UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITES EXCHANGE ACT OF
1934 For the quarterly period ended December 31, 2005
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ____________ to_________________
Commission File number 0-25541
VISUALANT, INCORPORATED
---------------------------------------------------------
(Exact name of registrant as specified in charter)
Nevada 91-1948357
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 406, 500 Union Street,
Seattle, Washington USA 98101
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
206-903-1351
-----------------
Registrant's telephone number, including area code
N/A
---
(Former name, address, and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes [X] No [ ] and ( ) has been
subject to filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding as of December 31, 2005
---------- ------------------------------------
Common Stock, $0.001 per share 16,387,224
1
INDEX
Page
Number
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PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) 3
Balance Sheet as 0f December 31, 2005 and September 30, 2005 .......... 4
Statement of Operations For the three months ended December 31,
2005 and 2004, and for the period from October 8, 1998 (Date of
Inception) to December 31, 2005 ....................................... 5
Statement of Changes in Stockholders' Equity For the period
October 8, 1998 (Date of Inception) to December 31, 2005 ............. 6
Statement of Cash Flows For the three months ended December 31,
2005 and 2004 and for the period from October 8, 1998 (Date of
Inception) to December 31, 2005 ....................................... 8
Notes to the Financial Statements ..................................... 9
ITEM 2 Management's Discussion and Analysis or Plan of Operation .......... 14
ITEM 3. Controls and Procedures ........................................... 19
PART 11. OTHER INFORMATION ................................................ 20
ITEM 1. Legal Proceedings ................................................. 20
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 20
ITEM 3. Defaults Upon Senior Securities ................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 20
ITEM 5. Other Information ................................................. 20
ITEM 6. Exhibits and Reports on Form 8-K .................................. 21
SIGNATURES ................................................................ 22
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying balance sheet of Visualant, Incorporated (development stage
company) at December 31, 2005 and September 30, 2005 and the statement of
operations for the three months ended December 31, 2005 and 2004 and statement
of cash flow for the three months ended December 31, 2005 and 2004 and for the
period from October 8, 1998 (date of incorporation) to December 31, 2005, have
been prepared by the Company's management, in conformity with principles
generally accepted in the United States of America. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and all such
adjustments are of a normal recurring nature.
Operating results for the quarter ended December 31, 2005 are not necessarily
indicative of the results that can be expected for the year ending September 30,
2006.
3
VISUALANT, INCORPORATED
(Development Stage Company)
BALANCE SHEET
December 31, 2005 and September 30, 2005
DECEMBER SEPTEMBER
31,2005 30,2005
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 343,765 $ 519,009
Accounts receivable - related party -- --
----------- -----------
Total Current Assets 343,765 519,009
----------- -----------
EQUIPMENT - net of accumulated depreciation 9,138 9,846
LICENSE - net of amortization 6,875 6,875
$ 359,778 $ 535,730
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - related party $ -- --
Accrued interest payable - related party -- --
Accounts payable - related parties -- --
Accounts payable 140,304 33,410
----------- -----------
Total Current Liabilities 140,304 133,410
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock
50,000,000 shares authorized, at $0.001 per share;
none outstanding
Common stock
200,000,000 shares authorized, at $0.001 par value;
16,387,224 shares issued and outstanding 16,387 16,307
Capital in excess of par value 3,493,666 3,458,666
Deficit accumulated during the development stage (3,290,579) (3,062,653)
----------- -----------
Total Stockholders' Equity (Deficiency) 219,474 402,320
----------- -----------
TOTAL LIABILITIES & EQUITY $ 359,778 $ 535,730
=========== ===========
The accompanying notes are an integral part of these financial statements
4
VISUALANT, INCORPORATED
(Development Stage Company)
STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2005 and 2004 and Period
October 8,1998 (Date of Inception) to December 31, 2005
Three Three October 8,
Months Months 1998
Ended Ended to
December 31, December 31, December 31,
2005 2004 2005
----------- ----------- -----------
REVENUES $ -- $ -- $ --
----------- ----------- -----------
EXPENSES
Research and development 37,200 55,800 255,879
Administrative 190,745 26,940 1,769,518
Compensation-incentive option -- 6,000 48,000
----------- ----------- -----------
NET LOSS - before other
Income & expenses (227,945) (88,740) (2,073,397)
OTHER INCOME AND
EXPENSES
Settlement of debt -- -- 43,400
Interest 19 (12,500) (106,255)
Loss of deposit - note 7 -- -- (1,154,327)
----------- ----------- -----------
NET LOSS $ (227,926) $ (101,240) $(3,290,579)
=========== =========== ===========
