NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited consolidated condensed financial statements
have been prepared by Visualant, Inc. (“the Company”,
“us,” “we,” or “our”) in
accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial reporting and rules and
regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted. In the opinion of our management, all
adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position,
results of operations, and cash flows for the fiscal periods
presented have been included.
These
financial statements should be read in conjunction with the audited
financial statements and related notes included in our Annual
Report filed on Form 10-K for the year ended September 30, 2016.
The results of operations for the three and six months ended March
31, 2017 are not necessarily indicative of the results expected for
the full fiscal year, or for any other fiscal period
The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company incurred net losses of $1,746,495 and $2,631,037 for the
years ended September 30, 2016 and 2015, respectively. Net cash
used in operating activities was $(3,373,734) and $(239,877) for
the years ended September 30, 2016 and 2015,
respectively.
The
Company anticipates that it will record losses from operations for
the foreseeable future. As of March 31, 2017, the Company’s
accumulated deficit was $31,234,591. The Company has
limited capital resources, and operations to date have been funded
with the proceeds from private equity and debt financings and loans
from Ronald P. Erickson, our Chief Executive Officer, or entities
with which he is affiliated. These conditions raise substantial
doubt about our ability to continue as a going concern. The audit
report prepared by the Company’s independent registered
public accounting firm relating to our financial statements for the
year ended September 30, 2016 includes an explanatory paragraph
expressing the substantial doubt about the Company’s ability
to continue as a going concern.
We
believe that our cash on hand will be sufficient to fund our
operations until May 31, 2017.
We need
additional financing to implement our business plan and to service
our ongoing operations and pay our current debts. There can be no
assurance that we will be able to secure any needed funding, or
that if such funding is available, the terms or conditions would be
acceptable to us. If we are unable to obtain additional financing
when it is needed, we will need to restructure our operations, and
divest all or a portion of our business.
We may seek additional
capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt
financing, if obtained, may involve agreements that include
covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, and could increase our
expenses and require that our assets secure such debt. Equity
financing, if obtained, could result in dilution to our
then-existing stockholders and/or require such stockholders to
waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may
be required to delay, scale back, eliminate the development of
business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely
affected.
Visualant, Incorporated (the “Company,”
“Visualant, Inc.” or “Visualant”) was
incorporated under the laws of the State of Nevada in 1998.
The Company has authorized 105,000,000 shares of capital stock, of
which 100,000,000 are shares of voting common stock, par value
$0.001 per share, and 5,000,000 are shares preferred stock, par
value $0.001 per share.
On July 21, 2015, the Company filed with the Nevada Secretary of
State an Amended and Restated Certificate of Designations,
Preferences and Rights for its Series A Convertible Preferred
Stock. Among other things, the Amended and Restated
Certificate
changed the conversion price and the stated
value from $0.10 (pre-reverse stock split) to $30.00 (post-reverse
stock split), and added a provision adjusting the conversion price
upon the occurrence of certain events. As a result of the
foregoing, the Company currently has 23,334 Series A Preferred
Stock issued and outstanding, with a conversion price of $0.70 per
share.
On
August 11, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series C Convertible Preferred Stock. The Certificate
designated 1,250,000 shares as Series C Convertible Preferred Stock
with a par value of $.001 per share. The Series C Convertible
Preferred Stock is convertible into common stock at $0.70 per
share, with certain adjustments as set forth in the Certificate.
The Series C Convertible Preferred Stock is convertible into common
stock at $0.70 per share, with certain adjustments as set forth in
the Certificate. As a result of the foregoing, the Company
currently has 1,785,715 shares of Series C Preferred Stock issued
and outstanding, with a conversion price of $0.70 per
share.
On
November 8, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series D Convertible Preferred Stock. The Certificate
designated up to 3,906,250 shares with a par value of $.001 per
share. The Series D Convertible Preferred Stock is convertible into
common stock at $0.80 per share, with certain adjustments as set
forth in the Certificate. The Company has issued 658,861 shares of
Series D Convertible Preferred Stock through March 31,, 2017, and
plans to issue up to 3,125,000 Series D Shares (and an equal number
of warrants) for gross proceeds of $2,500,000 pursuant on a
“best efforts” basis.
