income taxes are calculated based upon the asset and liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard to allow for recognition of such an asset. In addition, realization of an uncertain income tax position must be estimated as “more likely than not” (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. Further, the recognition of tax benefits recorded in the financial statements, if any, is based on the amount most likely to be realized assuming a review by tax authorities having all relevant information.
The Company recognizes refundable and deferred assets to the extent that management has determined their realization. As of September 30, 2015 and 2014, the Company had refundable tax assets related to TransTech of $0 and $29,590, respectively.
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 shareholders 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 September 30, 2015, there were options outstanding for the purchase of 57,407 common shares, warrants for the purchase of 899,750 common shares, 11,667 shares of our common stock issuable upon the conversion of Series A Convertible Preferred Stock, up to 34,871 shares of our common stock issuable upon the exercise of placement agent warrants and an unknown number of shares related to the conversion of $109,000 in convertible promissory notes which could potentially dilute future earnings per share. As of September 30, 2014, there were options outstanding for the purchase of 87,333 common shares, warrants for the purchase of 857,083 common shares and up to 34,871 shares of our common stock issuable upon the exercise of placement agent warrants and an unknown number of shares related to the conversion of $166,500 in convertible promissory notes which could potentially dilute future earnings per share.
Dividend Policy – The Company has never paid any cash dividends and intends, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.
In August 2014, FASB issued ASU 2014-15—Presentation of Financial Statements—Going Concern (ASC Subtopic 205-40): “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The update requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. All entities are required to apply the new requirements in annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. As such, GrowLife, Inc. is required to adopt these provisions for the annual period ending December 31, 2016. The Company is currently evaluating the impact of FASB ASU 2014-15 but does not expect the adoption thereof to have a material effect on the Company’s financial statements.
In May 2014, FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606): “Section A—Summary and Amendments That Create Revenue from Contracts with Customers, (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), Section B—Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables, Section C—Background Information and Basis for Conclusions”. The guidance in this update affects any entity that enters into contracts with customers to transfer goods or services and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. As such, GrowLife, Inc. is required to adopt these provisions as of December 31, 2016. The Company is currently evaluating the impact of FASB ASU 2014-09 but does not expect the adoption thereof to have a material effect on the Company’s financial statements.
In July 2013, FASB issued ASU 2013-11—Income Taxes (ASC Topic 740): “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this update provide explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of FASB ASU 2013-11 did not have a material effect on the Company’s financial statements.
F-11
New Accounting Standards Issued But Not Yet Adopted
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). This ASU requires inventories measured under any methods other than last-in, first-out ("LIFO") or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent measurement of inventory using LIFO or the retail inventory method is unchanged by this ASU. ASU 2015-11 is effective for public companies for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact that this standard will have on the consolidated financial statements and does not anticipate a significant impact to the Company's financial position as a result of this change.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for us on January 1, 2016, with early adoption permitted. The Company does not believe that this pronouncement will have an impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for the Company on January 1, 2016, with early adoption permitted. The Company is currently evaluating the potential changes from this ASU to the Company’s future financial reporting and disclosures.
|
4.
|
DEVELOPMENT OF OUR CHROMAID™ TECHNOLOGY
|
The Company is focused primarily on the development of a proprietary technology which is capable of uniquely identifying and authenticating almost any substance using light to create, record and detect the unique digital “signature” of the substance. The Company calls this its “ChromaID™” technology.
The Company’s ChromaID™ Technology
The Company has developed a proprietary technology to uniquely identify and authenticate almost any substance. This patented technology utilizes light at the photon (elementary particle of light) level through a series of emitters and detectors to generate a unique signature or “fingerprint” from a scan of almost any solid, liquid or gaseous material. This signature of reflected or transmitted light is digitized, creating a unique ChromaID signature. Each ChromaID signature is comprised of from hundreds or thousands of specific data points.
The ChromaID technology looks beyond visible light frequencies to areas of near infra-red and ultraviolet light that are outside the humanly visible light spectrum. The data obtained allows the Company to create a very specific and unique ChromaID signature of the substance for a myriad of authentication and verification applications.
Traditional light-based identification technology, called spectrophotometry, has relied upon a complex system of prisms, mirrors and visible light. Spectrophotometers typically have a higher cost and utilize a form factor more suited to a laboratory setting and require trained laboratory personnel to interpret the information. The ChromaID technology uses lower cost LEDs and photodiodes and specific frequencies of light resulting in a more accurate, portable and easy-to-use solution for a wide variety of applications. The ChromaID technology not only has significant cost advantages as compared to spectrophotometry, it is also completely flexible is size, shape and configuration. The ChromaID scan head can range in size from endoscopic to a scale that could be the size of a large ceiling-mounted florescent light fixture.
In normal operation, a ChromaID master or reference scan is generated and stored in a database. The Visualant scan head can then scan similar materials to identify, authenticate or diagnose them by comparing the new ChromaID digital signature scan to that of the original or reference ChromaID signature or scan result.
The following summarizes the Company’s plans for its Company’s proprietary ChromaID technology. Based on the Company’s anticipated expenditures on this technology, the expected efforts of its management and its relationship with Intellectual Ventures and its subsidiary, IDMC, and the Company’s other strategic partner, Sumitomo Precision Products, Ltd., the Company expects its ChromaID technology to provide an increasing portion of its revenues in future years from product sales, licenses, royalties and other revenue streams., as discussed further below.
F-12
ChromaID: A Foundational Platform Technology
The Company’s ChromaID technology provides a platform upon which a myriad of applications can be developed. As a platform technology, it is analogous to a smartphone, upon which an enormous number of previously unforeseen applications have been developed. The ChromaID technology is an enabling technology that brings the science of light and photonics to low cost, real world commercialization opportunities across multiple industries. The technology is foundational and as such, the basis upon which the Company believes a significant business can be built.
As with other foundational technologies, a single application may reach across multiple industries. The ChromaID technology can, for example effectively differentiate and identify different brands of clear vodkas that appear identical to the human eye. By extension this same technology can identify pure water from water with contaminants present. It can provide real time detection of liquid medicines such as morphine that have been adulterated or compromised. It can detect if jet fuel has water contamination present. It could determine when it is time to change oil in a deep fat fryer. These are but a few of the potential applications of the ChromaID technology based upon extensions of its ability to identify different clear liquids.