NET LOSS PER COMMON SHARE
Basic and diluted $ (.01) $ --
=========== ===========
AVERAGE OUTSTANDING SHARES
(stated in 1000,s)
Basic 16,347 12,864
=========== ===========
The accompanying notes are an integral part of these financial statements
5
VISUALANT INCORPORATED
(Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period October 8, 1998 (Date of Inception)
to December 31, 2005
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit
---------- ------------ ------------ ------------
Balance October 8, 1998 (date of inception) -- $ -- $ -- $ --
Issuance of common stock for cash 4,500,000 4,500 4,500 --
at $.002 - November 20, 1998
Issuance of common stock for cash
at $.01 - November 25, 1998 6,000,000 6,000 54,000 --
Issuance of common stock for cash
at $.25 - December 4, 1998 35,000 35 8,715 --
Capital contributions - expenses -- -- 3,650 --
Net operating loss for the period
October 8, 1998 to September 30, 1999 -- -- -- (27,748)
Capital contributions - expenses -- -- 3,650 --
Net operating loss for the year ended
September 30, 2000 -- -- -- (64,537)
Capital contributions - expenses -- -- 3,650 --
Net operating loss for the year ended
September 30, 2001 -- -- -- (7,585)
Issuance of common stock for cash at
$.50 - July 5, 2002 26,200 26 13,116 --
Net operating loss for the year ended
September 30, 2002 -- -- -- (113,475)
Issuance of common stock for cash at
$.50 - July 2003 100,000 100 49,900 --
Issuance of common stock for services
at $.001- June 2003 150,000 150 -- --
Issuance of common stock as payment
of debt at $.50 - July 2003 184,848 185 92,239 --
Refund and return of common shares
at $.50 - August 2003 (26,200) (26) (13,074) --
Issuance of common stock for cash
at $.75 - September 2003 520,000 520 389,480 --
Net operating loss for the year ended
September 30, 2003 -- -- -- (1,819,398)
---------- ------------ ------------ ------------
Balance September 30, 2003 11,489,848 11,490 609,826 (2,032,743)
Issuance of common stock for cash
at $.50 - net of issuance costs -
August 2004 200,000 200 89,800 --
Compensation - incentive stock options -- -- 24,000 --
Net operating loss for the year ended
September 30, 2004 -- -- -- (161,267)
Balance September 30, 2004 11,689,848 11,690 723,626 (2,194,010)
6
VISUALANT INCORPORATED
(Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - continued
For the Period October 8, 1998 (Date of Inception)
to December 31, 2005
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit
---------- ------------ ------------ ------------
Issuance of common stock for cash
at $.50 - October to December 2004 424,000 424 211,576 --
Issuance of common stock for debt
at $.50 - 2,665,502 2,665 1,330,086 --
Issuance of common stock for license
at $.75 - April 2005 10,000 10 7,490
Issuance of common stock for cash
at $.75 - May and June 2005 1,269,999 1,270 951,230 --
Issuance of common stock for services
at $.75 - August 2005 77,875 78 58,328 --
Issuance of common stock for cash
at $.75 - August 2005 170,000 170 127,330 --
Compensation - incentive stock options -- -- 24,000 --
Net operating loss for the year ended
ended September 30, 2005 -- -- -- (868,643)
Balance September 30, 2005 16,307,224 $ 16,307 $ 3,433,666 $ (3,062,653)
=========== ============ ============ ============
Issuance of common stock for cash
at $.75 - November 2005 80,000 80 60,000 --
Balance December 31, 2005 16,387,224 $ 16,387 $ 3,493,666 $ (3,290,579)
=========== ============ ============ ============
The accompanying notes are an integral part of these financial statements
7
VISUALANT, INCORPORATED
(Development Stage Company)
STATEMENT OF CASH FLOWS
For the three months ended December 31, 2005 and 2004 and the Period
October 8, 1998 (Date of Inception) to December 31, 2005
Oct 8, 1998
to
December 31 December 31 December 31,
2005 2004 2005
----------- ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $ (227,926) $ (101,240) $(3,290,579)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 708 -- 3,795
Issuance of capital stock for expenses -- -- 45,456
Changes in accounts and notes payable 6,974 (1,426,222) 1,565,559
Capital contributions - expenses -- -- 10,950
Incentive stock options -- 6,000 48,000
Loss of deposit -- -- 1,154,327
----------- ----------- -----------
Net Changes in Cash from Operations (220,244) (1,521,462) (462,492)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment -- (15,700) (28,008)
Purchase of investment - deposit -- -- (1,154,327)
----------- ----------- -----------
-- (15,700) (1,182,335)
CASH FLOWS FROM FINANCING
ACTIVITIES
Capital stock subscriptions received -- -- 15,000
Net - proceeds from issuance of
common stock 45,000 1,544,751 1,957,892
----------- ----------- -----------
Net Changes in Cash (175,244) 7,589 343765
Cash at Beginning of Period 519,009 12,831 --
----------- ----------- -----------
Cash at End of Period $ 343,765 $ 20,420 $ 343,765
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
8
VISUALANT INCORPORATED
(Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION
The Company was incorporated under the laws of the State of Nevada on October 8,
1998 with the name of "Cigar King Corporation" with authorized common stock of
200,000,000 shares at $.001 par value. On September 13, 2002 the name was
changed to "Starberrys Corporation" as part of a change in the authorized
capital stock by the addition of 50,000,000 shares of preferred stock with a par
value of $.001. On August 18, 2004 the name of the Company was changed to
"Visualant Incorporated". There are no preferred shares issued and the terms
have not been determined.