Since 2007, the Company has been focused primarily on the
development of a proprietary technology, which is capable of
uniquely identifying and authenticating almost any substance using
light at the “photon” level to detect the unique
digital “signature” of the substance. The Company calls
this its “ChromaID™” technology.
In 2010, the Company acquired TransTech Systems, Inc. as an adjunct
to its business. TransTech is a distributor of products for
employee and personnel identification. TransTech currently provides
substantially all of the Company’s revenues.
The Company is in the process of commercializing its
ChromaID™ technology. To date, the Company has entered into
License Agreements with Sumitomo Precision Products Co., Ltd. and
Intellicheck, Inc. In addition, it has a technology license
agreement with
Xinova.,
formerly Invention Development Management Company,
a subsidiary of Intellectual Ventures.
The Company believes that its commercialization success is
dependent upon its ability to significantly increase the number of
customers that are purchasing and using its products. To date the
Company has generated minimal revenue from sales of its ChromaID
products. The Company is currently not profitable. Even if the
Company succeeds in introducing the ChromaID technology and related
products to its target markets, the Company may not be able to
generate sufficient revenue to achieve or sustain
profitability.
ChromaID was invented by scientists from the University of
Washington under contract with Visualant. The Company has pursued
an intellectual property strategy and have been granted eleven
patents. The Company also has 20 patents pending. The Company
possess all right, title and interest to the issued patents. Ten of
the pending patents are licensed exclusively to the Company in
perpetuity by the Company’s strategic partner,
Xinova
3.
ACCOUNTS RECEIVABLE/CUSTOMER CONCENTRATION
Accounts receivable were $740,488 and $808,955, net of allowance,
as of March 31, 2017 and September 30, 2016, respectively. The
Company had no customers in excess of 10% of the Company’s
consolidated revenues for the three or six months ended March 31,
2017. The Company had one customer (31.9%) with accounts receivable
in excess of 10% as of March 31, 2017. The customer has not made a
payment on the account since March 31, 2016 and the Company
reserved $120,000 during the six months ended March 31, 2017 as
selling, general and administrative expenses. The Company intends
to aggressively pursue collection of the balance. The Company has a
total allowance for bad debt in the amount of $180,000 at March 31,
2017.
Inventories were $236,549 and $295,218 as of March 31, 2017 and
September 30, 2016, respectively. Inventories consist primarily of
printers and consumable supplies, including ribbons and cards,
badge accessories, capture devices, and access control components
held for resale. There is a $25,000 reserve for impaired inventory
as of March 31, 2017 and September 30, 2016,
respectively.
On
November 1, 2016, the Company purchased an Original Issue Discount
Convertible Promissory Note from BioMedx, Inc. The Company paid
$260,000 for the Note with a principal amount of $286,000. The Note
matures one year from issuance and bears interest at 5%. The
principal and interest can be converted to Biologic common stock at
the option of the Company. The Company received 150,000 shares of
Pulse Biologics common stock as partial consideration for
purchasing the Note. In addition, if BioMedx does not repay the
Promissory Note, the Company will have the right to convert the
Promissory Note into 51% of the ownership of BioMedx.
In
addition, the Company and Pulse Biologics agreed to negotiate in
good faith to enter into a joint development agreement and
subsequent merger transaction prior to December 31,
2017.
Due to
the inherent uncertainty involved with a start-up company, The
Company’s management has determined the value of the
Promissory Note and BioMedx common stock is zero at December 31,
2016 and recorded a reserve for the full value. During the three
months ended March 31, 2017 BiomedX paid the Company $290,608 in
full satisfaction of the Note. The Company recorded the gain as a
reduction in SG&A expense during the period.
Fixed assets, net of accumulated depreciation, was $268,016 and
$285,415 as of March 31, 2017 and September 30, 2016, respectively.
Accumulated depreciation was $805,251 and $796,481 as of March 31,
2017 and September 30, 2016, respectively. Total depreciation
expense, was $17,399 and $36,278 for the six months ended March 31,
2017 and 2016, respectively. All equipment is used for selling,
general and administrative purposes and accordingly all
depreciation is classified in selling, general and administrative
expenses.