The cornerstone of a company with a foundational platform technology is its intellectual property. ChromaID was invented by scientists from the University of Washington under contract with Visualant. The Company has pursued an aggressive intellectual property strategy and has been granted nine patents. The Company currently have 21 patents pending. The Company possesses all right, title and interest to the issued patents. Ten of the pending patents are licensed exclusively to us in perpetuity by our strategic partner, the IDMC subsidiary of Intellectual Ventures.
At the Photonics West trade show held in San Francisco in February 2013, we were honored to receive a PRISM award from the Society of Photo-Optical Instrumentation Engineers International, better known as SPIE. The PRISM awards recognizes photonic products that break with conventional ideas, solve problems, and improve life through the application of light-based technologies.
IDMC Relationship
In November 2013, the Company entered into a strategic relationship with IDMC, a subsidiary of Intellectual Ventures, a private intellectual property fund with over $5 billion under management. Intellectual Ventures 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. IDMC 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 the Company. In connection with IDMC’s work to expand the Company’s intellectual property portfolio, the Company agreed to curtail outbound marketing activities of its technology through the fourth fiscal quarter of 2014.
Initial testing in the Company’s laboratories and the work of the IDMC inventors have shown that the ChromaID technology has a number of broad and useful applications a few of which include:
|
|
·
|
Milk identification for quality, protein and fat content and impurities
|
|
|
·
|
Identification of liquids for counterfeits or contaminants
|
|
|
·
|
Detecting adulterants in food and food products compromising its quality
|
|
|
·
|
Color grading of diamonds
|
|
|
·
|
Identifying real cosmetics versus counterfeit cosmetics
|
|
|
·
|
Identifying counterfeit medications versus real medications
|
|
|
·
|
Identifying regular flour versus gluten free flour
|
|
|
·
|
Authenticating secure identification cards
|
Products
The Company first delivered product, the ChromaID Lab Kit, scans and identifies solid surfaces. The Company is marketing this product to customers who are considering licensing the technology. Target markets include, but are not limited to, commercial paint manufacturers, pharmaceutical equipment manufacturers, process control companies, currency paper and ink manufacturers, security cards, cosmetic companies, scanner manufactures and food processing companies.
The Company’s second product, the ChromaID Liquid Lab Kit, scans and identifies liquids. This product is currently in prototype form. Similar to the Company’s first product, it will be marketed to customers who are considering licensing the technology. Rather than use an LED emitter to reflect light off of a surface that is captured by a photodiode to generate a ChromaID signature the liquid analysis product shines light through the liquid (transmissive) with the LEDs positioned on one side of the liquid sample and the photo detectors on the opposite side. This device is in a functional state in our laboratory and the Company anticipates having a Liquid ChromaID Lab Kit available for customers by the Company during the fall of 2015. Target markets include, but are not limited to, water companies, petrochemical companies, pharmaceutical companies, and numerous consumer applications.
The ChromaID Lab Kits allows potential licensors of our technology to work with our technology and develop solutions for their particular application. Our contractual arrangements with IDMC are described in greater detail below.
F-13
Our Commercialization Plans for the ChromaID Technology.
The Company shipped its first ChromaID product, the ChromaID Lab Kits, to our strategic partner IDMC during the last calendar quarter of 2013 and first calendar quarter of 2014, after we completed final assembly and testing. As part of the Company’s agreement with IDMC, the Company curtailed its ChromaID marketing efforts through the fourth calendar quarter of 2014 while IDMC worked to expand our intellectual property portfolio. Thereafter, the Company began to actively market the ChromaID Lab Kits to interested and qualified customers. Some ChromaID Lab Kits are provided free of charge to potential customers. Others are sold for a modest price. To date, the Company has achieved limited revenue from the sale of our ChromaID Lab Kits.
The Lab Kit includes the following:
ChromaID Scanner. A small device made with electronic and optical components and firmware which pulses light onto a flat material and records and digitizes the light that is reflected back from that material. The device is the size of a typical flashlight (5.5” long and 1.25” diameter). However, the technology can be incorporated into almost any size, shape and configuration.
ChromaID Lab Software. A software application that runs on a Windows PC. The software allows for configuration of the scanner, controls the behavior of the ChromaID Scanner, displays a graph of the captured ChromaID signature profile, stores the ChromaID signature in a database and uses algorithms to compare the accuracy of the match of the unknown scan to the known ChromaID signature profile. This software is intended for lab and experimental use only and is not required for commercialized product applications.
Software Development Toolkit. A collection of software applications, API (an abbreviation of application program interface – a set of routines, protocols, and tools for building software applications) definitions and file descriptions that allow a customer to extract the raw data from the ChromaID signatures and run their own software routines against that raw data.
The ChromaID Lab Kit allows customers to experiment with and evaluate the ChromaID technology and determine if it is appropriate for their specific applications. The primary electronic and optical parts of the ChromaID scanner, called the “scan head,” could be supplied to customers to integrate into their own products. A set of ChromaID Developer Tools are also available. These allow customers to develop their own applications and products based on the ChromaID technology.
ChromaID signatures must be stored, managed, and readily accessible for comparison, matching and authentication purposes. The database can be owned and operated by the end customer, but in the case of thousands of ChromaID signatures, database management may be outsourced to us or a third party provider. These database services could be made available on a per-access transaction basis or on a monthly or annual subscription basis. The actual storage location of the database can be cloud-based, on a stand-alone scanning device or on a mobile device via a Bluetooth connection depending on the requirements of access, size of the database and security as defined by the customer. As a result, large databases can be accessed by cell phone or other mobile technologies using either local storage or cloud based storage.
Based on the commercialization plans outlined above, the Company’s business model anticipates deriving revenue from several sources:
|
|
·
|
Sales of the ChromaID Lab Kit and ChromaID Liquid Lab Kit
|
|
|
·
|
Non Recurring Engineering (NRE) fees to assist customers with scan integration into their products
|
|
|
·
|
Licensing of the ChromaID technology
|
|
|
·
|
Royalties per unit generated from the sales of scan heads
|
|
|
·
|
Per click transaction revenue from accessing the unique ChromaID signatures
|
|
|
·
|
Developing custom product applications for customers
|
|
|
·
|
ChromaID database administration and management services
|
The Company’s Acceleration of Business Development in the United States and Around the World
The Company is coordinating its internal business development, sales and marketing efforts with those of its strategic partners IDMC, and Sumitomo Precision Products to leverage market data and information in order to focus on specific target vertical markets which have the greatest potential for early adoption. The ChromaID Lab Kit provides a means for us to demonstrate the technology to customers in these markets. It also allows customers to experiment with developing unique applications for their particular use. Visualant’s Business Development team is pursuing license opportunities with customers in our target markets.