The Company has not started any operations and is in the development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Methods
- ------------------
The Company recognizes income and expenses based on the accrual method of
accounting.
Dividend Policy
- ---------------
The Company has not adopted a policy regarding payment of dividends.
Basic and Diluted Net Income (Loss) Per Share
- ---------------------------------------------
Basic net income (loss) per share amounts are computed based on the weighted
average number of shares actually outstanding. Diluted net income (loss) per
share amounts are computed using the weighted average number of common shares
and common equivalent shares outstanding as if shares had been issued on the
exercise of common share rights unless the exercise becomes antidilutive and
then only the basic per share amounts are shown in the report.
Key Employee Incentive Stock Option Plan
- ----------------------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes accounting
and reporting standards for stock-based employee compensation plans. As
permitted by SFAS No. 123, the Company accounts for such arrangements under APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid instruments purchased with a maturity,
at the time of purchase, of less than three months, to be cash equivalents.
9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income Taxes
- ------------
The Company utilizes the liability method of accounting for income taxes. Under
the liability method deferred tax assets and liabilities are determined based on
the differences between financial reporting and the tax bases of the assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect, when the differences are expected to reverse. An allowance against
deferred tax assets is recognized, when it is more likely than not, that such
tax benefits will not be realized.
On September 30, 2005 the Company had a net operating loss available for
carryforward of $3,290,579. The tax benefit of approximately $ 987,000 from the
loss carry forward has been fully offset by a valuation reserve because the use
of the future tax benefit is doubtful since the Company has no operations. The
loss carryforward will expire in 2025.
Financial Instruments
- ---------------------
The carrying amounts of financial instruments, including cash and accounts
payable, are considered by management to be their estimated fair values due to
their short term maturities.
Financial and Concentrations Risk
- ---------------------------------
The Company does not have any concentration or related financial credit risk
except that it maintains cash in banks in amounts over the insured amounts of
$100,000, but are otherwise banks of high integrity.
Research and Development Costs
- ---------------------------------
Research and development costs, including wages, supplies, depreciation of
equipment used in the research activity, and any assigned overhead expense, are
expensed as incurred.
Revenue Recognition
- -------------------
Revenue will be recognized on the sale and delivery of a product or the
completion of a service provided.
Advertising and Market Development
- ----------------------------------
The Company will expense advertising and market development costs as incurred.
10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Estimates and Assumptions
- -------------------------
Management uses estimates and assumptions in preparing financial statements in
accordance with accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported amounts of the
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing these financial statements.
Foreign Currency Translation
- ----------------------------
Part of the transactions of the Company were completed in Canadian dollars and
have been translated to US dollars as incurred, at the exchange rate in effect
at the time, and therefore, no gain or loss from the translations is recognized.
US dollars are considered to be the functional currency.
Recent Accounting Pronouncements
- --------------------------------
The Company does not expect that the adoption of other recent accounting
pronouncements will have a material impact on its financial statements.
3. DEVELOPMENT OF TECHNOLOGIES OWNED BY THE COMPANY
The Company is in the business of researching, developing, acquiring, and
commercializing products and services related to color technology outside the
visible spectrum, using specialized narrow and N-IR and N-UV sensors and spatial
analysis software modeling which translate the invisible into the visible and
involving specialized and proprietary information and trade secrets which the
Company owns, which is considered to be among its most sensitive, confidential,
and proprietary information.