Total amortization expense was $24,012 and $35,625 for the six
months ended March 31, 2017 and 2016, respectively.
The Company’s TransTech business is very capital intensive.
The Company reviewed TransTech’s operations based on its
overall financial constraints and determined the value has been
impaired. The company recorded an impairment of goodwill associated
with TransTech of $983,645 during the six months March 31,
2017.
9.
DERIVATIVE INSTRUMENTS
In
April 2008, the FASB issued a pronouncement that provides guidance
on determining what types of instruments or embedded features in an
instrument held by a reporting entity can be considered indexed to
its own stock for the purpose of evaluating the first criteria of
the scope exception in the pronouncement on accounting for
derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15,
2008. The adoption of these requirements can affect the accounting
for warrants and many convertible instruments with provisions that
protect holders from a decline in the stock price (or
“down-round” provisions). For example, warrants or
conversion features with such provisions are no longer recorded in
equity. Down-round provisions reduce the exercise price of a
warrant or convertible instrument if a company either issues equity
shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that
have a lower exercise price.
Derivative
liability as of March 31, 2017 is as follows:
|
|
|
|
|
|
Fair Value Measurements
Using Inputs
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative Instruments
|
$
-
|
$
1,367,837
|
$
-
|
$
1,367,837
|
|
|
|
|
|
Total
|
$
-
|
$
1,367,837
|
$
-
|
$
1,367,837
|
Derivative
liability as of September 30, 2016 is as follows:
|
|
|
|
|
|
Fair Value Measurements
Using Inputs
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative Instruments
|
$
-
|
$
145,282
|
$
-
|
$
145,282
|
|
|
|
|
|
Total
|
$
-
|
$
145,282
|
$
-
|
$
145,282
|
The
risk-free rate of return reflects the interest rate for the United
States Treasury Note with similar time-to-maturity to that of the
warrants, historical volatility was 130% and the stock price was
$0.70 at March 31, 2017.
Derivative Instruments – Warrants with the June 2013 Private
Placement
|
|
The
Company issued warrants to purchase 697,370 shares of common stock
in connection with our June 2013 private placement of 348,685
shares of common stock. The per share price is subject
to adjustment.
In August
2016, the exercise price was reset to $0.70 per share.
These warrants were not issued with
the intent of effectively hedging any future cash flow, fair value
of any asset, liability or any net investment in a foreign
operation. These warrants were issued with a down-round
provision whereby the exercise price would be adjusted downward in
the event that additional shares of our common stock or securities
exercisable, convertible or exchangeable for the Company’s
common stock were issued at a price less than the exercise
price. Therefore, the fair value of these warrants were
recorded as a liability in the consolidated balance sheet and are
marked to market each reporting period until they are exercised or
expire or otherwise extinguished.
The
proceeds from the private placement were allocated between the
shares of common stock and the warrants issued in connection with
the private placement based upon their estimated fair values as of
the closing date at June 14, 2013, resulting in the aggregate
amount of $2,494,710 allocated to stockholders’ equity and
$2,735,290 allocated to the warrant derivative. The
Company recognized $1,448,710 of other expense resulting from the
increase in the fair value of the warrant liability at September
30, 2013. During the year ended September 30, 2014, the Company
recognized $2,092,000 of other income resulting from the decrease
in the fair value of the warrant liability at September 30, 2014.
During the year ended September 30, 2015, the Company recognized
$104,716 of other expense resulting from the decrease in the fair
value of the warrant liability at September 30, 2015. During the
year ended September 30, 2016, the Company recognized $2,085,536 of
other income resulting from the decrease in the fair value of the
warrant liability at September 30, 2016. During the six months
March 31, 2017, the Company recognized $7,370 of other expense
resulting from the increase in the fair value of the warrant
liability at March 31, 2017.
Derivative Instruments – Warrant with the November 2013
Xinova
Services and License
Agreement
|
The
Company issued a warrant to purchase 97,169 shares of common stock
in connection with the
November
2013 Xinova Services and License Agreement. The warrant price of
$30.00 per share expires November 10, 2018 and the per share price
is subject to adjustment.
