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TMCNet:  VISUALANT INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[August 14, 2014]

VISUALANT INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Forward-looking statements in this report reflect the good-faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.


The following summarizes our plans for our ChromaID™ technology. Based on our expenditures on this technology, the management effort and the Intellectual Venture relationship, we expect our ChromaID™ technology to provide the majority of net revenues in future years from product sales, licenses, royalties and other revenue streams as discussed in the Business section. TransTech currently provides the majority of our net revenues. There is no government regulation of our business at this time.

Our ChromaID™ Technology We have invented a way to project light at a material (solid surface, liquid, or gas) and measure the amount of light that is reflected back. The pattern of this reflected light is compared to other patterns we have captured and this allows us to identify, detect, or diagnose materials that cannot be identified by the human eye. We refer to this pattern of reflected light as a ChromaID™. We design ChromaID scanning devices made with electronic, optical, and software parts to produce and capture the light.

Our first product, the ChromaID F12 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, plastic packing, semiconductors, pharmaceutical equipment manufacturers, medical waste, commercial paint manufacturers, process control companies, currency paper and ink manufacturers, security card, reader, and scanner manufacturers, food processing, and electronic gaming.

There is no current requirement for FDA or other government approval for the current applications of our ChromaID technology. Over time, as the Company explores the application of its ChromaID technology for medical diagnostics and other applications, the Company expects that there will be requirements for FDA and other government approvals before applications using the technology in medical and other regulated fields can enter the marketplace.

Our research and development expenses are as follows: Nine months ended June 30, 2014- $570,754 Year ended September 30, 2013- $1,169,281 Year ended September 30, 2012- $176,944 We employ two individuals and utilize contractors at other suppliers for our research and development.

Our Patents 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.

20 --------------------------------------------------------------------------------We are pursuing an aggressive patent strategy to expand our unique intellectual property in the United States and Japan and other countries.

Services and License Agreement with Invention Development Management Company, L.L.C.

On November 11, 2013, we entered into a Services and License Agreement with Invention Development Management Company, L.L.C., a Delaware limited liability company. IDMC is affiliated with Intellectual Ventures, which collaborates with inventors, partners with pioneering companies and invests both expertise and capital in the process of invention.

The Agreement requires IDMC to identify and engage investors to develop new applications of the Company's ChromaID™ development kits, present the developments to the Company for approval, and file at least ten (10) patent applications to protect the developments. IDMC is responsible for the development and patent costs. We provided the development 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 development 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 services to secure potential customers and licensees for its technology. We shipped twenty ChromaID F12 Lab Kits to inventors in the IDMC network during December 2013 and January 2014.

We received a worldwide, nontransferable, exclusive license to the licensed IP developed under this 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 nontransferrable option to acquire a worldwide, nontransferrable, nonexclusive license to the useful IP 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 the Company, including present Visualant IP and any licensed IP, if applicable, to potential customers, licensees, and distributors in markets or geographies not being pursued by Visualant. Also, IDMC has introduced Visualant to potential customers, licensees, or distributors for the purpose of identifying and closing a license, sale, or distribution deal or other monetization event.

We granted to IDMC a nonexclusive, worldwide, fully paid up, nontransferable, sublicenseable, perpetual license to the Visualant IP, 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, nonsublicenseable, perpetual license to access and use Visualant Technology solely for the purpose of marketing the aforementioned sublicenses to the Visualant IP to third parties outside the designated fields of use.

We issued a warrant to purchase 14,575,286 shares of common stock as consideration for the exclusive IP license and application development services to IDMC signed on November 11, 2013. The warrant price of twenty cents ($0.20) per share expires November 10, 2018 and the per share price is subject to adjustment.

We also agreed to pay IDMC a percentage of license revenue for the global development business services and a percentage of revenue received from any IDMC introduced company. We also agreed to pay IDMC a royalty when Visualant receives royalty product revenue from an IDMC introduced company.

IDMC agreed to pay us a license fee for the nonexclusive license of the Visualant IP.

The term of the exclusive IP license and the nonexclusive IP 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.

21--------------------------------------------------------------------------------Purchase Agreement with Special Situations and forty other Accredited Investors which closed June 14, 2013 On June 10, 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 52,300,000 shares of common stock at $0.10 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 52,300,000 shares of common stock at $0.15 per share; and (ii) five year Series B Warrants to purchase a total of 52,300,000 shares of common stock at $0.20 per share. In addition, GVC Capital LLC, the placement agent in that transaction, was issued five-year warrants to purchase a total of 5,230,000 shares of common stock at $0.10 per share. 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.