The Company has a working agreement with a contractor to further develop the
technology in which the Company has agreed to pay development costs on a semi
monthly basis.
11
4. COMMON CAPITAL STOCK
During the 12-month period ended December 31, 2005, the Company issued the
following common shares of capital stock.
1,863,999 shares for cash of $1,292,000 as part of a private offering
of the Company's stock.
2,665,502 shares for payment of debt of $1,332,751 of which $1,235,252
was due former related parties.
10,000 shares for a license.
77,875 shares for services of $58,406.
80,000 shares for cash of $60,000 as part of a private offering.
5. INCENTIVE STOCK OPTIONS
During 2002 the Company granted stock options to related parties of 235,000
shares of common stock at $1.00 per share, which will expire in June and
December 2006. On the date of the grants the fair market value of the shares was
$.50 per share.
On August 15, 2004 the Company granted incentive stock options, to a related
party, to purchase 300,000 common shares at $.10 per share, which will expire
August 15, 2009. The options will vest at 25,000 shares each quarter starting on
August 15, 2004. On the date of grant the fair market value of the shares was
$.50 per share.
During August 2005 the Company granted incentive stock options to related
parties to purchase 600,000 common shares at $.75 per share, which will expire
August 2009. On the date of the grants the fair market value of the shares was
$.75 per share.
None of the options had been exercised by the report date.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes accounting
and reporting standards for stock-based employee compensation plans. As
permitted by SFAS No. 123, the Company accounts for such arrangements under the
intrinsic value method as provided in APB Opinion No. 25, "Accounting for Stock
Issued to Employees." and related interpretations.
The Company applies the intrinsic value method in accounting for its
compensation based stock options. If the Company had measured the options under
the fair value based method the net pro-forma operating loss and loss per share
amounts for the year ended September 30, 2005 would not have been materially
different.
12
6. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Officer-directors and key consultants have acquired 18 % of the outstanding
common stock and have received the stock options outlined in note 5.
7. CANCELLATION OF AGREEMENT TO PURCHASE SHARES OF SCI
On April 9, 2003 the Company signed a Purchase Agreement with Malaremastastarnas
Riksforening, the owner of all the shares of Skandinaviska Farginstituter AB
(the Scandinavian Colour Institute or "SCI") which owns the color notation
system Natural Color Systems ("NCS"), containing the terms of an acquisition by
the Company or its assigns for a price of SEK 35,000,000 of all shares of SCI.
Pursuant to the terms of the agreements the Company made payments of $1,154,327
into an escrow account as part payment toward the purchase price. The Company
subsequently failed to make further payments on the contracts and by mutual
agreement the contracts were cancelled and the moneys paid were expensed.
8. GOING CONCERN
The Company does not have the working capital for any future planned activity
which raises substantial doubt about its ability to continue as a going concern.
Continuation of the company as a going concern is dependant upon obtaining
additional working capital and the management of the Company has developed a
strategy, which it believes will accomplish this objective through additional
equity funding, payment of debt by the issuance of common stock, and
contributions to capital by officers, which will enable the Company to conduct
operations for the coming year.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Overview
The Company was incorporated on October 8, 1998 under the laws of the State of
Nevada. The Company's Articles of Incorporation currently provide that the
Company is authorized to issue 200,000,000 shares of Common Stock, par value
$0.001 per share, and 50,000,000 shares of Preferred Stock with such terms as
will be specified by the Board of Directors at the time it acts to create a
specific series of the Preferred Stock to be issued. As of December 31, 2005
there were 16,387,224 Common Shares and no Preferred Shares outstanding.
The Company has no current commercial products. The Company is in the business
of researching, developing, acquiring, and commercializing products and services
related to color technology outside the visible spectrum, using specialized
narrow and N-IR and N-UV sensors and spatial analysis software modeling which
translate the invisible into the visible. The Company owns or has obtained an
exclusive license to use this specialized and proprietary color technology.
On June 16, 2004, the Company entered into a contract with eVision Technologies
Corporation for the development of its color technology providing 3D
spectral-based pattern file creation and matching. Color pattern files can be
created from any digital photograph or scan, without having to reprint,
recreate, recall or modify existing digital source of documents. Those pattern
files can then be matched against existing databases to detect and identify
crime, forgery, counterfeiting and other frauds. The Company believes that its
technology has the potential to provide a new, accurate and fast detection tool
for critical applications such as national security, forgery/fraud prevention,
brand protection, and product tampering. As of the date of this filing, no
material progress has been made towards such development.