In August 2016, the exercise price
was reset to $0.70 per share.
This warrant was not issued with the
intent of effectively hedging any future cash flow, fair value of
any asset, liability or any net investment in a foreign
operation. This warrant was issued with a down-round
provision whereby the exercise price would be adjusted downward in
the event that additional shares of our common stock or securities
exercisable, convertible or exchangeable for our common stock were
issued at a price less than the exercise
price. Therefore, the fair value of these warrants was
recorded as a liability in the consolidated balance sheet and are
marked to market each reporting period until they are exercised or
expire or otherwise extinguished. During the year ended September
30, 2014, the Company recognized $320,657 of other expense related
to the Xinova warrant. During the year ended September 30, 2015,
the Company recognized $14,574 of other income related to the
Xinova warrant. During the year ended September 30, 2016, the
Company recognized $
286,260
of
other income from the increase in the fair value of the warrant
liability at September 30, 2016. During the six months ended March
31, 2017, the Company recognized $2,138 of other expense resulting
from the increase in the fair value of the warrant liability at
March 31, 2017.
Derivative Instrument – Series A Convertible Preferred
Stock
The
Company issued 11,667
shares of Series
A Convertible Preferred Stock with attached warrants during the
year ended September 30, 2015. The Company allocated $233,322 to
stockholder’s equity and $116,678 to the derivative warrant
liability.
The warrants were
issued with a down round provision. The warrants have a term of
five years, 23,334 are exercisable at $30 per common share and
23,334 are exercisable at $45 per common share. On August 4, 2016,
the exercise price was adjusted to $0.70 per share.
During
the year ended September 30, 2015, the Company recognized $30,338
of other expense related to the warrant liability. During the year
ended September 30, 2016, the Company recognized $
132,724
of other income resulting from the
increase in the fair value of the warrant liability at September
30, 2016. During the six months March 31, 2017, the Company
recognized $1,450 of other expense resulting from the increase in
the fair value of the warrant liability at March 31,
2017.
Derivative Instrument – Series C Convertible Preferred
Stock
The
Company issued
shares of Series C
Convertible Preferred Stock with attached warrants during the year
ended September 30, 2016. In February 2017, the Company modified
the term of the warrants to provide a down round provision.
The Company recognized $
769,643
of other expense resulting from the fair value of the warrant
liability at March 31, 2017.
10.
CONVERTIBLE NOTES PAYABLE
Convertible notes payable as of March 31, 2017 and September 30,
2016 consisted of the following:
The Company entered into Convertible Promissory Notes totaling
$710,000 with accredited investors during September 2015 to
February 2016 to fund short-term working capital. The Notes accrue
interest at a rate of 8% per annum and become due September 2016 to
February 2017 and are convertible into common stock at the same
price of our next financing. On November 31, 2016, holders of
$695,000 of the Convertible Promissory Notes converted to 944,948
shares of common stock and five year warrants to purchase common
stock at a price of $1.00 per share.
The
Company recorded accrued interest of $14,687
during the six months ended March 31, 2017.
On February 15, 2017 the Company repaid the remaining $15,000
Promissory Note and accrued interest in cash.
On September 30, 2016, the Company entered into a $175,000
Convertible Promissory Note with Clayton A. Struve, an accredited
investor and affiliate of the Company, to fund short-term working
capital. The Convertible Promissory Note accrues interest at a rate
of 10% per annum and becomes due on March 30, 2017. The Note holder
can convert to common stock at $0.70 per share. During the six
months ended March 31, 2017, the Company recorded interest of $
8,750 related to the convertible note.
The Company entered into two Convertible Promissory Notes totaling
$330,000 with accredited investors during on November 1, 2016. The
Notes accrue interest at a rate of 10% per annum and become due May
1, 2017 and are convertible into Preferred stock at a conversion
price of $0.80 per share and a five-year warrant to purchase a
share of common stock at $1.00 per share. The company first
allocated the value received to the warrants based on the Black
Scholes value assuming a 1 year life, 130% volatility and .7% risk
free interest rate. The remaining value was below the fair market
value on the date of issuance and as a result the company recorded
and beneficial conversion dividend of $326,687 at the time
issuance.
