10-K: Annual report pursuant to Section 13 and 15(d)
Published on January 13, 2017
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended September 30, 2016
☐ 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)
Nevada
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90-0273142
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(State or other jurisdiction of incorporation
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(I.R.S. Employer
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or organization)
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Identification No.)
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500 Union Street, Suite 420
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Seattle, Washington
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98101
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(Address of principal executive offices)
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(Zip Code)
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Issuer's telephone number, including area code
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206-903-1351
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Securities registered pursuant to Section 12 (b) of the Exchange
Act:
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Common
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OTCQB
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(Title of each class)
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(Name of each exchange on which registered)
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Securities registered pursuant to Section 12 (g) of the Exchange
Act:
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None
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(Title of Class)
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. ☐ Yes ☒ 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. ☐ Yes ☒ 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. ☒ Yes ☐ 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). ☒ Yes ☐ 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. ☒
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
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☐
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Smaller reporting company
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☒
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). ☐ Yes ☒ No
As of March 31, 2016 (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 $6,469,953.
As of January 13, 2017, the Company had 3,570,010 shares of common
stock outstanding.
2
TABLE OF
CONTENTS
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Page
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PART 1
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ITEM 1.
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Description of Business
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4
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ITEM 1A.
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Risk Factors
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12
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ITEM 1B
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Unresolved Staff Comments
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21
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ITEM 2.
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Properties
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21
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ITEM 3.
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Legal Proceedings
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21
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ITEM 4.
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Mine Safety Disclosures
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21
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PART
II
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ITEM 5.
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Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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22
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ITEM 6.
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Selected Financial Data
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26
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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26
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ITEM 7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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30
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ITEM 8.
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Financial Statements and Supplementary Data
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30
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ITEM 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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30
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ITEM 9A.
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Controls and Procedures
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30
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ITEM 9B.
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Other Information
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31
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PART
III
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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32
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ITEM 11.
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Executive Compensation
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34
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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39
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ITEM 13.
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Certain Relationships and Related Transactions, and Director
Independence
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40
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ITEM 14.
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Principal Accounting Fees and Services
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43
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PART
IV
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ITEM 15.
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Exhibits, Financial Statement Schedules
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44
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SIGNATURES
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49
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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 January 13, 2017, we had 3,570,010 shares of common stock
issued and outstanding, held by 54 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 January 13, 2017, there were options outstanding for the
purchase of 50,908 shares of common stock and warrants for the
purchase of 4,494,080 shares of common stock. In addition,
2,184,048 shares of our common stock are issuable upon the
conversion of Preferred Stock, up to 270,439 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 $490,000 in convertible promissory
notes, all of which could potentially dilute future earnings per
share.
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 ten
patents. We also have 20 patents pending. We possess all right,
title and interest to the issued patents. Ten of the pending
patents are licensed exclusively to us in perpetuity by 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 ten patents. We currently have 20
patents pending. We possess all right, title and interest to the
issued patents. Ten of the pending patents are licensed exclusively
to us in perpetuity by our strategic partner, 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. In May of 2016,
Intellectual Ventures was spun out IDMC into an independent company
called Xinova. The relationship remains intact. 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
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Identification
of liquids for counterfeits or contaminants
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Detecting
adulterants in food and food products compromising its
quality
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Color
grading of diamonds
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Identifying
real cosmetics versus counterfeit cosmetics
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Identifying
counterfeit medications versus real medications
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Identifying
regular flour versus gluten free flour
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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
next planned product should be an exemplar product is a prototype
that will be produced to address several markets. The primary
purpose of this prototype will be to demonstrate the technology to
prospective business partners, and will consist of a small, hand
held, battery powered, Bluetooth enabled scanning device. The
scanner should wirelessly connect to a smart phone or tablet to
transfer the scanned data. The smart phone application will include
two or three industry specific but generic applications that allow
for the demonstration of the scanning and matching of the ChromaID
signatures. The applications will focus on drug identification,
food safety and liquid detection. The
prototype device will lend itself to consumer applications and can
be a consumer product as well.
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.
6
Software Development
Toolkit. A collection of
software applications, API (an abbreviation of application program
interface – a set of routines, protocols, and tools for
building software applications) definitions and file descriptions
that allow a customer to extract the raw data from the ChromaID
signatures and run their own software routines against that raw
data.
The ChromaID Lab Kit allows customers to experiment with and
evaluate the ChromaID technology and determine if it is appropriate
for their specific applications. The primary electronic and optical
parts of the ChromaID scanner, called the “scan head,”
could be supplied to customers to integrate into their own
products. A set of ChromaID Developer Tools are also available.
These allow customers to develop their own applications and
products based on the ChromaID technology.
ChromaID signatures must be stored, managed, and readily accessible
for comparison, matching and authentication purposes. The database
can be owned and operated by the end customer, but in the case of
thousands of ChromaID signatures, database management may be
outsourced to us or a third party provider. These database services
could be made available on a per-access transaction basis or on a
monthly or annual subscription basis. The actual storage location
of the database can be cloud-based, on a stand-alone scanning
device or on a mobile device via a Bluetooth connection depending
on the requirements of access, size of the database and security as
defined by the customer. As a result, large databases can be
accessed by cell phone or other mobile technologies using either
local storage or cloud based storage.
Based on the commercialization plans outlined above, our business
model anticipates deriving revenue from several
sources:
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Sales
of the ChromaID Lab Kit and ChromaID Liquid Lab Kit
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Non
Recurring Engineering (NRE) fees to assist customers with scan
integration into their products
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Licensing
of the ChromaID technology
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Royalties
per unit generated from the sales of scan heads
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Multi-unit
sales of the above referenced exemplar product for as yet to be
determined consumer product applications
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Per
click transaction revenue from accessing the unique ChromaID
signatures
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Developing
custom product applications for customers
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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. As an
example, in March 2016 we entered into a Collaboration
Agreement and License with Intellicheck Mobilisa. The agreement
provides Intellicheck with exclusive rights to our ChromaID
technology in the areas of homeland security, law enforcement and
crime prevention.
There is no requirement for FDA or other government approval for
the current applications of our ChromaID technology. Over time, as
we explore the application of our ChromaID technology for medical
diagnostics and other applications, we expect that there will be
requirements for FDA and other government approvals before
applications using the technology in medical and other regulated
fields can enter the marketplace.
Research and Development
Our research and development efforts are primarily focused
improving the core foundational ChromaID technology and developing
new and unique applications for the technology. As part of this
effort, we typically conduct testing to ensure that ChromaID
application methods are compatible with the customer’s
requirements, and that they can be implemented in a cost effective
manner. We are also actively involved in identifying new
application methods. Our team has considerable experience working
with the application of light-based technologies and their
application to various industries. We believe that its continued
development of new and enhanced technologies relating to our core
business is essential to our future success. We spent $325,803 and
$362,661 during the years ended September 30, 2016 and 2015,
respectively, on development activities. Our 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 ten patents, 20 patent applications, and two
registered trademarks, and our trade secrets, copyrights and other
intellectual property rights are important assets for us. Our
patents will expire at various times between 2027 and 2033. The
duration of our trademark registrations varies from country to
country. However, trademarks are generally valid and may be renewed
indefinitely as long as they are in use and/or their registrations
are properly maintained.
7
The patents that have been granted to Visualant
include:
On August 9, 2011, we were issued US Patent No. 7,996,173 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy,” by the United States Office of Patents and
Trademarks. The patent expires August 24, 2029.
On December 13, 2011, we were issued US Patent No. 8,076,630 B2
entitled “System and Method of Evaluating an Object Using
Electromagnetic Energy” by the United States Office of
Patents and Trademarks. The patent expires November 7,
2028.
On December 20, 2011, we were issued US Patent No. 8,081,304 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires
July 28, 2030.
On October 9, 2012, we were issued US Patent No. 8,285,510 B2
entitled “Method, Apparatus, and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires July 31, 2027.
On February 5, 2013, we were issued US Patent No. 8,368,878 B2
entitled “Method, Apparatus and Article to Facilitate
Evaluation of Objects Using Electromagnetic Energy by the United
States Office of Patents and Trademarks. The patent expires July
31, 2027.
On November 12, 2013, we were issued US Patent No. 8,583,394 B2
entitled “Method, Apparatus and Article to Facilitate
Distributed Evaluation of Objects Using Electromagnetic Energy by
the United States Office of Patents and Trademarks. The patent
expires July 31, 2027.
On
November 21, 2014, we were issued US Patent No. 8,888,207 B2
entitled “Systems, Methods, and Articles Related to
Machine-Readable Indicia and Symbols” by the United States
Office of Patents and Trademarks. The
patent expires February 7, 2033.
On
March 23, 2015, we were issued US Patent No. 8,988,666 B2 entitled
“Method, Apparatus, and Article to Facilitate Evaluation of
Objects Using Electromagnetic Energy” by the United States
Office of Patents and Trademarks. The
patent expires July 31, 2027.
On May
26, 2015, we were patent US Patent No. 9,041,920 B2 entitled
“Device for Evaluation of Fluids using Electromagnetic
Energy” by the United States Office of Patents and
Trademarks. The patent expires March
12, 2033.
On
April 19, 2016, we were issued patent US Patent No. 9,316,581 B2
entitled “Method, Apparatus, and Article to Facilitate
Evaluation of Substances Using Electromagnetic Energy” by the
United States Office of Patents and Trademarks. The patent expires March 12,
2033.
We pursue 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. In May of
2016, Intellectual Ventures was spun out IDMC into an independent
company called Xinova. The relationship
remains intact.
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).
8
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 $0.70
per share and expires November 10, 2018. The per share price is
subject to adjustment based on any issuances below
$0.70
per share except as described in the warrant.
We agreed to pay 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.