On December 16, 2005 the Company entered into a research and development
contract with RatLab LLC, a privately-owned research laboratory in Seattle,
Washington. The contract calls for monthly payments by the Company to RatLab LLC
for an initial research Phase 1, expected to last approximately three months.
The contract also includes provisions for extending the payments and research
agreement for multiple phases, which could extend in excess of one year. Under
the contract, RatLab will perform research and development using the Company's
existing intellectual property, as well as newly developed research and
technologies in order to assist the Company with the commercialization of its
core technologies in the areas of brand and forgery protection, homeland
security, medical diagnostics, and color-based file creation and matching.
RatLab LLC is a research laboratory formed primarily by Dr. Thomas Furness,
founder and former director of the Human Interface Technology Lab (HitLab) at
the University of Washington, and one of the leading researchers in the world in
the area of human interface technology. Dr. Furness also is the founder of the
Virtual World Consortium, an organization of more than fifty leading technology
companies and enterprises dedicated to sharing and advancing research in many
scientific research areas important to the Company. The Company has been a
member of the Virtual World Consortium since July 2005.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
RatLab LLC also employs other leading scientists and research associates in the
areas of computer science, imaging technology, and light sensing technology, who
will be part of the team conducting research on behalf of the Company.
The Company intends to position its technology as both a revolutionary as well
as a practical solution for security and fraud prevention applications and
markets. The Company's current focus is to capitalize upon the potential
business opportunities in the areas of national security, document
forgery/fraud, brand protection, label fraud and product tampering.
The Company has no revenue to date from its operations, and its ability to
implement its plans for the future will depend on the future availability of
financing. Such financing will be required to enable the Company to develop its
technology and acquire new businesses. The Company intends to raise further
funds through private placements of the Company's common stock. The financing
activities of the Company are current and ongoing, and it will expand and
accelerate its marketing program as the timing and amount of financing allow.
However, there can be no assurance that the Company will be successful in
obtaining additional capital for such technology development and/or business
acquisitions from the sale of its capital stock, or in otherwise raising
substantial capital.
The Company's cost to continue operations as they are now conducted is
approximately $63,000 per month, and the Company has sufficient funds to cover
existing operations for approximately five (5) months. However, the Company will
need to raise additional funds in order to finance its plans to expand its
operations for the next year. The Company intends to raise the required funds by
obtaining share capital from outside sources. During the three months ended
December 31, 2004, the Company raised $212,000 in additional share capital
through the sale of common shares. From January 2005 through September 30, 2005,
an additional $1,140,000 was raised through the sale of common shares. The
Company plans to raise a minimum of $500,000 and a maximum of $1,300,000 through
the sale of common shares in 2006. If the Company is successful in raising
additional funds, the Company's research and development efforts will be
increased.
The Company plans to purchase up to approximately $20,000 in new equipment to be
used primarily as part of its research and development agreement with RatLab
LLC.
If the Company is successful in raising additional funds, it intends to hire two
to three programmers and/or software engineers to accelerate its research and
development program and complete the development of its technology, as well as
file patents and initiate marketing of the technology. With the hiring of
additional personnel, the Company expects to have a product available for
demonstration within the next six months. The Company's software currently is in
modular form, and eventually will be developed into software development kits
specific to market/application needs. In lieu of such hirings, the Company may
contract with certain research organizations to perform development activities
on behalf of the Company.
In addition to securing the necessary funds, commercialization of the Company's
technology and the availability of a marketable product are dependent upon a
number of factors including:
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
(i) Securing patent protection for the Company's intellectual property. The
Company has filed a patent application on its core technology, and expects to
receive notification from the U.S. Patent and Trademark Office before the end of
2006 as to whether a patent will be granted.
(ii) Development of new applications for the Company's technology and
pursuit of new markets and market segments that will utilize the technology.
(iii) Ongoing patent research and writing relating to the evolution of the
Company's technology and its product application(s) as the Company's technology
is tested and refined.