The
Company recorded
interest of $10,633 as of February 24, 2017.
On February 24,
2016, The Company paid $113,544 in full payment of an Original
Issue Discount Convertible Promissory Note issued to an accredited
investor on November 1, 2016. On February 24, 2017, the holder of
an Original Issue Discount Convertible Promissory Note issued on
November 1, 2016 converted the principal and outstanding interest
of $227,088 into 283,861 shares of the Company’s Series D
Preferred Stock and a five-year warrant to purchase 283,861 shares
of common stock.
The warrants were issued with a down round provision. The warrants
have a term of five years, and are exercisable at $1.00 per common
share
. The Company recorded the fair value of the warrants
as a derivative liability. During the six months March 31, 2017,
the Company recognized $122,344 of other expense related to the
value of the warrants.
11.
|
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT
|
Notes payable, capitalized leases and long-term debt as of March
31, 2017 and September 30, 2016 consisted of the
following:
|
|
|
|
|
|
|
|
|
Capital Source Business Finance
Group
|
$
365,558
|
$
370,404
|
Note Payable to Umpqua
Bank
|
199,935
|
199,935
|
Secured note payable to J3E2A2Z LP -
related party
|
600,000
|
600,000
|
Total debt
|
1,165,493
|
1,170,339
|
Less current portion of long term
debt
|
(1,165,493
)
|
(1,170,339
)
|
Long term debt
|
$
-
|
$
-
|
Capital Source Business Finance Group
The
Company finances its TransTech operations from operations and a
Secured Credit Facility with Capital Source
Business
Finance
Group. On December 9, 2008,
TransTech entered into a $1,000,000 secured credit facility with
Capital Source
to fund
its operations. On December 12, 2016, the secured
credit facility was renewed for an additional six months, with a
floor for prime interest of 4.5% (currently 4.5%) plus 2.5%. The
eligible borrowing is based on 80% of eligible trade accounts
receivable, not to exceed $1,000,000. The secured credit facility
is collateralized by the assets of TransTech, with a guarantee by
Visualant, including a security interest in all assets of
Visualant. Availability under this Secured Credit ranges from $0 to
$175,000 ($10,000 as of September 30, 2016) on a daily basis. The
remaining balance on the accounts receivable line of $365,588 as of
March 31, 2017 must be repaid by the time the secured credit
facility expires on June 12, 2017, or we renew by automatic
extension for the next successive six-month term.
Note Payable to Umpqua Bank
The Company has a $199,935 Business Loan Agreement with Umpqua Bank
(the “Umpqua Loan”), which matures on December 31, 2017
and provides for interest at 3.25% per year.
Related to this
Umpqua Loan, the Company entered into a demand promissory note for
$200,000 on January 10, 2014 with an entity affiliated with Ronald
P. Erickson, our Chief Executive Officer. This demand promissory
note will be effective in case of a default by the Company under
the Umpqua Loan.
The Company recorded
accrued interest of $17,852 as of March 31,
2017.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
The Company also has two other demand promissory notes payable to
entities affiliated with Mr. Erickson, totaling $600,000. Each of
these notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. The Company
recorded accrued interest of $49,204 as of March 31,
2017.
Authorized Capital Stock
Series D Convertible Preferred Stock
On
November 14, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to certain accredited
investors for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated November 10,
2016.
On
December 19, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to an accredited
investor for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated December 14,
2016.
On
February 28, 2017, the Company issued 283,861 shares of Series D
Convertible Preferred Stock and a warrant to purchase 283,861
shares of common stock in a private placement to an accredited
investor for conversion of a $220,000 Promissory Note and accrued
interest of $7,089 pursuant to a Series D Preferred Stock and
Warrant Purchase Agreement dated February 28, 2017.
The
initial conversion price of the Series D Shares is $0.80 per share,
subject to certain adjustments. The initial exercise price of the
warrant is $1.00 per share, also subject to certain
adjustments.
As part
of the Purchase Agreement, the Company has agreed to register the
shares of common stock sold in the private placement and the shares
of common stock issuable upon exercise of the warrant for resale or
other disposition.