There is no requirement for FDA or other government approval for the current applications of our ChromaID technology. Over time, as the Company explores the application of its ChromaID technology for medical diagnostics and other applications, the Company expects that there will be requirements for FDA and other government approvals before applications using the technology in medical and other regulated fields can enter the marketplace.
F-14
Research and Development
The Company’s research and development efforts are primarily focused improving the core foundational ChromaID technology and developing new and unique applications for the technology. As part of this effort, the Company typically conduct testing to ensure that ChromaID application methods are compatible with the customer’s requirements, and that they can be implemented in a cost effective manner. The Company is also actively involved in identifying new application methods. Visualant’s team has considerable experience working with the application of light-based technologies and their application to various industries. The Company believes that its continued development of new and enhanced technologies relating to our core business is essential to its future success. The Company spent $362,661 and $670,742 during the years ended September 30, 2015 and 2014, respectively, on research and development activities. The Company’s research and development efforts are supported internally, through its relationship with IDMC and through contractors led by Dr. Tom Furness and his team at RATLab LLC.
The Company’s Patents
The Company believes that it’s nine patents, 21 patent applications, and two registered trademarks, and our trade secrets, copyrights and other intellectual property rights are important assets. The Company’s patents will expire at various times between 2027 and 2033. The duration of the Company’s trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
The patents that have been granted to Visualant include:
On August 9, 2011, the Company was issued US Patent No. 7,996,173 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy,” by the United States Office of Patents and Trademarks. The patent expires August 24, 2029.
On December 13, 2011, the Company was issued US Patent No. 8,076,630 B2 entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires November 7, 2028.
On December 20, 2011, the Company was issued US Patent No. 8,081,304 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 28, 2030.
On October 9, 2012, the Company was issued US Patent No. 8,285,510 B2 entitled “Method, Apparatus, and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On February 5, 2013, the Company was issued US Patent No. 8,368,878 B2 entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On November 12, 2013, the Company was issued US Patent No. 8,583,394 B2 entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On November 21, 2014, the Company was issued US Patent No. 8,888,207 B2 entitled “Systems, Methods, and Articles Related to Machine-Readable Indicia and Symbols” by the United States Office of Patents and Trademarks. The patent expires February 7, 2033.
On March 23, 2015, the Company was issued US Patent No. 8,988,666 B2 entitled “Method, Apparatus, and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires July 31, 2027.
On May 26, 2015, the Company was issued patent US Patent No. 9,041,920 B2 entitled “Device for Evaluation of Fluids using Electromagnetic Energy” by the United States Office of Patents and Trademarks. The patent expires March 12, 2033.
The Company pursues an aggressive patent strategy to expand its unique intellectual property in the United States and other countries.
Services and License Agreement Invention Development Management Company, L.L.C.
In November 2013, the Company entered into a Services and License Agreement with IDMC. IDMC is affiliated with Intellectual Ventures, which collaborates with inventors and partners with pioneering companies and invests both expertise and capital in the process of invention. On November 19, 2014, the Company amended the Services and License Agreement with IDMC. This amendment exclusively licenses 10 filed patents to us.
F-15
The agreement requires IDMC to identify and engage inventors to develop new applications of Visualant’s ChromaID™ technology, present the developments to us for approval, and file at least 10 patent applications to protect the developments. IDMC is responsible for the development and patent costs. The Company provided the Chroma ID Lab Kits to IDMC at no cost and are providing ongoing technical support. In addition, to provide time for this accelerated expansion of its intellectual property the Company delayed the selling of the ChromaID Lab Kits for 140 days except for certain select accounts. The Company continued its business development efforts during this period and have worked with IDMC and their global business development resources to secure potential customers and licensees for the ChromaID technology. The Company shipped 20 ChromaID Lab Kits to inventors in the IDMC network during December 2013 and January 2014. As part of the agreement with IDMC, the Company curtailed its ChromaID marketing efforts through the fourth calendar quarter of 2014 while IDMC worked to expand our intellectual property portfolio. Thereafter, the Company began to actively market the ChromaID Lab Kits to interested and qualified customers.
The Company has received a worldwide, nontransferable, exclusive license to the intellectual property developed under the IDMC agreement during the term of the agreement, and solely within the identification, authentication and diagnostics field of use, to (a) make, have made, use, import, sell and offer for sale products and services; (b) make improvements; and (c) grant sublicenses of any and all of the foregoing rights (including the right to grant further sublicenses).
The Company received a nonexclusive and nontransferable option to acquire a worldwide, nontransferable, nonexclusive license to the useful intellectual property held by IDMC within the identification, authentication and diagnostics field of use to (a) make, have made, use, import, sell and offer to sell products and services and (b) grant sublicenses to any and all of the foregoing rights. The option to acquire this license may be exercised for up to two years from the effective date of the Agreement.
IDMC is providing global business development services to us for geographies not being pursued by Visualant. Also, IDMC has introduced the Company to potential customers, licensees and distributors for the purpose of identifying and pursuing a license, sale or distribution arrangement or other monetization event.
The Company granted to IDMC a nonexclusive, worldwide, fully paid, nontransferable, sublicenseable, perpetual license to our intellectual property solely outside the identification, authentication and diagnostics field of use to (a) make, have made, use, import, sell and offer for sale products and services and (b) grant sublicenses of any and all of the foregoing rights (including the right to grant further sublicenses).
The Company granted to IDMC a nonexclusive, worldwide, fully paid up, royalty-free, nontransferable, non-sublicenseable, perpetual license to access and use the Company’s technology solely for the purpose of marketing the aforementioned sublicenses of our intellectual property to third parties outside the designated fields of use.