Agreements with Sumitomo Precision Products Co., Ltd.

On May 31, 2012, we entered into a Joint Research and Product Development Agreement with Sumitomo, a publicly-traded Japanese corporation, for the commercialization of our ChromaID™ technology. On March 29, 2013, we entered into an Amendment to Joint Research and Product Development Agreement or Amended Agreement with Sumitomo. The Amended Agreement 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. The current version of the technology, identified as Version 6D, was introduced to the marketplace as a part of our ChromaID F12 Lab Kit during the three months ended December 31, 2013. The Amended Agreement expired December 31, 2013.

Sumitomo invested $2,250,000 in exchange for 17,307,693 shares of restricted common shares priced at $0.13 per share that was funded on June 21, 2012. Sumitomo also paid the Company an initial payment of $1 million in accordance for an exclusive License Agreement for the Spectral Pattern Matching technology which covers Japan, China, Taiwan, Korea and the entirety of Southeast Asia (Burma, Indonesia, Thailand, Cambodia, Laos, Vietnam, Singapore and the Philippines). A running royalty for the license granted under the License Agreement is expected be negotiated at the completion of the Joint Development Agreement. The Sumitomo License fee was recorded as revenue over the life the Joint Development Agreement and was fully recorded as of May 31, 2013.

Sumitomo is publicly traded in Japan and has operations in Japan, United States, China, United Kingdom, Canada and other parts of the world.

KEY MARKET PRIORITIES Our Developing Markets and Customers.

Our plan is to develop markets and customers who have a need to identify, detect, or diagnose flat surface materials which include, but are not limited to, commercial paint manufacturers, pharmaceutical equipment manufacturers, process control companies, currency paper and ink manufacturers, security card, reader, and scanner manufacturers, food processing, and electronic gaming.

Future market opportunities might include identification, detection, or diagnosis of: - Powders for law enforcement applications, - Drugs and drug container seals for protection against contamination and counterfeiting for pharmaceutical applications.

- Fruit and vegetable ripeness for agriculture applications, - Noninvasive skin analysis for discovery of certain diseases or conditions for medical applications.

Our Commercialization Plans for our ChromaID Technology.

We started shipping our first ChromaID product, the ChromaID F12 Lab Kit, during the last calendar quarter of 2013, after we complete final assembly and testing.

This Lab Kit will include the following: - ChromaID F12 Scanner. A small device made with electronic, optical, and software parts, which shines light onto a flat material and measures the amount of light that is reflected back. The device is the size of a flashlight (5.5" long and 1.25" diameter).

- ChromaID Lab Software. A software application that runs on a Windows Personal Computer. This software configures and controls the ChromaID F12 Scanner, displays the captured ChromaID Profile, and compares it to known ChromaID Profiles.

The ChromaID F12 Scanner allows customers to evaluate the technology and determine if it is appropriate for their application. The main electronic and optical parts of the ChromaID scanner could be supplied to customers to put in their own products, these parts are called the 'Scanhead'. A set of ChromaID Developer Tools are also available, which allows customers to develop their own products based on the ChromaID technology.

22 --------------------------------------------------------------------------------The ChromaID profile must be stored, managed, and readily accessible. The database can be owned and operated by the end customer, but in the case of thousands of ChromaID profiles database management may be outsourced to Visualant or a third party provider. These database services can 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 or local 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.

Based on the commercialization plans outlined above, revenue can be derived from several sources: - Sale of the ChromaID F12 Lab Kit and ChromaID Developer Tools.

- Licensing of the ChromaID technology, - Sales of the Scanhead and associated licensing and royalties.

- ChromaID database administration and management services.

Our Acceleration of Business Development in the United States and Japan.

We are coordinating the sales and marketing efforts of both Visualant and Sumitomo 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 F12 Lab Kit provides a means for us to demonstrate the technology to customers in these markets.

Development of License, Royalty and Other Opportunities Our plan is to develop license and royalty producing opportunities and partners, including major companies in the US, Europe and Asia. We expect to develop our patent portfolio by continually extending the reach and application of our intellectual property.