On
November 8, 2016, the Company applied with the State of Nevada for
the approval of the Certificate of Designations, Preferences, and
Rights of Series D Convertible Preferred Stock. The Certificate
designated up to 3,906,250 shares with a par value of $.001 per
share. The Series D Convertible Preferred Stock is convertible into
common stock at $0.80 per share, with certain adjustments as set
forth in the Certificate. The Company has issued 375,000 shares of
Series D Convertible Preferred Stock through February 21, 2017, and
intends to issue up to 3,125,000 Series D Shares (and an equal
number of warrants) for gross proceeds of $2,500,000 pursuant on a
“best efforts” basis.
To
determine the effective conversion price, a portion of the proceeds
received by the Company upon issuance of the Series D Preferred
Stock was first allocated to the freestanding warrants issued as
part of this transaction. Given that the warrants are subject to
repricing in the event of a future financing below $0.80 per share,
the Company determined that the warrants should receive an
allocation of the proceeds based on their relative fair
value.
As
such, the warrants associated with the November 14, 2016 issuance
were allocated a fair value of approximately $56,539 upon issuance,
with the remaining $63,539 of net proceeds allocated to the Series
D Preferred Stock. Proportionately, this allocation resulted in
approximately 53% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.34. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$1.14 per share, and concluded that the conversion feature did have
an intrinsic value of $0.80 per share. As such, the Company
concluded that the Series D Preferred Stock did contain a
beneficial conversion feature of $150,211 which was recorded as a
beneficial conversion in stockholders’ equity.
The
warrants associated with the December 19, 2016 issuance were
allocated a fair value of approximately $60,357 upon issuance, with
the remaining $69,643 of net proceeds allocated to the Series D
Preferred Stock. Proportionately, this allocation resulted in
approximately 54% of the amount of the Series D Preferred Stock
issuance remaining, which applied to the stated conversion price of
$0.80 resulted in an effective conversion price of approximately
$0.37. Having determined the effective conversion price, the
Company then compared this to the fair value of the underlying
Common Stock as of the commitment date, which was approximately
$0.81 per share, and concluded that the conversion feature did have
an intrinsic value of $0.44 per share. As such, the Company
concluded that the Series C Preferred Stock did contain a
beneficial conversion feature of $82,232 which was recorded as a
beneficial conversion in stockholders’ equity.
Common Stock
All of the offerings and sales described below were deemed to be
exempt under Rule 506 of Regulation D and/or Section 4(a)(2) of the
Securities Act. No advertising or general solicitation was employed
in offering the securities, the offerings and sales were made to a
limited number of persons, all of whom were accredited investors
and transfer was restricted by the company in accordance with the
requirements of Regulation D and the Securities Act. All issuances
to accredited and non-accredited investors were structured to
comply with the requirements of the safe harbor afforded by Rule
506 of Regulation D, including limiting the number of
non-accredited investors to no more than 35 investors who have
sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of
an investment in our securities.
The following equity issuances occurred during the six months ended
March 31, 2017:
On October 21, 2015, the Company entered into a Public Relations
Agreement with Financial Genetics LLC for public relation services.
On October 18, 2016, the Company entered into an Amendment to
Public Relations Agreement with Financial Genetics LLC. Under the
Agreements, Financial Genetics was issued 297,481 shares of our
common stock during the six months ended March 31, 2017. The
Company expensed $238,261 during the six months ended March 31,
2017.
On October 6, 2016, the Company entered into a Services Agreement
with Redwood Investment Group LLC for financial services. Under the
Agreement, Redwood was issued 200,000 shares of our common stock.
The Company expensed $140,000 during the six months ended March 31,
2017.
The Company entered into Convertible Promissory Notes totaling
$710,000 with accredited investors during September 2015 to
February 2016 to fund short-term working capital. The Notes accrued
interest at a rate of 8% per annum and became due September 2016 to
February 2017 and were convertible into common stock as part of our
next financing. On November 30, 2016, the Company converted
$695,000 of the /Convertible Promissory Notes and interest of
$54,078 into 936,348 shares of comment stock at $0.80 per share.