In connection with the original license agreement, the Company issued a warrant to purchase 97,169 shares of common stock to IDMC as consideration for the exclusive intellectual property license and application development services. The warrant has a current exercise price of $2.50 per share and expires November 10, 2018. The per share price is subject to adjustment based on any issuances below $2.50 per share except as described in the warrant.
The Company agreed to pay IDMC a percentage of license revenue for the global development business services and a percentage of revenue received from any company introduced to us by IDMC. The Company also have also agreed to pay IDMC a royalty when the Company receives royalty product revenue from an IDMC-introduced company. IDMC has agreed to pay the Company a license fee for the nonexclusive license of the Company’s intellectual property.
The term of both the exclusive intellectual property license and the nonexclusive intellectual property license commences on the effective date of November 11, 2013, and terminates when all claims of the patents expire or are held in valid or unenforceable by a court of competent jurisdiction from which no appeal can be taken.
The term of the Agreement commences on the effective date until either party terminates the Agreement at any time following the fifth anniversary of the effective date by providing at least ninety days’ prior written notice to the other party.
|
5.
|
AGREEMENTS WITH SUMITOMO PRECISION PRODUCTS CO., LTD.
|
In May 2012, the Company entered into a Joint Research and Product Development Agreement (the “Joint Development Agreement”) with Sumitomo Precision Products Co., Ltd., a publicly-traded Japanese corporation, for the commercialization of our ChromaID technology. In March 2013, the Company entered into an amendment to this agreement, which extended the Joint Development Agreement from March 31, 2013 to December 31, 2013. The extension provided for continuing work between Sumitomo and Visualant focused on advancing the ChromaID technology and market research aimed at identifying the most significant markets for the ChromaID technology. This agreement expired December 31, 2013. This collaborative work supported the development of the ChromaID Lab Kit. The current version of the technology was introduced to the marketplace as a part of our ChromaID Lab Kit during the fourth quarter of 2013.
F-16
The Company also entered into a License Agreement with Sumitomo in May 2012 which provides for an exclusive license for the then-extant ChromaID technology. The territories covered by this license include Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines). On May 21, 2015, the Company entered into an amendment to the License Agreement, which, effective as of June 18, 2014, which eliminated the Sumitomo exclusivity and provides that if the Company sells products in certain territories – Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines) – the Company will pay Sumitomo a royalty rate of 2% of net sales (excluding non-recurring engineering revenues) over the remaining term of the five-year License Agreement (through May 2017).
|
6.
|
ACQUISITION OF TRANSTECH
|
The Company’s wholly owned subsidiary, TransTech Systems, Inc., is a distributor of products, including systems solutions, components and consumables, for employee and personnel identification in government and the private sector, document authentication, access control, and radio frequency identification. TransTech provides these products and services, along with marketing and business development assistance to value-added resellers and system integrators throughout North America.
The Company expects its ownership of TransTech to accelerate our market entry and penetration through well-operated and positioned dealers of security and authentication systems, thus creating a natural distribution channel for products featuring its proprietary ChromaID technology. TransTech currently provides substantially all of our revenues. TransTech’s management team functions independently from Visualant’s and its operations require a minimal commitment of our management time and other resources. The Company’s acquisition of TransTech in June 2010.
|
7.
|
ACCOUNTS RECEIVABLE/CUSTOMER CONCENTRATION
|
Accounts receivable were $619,845 and $815,460, net of allowance, as of September 30, 2015 and 2014, respectively. The Company had one customer (11.1%) in excess of 10% of the Company’s consolidated revenues for the year ended September 30, 2015. The Company had two customers (13.5% and 11.1%) with accounts receivable in excess of 10% as of September 30, 2015. The Company does expect to have customers with consolidated revenues or accounts receivable balances of 10% of total accounts receivable in the foreseeable future.
|
8.
|
INVENTORIES
|
Inventories were $217,824 and $412,831 as of September 30, 2015 and 2014, respectively. Inventories consist primarily of printers and consumable supplies, including ribbons and cards, badge accessories, capture devices, and access control components held for resale. There is a $20,000 and $10,000 reserve for impaired inventory as of September 30, 2015 and 2014, respectively.
|
9.
|
FIXED ASSETS
|
Fixed assets, net of accumulated depreciation, was $366,250 and $447,236 as of September 30, 2015 and 2014, respectively. Accumulated depreciation was $803,705 and $742,676 as of September 30, 2015 and 2014, respectively. Total depreciation expense, was $79,576 and $64,357 for the years ended September 30, 2015 and 2014, 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 September 30, 2015 was comprised of the following:
|
Estimated
|
June 30, 2015
|
||||||||||||
|
Useful Lives
|
Purchased
|
Capital Leases
|
Total
|
||||||||||
|
Machinery and equipment
|
2-10 years
|
$ | 192,374 | $ | 87,038 | $ | 279,412 | ||||||
|
Leasehold improvements
|
5-20 years
|
603,612 | - | 603,612 | |||||||||
|
Furniture and fixtures
|
3-10 years
|
77,039 | 101,260 | 178,299 | |||||||||
|
Software and websites
|
3- 7 years
|
63,783 | 44,849 | 108,632 | |||||||||
|
Less: accumulated depreciation
|
(570,558 | ) | (233,147 | ) | (803,705 | ) | |||||||
| $ | 366,250 | $ | - | $ | 366,250 | ||||||||
F-17
|
10.
|
INTANGIBLE ASSETS
|
Intangible assets as of September 30, 2015 and 2014 consisted of the following:
|
Estimated
|
September 30,
|
September 30,
|
|||||||
|
Useful Lives
|
2015
|
2014
|
|||||||
|
Customer contracts
|
5 years
|
$ | 983,645 | $ | 983,645 | ||||
|
Technology
|
5 years
|
712,500 | 712,500 | ||||||
|
Less: accumulated amortization
|
(1,538,145 | ) | (1,264,492 | ) | |||||
|
Intangible assets, net
|
$ | 158,000 | $ | 431,653 | |||||
Total amortization expense was $273,653 and $339,229 for the years ended September 30, 2015 and 2014, respectively.
The fair value of the TransTech intellectual property acquired was $983,645, estimated by using a discounted cash flow approach based on future economic benefits associated with agreements with customers, or through expected continued business activities with its customers. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results. The TransTech intellectual property was fully amortized as of September 30, 2015.