9
We also entered into a License Agreement with Sumitomo in May 2012,
under which Sumitomo paid the Company an initial payment of $1
million. The License Agreement granted Sumitomo an exclusive
license for the then extant ChromaID technology. The territories
covered by this license include Japan, China, Taiwan, Korea and the
entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia,
Laos, Vietnam, Singapore and the Philippines). The Sumitomo License
fee was recorded as revenue over the life the Joint Research and
Product Development Agreement and was fully recorded as of May 31,
2013. On May 21, 2015, we entered into an amendment to the License
Agreement, which, effective as of June 18, 2014, eliminated the
Sumitomo exclusivity and provides that if we sell products in
certain territories – Japan, China, Taiwan, Korea and the
entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia,
Laos, Vietnam, Singapore and the Philippines) – the Company
will pay Sumitomo a royalty rate of 2% of net sales (excluding
non-recurring engineering revenues) over the remaining term of the
five-year License Agreement (through May 2017).
Potential Markets and Customers
Our plan is to develop markets and customers who have a need to
authenticate, detect, identify, verify or diagnose materials or
substances which may include, but are not limited to, commercial
paint manufacturers, pharmaceutical equipment manufacturers,
process control companies, water purification and quality
companies, currency paper and ink manufacturers, security card
manufacturers, cosmetic companies and food processing
companies.
Market opportunities include identification, detection, or
diagnosis of:
●
Pharmaceuticals
– pill counting and verification
●
Food
safety – testing for contaminants and quality
●
Gemstones
– diamond color grading
●
Liquid
analysis – water purity
●
Law
enforcement - illicit drug identification for law enforcement
applications
●
Paint
– color matching
●
ID
badges – counterfeit ID detection
●
Secure
packaging - Container seals and packaging materials with invisible
markings
●
Cosmetics
– matching skin tones to correct products
●
Documents
and Currency– detect counterfeit paper and inks
●
Medical
- Noninvasive skin analysis for discovery of diseases or medical
conditions
Our Strategy
To date, the substantial portion of our non-TransTech revenue has
been generated from the development license with Sumitomo Precision
Products and sales of our ChromaID Lab Kits. We expect to continue
to grow revenues from sales of our Lab Kits, non-recurring
engineering fees, licenses, per unit royalties and subscriptions,
as well as “per click” revenues. Key aspects of our
strategy include:
Customize and Refine our Solutions to Meet Potential
Customers’ Needs
We are continuously improving and expanding our potential product
offerings by testing the incorporation of our technologies into
different media, such as the new ChromaID Liquid Lab Kit that is in
the prototype stage. Each vertical market has specific requirements
for their potential product application that will involve
determining the range of LEDs and photodiodes that will provide
optimum performance and the associated form factor required for
their product. Our goal is to develop a cost-effective scanning
system for each potential industry and customer that can be
incorporated into that potential customer’s products that
they will then take to market.
Continue to Expand Applications for ChromaID
Technology
While we have basic proof of concepts for applications in several
large markets to date, we plan to continue our ongoing effort to
expand proof-of-concept testing in other vertical markets that have
yet to be tested. We have also identified and are further examining
opportunities to collaborate with companies and universities to
develop new applications for the ChromaID technology. We believe
the strength of our solutions is based on the unique and
proprietary ChromaID signature that is created from every
scan.
Target Potential High-Volume Markets
We will continue to focus our efforts on target vertical markets
that are characterized by a high level of vulnerability to
counterfeiting, product tampering, piracy, fraud, identity theft,
contamination and adulteration. We believe the ChromaID technology
can be a lower cost, real time, flexible form factor solution in
the following areas: access control, quality and process control,
food safety, water quality, law enforcement support,
standardization and medical diagnostics. Our current target markets
include pharmaceuticals, food quality and safety, gemstone grading,
water purity, law enforcement, paint color matching, identity
cards, chemical identification, cosmetics, currency, process
control and healthcare. If and when we have significantly
penetrated these markets, we intend to expand into additional
related high volume markets.
10
Pursue Strategic Acquisitions and Alliances
We intend to pursue strategic acquisitions of companies and
technologies that strengthen and complement our core technologies,
improve our competitive positioning, allow us to penetrate new
markets, and grow our customer base. We also intend to work in
collaboration with potential strategic partners in order to
continue to market and sell new product lines derived from, but not
limited to, ChromaID technology.
Target Additional Markets
In fourth fiscal quarter of 2014, we began introducing our
technology and services in Europe, the United States and Asia.
Several potential customers are currently analyzing our technology.
At the present time, we are focusing our efforts on the
pharmaceutical industry, the food safety industry, law enforcement
and homeland security. In the future, we plan to expand our focus
to include identification cards and other secure documents,
industrial materials, agrochemicals, pharmaceuticals, consumer
products, cosmetics, currency and medical diagnostics.
Industry Background
Visualant’s
ChromaID is a part of the broad industry built upon photonics or
light-based technology. Photonics science includes the generation,
emission, transmission, modulation, signal processing, switching,
amplification, and detection/sensing of light. Though covering all
light's technical applications over the whole spectrum, most
photonic applications are in the range of visible and near-infrared
light. The term photonics developed as an outgrowth of the first
practical semiconductor light emitters invented in the early 1960s
and optical fibers developed in the 1970s.
Photonics
came into common use in the 1980s as fiber-optic data transmission
was adopted by telecommunications network operators. At that time,
the term was used widely at Bell Laboratories. Its use was
confirmed when the IEEE Lasers and Electro-Optics Society
established an archival journal named Photonics Technology Letters
at the end of the 1980s.
Photonics
covers a huge range of science and technology applications,
including laser manufacturing, biological and chemical sensing,
medical diagnostics and therapy, display technology, and optical
computing.
Applications
of photonics includes all areas from everyday life to the most
advanced science, e.g. light detection, telecommunications,
information processing, lighting, metrology, spectroscopy,
holography, medicine (surgery, vision correction, endoscopy, health
monitoring), military technology, laser material processing, visual
art, biophotonics, agriculture and robotics.
The
world photonics market, according to the World Photonics Report of 2013 was a
$350 billion market and will grow to a $650 billion market by
2020.
Our
business model is focused on the use of structured light - a
disruptive conceptual breakthrough in photonics. Light-emitting
diodes (LEDs) shine a single wavelength of pulsed light in
increasing steps of intensity onto a subject. Photodiodes capture
the light that is returned via reflection or re emission of that
light. The photodiode produces an analog signal that is then
converted into a 24 bit digital data point for each pulse of light.
A typical scan is comprised of hundreds of pulses of light across a
number of specific frequency LED’s creating a unique ChromaID
signature for the subject being scanned. In a typical application a
“reference” or “master” ChromaID signature
is captured and stored in a database for that specific subject.
When an unknown substance is scanned to produce its own ChromaID
signature, (the “discovery scan”), the unknown
substance’s ChromaID signature is compared to that of the
known (or “reference”) ChromaID signature. Algorithms
are used to compare the two sets of data and determine if the
“discovery” signature is the same as the
“reference” ChromaID signature. This accuracy threshold
can be adjusted from 51 % to 99.995 % accuracy based on the
requirements for each specific application of the ChromaID
technology. Historically, a number of the applications for ChromaID
technology were performed by spectrophotometers. The sales of
spectrophotometers by companies such as Ocean Optics, Perkin Elmer,
Fisher Thermo Scientific and Agilent are multibillion dollar
businesses. Spectrophotometers combine broad-spectrum light; a
diffraction grating to split it; and a linear array for graphical
presentation in software. They tend to be bulky, fragile, and
expensive; scanning and analysis are complex. We believe our
ChromaID technology uses lower cost components, provides more
accurate data, has a very flexible form factor and the information
it provides can be easily understood. The use of structured light
by our ChromaID technology provides a platform for the development
of a myriad of applications in the categories of identification,
authentication and diagnostics.
We
believe that the ChromaID technology is analogous to a smartphone,
upon which an enormous number of previously unforeseen applications
have been developed. The ChromaID technology may be considered an
enabling technology that brings the science of light and photonics
to low cost, real world commercialization opportunities across
multiple industries. ChromaID is a sensor technology which, with
its low cost, small form factor, and ease of connectivity can be an
enabling technology for the broad Internet of Things and integrated
into many aspects of everyday life providing useful information
relating health, life and safety. The technology is foundational
and as such, the basis upon which we believe a significant business
can be built.
11
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 January 13, 2017, we had twenty full-time employees. Our
senior management is located in the Seattle, Washington
office.
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.
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.
12
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 20 as of January 13, 2017 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.
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,
2016, we had an accumulated deficit of $27.1 million and net losses
in the amount of $1,746,000 and $2,631,000 for the years ended
September 30, 2016 and 2015, respectively. There can be no
assurance that we will achieve or maintain
profitability. If we achieve
profitability in the future, we may not be able to sustain
profitability in subsequent periods. Failure to become and remain
profitable would impair our ability to sustain operations and
adversely affect the price of our common stock and our ability to
raise capital. Our operating expenses may increase as we spend
resources on growing our business, and if our revenue does not
correspondingly increase, our operating results and financial
condition will suffer. Our
ChromaID business has produced 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
will not receive any of the proceeds from the sale of the common
stock by the selling stockholder.
We are currently operating at a loss. We believe that our cash on
hand will be sufficient to fund our operations through January 31,
2017. We need additional
financing to implement our business plan and to service our ongoing
operations, pay our current debts (described below) and maintain
ownership of our intellectual property. There can be no assurance
that we will be able to secure any needed funding, or that if such
funding is available, the terms or conditions would be acceptable
to us. If we are unable to obtain additional financing when it is
needed, we will need to restructure our operations and/or divest
all or a portion of our business.
We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back or eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected.