Our first major license was signed May 31, 2012 with Sumitomo. Our Business Development team is pursuing other license opportunities with customers in our target markets.

Products TransTech products are as follows: ID Systems & Components: Provision of ID personalization systems to the security industry. These systems include components such as ID cards, printers, software, supplies, data collection devices, document scanners, photo capture products, document authentication devices, and signature capture products.

Logical and Physical Access Control: Logical access readers used for logging onto computer networks and VPNs, physical access control readers used to gain access into buildings or secure areas, software such as visitor management & temporary card solutions, and additional applications outside of security.

Radio Frequency Identification and Tracking: These products include RF scanner, readers, cards, tags, labels, tracking software, and even video surveillance cameras to tie video clips of the asset or article movement to the personnel using them or to record other events surrounding asset and article movement.

Kiosk printers for the self service industry - The self service industry is expanding from ATM's and grocery store check-out lines to fully integrated systems for paying bills, depositing cash or checks, and using financial services. TransTech provides Kiosk card printers. The mechanical functions of the printers are the same as a standard desktop card printer, but typically do not have the fancy housing and may come with much higher volume feeder capacities.

Markets Regions: Revenues are derived from over 400 resellers and national accounts in the United States.

Route to Market: TransTech's focus is on its reseller channel. Approximately 90% of sales are through the reseller channel and government prime vendors. The remaining approximately 10% is direct to end users.

Distribution Network Development: TransTech is exploring a closer position with its direct channel for tighter market feedback, insurance against manufacturer's policies, and for financial benefits. This exploration includes partnering, LLCs, Joint Ventures, and potential acquisitions.

Applications and Verticals: The primary use of TransTech products is for security applications. These fit within many verticals, including but not limited to, commercial industries, manufacturing, distribution, transportation, government, health care, education, entertainment. In recent years there has been growth into several non-security applications such as gaming/player's cards, loyalty cards, gift cards, direct marketing, certifications, amusement, payment, and guest cards.

Key Partners Customers: We currently do not have any customer concentrations where one customer exceeds 10% of net revenues on an annual basis.

23 -------------------------------------------------------------------------------- Suppliers: Evolis, Fargo, Magicard and NiSCA, are major vendors whose products account for approximately 70% of TransTech's revenue. TransTech buys, packages and distributes products from these vendors after issuing purchase orders. Our products do not have any limit on availability, subject to proper payment of outstanding invoices.

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, the potential adjustment in the exercise price of our warrants and a volatile market price for our common stock.

These risks and uncertainties are discussed in more detail below in Part II, Item 1A.

RESULTS OF OPERATIONS The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from period-to-period.

(dollars in thousands) Three Months Ended June 30, 2014 2013 $ Variance % Variance Revenue $ 2,021 $ 2,060 $ (39 ) -1.9 % Cost of sales 1,710 1,642 68 -4.1 % Gross profit 311 418 (107 ) -25.6 % Research and development expenses 166 341 (175 ) 51.3 % Selling, general and administrative expenses 781 1,018 (237 ) 23.3 % Operating loss (636 ) (941 ) 305 32.4 % Other income (expense): Interest expense (27 ) (38 ) 11 28.9 % Other income 9 5 4 80.0 % Gain (loss) on change - derivative liability warrants 1,997 (1,449 ) 3,446 237.8 % Total other income (expense) 1,979 (1,482 ) 3,461 233.5 % Income (loss) before income taxes 1,343 (2,423 ) 3,766 155.4 % Income taxes - current benefit 3 (14 ) 17 121.4 % Net income (loss) 1,340 (2,409 ) 3,749 155.6 % Non-controlling interest 3 (6 ) 9 150.0 % Net income (loss) attributable to Visualant, Inc. common shareholders $ 1,337 $ (2,403 ) $ 3,740 155.6 % THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2013 SALES Net revenue for the three months ended June 30, 2014 decreased $39,000 to $2,021,000 as compared to $2,060,000 for the three months ended June 30, 2013.

The decrease was due to increased sales of $128,000 at TransTech, offset by a reduction of $167,000 at Visualant in license revenue from Sumitomo. Sumitomo paid the Company an initial payment of $1 million under a License Agreement dated May 31, 2012 providing Sumitomo with an exclusive license of our technology in identified Asian territories. This license revenue was fully recognized by May 31, 2013. The TransTech increase primarily resulted from the release of new products, including radio frequency and asset tracking and kiosk printer products and sales to an aerospace company.