The fair value of the RATLab intellectual property associated with the assets acquired was $450,000 estimated by using a discounted cash flow approach based on future economic benefits. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.
The fair value of the Javelin intellectual property acquired was $262,500 estimated by using a discounted cash flow approach based on future economic benefits associated with the assets acquired. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.
|
11.
|
ACCOUNTS PAYABLE
|
Accounts payable were $2,520,223 and $2,234,123 as of September 30, 2015 and 2014, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases and technology development, external audit, legal and other expenses incurred by the Company. The Company had one vendor (12.5%) with accounts payable in excess of 10% of its accounts payable as of September 30, 2015. The Company does expect to have vendors with accounts payable balances of 10% of total accounts payable in the foreseeable future.
|
12.
|
CONVERTIBLE NOTES PAYABLE
|
The Company entered into a Convertible Note Payable with KBM Worldwide, Inc. on August 25, 2014 for $103,500. The Note was paid off on March 2, 2015. The Company entered into a Convertible Note Payable with KBM on September 24, 2014 for $63,000. The Note was repaid March 27, 2015. The Company entered into a Convertible Note Payable with KBM on January 27, 2015 for $64,000. The KBM Note accrued interest at a rate of 8% per annum and becomes due on October 27, 2015 and was convertible into common stock on July 26, 2015. On August 3, 10, 13 and 14, 2015, the Company issued a total of 23,010 shares of common stock to KBM Worldwide, Inc. related to the conversion of $64,000 of debt and interest of $2,560 pursuant to a Securities Purchase Agreement dated January 27, 2015. The shares were issued at an average of $2.785 per share, with a low price of $2.50 per share.
During the year ended September 30, 2014, the Company recognized $166,500 of other expense related to the KBM Note. During the year ended September 30, 2015, the Company recognized $29,529 of other income and allocated $98,940 to stockholder’s equity related to the KBM Note. The Company recorded accrued interest of $898 as of June 30, 2015. The Company recorded on a loss on conversion of $34,035 and allocated $34,035 to stockholder’s equity.
The Company entered into a Convertible Note Payable with Vis Vires Group, Inc. on August 10, 2015 for $84,000 to fund short-term working capital. The Vis Vires Note accrues interest at a rate of 8% per annum and becomes due on May 12, 2016 and is convertible into common stock on February 5, 2016. The Vis Vires Note is convertible at 65% of the average of the lowest three day trading price in the 10 days prior to conversion. The Company recorded accrued interest of $405 as of September 30, 2015.
The Company entered into a Convertible Promissory Note with Planning Partners, Inc. on September 24, 2015 for $25,000 to fund short-term working capital. The Planning Partners Note accrues interest at a rate of 8% per annum and becomes due on September 23, 2016 and is convertible into common stock as part of our next financing. The Company recorded accrued interest of $38 as of September 30, 2015.
F-18
|
13.
|
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
|
Notes payable, capitalized leases and long term debt as of September 30, 2015 and 2014 consisted of the following:
|
September 30,
|
September 30,
|
|||||||
|
2015
|
2014
|
|||||||
|
Capital Source Business Finance Group
|
$ | 364,757 | $ | 488,398 | ||||
|
Note payable to Umpqua Bank
|
199,935 | 200,000 | ||||||
|
Secured note payable to J3E2A2Z LP - related party
|
600,000 | 600,000 | ||||||
|
TransTech capitalized leases, net of capitalized interest
|
0 | 2,562 | ||||||
|
Total debt
|
1,164,692 | 1,290,960 | ||||||
|
Less current portion of long term debt
|
(1,164,692 | ) | (1,290,960 | ) | ||||
|
Long term debt
|
$ | - | $ | - | ||||
Capital Source Business Finance Group Secured Credit Facility
The Company finances its TransTech operations from operations and a Secured Credit Facility with Capital Source Business Finance Group. On December 9, 2008, TransTech entered into a $1,000,000 secured credit facility with Capital Source to fund its operations. On June 12, 2015, the secured credit facility was renewed for an additional six months, with a floor for prime interest of 4.5% (currently 4.5%) plus 2.5%. The eligible borrowing is based on 80% of eligible trade accounts receivable, not to exceed $1,000,000. The secured credit facility is collateralized by the assets of TransTech, with a guarantee by Visualant, including a security interest in all assets of Visualant. Availability under this Secured Credit ranges from $0 to $175,000 ($24,000 as of September 30, 2015) on a daily basis. The remaining balance on the accounts receivable line of $364,757 as of September 30, 2015 must be repaid by the time the secured credit facility expires on December 12, 2015, or we renew by automatic extension for the next successive six-month term.
Note Payable to Umpqua Bank
The Company has a $199,935 Business Loan Agreement with Umpqua Bank (the “Umpqua Loan”), which currently matures on December 31, 2015 and provides for interest at 3.25% per year. Related to this Umpqua Loan, the Company entered into a demand promissory note for $200,000 on January 10, 2014 with an entity affiliated with Ronald P. Erickson, our Chief Executive Officer. This demand promissory note will be effective in case of a default by the Company under the Umpqua Loan. The Company recorded accrued interest of $10,340 as of September 30, 2015.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
The Company also has two other demand promissory notes payable to entities affiliated with Mr. Erickson, totaling $600,000. Each of these notes were issued between January and July 2014, provide for interest of 3% per year and now mature on December 31, 2015. They also provide for a second lien on our assets if not repaid by December 31, 2015 or converted into convertible debentures or equity on terms acceptable to the Mr. Erickson. The Company recorded accrued interest of $22,167 as of September 30, 2015.
Aggregate maturities totaling $1,164,692 are all due within twelve months.
|
14.
|
EQUITY
|
Authorized Capital Stock
The Company has authorized 105,000,000 shares of capital stock, of which 100,000,000 are shares of voting common stock, par value $0.001 per share, and 5,000,000 are shares of voting preferred stock, par value $0.001 per share.
Voting Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $0.001.
On July 21, 2015, the Company filed with the Nevada Secretary of State an Amended and Restated Certificate of Designations, Preferences and Rights for our Series A Convertible Preferred Stock. Among other things, the Amended and Restated Certificate changed the conversion price and the stated value of the Series A Preferred from $0.10 (pre reverse stock split) to $30.00 (post-reverse stock split), and added a provision adjusting the conversion price upon the occurrence of certain events.