If our development and license agreement with Intellicheck is
terminated for any reason it may have a material adverse effect on
our business strategy and our results of operations may
suffer.
In March 2016, we entered into a Collaboration Agreement and
License with Intellicheck Mobilisa, Inc. that provides Intellicheck
exclusive rights to our ChromaID technology for threat assessment
and document verification in the areas of homeland security, law
enforcement and crime prevention.
We are working with Intellicheck to develop solutions for threat
assessment and document verification solutions for markets in the
United States and abroad. Documents that can potentially be
verified include driver’s licenses, access control cards,
commercial instruments, currency, birth certificates and other
so-called “breeder” documents which can allow the
holder to obtain a passport and various other
documents.
Failure to operate in accordance with the Intellicheck agreement,
or an early termination or cancellation of this agreement for any
reason, would have a material adverse effect on our ability to
execute our business strategy and our results of operations
and financial condition may
be materially adversely affected.
13
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. In May of 2016, Intellectual Ventures was
spun out IDMC into an independent company called Xinova.
The
relationship remains intact.
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.
Because of our recurring losses and negative cash flows from
operations, the audit report of our independent registered public
accountants on our consolidated financial statements for the year
ended September 30, 2016 contains an explanatory paragraph stating
that there is substantial doubt about our ability to continue as a
going concern. Factors identified in the report include our
historical net losses, negative working capital, and the need for
additional financing to implement our business plan and service our
debt repayments. If we are not able to attain profitability in the
near future our financial condition could deteriorate further,
which would have a material adverse impact on our business and
prospects and result in a significant or complete loss of your
investment. Further, we may be unable to pay our debt obligations
as they become due, which include obligations to secured
creditors. If we are unable to
continue as a going concern, we might have to liquidate our assets
and the values we receive for our assets in liquidation or
dissolution could be significantly lower than the values reflected
in our financial statements. Additionally, we are
subject to customary operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends,
redeem stock, make specified investments and engage in merger,
consolidation or asset sale transactions, among other restrictions.
In addition, the inclusion of an explanatory paragraph regarding
substantial doubt about our ability to continue as a going concern
and our lack of cash resources may materially adversely affect our
share price and our ability to raise new capital or to enter into
critical contractual relations with third
parties.
As of September 30, 2016, we have obligations to repay
approximately $2,631,640 in various loans in the near future, and
if we do not satisfy these obligations, the lenders may have the
right to demand payment in full or exercise other
remedies.
We have a $199,935 Business Loan Agreement with Umpqua Bank (the
“Umpqua Loan”), which matures on December 31, 2017 and
provides for interest at 3.25% per year. Related to this
Umpqua Loan, we entered into a demand promissory note for $200,000
on January 10, 2014 with an entity affiliated with Ronald P.
Erickson, our Chief Executive Officer. This demand promissory note
will be effective in case of a default by the Company under the
Umpqua Loan. We recorded accrued
interest of $16,340 as of September 30, 2016.
We also have two other demand promissory notes payable to entities
affiliated with Mr. Erickson, totaling $600,000. Each of these
notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. We recorded accrued
interest of $40,167 as of September 30, 2016.
Mr. Erickson and/or entities with which he is affiliated also have
advanced $521,833 and have unreimbursed expenses and compensation
of approximately $424,872. We owe Mr. Erickson, or entities with
which he is affiliated, $1,546,705 as of September 30,
2016.
14
On September 30, 2016, we entered into a $175,000 Convertible
Promissory Note with Clayton A. Struve, an accredited investor and
affiliate of the Company, to fund short-term working capital. The
Convertible Promissory Note accrues interest at a rate of 10% per
annum and becomes due on March 30, 2017. The Note holder can
convert to common stock at $0.70 per share. We recorded a
beneficial conversion feature of $10,500 and expensed an additional
$24,500 related to the convertible note.
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, 2016, our
management identified material weaknesses in our internal control
over financial reporting. If these weaknesses continue, investors
could lose confidence in the accuracy and completeness of our
financial reports and other disclosures.
In addition, our management has concluded that our disclosure
controls and procedures were not effective due to the lack of an
audit committee “financial expert.” These material
weaknesses, if not remediated, create an increased risk of
misstatement of the Company’s financial results, which, if
material, may require future restatement thereof. A failure to
implement improved internal controls, or difficulties encountered
in their implementation or execution, could cause future delays in
our reporting obligations and could have a negative effect on us
and the trading price of our common stock.
If 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.
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.
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We have limited insurance which may not cover claims by third
parties against us or our officers and directors.
We have limited directors’ and officers’ liability
insurance and commercial liability insurance policies. Claims by
third parties against us may exceed policy amounts and we may not
have amounts to cover these claims. Any significant claims would
have a material adverse effect on our business, financial condition
and results of operations. In addition, our limited
directors’ and officers’ liability insurance may affect
our ability to attract and retain directors and
officers.
Our inability to effectively protect our intellectual property
would adversely affect our ability to compete effectively, our
revenue, our financial condition and our results of
operations.
We rely on a combination of patent, trademark, and trade secret
laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. Obtaining and
maintaining a strong patent position is important to our business.
Patent law relating to the scope of claims in the technology fields
in which we operate is complex and uncertain, so we cannot be
assured that we will be able to obtain or maintain patent rights,
or that the patent rights we may obtain will be valuable, provide
an effective barrier to competitors or otherwise provide
competitive advantages. Others have filed, and in the future are
likely to file, patent applications that are similar or identical
to ours or those of our licensors. To determine the priority of
inventions, or demonstrate that we did not derive our invention
from another, we may have to participate in interference or
derivation proceedings in the USPTO or in court that could result
in substantial costs in legal fees and could substantially affect
the scope of our patent protection. We cannot be assured our patent
applications will prevail over those filed by others. Also, our
intellectual property rights may be subject to other challenges by
third parties. Patents we obtain could be challenged in litigation
or in administrative proceedings such as ex parte reexam, inter partes review,
or post grant review in the United States or opposition proceedings
in Europe or other jurisdictions.
There can be no assurance that:
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any of our existing patents will continue to be held valid, if
challenged;
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patents will be issued for any of our pending
applications;
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any claims allowed from existing or pending patents will have
sufficient scope or strength to protect us;
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our patents will be issued in the primary countries where our
products are sold in order to protect our rights
and potential commercial advantage; or
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any of our products or technologies will not infringe on the
patents of other companies.
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If we are enjoined from selling our products, or if we are required
to develop new technologies or pay significant monetary damages or
are required to make substantial royalty payments, our business and
results of operations would be harmed.
Obtaining
and maintaining a patent portfolio entails significant expense and
resources. Part of the expense includes periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or
inadvertently, our competitive position could suffer.
Legal
actions to enforce our patent rights can be expensive and may
involve the diversion of significant management time. In addition,
these legal actions could be unsuccessful and could also result in
the invalidation of our patents or a finding that they are
unenforceable. We may or may not choose to pursue litigation or
interferences against those that have infringed on our patents, or
used them without authorization, due to the associated expense and
time commitment of monitoring these activities. If we fail to
protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could
have a material adverse effect on our results of operations and
business.
Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing
and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of
non-infringing technology.
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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,
hemanages 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.
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:
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our
inability to recruit and retain adequate numbers of effective sales
and marketing personnel;
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the
lack of complementary products to be offered by sales personnel,
which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating an independent sales
and marketing organization.
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Government regulatory approval may be necessary before some of our
products can be sold and there is no assurance such approval will
be granted.
Although we do not need regulatory approval for our current
applications, our ChromaID technology may have a number of
potential applications in fields of use which will require prior
governmental regulatory approval before the technology can be
introduced to the marketplace. For example, we are exploring the
use of our ChromaID technology for certain medical diagnostic
applications. There is no assurance that we will be
successful in developing medical applications for our ChromaID
technology. If we were to be successful in developing medical
applications of our technology, prior approval by the FDA and other
governmental regulatory bodies may be required before the
technology could be introduced into the marketplace. There is
no assurance that such regulatory approval would be obtained for a
medical diagnostic or other applications requiring such
approval.
We may engage in
acquisitions, mergers, strategic alliances, joint ventures and
divestures that could result in final results that are different
than expected.
In the normal course of business, we engage in discussions relating
to possible acquisitions, equity investments, mergers, strategic
alliances, joint ventures and divestitures. Such transactions are
accompanied by a number of risks, including the use of significant
amounts of cash, potentially dilutive issuances of equity
securities, incurrence
of debt on potentially unfavorable terms as well as impairment
expenses related to goodwill and amortization expenses related to
other intangible assets, the possibility that we may pay too much
cash or issue too many of our shares as the purchase price for an
acquisition relative to the economic benefits that we ultimately
derive from such acquisition, and various potential difficulties
involved in integrating acquired businesses into our
operations.
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From time to time, we have also engaged in discussions with
candidates regarding the potential acquisitions of our product
lines, technologies and businesses. If a divestiture such as this
does occur, we cannot be certain that our business, operating
results and financial condition will not be materially and
adversely affected. A successful divestiture depends on various
factors, including our ability to effectively transfer liabilities,
contracts, facilities and employees to any purchaser; identify and
separate the intellectual property to be divested from the
intellectual property that we wish to retain; reduce fixed costs
previously associated with the divested assets or business; and
collect the proceeds from any divestitures.
If we do not realize the expected benefits of any acquisition or
divestiture transaction, our financial position, results of
operations, cash flows and stock price could be negatively
impacted.
Our growth strategy depends in part on our ability to execute
successful strategic acquisitions. We have made strategic
acquisitions in the past and may do so in the future, and if the
acquired companies do not perform as expected, this could adversely
affect our operating results, financial condition and existing
business.
We
may continue to expand our business through strategic acquisitions.