COST OF SALES Cost of sales for the three months ended June 30, 2014 increased $68,000 to $1,710,000 as compared to $1,642,000 for the three months ended June 30, 2013.

The increase was due to increased sales and product mix at TransTech.

Gross margin was $311,000 from TransTech as compared to $418,000 for the three months June 30, 2013.The gross margin was 15.4% for the three months ended June 30, 2014 as compared to 20.3% for the three months ended June 30, 2013. The decrease relates to the reduction in Sumitomo license revenue, offset by an increase in TransTech gross margin from 13.3% to 15.4% related to the release of new products, including radio frequency and asset tracking and kiosk printer products.

24--------------------------------------------------------------------------------RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the three months ended June 30, 2014 decreased $175,000 to $166,000 as compared to $341,000 for the three months ended June 30, 2013. The decrease was due to reduced expenditures for suppliers related to the commercialization of Visualant's ChromaID technology as result of the Services and License Agreement with IDMC.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the three months ended June 30, 2014 decreased $237,000 to $781,000 as compared to $1,018,000 for the three months ended June 30, 2013. The decrease was due to reduced legal expenses of ($176,000), reduced expenses at TransTech ($64,000), and an increase in other general expenses ($3,000). The reduction in legal expenses related to reduced expenses. The decrease in TransTech expenses related to the departure of James Gingo at TransTech. As part of the selling, general and administrative expenses for the three months ended June 30, 2014, we incurred investor relation expenses of $14,000 and business development expenses of $93,000.

OTHER INCOME/EXPENSE Other income for the three months ended June 30, 2014 was $1,997,000 as compared to other expense of $1,482,000 for the three months ended June 30, 2013. The income and expenses for the three months ended June 30, 2014 included $27,000 for interest expense, offset by gain on change - derivative liability warrants of $1,997,000 and other income of $9,000. The gain on change- derivative liability warrants is the non-cash change in the fair value and relates to derivative instruments included in the June 2013 Private Placement and the November 2013 IDMC Services and License Agreement.

The other expense for the three months ended June 30, 2013 included interest expense of $38,000 and loss on change - derivative liability warrants of $1,449,000, offset by other income of $5,000. The loss on change- derivative liability warrants is the non-cash change in the fair value and relates to derivative instruments included in the June 2013 Private Placement.

NET INCOME (LOSS) Net income for the three months ended June 30, 2014 was $1,340,000 as compared to a net loss of $2,409,000 for the three months ended June 30, 2013 for the reasons discussed above. The net loss for the three months ended June 30, 2014 included non-cash income of $1,607,000, including (i) depreciation and amortization of $93,000; and (ii) stock based compensation share and warrant issuances of $298,000; offset by (iii) gain on change- derivative liability warrants of ($1,997,000); and (iv) other income of $1,000. TransTech net loss from operations was $36,000 for the three months ended June 30, 2014 as compared to a net loss of $163,000 for the three months ended June 30, 2013.

The net loss for the three months ended June 30, 2013 included non-cash expenses of $1,624,000 consisting of (i) depreciation and amortization of $100,000; (ii) issuance of shares for services and stock based compensation of $46,000; (iv) loss on change- derivative liability warrants of $1,449,000; and (v) other expenses of $29,000.

We expect losses to continue as we commercialize our ChromaID™ technology.

The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from period-to-period.

(dollars in thousands) Nine Months Ended June 30, 2014 2013 $ Variance % Variance Revenue $ 5,923 $ 6,334 $ (411 ) -6.5 % Cost of sales 4,965 4,807 158 -3.3 % Gross profit 958 1,527 (569 ) -37.3 % Research and development expenses 571 720 (149 ) 20.7 % Selling, general and administrative expenses 2,377 3,572 (1,195 ) 33.5 % Operating loss (1,990 ) (2,765 ) 775 28.0 % Other income (expense): Interest expense (68 ) (154 ) 86 55.8 % Other income 22 25 (3 ) -12.0 % Gain (loss) on change - derivative liability warrants 818 (1,449 ) 2,267 156.5 % Loss on purchase of warrants and additional investment rights - (1,150 ) 1,150 100.0 % Total other income (expense) 772 (2,728 ) 3,500 128.3 % Loss before income taxes (1,218 ) (5,493 ) 4,275 77.8 % Income taxes - current benefit (3 ) (30 ) 27 90.0 % Net loss (1,215 ) (5,463 ) 4,248 77.8 % Non-controlling interest 24 (15 ) 39 260.0 % Net loss attributable to Visualant, Inc.

common shareholders $ (1,239 ) $ (5,448 ) $ 4,209 77.3 % 25--------------------------------------------------------------------------------NINE MONTHS ENDED JUNE 30, 2014 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2013 SALES Net revenue for the nine months ended June 30, 2014 decreased $411,000 to $5,923,000 as compared to $6,334,000 for the nine months ended June 30, 2013.