F-19
Under the Amended and Restated Certificate, the Company has 11,667 shares of Series A Preferred authorized, all of which are outstanding. Each holder of outstanding shares of Series A Preferred is entitled to the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred held by such holder are then convertible as of the applicable record date. The Company cannot amend, alter or repeal any preferences, rights, or other terms of the Series A Preferred so as to adversely affect the Series A Preferred, without the written consent or affirmative vote of the holders of at least 66% of the then outstanding shares of Series A Preferred, voting as a separate voting group, given by written consent or by vote at a meeting called for such purpose for which notice shall have been duly given to the holders of the Series A Preferred.
During the year ended September 30, 2015, the Company sold 11,667 Series A Preferred Stock to two investors totaling $350,000. These shares are expected to be convertible into 11,667 shares of common stock at $30.00 per share, subject to adjustment, for a period of five years. The Series A Preferred Stock has voting rights and may not be redeemed without the consent of the holder. The Company also issued (i) a Series C five-year Warrant for 23,334 shares of common stock at an exercise price of $30.00 per share, which is callable at $60.00 per share; and (ii) a Series D five-year Warrant for 23,334 shares of common stock at an exercise price of $45.00 per share, which is callable at $90.00 per share. The Series A Preferred Stock and Series C and D Warrants had registration rights.
On July 20, 2015, the two investors entered into an Amendment to Series A Preferred Stock Terms whereby they agreed to the terms of the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock and waived all registration rights.
On August 14, 2015, the warrant exercise price was adjusted to $2.50 per share due to the issuance of common stock at that price.
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 year ended September 30, 2015:
On December 14, 2014, the Company entered into an Advisory Agreement with Lester Garfinkel for financial consulting services. Under the Advisory Agreement, Mr. Garfinkel was awarded 167 shares of our common stock. The Company expensed $2,500 during the year ended September 30, 2015.
On January 23, 2015, the Company issued 9,002 shares of restricted common stock to seven employees and directors for services during 2014. The shares were issued in accordance with the 2011 Stock Incentive Plan and were valued at $15.00 per share, the market price of our common stock. The Company expensed $135,000 during the year ended September 30, 2015.
On February 23, 2015, the Company issued 1,700 shares of common stock to NVPR LLC related to a conversion of $25,499 under a 7% Convertible Debenture.
On April 24, 2015, the Company filed a registration statement on Form S-1 to register $10 million of Company securities in a proposed public offering. The Company has applied for listing of the Company’s common stock and the warrants on The NASDAQ Capital Market.
On May 6, 2015, the Company’s stockholders approved a reverse split of our common stock, in a ratio to be determined by the Company’s Board of Directors, of not less than 1-for-50 nor more than 1-for-150. On June 9, 2015, the Company’s Board of Directors determined that the ratio of the reverse split would be 1-for-150 , and the reverse split became effective on June 17, 2015. All warrant, option, share and per share information in this Form 10-Q gives retroactive effect for a 1-for-150 split with all numbers rounded up to the nearest whole share. The Company issued 962 fractional shares related to the reverse split.
On August 3, 10, 13 and 14, 2015, the Company issued a total of 23,010 shares of common stock to KBM Worldwide, Inc. related to the conversion of $64,000 of debt and interest of $2,560 pursuant to a Securities Purchase Agreement dated January 27, 2015. The shares were issued at an average of $2.785 per share, with a low price of $2.50 per share. The Company recorded on a loss on conversion of $34,035 and allocated $34,035 to stockholder’s equity.
F-20
The Company had the following equity transactions during the year ended September 30, 2014:
On May 15, 2014, the Company issued 10,667 shares of common stock to White Oak Capital LLC related to a conversion under a 7% Convertible Debenture. The shares were valued at $160,000 or $15.00 per share.
On June 12, 2014, the Company issued 2,000 shares of common stock to Dynasty Wealth, Inc. related to Financial Public Relations Group dated June 9, 2014. The shares were valued at $60,000 or $30.00 per share.
On August 27, 2014, the Company entered into an Addendum to a Financial Consultant Agreement or Agreement with D. Weckstein and Co, Inc. for financial consulting and investment banking services. Under the Addendum, Weckstein was awarded 6,667 shares of the Company’s common stock on August 27, 2014. The shares were valued at $30.00 per share by the parties. The Company expensed $70,000 during the year ended September 30, 2014 or $10.50, the closing price on August 27, 2014.
Warrants to Purchase Common Stock
The following warrant issuances occurred during the year ended September 30, 2015:
On June 14, 2013, the Company entered into a Purchase Agreement, Warrants, and Registration Rights Agreement with Special Situations Technology Funds and forty other accredited investors, pursuant to which the Company issued 348,685 shares of common stock at $15.00 per share for a total of $5,230,000, which amount includes the conversion of $500,000 in outstanding debt of the Company owed to one of its officers. As part of the transaction, which closed on June 14, 2013, the Company issued to the investors (i) five year Series A Warrants to purchase a total of 348,685 shares of common stock at $22.50 per share; and (ii) five year Series B Warrants to purchase a total of 348,685 shares of common stock at $30.00 per share. The Company also issued 34,871 placement agent warrants exercisable at $15.00 per share to GVC Capital, with an obligation to issue up to 34,871 additional placement agent warrants exercisable at $22.50 per share. The placement agent warrants shall issue only upon the exercise of the Series A Warrants by the investors, and are issuable ratably based upon the number of Warrants exercised by the investors. The placement agent warrants have a term of five years from the date of closing of the transaction. On August 14, 2015, the warrant exercise price was adjusted to $2.50 per share due the issuance of common stock at this price.
Warrants to purchase 4,000 shares of common stock at $15.00 per share were forfeited.
The following warrant issuances occurred during the year ended September 30, 2014:
The Company issued a warrant to purchase 97,169 shares of common stock as consideration for the exclusive IP license and application development services to IDMC signed on November 11, 2013. The warrant price of $30.00 per share expires November 10, 2018 and the per share price is subject to adjustment. On August 14, 2015, the warrant exercise price was adjusted to $2.50 per share due the issuance of common stock at this price.