The success of any acquisition will depend on, among other
things:
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the
availability of suitable candidates;
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higher
than anticipated acquisition costs and expenses;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate
favorable terms for those acquisitions;
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the
availability of funds to finance acquisitions and obtaining any
consents necessary under our credit facility;
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the
ability to establish new informational, operational and financial
systems to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services; and
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the
availability of management resources to oversee the integration and
operation of the acquired businesses.
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We
may not be successful in effectively integrating acquired
businesses and completing acquisitions in the future. We also may
incur substantial expenses and devote significant management time
and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do
not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the
same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely
affected.
We are subject to corporate governance and internal control
requirements, and our costs related to compliance with, or our
failure to comply with existing and future requirements could
adversely affect our business.
We must comply with corporate governance requirements under the
Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street
Reform and Consumer Protection Act of 2010, as well as additional
rules and regulations currently in place and that may be
subsequently adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules, and regulations continue to
evolve and may become increasingly stringent in the future. The
financial cost of compliance with these laws, rules, and
regulations is expected to remain substantial.
Our management has concluded that our disclosure controls and
procedures were not effective due to the lack of an audit committee
“financial expert.” We expect to appoint an additional
independent director to serve as Audit Committee Chairman. This
director will be an “audit committee financial expert”
as defined by the SEC. However, we cannot assure you that we will
be able to fully comply with these laws, rules, and regulations
that address corporate governance, internal control reporting, and
similar matters in the future. Failure to comply with these laws,
rules and regulations could materially adversely affect our
reputation, financial condition, and the value of our
securities.
The Capital
Source credit facility contains
covenants that may limit our flexibility in operating our business
and failure to comply with any of these covenants could have a
material adverse effect on our business.
In December 8, 2009, we entered into the Capital Source credit
facility. These Capital Source credit facility contains covenants
that limit our ability to engage in specified types of
transactions. These covenants limit our ability to, among other
things:
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sell,
transfer, lease or dispose of certain assets;
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engage
in certain mergers and consolidations;
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incur
debt or encumber or permit liens on certain assets, except in the
limited circumstances permitted under the loan and security
agreements;
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make
certain restricted payments, including paying dividends on, or
repurchasing or making distributions with respect to, our common
stock; and
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enter
into certain transactions with affiliates.
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A breach of any of the covenants under the Capital Source credit
facility could result in a default under the Capital Source credit
facility. Upon the occurrence of an event of default under the
Capital Source credit facility, the lenders could elect to declare
all amounts outstanding to be immediately due and payable and
terminate all commitments to extend further credit. If we are
unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure such
indebtedness.
The exercise prices of certain warrants and the Series A and C
Preferred Shares may require further adjustment.
In the
future, if we sell our common stock at a price below $0.70 per
share, the exercise prices of certain warrants and Series A and
Series C Preferred Shares may require further adjustment from
$0.70 per share.
Risks Relating to Our Stock
The price of our
common stock is volatile, which may cause investment losses for our
stockholders.
The market price of our common stock has been and is likely in the
future to be volatile. Our common stock price may fluctuate in
response to factors such as:
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Announcements by us regarding liquidity, significant acquisitions,
equity investments and divestitures,
strategic relationships, addition or loss of significant customers
and contracts, capital expenditure
commitments and litigation;
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Issuance of convertible or equity securities and related warrants
for general or merger and acquisition purposes;
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Issuance or repayment of debt, accounts payable or convertible debt
for general or merger and acquisition
purposes;
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Sale of a significant number of shares of our common stock by
stockholders;
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General market and economic conditions;
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Quarterly variations in our operating results;
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Investor and public relation activities;
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Announcements of technological innovations;
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New product introductions by us or our competitors;
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Competitive activities; and
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Additions or departures of key personnel.
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These broad market and industry factors may have a material adverse
effect on the market price of our common stock, regardless of our
actual operating performance. These factors could have a material
adverse effect on our business, financial condition and results of
operations.
Transfers of our securities may be restricted by virtue of state
securities “blue sky” laws, which prohibit trading
absent compliance with individual state laws. These restrictions
may make it difficult or impossible to sell shares in those
states.
Transfers of our common stock may be restricted under the
securities or securities regulations laws promulgated by various
states and foreign jurisdictions, commonly referred to as "blue
sky" laws. Absent compliance with such individual state laws, our
common stock may not be traded in such jurisdictions. Because the
securities held by many of our stockholders have not been
registered for resale 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.
Two
individual investors could have significant influence over matters
submitted to stockholders for approval.
As of September 30, 2016, two individuals in the aggregate,
assuming the exercise of all warrants to purchase common stock,
hold shares representing approximately 80% of our common stock on a
fully-converted basis and could be considered a control group for
purposes of SEC rules. However, the agreement with one of these
individuals limits his ownership to 4.99% individually. Beneficial
ownership includes shares over which an individual or entity has
investment or voting power and includes shares that could be issued
upon the exercise of options and warrants within 60 days after the
date of determination. If these persons were to choose to act
together, they would be able to significantly influence all matters
submitted to our stockholders for approval, as well as our
officers, directors, management and affairs. For example, these
persons, if they choose to act together, could significantly
influence the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of us on terms that other stockholders may
desire.
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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
January 13, 2017, we had 3,570,010 shares of common stock issued
and outstanding, held by 54 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 January 13, 2017, there were options outstanding for the
purchase of 50,908 shares of common stock and warrants for the
purchase of 4,494,080 shares of common stock. In addition,
2,184,048 shares of our common stock are issuable upon the
conversion of Preferred Stock, up to 270,439 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 $490,000 in convertible promissory
notes, all of which could potentially dilute future earnings per
share.
Significant shares of common stock are held by our principal
stockholders, other company insiders and other large stockholders.
As “affiliates” of Visualant, as defined under
Securities and Exchange Commission Rule 144 under the Securities
Act of 1933, our principal stockholders, other of our insiders and
other large stockholders may only sell their shares of common stock
in the public market pursuant to an effective registration
statement or in compliance with Rule 144.
These options, warrants, convertible notes payable and convertible
preferred stock could result in further dilution to common stock
holders and may affect the market price of the common
stock.
Future issuance of additional shares of
common stock and/or preferred stock could dilute existing
stockholders. We have and may
issue preferred stock that could have rights that are preferential
to the rights of common stock that could discourage potentially
beneficially transactions to our common
stockholders.
Pursuant to our certificate of incorporation, we currently have
authorized 100,000,000 shares of common stock and 5,000,000 shares
of preferred stock. To the extent that common shares are available
for issuance, subject to compliance with applicable stock exchange
listing rules, our board of directors has the ability to issue
additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient.
The issuance of any additional securities could, among other
things, result in substantial dilution of the percentage ownership
of our stockholders at the time of issuance, result in substantial
dilution of our earnings per share and adversely affect the
prevailing market price for our common stock.
An issuance of additional shares of preferred stock could result in
a class of outstanding securities that would have preferences with
respect to voting rights and dividends and in liquidation over our
common stock and could, upon conversion or otherwise, have all of
the rights of our common stock. Our Board of Directors'
authority to issue preferred stock could discourage potential
takeover attempts or could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making
these attempts more difficult or costly to achieve. The
issuance of preferred stock could impair the voting, dividend and
liquidation rights of common stockholders without their
approval.
Future capital raises may dilute our existing stockholders’
ownership and/or have other adverse effects on our
operations.
If we
raise additional capital by issuing equity securities, our existing
stockholders’ percentage ownership will be reduced and these
stockholders may experience substantial dilution. We may also issue
equity securities that provide for rights, preferences and
privileges senior to those of our common stock. If we raise
additional funds by issuing debt securities, these debt securities
would have rights senior to those of our common stock and the terms
of the debt securities issued could impose significant restrictions
on our operations, including liens on our assets. If we raise
additional funds through collaborations and licensing arrangements,
we may be required to relinquish some rights to our technologies or
candidate products, or to grant licenses on terms that are not
favorable to us.
We do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
We have never declared or paid cash dividends on our capital stock.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business, and we do
not anticipate paying any cash dividends on our capital stock in
the foreseeable future. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions may limit the ability of another party to
acquire our company, which could cause our stock price to
decline.
Our certificate of incorporation, as amended, our bylaws and Nevada
law contain provisions that could discourage, delay or prevent a
third party from acquiring our company, even if doing so may be
beneficial to our stockholders. In addition, these provisions could
limit the price investors would be willing to pay in the future for
shares of our common stock.
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Our articles of incorporation allow for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock; our Series A Preferred Stock contains
provisions that restrict our ability to take certain actions
without the consent of at least 66% of the Series A Preferred Stock
then outstanding.
Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that
would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our Board
of Directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
In addition, our articles of incorporation restrict our ability to
take certain actions without the approval of at least 66% of the
Series A Preferred Stock then outstanding. These actions include,
among other things;
● authorizing, creating,
designating, establishing or issuing an increased number of shares
of Series A Preferred Stock or any other class or series of capital
stock ranking senior to or on a parity with the Series A Preferred
Stock;
● adopting a plan for the
liquidation, dissolution or winding up the affairs of our company
or any recapitalization plan (whether by merger, consolidation or
otherwise);
● amending, altering or
repealing, whether by merger, consolidation or otherwise, our
articles of incorporation or bylaws in a manner that would
adversely affect any right, preference, privilege or voting power
of the Series A Preferred Stock; and
● declaring or paying any
dividend (with certain exceptions) or directly or indirectly
purchase, redeem, repurchase or otherwise acquire any shares of our
capital stock, stock options or convertible securities (with
certain exceptions).
ITEM 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 1,014 square feet and our
net monthly payment is $2,535. We also lease 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. We lease this office on
a month to month basis at $6,942 per month.
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.
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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 had 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 4, 2016, the price of the Series A Preferred Stock was adjusted to
$0.70 per share
due to the issuance of common stock at that price.