The decrease was due to increased sales of $253,000 at TransTech and $3,000 at Visualant related to the first shipments of our ChromaID product, offset by a reduction of $667,000 in license revenue from Sumitomo. Sumitomo paid the Company an initial payment of $1 million under a License Agreement dated May 31, 2012 providing Sumitomo with an exclusive license of our technology in identified Asian territories. This license revenue was fully recognized by May 31, 2013. The TransTech increase primarily resulted from the release of new products, including radio frequency and asset tracking and kiosk printer products and sales to an aerospace company.

COST OF SALES Cost of sales for the nine months ended June 30, 2014 increased $158,000 to $4,965,000 as compared to $4,807,000 for the nine months ended June 30, 2013.

The increase was due to increased sales and product mix at TransTech.

Gross margin was $1,000 for our revenue and $957,000 from TransTech for a total of $958,000 as compared to $1,527,000 for the nine months ended June 30, 2013.

The gross margin was 16.2% for the nine months ended June 30, 2014 as compared to 24.1% for the nine months ended June 30, 2013. The decrease relates to the reduction in Sumitomo license revenue, offset by and an increase in TransTech gross margin from 15.2% to 16.2% related to the release of new products, including radio frequency and asset tracking and kiosk printer products.

RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the nine months ended June 30, 2014 decreased $149,000 to $571,000 as compared to $720,000 for the nine months ended June 30, 2013. The decrease was due to reduced expenditures for suppliers related to the commercialization of Visualant's ChromaID technology as result of the Services and License Agreement with IDMC.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the nine months ended June 30, 2014 decreased $1,195,000 to $2,377,000 as compared to $3,572,000 for the nine months ended June 30, 2013. The decrease was due to reduced business development expenses ($168,000), reduced stock based compensation of ($361,000), reduced legal expenses of ($317,000), reduced expenses at TransTech ($280,000), and an increase in other general expenses ($69,000). The reduction in business development, stock based compensation and legal expenses related to reduced expenses. The decrease in TransTech expenses related to the departure of James Gingo at TransTech. As part of the selling, general and administrative expenses for the three months ended June 30, 2014, we incurred investor relation expenses of $81,000 and business development expenses of $129,000.

OTHER INCOME/EXPENSE Other income for the nine months ended June 30, 2014 was $772,000 as compared to other expense of $2,728,000 for the nine months ended June 30, 2013. The expenses for the nine months ended June 30, 2014 included $68,000 for interest expense, offset by gain on change - derivative liability warrants of $818,000, offset other income of $22,000. The gain on change- derivative liability warrants relates to derivative instruments included in the June 2013 Private Placement and the November 2013 IDMC Services and License Agreement.

The other expense for the nine months ended June 30, 2013 included (i) $1,150,000 loss on the purchase of warrants and additional investment right; (ii) $154,000 for interest expense; (iii) loss on change - derivative liability warrants of $1,449,000; and offset (iv) by $25,000 in other income. On January 30, 2013, we entered into agreements with Gemini Master Fund, Ltd. and Ascendiant Capital Partners, LLC where we acquired certain warrant and additional investment rights related to Convertible Notes Payable dated May 19, 2011. The loss on change- derivative liability warrants relates to derivative instruments included in the June 2013 Private Placement.

NET LOSS Net loss for the nine months ended June 30, 2014 was $1,215,000 as compared to a net loss of $5,463,000 for the nine months ended June 30, 2013 for the reasons discussed above. The net loss for the nine months ended June 30, 2014 non-cash expenses of $188,000, including (i) depreciation and amortization of $289,000; (ii) stock based compensation share and warrant issuances of $343,000; (iii) gain on change- derivative liability warrants of ($818,000); and (iv) other of ($2,000). TransTech net loss from operations was $31,000 for the nine months ended June 30, 2014 as compared to a net loss of $350,000 for the nine months ended June 30, 2013.