On April 2, 2014, the Company issued a warrant to purchase 6,667 shares of common stock to Thomas Furness, a supplier, at an exercise price of $30.00 per share. The Warrant expires on April 1, 2019.
On April 2, 2014, the Company issued a warrant to purchase 1,334 shares of common stock to Delacore LLC, a supplier, at an exercise price of $30.00 per share. The Warrant expires on April 1, 2017.
On June 11, 2014, the Company issued a warrant to purchase 3,334 shares of common stock to Designsense Ltd, a supplier, at an exercise price of $30.00 per share. The Warrant expires on June 10, 2017.
On June 11, 2014, the Company issued a warrant to purchase 1,667 shares of common stock to Alan Tompkins, a supplier, at an exercise price of $30.00 per share. The Warrant expires on June 10, 2017.
On June 12, 2014, the Company issued a warrant for 1,334 shares of common stock to Dynasty Wealth, Inc. The warrants vested on June 12, 2014, are exercisable at $30.00 per share expire on September 3, 2016.
Warrants to purchase 11,180 shares of common stock at $46.35 per share were forfeited.
F-21
A summary of the warrants issued as of September 30, 2015 were as follows:
|
September 30, 2015
|
||||||||
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Exercise
|
||||||||
|
Shares
|
Price
|
|||||||
|
Outstanding at beginning of period
|
857,083 | $ | 26.28 | |||||
|
Issued
|
46,667 | 37.50 | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Expired
|
(4,000 | ) | 15.00 | |||||
|
Outstanding at end of period
|
899,750 | $ | 3.18 | |||||
|
Exerciseable at end of period
|
899,750 | |||||||
A summary of the status of the warrants outstanding as of September 30, 2015 is presented below:
|
September 30, 2015
|
||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||
|
Number of
|
Remaining
|
Exercise
|
Shares
|
Exercise
|
||||||||||||||
|
Warrants
|
Life ( In Years)
|
Price
|
Exerciseable
|
Price
|
||||||||||||||
| 876,078 | 3.31 | $ | 2.50 | 876,078 | $ | 2.50 | ||||||||||||
| 3,334 | 1.13 | 19.50-22.50 | 3,334 | 19.50-22.50 | ||||||||||||||
| 20,338 | 1.83 | 30.00 | 20,338 | 30.00 | ||||||||||||||
| 899,750 | 2.94 | $ | 3.18 | 899,750 | $ | 3.18 | ||||||||||||
The significant weighted average assumptions relating to the valuation of the Company’s warrants for the year ended September 30, 2015 were as follows:
|
Dividend yield
|
0%
|
|
Expected life
|
3
|
|
Expected volatility
|
90%
|
|
Risk free interest rate
|
0.7%
|
At September 30, 2015, vested warrants totaling 876,078 shares had an aggregate intrinsic value of $2,715,842.
|
15.
|
STOCK OPTIONS
|
Description of Stock Option Plan
On April 29, 2011, the Company’s 2011 Stock Incentive Plan was approved at the Annual Stockholder Meeting. The Company was authorized to issue options for, and has reserved for issuance, up to 46,667 shares of common stock under the 2011 Stock Incentive Plan. On March 21, 2013, an amendment to the Stock Option Plan was approved by the stockholders of the Company, increasing the number of shares reserved for issuance under the Plan to 93,333 shares.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjusts share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
F-22
Stock Option Activity
The Company had the following stock option transactions during the year ended September 30, 2015:
During the year ended September 30, 2015, twelve employees and directors, forfeited stock option grants for 41,621 shares of common stock at $18.29 per share.
On January 23, 2015, three employees were issued performance grants for 11,335 shares of common stock at $15.00 per share. The grants were issued in accordance with the 2011 Stock Incentive Plan, vest quarterly over three years after being earned and expire January 22, 2020. As of September 30, 2015, none of the stock option grants were earned.
The Company had the following stock option transactions during the year ended September 30, 2014:
During the year ended September 30, 2015, two employees of TransTech, forfeited stock option grants for 200 shares of common stock at $31.50 per share.
On April 2, 2014, the Company issued stock option grants to two employees totaling 2,633 shares at $15.00 per share. The grants vest quarterly over three years and expire on April 1, 2019.
There are currently 57,407 options to purchase common stock at an average exercise price of $18.435 per share outstanding as of September 30, 2015 under the 2011 Stock Incentive Plan. The Company recorded $65,463 and $87,550 of compensation expense, net of related tax effects, relative to stock options for the years ended September 30, 2015 and 2014 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.058) and ($.079) per share, respectively. At September 30, 2015, there is approximately $185,211 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 4.24 years.
Stock option activity for the year ended September 30, 2015 and 2014 was as follows:
| Weighted Average | ||||||||||||
|
Options
|
Exercise Price
|
$ | ||||||||||
|
Outstanding as of September 30, 2013
|
84,900 | 18.954 | 1,609,200 | |||||||||
|
Granted
|
2,633 | 15.000 | 39,500 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Forfeitures
|
(200 | ) | (32.500 | ) | (6,500 | ) | ||||||
|
Outstanding as of September 30, 2014
|
87,333 | 18.804 | 1,642,200 | |||||||||
|
Granted
|
11,335 | 15.000 | 170,025 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Forfeitures
|
(41,261 | ) | (18.286 | ) | (754,500 | ) | ||||||
|
Outstanding as of September 30, 2015
|
57,407 | $ | 18.425 | $ | 1,057,725 | |||||||
The following table summarizes information about stock options outstanding and exercisable at September 30, 2015:
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||
|
Range of
|
Number
|
Remaining Life
|
Exercise Price
|
Number
|
Exercise Price
|
|||||||||||||||||
|
Exercise Prices
|
Outstanding
|
In Years
|
Exerciseable
|
Exerciseable
|
Exerciseable
|
|||||||||||||||||
| 13.500 | 3,334 | 2.38 | $ | 13.50 | 3,334 | $ | 13.50 | |||||||||||||||
| 15.000 | 20,970 | 3.83 | 15.00 | 6,837 | 15.00 | |||||||||||||||||
| 19.500 | 19,002 | 4.50 | 19.50 | 19,002 | 19.50 | |||||||||||||||||
| 22.500 | 13,334 | 4.63 | 22.50 | 13,334 | 22.50 | |||||||||||||||||
| 36.000 | 767 | - | 36.00 | 934 | 36.00 | |||||||||||||||||
| 57,407 | 4.24 | $ | 18.43 | 43,441 | $ | 20.35 | ||||||||||||||||
There is no aggregate intrinsic value of the exercisable options as of September 30, 2015.