On
March 8, 2016, we received approval from the State of Nevada for
the Correction to the Company’s Amended and Restated
Certificate of Designations, Preferences and Rights of its Series A
Convertible Preferred Stock. The Amended and Restated Certificate
filed July 21, 2015 changed the conversion price and the stated
value from $0.10 (pre reverse stock split) to $30.00 (post-reverse
stock split), and adding a provision adjusting the conversion price
upon the occurrence of certain events. On February 19, 2016, the
holders of Series A Convertible Preferred Stock entered into
Amendment 2 of Series A Preferred Stock Terms and increased the
number of Preferred Stock Shares to properly account for the
reverse stock split. We have 23,334 Series A Preferred Stock issued
and outstanding.
Series C Convertible Preferred Stock
On August 5, 2016, we closed a Series C Preferred Stock and Warrant
Purchase Agreement with an accredited investor for the purchase of
$1,250,000 of preferred stock with a conversion price of $0.70 per
share. The preferred has a yield of 8% and an ownership blocker of
4.99%. In addition, the investor received 100% warrant coverage
with five year warrants having a strike price of $0.70. Both the
Series C and warrants were included in a registration statement
filed by us.
On
August 11, 2016, we applied with the State of Nevada for the
approval of the Certificate of Designations, Preferences, and
Rights of Series C Convertible Preferred Stock. The Certificate
designated 1,785,715 shares as Series C Convertible Preferred Stock
at a par value of $.001 per share that is convertible into common
stock at $0.70 per share, with certain adjustments as set forth in
the Certificate. On August 31, 2016, we filed with the State of
Nevada a Certificate of Correction to the Certificate of
Designations of Preferences, Powers, Rights and Limitations for the
Series C Redeemable Convertible Preferred Stock. The Certificate
authorized 5,000 shares of Series C Preferred Stock at a par value
of $.001 per share that is convertible into common stock at $0.70
per share, with certain adjustments as set forth in the
Certificate.
22
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 January 13, 2017, we had
3,570,010 shares of common stock issued and outstanding, held by 54
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 January 13, 2017, there were options outstanding for the
purchase of 50,908 shares of common stock and warrants for the
purchase of 4,494,080 shares of common stock. In addition,
2,184,048 shares of our common stock are issuable upon the
conversion of Preferred Stock, up to 270,439 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 $490,000 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 the
stockholders of the Company, increasing the number of shares
reserved for issuance under the Plan to 93,333 shares.
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.
23
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);
● 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". 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.
24
Period
Ended
|
High
|
Low
|
Year Ending September 30, 2016
|
|
|
July
1, 2016 to September 30, 2016
|
$3.50
|
$0.60
|
June
30, 2016
|
$9.35
|
$2.25
|
March
31, 2016
|
$8.04
|
$5.00
|
December
31, 2015
|
$9.00
|
$4.30
|
|
|
|
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
|
As of
January 9, 2017, the high and low sales price of our common stock
was $0.75 per share and $0.65 per share, respectively. As of
January 13, 2016, there were 3,570,010
shares of common stock outstanding held by approximately 54
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.
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, 2016, we had the following
sales of unregistered sales of equity securities:
Two investors exercised warrants at $2.50 per
share and were issued 68,001 shares of common stock, for a total of
$170,003 in proceeds to us.
On
October 21, 2015, we entered into a Public Relations Agreement with
Financial Genetics LLC for public relation services. Under the
Agreement, Financial Genetics was issued 8,572 shares of our common
stock during the three months ended September 30,
2016.
On
July 12, 2016, a supplier converted accounts payable totaling
$232,966 into 77,665 shares of common stock valued at $3.00 per
share.
On
August 1, 2016, we entered an Agreement with Axiom Financial, Inc.
for business development services. Under the Agreement, we issued
25,000 shares of our common stock.
On
August 10, 2016, we closed a Stock Purchase Agreement with Dale
Broadrick, an accredited investor and affiliate of the Company for
the purchase of $500,000 of our common stock at $0.70 per share or
714,286 shares of common stock. In addition, the investor received
100% warrant coverage with a five year warrant having a strike
price of $0.70. These common shares and warrants are not subject to
a registration statement.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of September 30, 2016
related to the equity compensation plan in effect at that
time.
25
|
(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
|
50,908
|
18.045
|
27,425
|
Equity
compensation plans
|
|
|
|
not
approved by shareholders
|
-
|
-
|
-
|
Total
|
50,908
|
18.045
|
27,425
|
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,
2016 and 2015. 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.
(dollars in thousands)
|
Years
Ended September 30,
|
||||
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS DATA:
|
|
|
|
|
|
Net
revenue
|
$6,024
|
$6,291
|
$7,983
|
$8,573
|
$7,924
|
Cost
of goods sold
|
5,036
|
5,274
|
6,694
|
6,717
|
6,344
|
Gross
profit
|
988
|
1,017
|
1,289
|
1,856
|
1,580
|
Research
and development expenses
|
326
|
363
|
670
|
1,169
|
177
|
General
and administrative expenses
|
3,355
|
2,984
|
3,180
|
4,581
|
3,625
|
Operating
(loss)
|
(2,693)
|
(2,330)
|
(2,561)
|
(3,894)
|
(2,222)
|
Other
expense
|
947
|
(271)
|
1,538
|
(2,741)
|
(533)
|
Net
profit (loss)
|
(1,746)
|
(2,601)
|
(1,023)
|
$(6,635)
|
$(2,755)
|
Income
taxes current benefit
|
-
|
30
|
(6)
|
$(30)
|
$(29)
|
Net
profit (loss)
|
(1,746)
|
(2,631)
|
(1,017)
|
(6,605)
|
(2,726)
|
Noncontrolling
interest
|
-
|
-
|
-
|
$17
|
$6
|
Net
profit (loss) attributable to Visualant, Inc. and Subsidiaries
common shareholders
|
$(1,746)
|
$(2,631)
|
$(1,017)
|
$(6,622)
|
$(2,732)
|
Net
(loss) per share
|
$(1.22)
|
$(2.33)
|
$(1.24)
|
$(15.11)
|
$(9.58)
|
Weighted
average number of shares
|
1,428,763
|
1,131,622
|
819,563
|
437,049
|
284,552
|
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 from hundreds to
thousands of specific data points.
26
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 ten
patents. We also have 20 patents pending. We possess all right,
title and interest to the issued patents. Ten of the pending
patents are licensed exclusively to us in perpetuity by our
strategic partner, Intellectual Ventures through its subsidiary
IDMC.
In 2010, we acquired TransTech Systems 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.
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.
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,
|
|||
|
2016
|
2015
|
$
Variance
|
%
Variance
|
|
|
|
|
|
Revenue
|
$6,024
|
$6,291
|
$(267)
|
-4.2%
|
Cost
of sales
|
5,036
|
5,274
|
(238)
|
4.5%
|
Gross
profit
|
988
|
1,017
|
(29)
|
-2.9%
|
Research
and development expenses
|
326
|
363
|
(37)
|
10.2%
|
Selling,
general and administrative expenses
|
3,355
|
2,984
|
371
|
-12.4%
|
Operating
loss
|
(2,693)
|
(2,330)
|
(363)
|
-15.6%
|
Other
income (expense):
|
|
|
|
|
Interest
expense
|
(324)
|
(170)
|
(154)
|
-90.6%
|
Other
(expense) income
|
(11)
|
41
|
(52)
|
-126.8%
|
Gain
(loss) on change- derivative liability warrants
|
2,560
|
(108)
|
2,668
|
2470.4%
|
(Loss)
on conversion of debt
|
(1,278)
|
(34)
|
(1,244)
|
-3658.8%
|
Total
other income
|
947
|
(271)
|
1,218
|
449.4%
|
Income
before income taxes
|
(1,746)
|
(2,601)
|
855
|
32.9%
|
Income
taxes - current (benefit)
|
-
|
30
|
(30)
|
-100.0%
|
Net
income
|
(1,746)
|
(2,631)
|
885
|
33.6%
|
Sales
Net revenue for the year ended September 30, 2016 decreased
$267,000 to $6,024,000 as compared to $6,291,000 for the year ended
September 30, 2015. The decrease was due to lower sales at
TransTech resulting from a reduction in product sales.
27
Cost of Sales
Cost of sales for the year ended September 30, 2016 decreased
$238,000 to $5,036,000 as compared to $5,274,000 for the year ended
September 30, 2015. The decrease was due to lower
sales.
Gross profit was $988,000 for the year ended September 30, 2016 as
compared to $1,017,000 for the year ended September 30, 2015. Gross
profit was 16.4% for the year ended September 30, 2016 as compared
to 16.2% for the year ended September 30, 2015.
Research and Development Expenses
Research and development expenses for the year ended September 30,
2016 decreased $37,000 to $326,000 as compared to $363,000 for the
year ended September 30, 2015. The decrease was due to reduced
expenditures for suppliers related to the commercialization of our
ChromaID technology.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended
September 30, 2016 increased $371,000 to $3,355,000 as compared to
$2,984,000 for the year ended September 30, 2015.
The increase primarily was due to increased business development
expenses of $466,000, investor relation expenses of $69.000,
consulting expenses of $82,000 and other expenses of
$63,000,
offset by reduced amortization expenses of $154,000 and stock based
compensation of $155,000. As part of the selling, general and
administrative expenses for the year ended September 30, 2016, we
incurred investor relation expenses of $107,000 and business
development expenses of $571,000.
Other Income (Expense)
Other income for the year ended September 30, 2016 was $947,000 as
compared to other expense of $271,000 for the year ended September
30, 2015. The other income for the year ended September 30, 2016
included change in the value of derivatives of $2,560,000, offset
by the loss on the retirement of debt of $1,278,000, interest
expenses of $324,000 and other expenses of $11,000. The gain on the
value of the derivative instruments is a result of the decline of
the derivative liability as our underlying stock price has
declined.