26-------------------------------------------------------------------------------- The net loss for the nine months ended June 30, 2013 included non-cash expenses of $3,264,000 consisting of (i) depreciation and amortization of $303,000; (ii) issuance of shares for services and stock based compensation of $643,000; (iii) loss on purchase of warrants and additional investment right of $850,000; (iv) loss on change - derivative liability warrants of $1,448,000; and (v) other expenses of $20,000.

We expect losses to continue as we commercialize our ChromaID™ technology.

LIQUIDITY AND CAPITAL RESOURCES We had cash of $79,000 and net working capital deficit of approximately $2,162,000 (excluding the derivative liability- warrants of $3,366,000) as of June 30, 2014. We expect losses to continue as we commercialize our ChromaID™ technology. Our cash used in operations for the nine months ended June 30, 2014 was $(902,000).

We will need to obtain additional financing in the future. There can be no assurance that we will be able to secure 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, we may need to restructure our operations, and divest all or a portion of our business.

As part of the transaction with accredited investors which closed June 14, 2013, the Company issued to the investors Series A Warrants for the purchase of 52,300,00 common shares at $0.15 per share and Series B Warrants for the purchase of 52,300,000 common shares at $0.20 per share. In addition, we issued a warrant to IDMC for the purchase of 14,575,286 common shares at $0.20 per share. If fully exercised, the warrants would provide the following liquidity (before fees) to fund the Company's operations: Series A Warrants - up to $7,845,000 and Series B Warrants - up to $10,460,000.

IDMC Warrant - up to $2,915,000.

We expect to consider other funding options if the warrants are not exercised or if we experience any delays in the commercialization of our ChromaID™ technology.

We have financed our corporate operations and our technology development through the issuance of convertible debentures, the sale common stock, issuance of common stock in conjunction with an equity line of credit, and loans by our Chief Executive Officer.

We finance our TransTech operations from operations and a Secured Credit Facility with BFI Finance Corp. On December 9, 2008 TransTech Systems, Inc.

entered into a $1,000,000 secured credit facility with BFI Business Finance to fund its operations. On June 12, 2014, 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 all assets of Visualant. Visualant believes any default would be satisfied by the assets of TransTech. Availability under this Secured Credit ranges from $0 to $175,000 ($80,589 as of June 30, 2014) on a daily basis. The remaining balance on the accounts receivable line ($481,863) as of June 30, 2014 must be repaid by the time the secured credit facility expires on December 11, 2014, or the Company renews by automatic extension for the next successive six month term.

OPERATING ACTIVITIES Net cash used in operating activities for the nine months ended June 30, 2014 was $902,000. This amount was primarily related to a net loss of $1,215,000, non-cash expenses of $188,000, including (i) depreciation and amortization of $289,000; (ii) stock based compensation share and warrant issuances of $343,000; (iii) gain on change- derivative liability warrants of ($818,000); and (iv) other of ($2,000), offset by a reduction in account receivable of $107,000, a reduction in inventory of $77,000 and an increase in accounts payable and accrued liabilities of $296,000. The gain on change- derivative liability warrants relates to derivative instruments included in the June 2013 Private Placement and the November 2013 IDMC Services and License Agreement.

INVESTING ACTIVITIES Net cash provided by investing activities for the nine months ended June 30, 2014 was $3,000. This amount was primarily related to proceeds from the sale of equipment of $3,000.

FINANCING ACTIVITIES Net cash used in financing activities for the nine months ended June 30, 2014 was $230,000. This amount was primarily related to proceeds from notes payable- related party of $500,000, offset by repayment of debt of $267,000. Ronald P.

Erickson, our Chief Executive Officer, or entities affiliated with Mr. Erickson provided or guaranteed $500,000 related to Notes Payable during the nine months ended June 30, 2014.

27-------------------------------------------------------------------------------- Our contractual cash obligations as of June 30, 2014 are summarized in the table below: Less Than Greater ThanContractual Cash Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years Operating leases $ 103,300 $ 65,292 $ 38,008 $ 0 $ 0 Notes payable 985,128 985,128 - - - Capital expenditures 375,000 75,000 150,000 150,000 - $ 1,463,428 $ 1,125,420 $ 188,008 $ 150,000 $ 0

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