The Company also issued warrants to purchase 936,348 shares of the
Company’s common stock. The five-year warrants are
exercisable at $1.00 per share, subject to adjustment.
On December 22, 2016, a supplier converted accounts payable
totaling $6,880 into 8,600 shares of common stock valued at $0.80
per share.
Warrants to Purchase Common Stock
The following warrants were issued during the six months ended
March 31, 2017:
The Company entered into Convertible Promissory Notes totaling
$710,000 with accredited investors during September 2015 to
February 2016 to fund short-term working capital. The Notes accrued
interest at a rate of 8% per annum and became due September 2016 to
February 2017 and were convertible into common stock as part of our
next financing. On November 30, 2016, the Company converted
$695,000 of the /Convertible Promissory Notes and interest of
$54,078 into 936,348 shares of comment stock at $0.80 per share.
The Company also issued warrants to purchase 936,348 shares of the
Company’s common stock. The five-year warrants are
exercisable at $1.00 per share, subject to adjustment.
On
November 14, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to certain accredited
investors for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated November 10,
2016.
On
December 19, 2016, the Company issued 187,500 shares of Series D
Convertible Preferred Stock and a warrant to purchase 187,500
shares of common stock in a private placement to an accredited
investor for gross proceeds of $150,000 pursuant to a Series D
Preferred Stock and Warrant Purchase Agreement dated December 14,
2016.
On
February 28, 2017, the Company issued 283,861 shares of Series D
Convertible Preferred Stock and a warrant to purchase 283,861
shares of common stock in a private placement to an accredited
investor for conversion of a $220,000 Promissory Note and accrued
interest of $7,089 pursuant to a Series D Preferred Stock and
Warrant Purchase Agreement dated February 28, 2017
The
initial conversion price of the Series D Shares is $0.80 per share,
subject to certain adjustments. The initial exercise price of the
warrant is $1.00 per share, also subject to certain
adjustments.
During
the six months ended March 31, 2017, the Company revised five year
placement agent warrants to purchase 312,500 shares of common
stock. The price was reduced from $1.00 to $0.70 per share and the
exercise price is now subject to adjustment. The Company recorded
250,000 shares during the year ended September 30, 2016 the fair
value of these warrants is $137,812
at March 31,
2017.
A
summary of the warrants outstanding as of
March 31, 2017
were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
3,453,171
|
$
0.84
|
Issued
|
1,698,263
|
0.94
|
Exercised
|
-
|
-
|
Forfeited
|
-
|
-
|
Expired
|
-
|
-
|
Outstanding
at end of period
|
5,151,434
|
$
0.88
|
Exercisable
at end of period
|
5,151,434
|
|
|
|
|
|
|
|
Intrinsic
value
|
-
|
-
|
A summary of the status of the warrants outstanding as of
March 31, 2017
is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,501,336
|
3.69
|
$
0.70
|
3,501,336
|
$
0.70
|
1,635,762
|
3.74
|
1.00
|
1,635,762
|
1.00
|
14,336
|
0.87
|
30.00
|
14,336
|
30.00
|
5,151,434
|
3.80
|
$
0.88
|
5,151,434
|
$
0.88
|
The
significant weighted average assumptions relating to the valuation
of the Company’s warrants for the period ended
March 31, 2017
were as
follows:
Assumptions
|
|
Dividend yield
|
0%
|
Expected life
|
.25-5
|
Expected volatility
|
130%
|
Risk free interest rate
|
.05-1.0%
|
There were vested warrants of 5,151,434 as of March 31, 2017 with
an aggregate intrinsic value of $0.
Description of Stock Option Plan
On March 21, 2013, an amendment to the Stock Option Plan was
approved by the stockholders of the Company, increasing the number
of shares reserved for issuance under the Plan to 93,333
shares.
Determining Fair Value under ASC 505
The Company records compensation expense associated with stock
options and other equity-based compensation using the
Black-Scholes-Merton option valuation model for estimating fair
value of stock options granted under our plan. The Company
amortizes the fair value of stock options on a ratable basis over
the requisite service periods, which are generally the vesting
periods. The expected life of awards granted represents the period
of time that they are expected to be outstanding. The
Company estimates the volatility of our common stock based on the
historical volatility of its own common stock over the most recent
period corresponding with the estimated expected life of the award.