The other expense for the 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
and loss on conversion of debt of
$34,000. 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.
Net Loss
Net loss for the year ended September 30, 2016 was $1,746,000 as
compared to $2,631,000 for the year ended September 30, 2015. The
decrease was primarily due to a gain on change - derivative
liability of $2,560,000.
The net loss for the year ended September 30, 2016, included
non-cash income of $956,000, including
(i) gain on change- derivative liability warrants of $2,560,000,
offset by (ii) other of $34,000, (iii) depreciation and
amortization of $179,000; (iv) stock based compensation of
$46,000;(v) share and warrant issuances of $395,000; (vi) non-cash
convertible debentures expenses of $177,000; and (vii) loss on
conversion of debt of $773,000. TransTech’s net loss from
operations was $192,000 for the year ended September 30,
2016 as compared to a net loss of
$194,000 for the year ended September 30, 2015.
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.
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 $188,000 and net working capital deficit of
approximately $3,982,000 (excluding the derivative liability-
warrants of $145,000 as of September 30, 2016. We expect
losses to continue as we commercialize our ChromaID™
technology. Our cash used in operations for years ended September
30, 2016 and 2015 was $3,373,000 and $240,000, respectively.
We believe
that our cash on hand will be sufficient to fund our operations
through January 31, 2017.
28
The
opinion of our independent registered public accounting firm on our
audited financial statements as of and for the year ended September
30, 2016 contains an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon raising capital
from financing transactions.
We need additional financing to implement our business plan and to
service our ongoing operations and pay our current debts. There can
be no assurance that we will be able to secure any needed funding,
or that if such funding is available, the terms or conditions would
be acceptable to us. If we are unable to obtain additional
financing when it is needed, we will need to restructure our
operations, and divest all or a portion of our business.
We may seek
additional capital through a combination of private and public
equity offerings, debt financings and strategic collaborations.
Debt financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back or eliminate the development of
business opportunities and our operations and financial condition
may be materially adversely affected.
We have financed our corporate operations and our technology
development through the issuance of convertible debentures, the
issuance of preferred stock, the sale common stock, issuance of
common stock in conjunction with an equity line of credit, loans by
our Chief Executive Officer and the exercise of
warrants.
We
intend to issue up to 3,125,000 Series D Shares (and an equal
number of warrants) for gross proceeds of $2,500,000 pursuant on a
“best efforts” basis.
We
finance our TransTech operations from operations and a Secured
Credit Facility with Capital Source Business Finance Group. On December 9, 2008,
TransTech entered into a $1,000,000 secured credit facility with
Capital Source to fund
its operations. On December 12, 2016, the secured
credit facility was renewed for an additional six months, with a
floor for prime interest of 4.5% (currently 4.5%) plus 2.5%. The
eligible borrowing is based on 80% of eligible trade accounts
receivable, not to exceed $1,000,000. The secured credit facility
is collateralized by the assets of TransTech, with a guarantee by
Visualant, including a security interest in all assets of
Visualant. Availability under this Secured Credit ranges from $0 to
$175,000 ($33,000 as of September 30, 2016) on a daily basis. The
remaining balance on the accounts receivable line of $370,404 as of
September 30, 2016 must be repaid by the time the secured credit
facility expires on June 12, 2017, or we renew by automatic
extension for the next successive six-month term.
Operating Activities
Net cash used in operating activities for the year ended September
30, 2016 was $3,374,000. This amount was primarily related to a net
loss of $1,746,000, an increase in accounts receivable of $189,000,
an increase in inventory of $77,000,
a decrease in accounts payable of $406,000, and non-cash other
income of $956,000. The non-cash other income of
$956,000
includes (i) gain on change-
derivative liability warrants of $2,560,000, offset by (ii) other
of $34,000, (iii) depreciation and amortization of $179,000; (iv)
stock based compensation of $46,000; (v) share and warrant
issuances of $395,000; (vi) non-cash convertible debentures
expenses of $177,000; and (vii) loss on conversion of debt of
$773,000.
Financing Activities
Net cash provided by financing activities for the year ended
September 30, 2016 was $3,497,000. This amount was primarily
related to (i) proceeds from the exercise of warrants of $519,000;
(ii) proceeds from convertible notes of $1,175,000; (iii) proceeds
from line of credit of $6,000; and (iv) proceeds from the sale of
common and preferred stock of $2,883,000, offset by the
repayment of convertible notes of $580,000 and redemption of
preferred stock of $505,000.
Our contractual cash obligations as of September 30, 2016 are
summarized in the table below:
|
|
Less
Than
|
|
|
Greater
Than
|
Contractual
Cash Obligations
|
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
Operating
leases
|
$10,030
|
$10,030
|
$-
|
$-
|
$-
|
Convertible
notes payable
|
909,500
|
909,500
|
-
|
-
|
-
|
Notes
payable
|
1,170,339
|
1,170,339
|
-
|
-
|
-
|
Capital
expenditures
|
100,000
|
20,000
|
40,000
|
40,000
|
-
|
|
$2,189,869
|
$2,109,869
|
$40,000
|
$40,000
|
$-
|
29
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:
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
$25,000 and $20,000 reserve for impaired inventory as of September
30, 2016 and 2015, 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
30
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, 2016 that our
disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weaknesses in our
internal controls over financial reporting discussed immediately
below.
Identified
Material Weakness
A
material weakness in our internal control over financial reporting
is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or
detected.
Management
identified the following material weakness during its assessment of
internal controls over financial reporting:
Audit Committee: While we have
an audit committee, we lack a financial expert. During 2017, the
Board expects to appoint an additional independent Director to
serve as Audit Committee Chairman who is an “audit
committee financial expert” as defined by the Securities and
Exchange Commission (“SEC”) and as adopted under the
Sarbanes-Oxley Act of 2002.
b) Changes in Internal Control over Financial
Reporting
During
the quarter ended September 30,
2016, there were no changes in our internal controls over
financial reporting during this fiscal quarter that materially
affected, or is reasonably likely to have a materially affect, on
our internal control over financial reporting.
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, 2016 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
|
72
|
Chairman of the Board, Chief Executive Officer and President
(1)
|
Jon Pepper
|
65
|
Director (2)
|
Ichiro Takesako
|
57
|
Director
|
|
|
|
|
|
|
Executive Officers-
|
|
|
Jeff Wilson
|
55
|
Chief Financial Officer and Secretary
|
Todd Martin Sames
|
62
|
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 recently held a number of executive position at
Sumitomo and its affiliates. Since January, 2013 he has been CEO of
M2M Technologies, Inc., a portfolio company of Sumitomo Precision
Products. During a portion of his time as CEO of M2M he has also
served as General Manager of the Business Development Department of
Sumitomo Precision Products. From August, 2011 to January, 2013 he
served as General Manager, Corporate Strategic Planning Group, of
Sumitomo Precision Products. From July, 2010 to August, 2011 he
served as Executive Director of SPP Process Technology Systems, a
wholly- owned subsidiary of Sumitomo Precision Products located in
Newport, Wales in the United Kingdom. From April, 2009 to July,
2010 he served as General Manager of the Overseas Business
Department of Micro Technology Division, where he was in charge of
M&A activity of certain business segments and assets of Aviza
Technology, Inc. From June, 2008 until April, 2009, he was General
Manager of Sales and Marketing Department of Sumitomo’s Micro
Technology Division.
Mr.
Takesako’s career at Sumitomo Precision Products, Ltd and
Sumitomo began in 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.
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.
Mr.
Pepper was appointed as a director because of his marketing skills
with technology companies.
Other Executive Officers
Jeff T. Wilson has been our Chief Financial Officer since
September 2016. Mr. Wilson has significant financial, capital
markets and operations experience in public technology companies.
Most recently, Mr. Wilson was the Chief Financial Officer for
Command Center, a publicly traded staffing company. From 2010 to
2015 Mr. Wilson also served on the Board of Directors for Command
Center and was Chairman of the Audit Committee.
During
the previous 25 years, Mr. Wilson held senior finance roles in a
number of companies bringing new technologies to market. From 2013
to 2014 Mr. Wilson was the Chief Financial Officer for Acuamtica
Inc., a developer of cloud-based ERP systems. From 1999 to 2013,
Mr. Wilson was the Controller and later Chief Financial Officer of
Microvision Inc., a developer of miniature display technologies.
Earlier in his career, Mr. Wilson held several finance positions at
Siemens Medical Systems and was an audit manager at Price
Waterhouse Coopers. Mr. Wilson is a CPA and holds a Bachelor of
Science degree in Accounting from Oklahoma State
University.
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, 2016 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
Overview of Compensation Program
34
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 2017.
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 2016 and 2015, the Compensation
Committee and the Board compensated its Chief Executive Officer
with an annual salary of $180,000 effective June 1, 2012. During
2016 and 2015, the Committee compensated its Chief Financial
Officer with an annual salary of $120,000 effective June 1, 2012.
This compensation reflected the financial condition of the Company.
Other Named Executive Officers were paid by us during 2016. 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,
2016
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, 2016. 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, 2016, 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, Mr. Scott and Mr. Wilson 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, 2016 based on our
financial condition.
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 did not receive stock grants and
option awards during the year ended September 30,
2016.
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, 2016, 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 $1 million compensation limit, provided
certain disclosure, shareholder approval and other requirements are
met. We periodically review the potential consequences of Section
162(m) and may structure the performance-based portion of our
executive compensation to comply with certain exceptions to Section
162(m). However, we may authorize compensation payments that do not
comply with the exceptions to Section 162(m) when we believe that
such payments are appropriate and in the best interests of the
stockholders, after taking into consideration changing business
conditions or the officer's performance.