F-23
|
16.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Note 13 for Notes Payable to Ronald P. Erickson, our Chief Executive Officer Chief and/or entities in which Mr. Erickson has a beneficial interest.
The Company a $199,935 Business Loan Agreement with Umpqua Bank (the “Umpqua Loan”), which currently matures on December 31, 2015 and provides for interest at 3.25% per year. Related to the Umpqua Loan, the Company entered into a demand promissory note for $200,000 on January 10, 2014 with an entity with which Ronald P. Erickson, our Chief Executive Officer, is affiliated. This demand promissory note will be effective in case of a default by us under the Umpqua Loan.
The Company have two other demand promissory notes payable to entities affiliated with Mr. Erickson, totaling $600,000. Each of these notes were issued between January and July 2014, provide for interest of 3% per year and now mature on December 31, 2015. They also provide for a second lien on our assets if not repaid by December 31, 2015 or converted into convertible debentures or equity on terms acceptable to the Mr. Erickson. Mr. Erickson and/or entities with which he is affiliated also have advanced $708,500 and have unreimbursed expenses and compensation of approximately $344,221. The Company Mr. Erickson, or entities with which he is affiliated, $1,652,721 as of September 30, 2015.
|
17.
|
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
|
Legal Proceedings
The Company may from time to time become a party to various legal proceedings arising in the ordinary course of our business. The Company is currently not a party to any pending legal proceeding that is not ordinary routine litigation incidental to our business.
Properties and Operating Leases
The Company is obligated under various non-cancelable operating leases for its various facilities and certain equipment.
Corporate Offices
The Company’s executive office is located at 500 Union Street, Suite 420, Seattle, Washington, USA, 98101. The Company leases 2,244 square feet and its net monthly payment is $2,535. The Company leases this office on a month to month basis.
TransTech Facilities
TransTech is located at 12142 NE Sky Lane, Suite 130, Aurora, OR 97002. TransTech leases a total of approximately 9,750 square feet of office and warehouse space for its administrative offices, product inventory and shipping operations. In March 2011, the lease was extended for a five year term at a monthly rental of $4,751. There are two additional five year renewals available with a set accelerating increase of 10% per 5 year term.
The aggregate future minimum lease payments under operating leases as of June 30, 2015 were $26,330.
|
18.
|
INCOME TAXES
|
The Company has incurred losses since inception, which have generated net operating loss carryforwards. The net operating loss carryforwards arise from United States sources.
Pretax losses arising from United States operations were approximately $773,000 for the year ended September 30, 2015.
Pretax losses arising from United States operations were approximately $835,000 for the year ended September 30, 2014.
The Company has net operating loss carryforwards of approximately $18,901,000, which expire in 2020-2033. Because it is not more likely than not that sufficient tax earnings will be generated to utilize the net operating loss carryforwards, a corresponding valuation allowance of approximately $6,426,000 was established as of September 30, 2015. Additionally, under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating losses may be limited in certain circumstances, including a change in control. The Company is subject to possible tax examination for the years 2011 through 2015.
Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no assurance that the Company will be able to utilize any net operating loss carryforwards in the future.
F-24
For the year ended September 30, 2015, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses and warrants issued for services.
The principal components of the Company’s deferred tax assets at September 30, 2015 are as follows:
|
2015
|
2014
|
|||||||
|
U.S. operations loss carry forward at statutory rate of 34%
|
$ | (6,426,360 | ) | $ | (6,163,645 | ) | ||
|
Non-U.S. operations loss carry forward at statutory rate of 20.5%
|
0 | 0 | ||||||
|
Total
|
(6,426,360 | ) | (6,163,645 | ) | ||||
|
Less Valuation Allowance
|
6,426,360 | 6,163,645 | ||||||
|
Net Deferred Tax Assets
|
- | - | ||||||
|
Change in Valuation allowance
|
$ | 6,426,360 | $ | 6,163,645 | ||||
A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the period ended September 30, 2015 and 2014 is as follows:
|
2015
|
2014
|
|||||||
|
Federal Statutory Rate
|
-34.0 | % | -34.0 | % | ||||
|
Increase in Income Taxes Resulting from:
|
||||||||
|
Change in Valuation allowance
|
34.0 | % | 34.0 | % | ||||
|
Effective Tax Rate
|
0.0 | % | 0.0 | % | ||||
|
19.
|
SUBSEQUENT EVENTS
|
The Company evaluated subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements were issued.
As of November 3, 2015, the Company received commitments from debtors to convert $1,000,000 into common stock of the Company as part of the Company’s proposed listing on The NASDAQ Capital Market. These conversions are expected to increase stockholder’s equity by $1,000,000.
The Company entered into convertible notes payable with accredited investors during September 2015 and October 2015 totaling $255,000 to fund short-term working capital. Notes payable accrue interest at a rate of 8% per annum and becomes due during September and October 2016 and are convertible into common stock as part of the Company’s next financing.
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Visualant, Inc. (the "Registrant") has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
VISUALANT, INC.
|
||
|
Date: November 4, 2015
|
By:
|
/s/ Ronald P. Erickson
|
|
Ronald P. Erickson
|
||
|
Chief Executive Officer, President and Director
(Principal Executive Officer)
|
||
|
By:
|
/s/ Mark E. Scott
|
|
|
Mark Scott
|
||
|
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
|
SIGNATURES
|
TITLE
|
DATE
|
|
/s/ Ronald P. Erickson
|
Chief Executive Officer, President and Director
|
November 4, 2015
|
|
Ronald P. Erickson
|
(Principal Executive Officer)
|
|
|
/s/ Mark E. Scott
|
Chief Financial Officer and Secretary
|
November 4, 2015
|
|
Mark Scott
|
(Principal Financial/Accounting Officer)
|
|
|
/s/ Jon Pepper
|
Independent Director
|
November 4, 2015
|
|
Jon Pepper
|
||
|
/s/ Ichiro Takesako
|
Management Director
|
November 4, 2015
|
|
Ichiro Takesako
|
||
50