The Company bases the risk-free interest rate used in the Black
Scholes-Merton option valuation model on the implied yield
currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term equal to the expected life of the award.
The Company has not paid any cash dividends on our common stock and
does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield
of zero in the Black-Scholes-Merton option valuation model and
adjusts share-based compensation for changes to the estimate of
expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate is
recognized in the period the forfeiture estimate is
changed.
Stock Option Activity
The Company had no stock option transactions during the six months
ended March 31, 2017:
There are currently 50,908 options to purchase common stock at an
average exercise price of $18.05 per share outstanding as of March
31, 2017 under the 2011 Stock Incentive Plan. The Company recorded
$21,774 and $23,674 of compensation expense, net of related tax
effects, relative to stock options for the six months ended March
31, 2017 and 2016 in accordance with ASC 505. Net loss per share
(basic and diluted) associated with this expense was approximately
($0.00) and ($0.01) per share, respectively. As of March 31, 2017,
there is approximately $91,643 of total unrecognized costs related
to employee granted stock options that are not vested. These costs
are expected to be recognized over a period of approximately 2.78
years.
Stock option activity for the six months ended March 31, 2017 and
the year ended September 30, 2016 was as follows:
|
Weighted Average
|
|
Options
|
Exercise Price
|
$
|
Outstanding
as of September 30, 2016
|
50,908
|
18.04
|
918,627
|
Granted
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
Forfeitures
|
-
|
-
|
-
|
Outstanding
as of December 31, 2016
|
50,908
|
$
18.045
|
$
918,627
|
Granted
|
|
|
|
Exercised
|
|
|
|
Forfeitures
|
|
|
|
Outstanding
as of March 31, 2017
|
50,908
|
$
18.045
|
$
918,627
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable as of March 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.500
|
3,334
|
1.72
|
$
13.50
|
3,334
|
$
13.50
|
15.000
|
20,906
|
2.52
|
15.00
|
9,514
|
15.00
|
19.500
|
13,334
|
2.61
|
19.50
|
13,334
|
19.50
|
22.500
|
13,334
|
3.31
|
22.50
|
13,334
|
22.50
|
|
50,908
|
2.81
|
$
18.04
|
39,516
|
$
18.92
|
There were exercisable options of 50,908 as of March 31, 2017 with
an aggregate intrinsic value of $0.
14.
|
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Related Party Transactions with Ronald P. Erickson
See Note 13 for Notes Payable to Ronald P. Erickson, our Chief
Executive Officer Chief and/or entities in which Mr. Erickson has a
beneficial interest.
Note Payable to Umpqua Bank
The Company has a $199,935 Business Loan Agreement with Umpqua Bank
(the “Umpqua Loan”), which matures on December 31, 2017
and provides for interest at 3.25% per year.
Related to this
Umpqua Loan, the Company entered into a demand promissory note for
$200,000 on January 10, 2014 with an entity affiliated with Ronald
P. Erickson, our Chief Executive Officer. This demand promissory
note will be effective in case of a default by the Company under
the Umpqua Loan.
The Company recorded
accrued interest of $19,476 as of March 31,
2017.
Note Payables to Ronald P. Erickson or J3E2A2Z LP
The Company also has two other demand promissory notes payable to
entities affiliated with Mr. Erickson, totaling $600,000. Each of
these notes were issued between January and July 2014, provide for
interest of 3% per year and now mature on March 31, 2017. The notes
payable also provide for a second lien on our assets if not repaid
by March 31, 2017 or converted into convertible debentures or
equity on terms acceptable to the Mr. Erickson. The Company
recorded accrued interest of $49,204 as of March 31,
2017.
Other Amounts Due to Mr. Erickson
Mr. Erickson and/or entities with which he is affiliated also have
advanced $524,832 and have unreimbursed expenses and compensation
of approximately $375,000. The Company owes Mr. Erickson, or
entities with which he is affiliated, $1,499,832 as of March 31,
2017.