36
Accounting for Stock-Based Compensation
Beginning on January 1, 2006, we began accounting for stock-based
payments including its Stock Option Program in accordance with the
requirements of ASC 718, “Compensation-Stock
Compensation.”
COMPENSATION COMMITTEE REPORT
The Compensation Committee, composed entirely of independent
directors in accordance with the applicable laws and regulations,
sets and administers policies that govern the Company's executive
compensation programs, and incentive and stock programs. The
Compensation Committee of the Company has reviewed and discussed
the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management and, based on such review and
discussions, the Compensation Committee recommended to the Board
that the Compensation Discussion and Analysis be included in this
Proxy Statement.
THE COMPENSATION COMMITTEE
Jon Pepper, Chairman
EXECUTIVE COMPENSATION
REMUNERATION OF EXECUTIVE OFFICERS
The following table provides information concerning remuneration of
the chief executive officer, the chief financial officer and
another named executive officer for the fiscal years ended
September, 2016 and 2015:
Summary Compensation Table
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Stock
|
Option
|
Other
|
|
|
|
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Total
|
Name
|
Principal Position
|
|
($)
|
($)
|
($) (5)
|
($)
|
($)
|
($)
|
Salary-
|
|
|
|
|
|
|
|
|
Ronald P. Erickson (1)
|
Chief Executive Officer
|
9/30/2016
|
$180,000
|
$-
|
$-
|
$-
|
$-
|
$180,000
|
|
|
9/30/2015
|
$180,000
|
$-
|
$-
|
$-
|
$-
|
$180,000
|
|
|
|
|
|
|
|
|
|
Jeff T Wilson (2)
|
Chief Financial Officer
|
9/30/2016
|
$8,300
|
$-
|
$-
|
$-
|
$-
|
$8,300
|
|
9/30/2015
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
Mark E. Scott (3)
|
Former Chief Financial Officer and
|
9/30/2016
|
$110,000
|
$-
|
|
$-
|
$-
|
$110,000
|
|
Secretary
|
9/30/2015
|
$120,000
|
$-
|
$20,010
|
$-
|
$-
|
$140,010
|
|
|
|
|
|
|
|
|
|
Todd Martin Sames (4)
|
Vice President of Business Development
|
9/30/2016
|
$120,000
|
$-
|
|
$-
|
$-
|
$120,000
|
|
|
9/30/2015
|
$120,000
|
$-
|
$15,000
|
$-
|
$-
|
$135,000
|
(1)
During the years ended September 30, 2016 and 2015, Mr. Erickson
was compensated at a monthly salary of $15,000. As of September 30,
2016 and 2015, Mr. Erickson had accrued but unpaid salary of
$105,000 and $180,000, respectively, 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 period from September 6, 2016 to September 30, 2016, Mr.
Wilson was paid $8,300. Mr. Wilson was appointed Chief Financial
Officer on September 6, 2016.
(3)
During the year ended September 30, 2016 and 2015, Mr. Scott was
compensated at a monthly salary of $10,000. As of September 30,
2016 and 2015, Mr. Scott had accrued but unpaid salary of $0 and
$40,000, respectively 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. Mr. Scott
resigned as Chief Financial Officer on August 12, 2016, effective
Augut 31, 2016.
(4) During
the year ended September 30, 2016 and 2015, Mr. Sames was
compensated at a monthly salary of $10,000. As of September 30,
2016 and 2015, Mr. Sames had accrued but unpaid salary of $25,000
and $40,000, respectively, 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. There was no accrued interest paid on
the unpaid salary. 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 $15.00 per
share.
(5) These
amounts reflect the grant date market value as required by
Regulation S-K Item 402(n)(2), computed in accordance with FASB ASC
Topic 718.
37
Grants of Stock Based Awards in Fiscal Year Then Ended September
30, 2016
The Compensation Committee did not approve any performance-based
incentive compensation to the Named Executive Officers during
2016.
Outstanding Equity Awards as of Fiscal Year Then Ended September
30, 2016
|
Option Awards
|
|||
|
Number
of
|
Number
of
|
|
|
|
Securities
|
Securities
|
|
|
|
Underlying
|
Underlying
|
|
|
|
Unexercised
|
Unexercised
|
Option
|
|
|
Options
|
Options
|
Exercise
|
Option
|
|
Exercisable
|
Unexerciseable
|
Price
|
Expiration
|
Name
|
(#)
|
(#)
|
($)
(4)
|
Date
|
|
|
|
|
|
Ronald
P. Erickson (1)
|
13,334
|
-
|
$22.50
|
5/9/2020
|
|
6,667
|
-
|
$19.50
|
6/5/2022
|
|
|
|
|
|
Jeff
T Wilson
|
-
|
-
|
$-
|
|
|
|
|
|
|
Mark
E.Scott (2)
|
-
|
-
|
$-
|
|
|
|
|
|
|
Todd
Martin Sames (3)
|
6,667
|
-
|
$19.50
|
9/4/2017
|
|
1,778
|
222
|
$15.00
|
4/1/2019
|
|
-
|
6,668
|
$15.00
|
1/22/2020
|
(1)
Mr.
Erickson’s stock option grants consist of (i) 13,334 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 resigned as Chief Financial Officer on August 12, 2016,
effective Augut 31, 2016. Mr. Scott forfeited stock option grants
of 5,668 shares at $19.50 per share.
(3)
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, 2016, 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.
Option Exercises and Stock Vested
Our Named Executive Officers did not exercise any stock options
during the year ended September, 2016 and 2015.
Pension Benefits
We do not provide any pension benefits.
Nonqualified Deferred Compensation
We do not have a nonqualified deferral program.
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.
38
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, 2016, 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 for
Mr.Erickson.
Compensation Paid to Board Members
No compensation was paid by us to non-employee directors during the
year ended September 30, 2016. Our independent non-employee
directors are not compensated in cash. The only
compensation generally has been in the form of stock awards. 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 September 30, 2016
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.
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)
|
175,087
|
7.4%
|
Jeff
Wilson (2)
|
-
|
*
|
Mark
E. Scott (3)
|
11,791
|
*
|
Jon
Pepper (4)
|
13,000
|
*
|
Todd
Martin Sames (5)
|
10,112
|
*
|
Sumitomo
Precision Products Co., Ltd./ Ichiro Takesako (6)
|
115,385
|
4.9%
|
Total
Directors and Officers (6 in total)
|
325,375
|
13.8%
|
* Less than 1%.
(1) Includes 155,086 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.
(2) Mr. Wilson was appointed Chief Finncia Officer and he does not
have any beneficial ownership.
(3) Includes 11,791 shares of shares of common stock beneficially
owned. Mr. Scott resigned as Chief Financial Officer on August 12,
2016, effective August 31, 2016.
(4) Includes 13,000 shares of shares of common stock beneficially
owned by Mr. Pepper.
39
(5) Includes 1,667 shares of shares of common stock beneficially
owned and stock option grants totaling 8,445 shares that Mr. Sames
has the right to acquire in 60 days.
(6) Includes 115,385 shares of shares of common stock beneficially
owned by Sumitomo Precision Products, Co. Ltd.
|
Shares
Beneficially Owned
|
|
|
Amount
|
Percentage
|
Greater
Than 5% Ownership
|
|
|
|
|
|
Special Situations Technology Funds, L.P./ Adam Stettner
(1)
|
318,000
|
12.4%
|
|
Blocker at 9.99%
|
|
|
|
|
Clayton
A. Struve (2)
|
3,821,428
|
61.9%
|
|
Blocker at 4.99%
|
|
|
|
|
Dale
Broadrick (3)
|
1,768,087
|
57.6%
|
(1) 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.
(2) Reflects the shares beneficially
owned by Clayton A. Struve. This total includes Series C
Preferred Stock that converts into 1,785,714 shares of common
stock, a warrant to purchase 1,785,714 shares of common stock and a
Convertible note that converts into 250,000 shares of common stock.
The address of Clayton A. Struve is 175 West Jackson Blvd, Suite
440, Chicago, Illinois.
(3) Reflects the shares beneficially
owned by Dale Broadrick. This total includes 1,053,801 shares
and a total of 714,286 Warrants to purchase shares of our common
stock. The address of Dale Broadrick is 3003 Brick Church Pike,
Nashville, Tennessee.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Related Party Transactions
Related party transactions for the year ended September 30, 2016
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.
40
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 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. In May of
2016, Intellectual Ventures was spun out IDMC into an independent
company called Xinova. The relationship
remains intact.
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).
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
$0.70 per share and expires November 10, 2018. The per share price
is subject to adjustment based on any issuances below $0.70 per
share except as described in the warrant.
We agreed to pay 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.
41
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 4, 2016, the warrant exercise price was adjusted to $0.70
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.
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
We have a $199,935 Business Loan Agreement with Umpqua Bank (the
“Umpqua Loan”), which matures on December 31, 2017 and
provides for interest at 3.25% per year. Related to this
Umpqua Loan, we entered into a demand promissory note for $200,000
on January 10, 2014 with an entity affiliated with Ronald P.
Erickson, our Chief Executive Officer. This demand promissory note
will be effective in case of a default by the Company under the
Umpqua Loan. We recorded accrued
interest of $16,340 as of September 30, 2016.
We also have two other demand promissory notes payable to entities
affiliated with Mr. Erickson, totaling $600,000. Each of these
notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. We recorded accrued
interest of $40,167 as of September 30, 2016.
Mr. Erickson and/or entities with which he is affiliated also have
advanced $521,833 and have unreimbursed expenses and compensation
of approximately $424,872. We owe Mr. Erickson, or entities with
which he is affiliated, $1,546,705 as of September 30,
2016.
42
On July 12, 2016, Mr. Erickson and/or entities with which he is
affiliated exercised a warrant for 66,667 shares of our common
stock at $2.50 per share or $166,668.
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, 2016, 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 SD Mayer and Associates, LLP to perform
an annual audit of the Company’s financial statements for the
fiscal years ended September 30, 2016 and 2015. Prior to June 2016,
the Company had engaged PMB Helin Donovan LLP to audit the
Company’s financial statements. The following is the
breakdown of aggregate fees paid to auditors for the Company for
the last two fiscal years:
|
Year
Ended
|
Year
Ended
|
|
September
30, 2016
|
September
30, 2015
|
Audit
fees
|
$37,920
|
$33,388
|
Audit
related fees
|
22,000
|
22,500
|
Tax
fees
|
16,450
|
-
|
All
other fees
|
26,200
|
7,220
|
|
|
|
|
$102,570
|
$63,108
|
-
“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, 2016 our executive officers, directors and 10%
holders complied with all filing requirements.
43
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 SD Mayer and Associates, LLP.
|
|
F-1
|
|
|
|
Consolidated Balance Sheets as of September 30, 2016 and
2015
|
|
F-2
|
|
|
|
Consolidated Statements of Operations for the years ended September
30, 2016 and 2015
|
|
F-3
|
|
|
|
Consolidated Statements of Changes in Stockholders' (Deficit) for
the years ended September 30, 2016 and 2015
|
|
F-4
|
|
|
|
Consolidated Statements of Cash Flows for the years ended September
30, 2016 and 2015
|
|
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 (incorporated by reference to the Company’s Current
Report on Form 8-K, filed July 29, 2015)
3.6
Correction to
Amended and Restated Certificate of Designations, Preferences and
Rights of its Series A Convertible Preferred Stock dated March 8,
2016 (incorporated by reference to the Company’s Current
Report on Form 8-K, filed March 15, 2016)
3.7
Amendment 2 of
Series A Preferred Stock Terms dated February 19, 2016
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 15, 2016)
3.8
Certificate of
Designations of Preferences, Powers, Rights and Limitations of
Series B Redeemable Convertible Preferred Stock dated March 8, 2016
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed March 15, 2016)
3.9
Certificate of Designations, Preferences and
Rights of Series C Convertible Preferred Stock (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed August 11, 2016)
3.10
Cancellation of
Certificate of Designations of Preferences, Powers, Rights and
Limitations of Series B Redeemable Convertible Preferred Stock
dated March 8, 2016 (incorporated by reference to the
Company’s Registration Statement on Form S-1, filed September
1, 2016)
3.11
Form of Series C
Convertible Preferred Stock 2016 (incorporated by reference to the
Company’s Registration Statement on Form S-1, filed September
1, 2016)
44
3.12
Certificate of Correction and Certificate of
Designations, Preferences and Rights of Series C Convertible
Preferred Stock (incorporated by reference to the
Company’s Amended Current Report on Form 8-K/A, filed January
9, 2017)
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
Job Offer Letter
dated August 9, 2012 by and between Visualant, Inc. and Todd Sames
(incorporated by reference to the Company’s Registration
Statement on Form S-1, filed April 24, 2015)
10.6
Settlement and
Release Agreement dated September 6, 2012 by and between Visualant,
Incorporated and Bradley E. Sparks (incorporated by reference to
the Company’s Current Report on Form 8-K, filed September 11,
2012)
10.7
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)
10.8
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)
10.9
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)
10.10
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)
10.11
Form of Stock
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)
10.12
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)
10.13
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)
10.14
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)
10.15
[Intentionally
Omitted]
10.16
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)
10.17
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)
10.18
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)
45
10.19
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)
10.20
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)
10.21
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)
10.22
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)
10.23
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)
10.24
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)
10.25
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)
10.26
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)
10.27
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.
10.28
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)
10.29
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)
10.30
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)
10.31
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)
10.32
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)
10.33
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)
10.34
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)
10.35
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)
10.36
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)
10.37
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)
10.38
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)
46
10.39
Form of Stock
Purchase 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)
10.40
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)
10.41
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)
10.42
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)
10.43
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)
10.44
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)
10.45
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)
10.46
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)
10.47
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)
10.48
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)
10.49
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)
10.50
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)
10.51
Amendment 5 to
Demand Promissory Note dated December 31, 2015 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed January 4,
2016)
10.52
Amendment 6 to
Demand Promissory Note dated December 31, 2015 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed January 4,
2016)
10.53
Amendment 7 to
Demand Promissory Note dated December 31, 2015 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed January 4,
2016)
10.54
Form of Note and
Warrant Purchase Agreement (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q, filed February 16,
2016)
10.55
Form of
Subordinated Convertible Promissory Note Agreement (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q, filed February 16,
2016)
10.56
Form of Warrant to
Purchase Shares Agreement (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q, filed February 16,
2016)
10.57
Stock Purchase Agreement dated March 8, 2016 by
and between Visualant, Incorporated and institutional
investor (incorporated by reference to the Company’s
Current Report on Form 8-K, filed March 10, 2016)
10.58
Amendment 6 to Demand Promissory Note dated April
29, 2016 by and between Visualant, Inc. and J3E2A2Z LP
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed May 2, 2016)
10.59
Amendment 7 to Demand Promissory Note dated April
29, 2016 by and between Visualant, Inc. and J3E2A2Z LP
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed May 2, 2016)
47
10.60
Amendment 8 to Demand Promissory Note dated April
29, 2016 by and between Visualant, Inc. and J3E2A2Z LP
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed May 2, 2016)
10.61
Amendment 7 to
Demand Promissory Note dated June 30, 2016 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed July 6,
2016).
10.62
Amendment 8 to
Demand Promissory Note dated June 30, 2016 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed July 6,
2016).
10.63
Amendment 9 to
Demand Promissory Note dated June 30, 2016 by and between
Visualant, Incorporated and J3E2A2Z LP (incorporated by reference
to the Company’s Current Report on Form 8-K, filed July 6,
2016).
10.64
Form of Preferred Stock and Warrant Purchase
Agreement by and between Visualant, Incorporated and Clayton A.
Struve (incorporated by reference to the Company’s
Current Report on Form 8-K, filed August 11, 2016)
10.65
Form of Warrant to Purchase Shares by and between
Visualant, Incorporated and Clayton A. Struve (incorporated
by reference to the Company’s Current Report on Form 8-K,
filed August 11, 2016)
10.66
Form of Registration Rights Agreement by and
between Visualant, Incorporated and Clayton A. Struve
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed August 11, 2016)
10.67
Form of Stock Purchase Agreement by and between
Visualant, Incorporated and Dale Broadrick (incorporated by
reference to the Company’s Current Report on Form 8-K, filed
August 11, 2016)
10.68
Form of Warrant for the Purchase of Common Stock
by and between Visualant, Incorporated and Dale Broadrick
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed August 11, 2016)
10.69
First Amendment to Stock Purchase Agreement by and
between Visualant, Incorporated and institutional investor
(incorporated by reference to the Company’s Current Report on
Form 8-K, filed August 11, 2016)
10.70
Notice, Consent, Amendment and Waiver Agreement by
and between Visualant, Incorporated and Clayton A. Stuve
(incorporated by reference to the Company’s Registration
Statement on Form S-1, filed September 1, 2016)
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)
16.1
Letter dated July
14, 2016 from PMB Helin Donovan LLP. (incorporated by reference to
the Company’s Current Report on Form 8-K, filed July 14,
2016)
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.
48
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
Visualant, Incorporated.:
We have audited the accompanying consolidated balance sheets of
Visualant, Incorported (the “Company”) as of September
30, 2016 and 2015 and the related consolidated statements of
operations, stockholders’ (deficit), and cash flows for the
years ended September 30, 2016 and 2015. 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, Incorporated as of September 30, 2016 and 2015, and the
results of its operations and its cash flows for the years ended
September 30, 2016 and 2015 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.
SD Mayer and Associates, LLP
/s/ SD Mayer and Associates, LLP
January 13, 2016
Seattle, Washington
|
F-1
VISUALANT, INCORPORATED AND
SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
September
30, 2016
|
September
30, 2015
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash
and cash equivalents
|
$188,309
|
$82,266
|
Accounts
receivable, net of allowance of $55,000 and $40,000,
respectively
|
808,955
|
619,849
|
Prepaid
expenses
|
20,483
|
27,774
|
Inventories,
net
|
295,218
|
217,824
|
Total
current assets
|
1,312,965
|
947,713
|
|
|
|
EQUIPMENT,
NET
|
285,415
|
366,250
|
|
|
|
OTHER
ASSETS
|
|
|
Intangible
assets, net
|
43,750
|
158,000
|
Goodwill
|
983,645
|
983,645
|
Other
assets
|
5,070
|
5,070
|
|
|
|
TOTAL
ASSETS
|
$2,630,845
|
$2,460,678
|
|
|
|
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts
payable - trade
|
$1,984,326
|
$2,520,223
|
Accounts
payable - related parties
|
41,365
|
73,455
|
Accrued
expenses
|
80,481
|
4,068
|
Accrued
expenses - related parties
|
1,109,046
|
1,256,861
|
Derivative
liability
|
145,282
|
2,704,840
|
Convertible
notes payable
|
909,500
|
109,000
|
Notes
payable - current portion of long term debt
|
1,170,339
|
1,164,692
|
Deferred
revenue
|
-
|
5,833
|
Total
current liabilities
|
5,440,339
|
7,838,972
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
Preferred
stock - $0.001 par value, 5,000,000 shares authorized, 0 shares
issued and
|
|
|
outstanding
at 9/30/2016 and 9/30/2015, respectively
|
-
|
-
|
Series
A Convertible Preferred stock - $0.001 par value, 23,334 shares
authorized, 23,334
|
|