In July 2005 the Company became a member of the University of Washington HIT Lab
Consortium. The Lab is supported in part by the Virtual Worlds Consortium, a
group of over 45 companies or organizations that provide funding and direction
to the Lab. These companies include: Advanced Telecommunications Research (ATR),
Alias/Wavefront, American Express Company, Armstrong Aeromedical Research
Laboratory (AAMRL), Battelle, The Broken Hill Proprietary Company (BHP), Boeing,
Chevron Petroleum Technology Company, Change Tools, Eastman Kodak Company,
Fluke, Ford Motor Company, Franz, Fujitsu, Hewlett Packard, Hughes, Industrial
Technology Research Institute, Intel Corporation, Institute for Information
Industry, Kopin Corporation, Lockheed-Martin, Marconi Aerospace Systems Inc.,
Microsoft, Microvision Inc., Museum of Flight, NBBJ, NEC Corporation, Nike,
Omron Corporation, Pentax Corporation, Philips, Reachin Technologies, Rockwell
Science Center Inc., Samsung, SensAble Technologies, Sense8/EAI, Sharp
Corporation, Stratos, Sun Microsystems, Tektronix, Telecom Italia, Texas
Instruments, U.S. Navy, U.S. West Communications, VisionGate, and Virtual
Vision.
Membership in the HIT Lab Consortium enables the Company to conduct specific
testing and research projects at the HIT Lab involving its color screening
technology. Other potential benefits of membership in the Consortium include
academic testing, validation and certification of the Company's technology,
recommendations for technology investments and additional applications for the
Company's technology, and introductions to strategic partners and prospective
customers in the industry.
When used in this discussion, the words "believe", "anticipates", "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to republish
revised forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers are
also urged to carefully review and consider the various disclosures made by the
Company that attempt to advise interested parties of factors which affect the
Company's business, in this report, as well as the Company's periodic reports on
Forms 10-KSB, 10-QSB and 8-K filed with the Securities and Exchange Commission
(the "SEC").
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
The Company's financial statements are stated in United States Dollars and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
RISK FACTORS
There are certain inherent risks which will have an effect on the Company's
development in the future and some of these risk factors are noted below but are
not all encompassing since there may be others unknown to management at the
present time which might have an impact on the future on the development of the
Company.
1. The Company is uncertain if it will be able to obtain additional capital
necessary for its development.
The Company has incurred a cumulative net loss for the period from October
8, 1998 (date of inception) to September 30, 2005 of $3,062,653. As a result of
these losses and negative cash flows from operations, the Company's ability to
continue operations will be dependent upon the availability of capital from
outside sources unless and until it achieves profitability.
2. Whether the Company will continue to be a going concern
The Company's auditors' concern in the audit opinion with regard to the
Company's financial statements as at September 30, 2005, as to whether the
Company will be able to raise sufficient funds to complete its objectives
indicates that the Company might not be able to continue as a going concern.
Without adequate future financing, the Company might cease to operate and the
existing shareholders and any future shareholders will lose their entire
investment.
3. Some of the present shareholders have acquired shares at extremely low
prices
Some of the present shareholders have acquired shares at prices ranging
from $0.001 to $0.25 per share whereas other shareholders have purchased their
shares at $0.50 and $0.75 per share. In addition, the Company has issued 300,000
incentive stock options to a related party at $0.10 per share exercisable in
whole or in part on or before August 15, 2009.
4. Future issuance of stock options, warrants and/or rights will have a
diluting factor on existing and future shareholders
The grant and exercise of stock options, warrants or rights to be issued in
the future would likely result in a dilution of the value of the Company's
common shares for all shareholders. At present, the Company has established a
Non-Qualified Stock Option Plan as noted on page 37 of this report and may in
the future issue further stock options to officers, directors and consultants
which will dilute the interest of the existing and future shareholders.
Moreover, the Company may seek authorization to increase the number of its
authorized shares and to sell additional securities and/or rights to purchase
such securities at any time in the future. Dilution of the value of the common
shares would likely result from such sales.
17
RISK FACTORS - continued
5. The Company does not expect to declare or pay any dividends
The Company has not declared or paid any dividends on its common stock
since its inception, and it does not anticipate paying any such dividends for
the foreseeable future.
6. Conflict of interest
Some of the Directors of the Company are also directors and officers of
other companies and conflicts of interest may arise between their duties as
directors of the Company and as directors and officers of other companies.
7. Concentration of ownership by management.
The management of the Company, either directly or indirectly, owns
1,472,500 shares. Even though this represents only 9.02 % of the issued and
outstanding shares, it might be difficult for any one shareholder to solicit
sufficient votes to replace the existing management. Therefore, any given
shareholder may never have a voice in the direction of the Company. 8. Key-man
insurance The Company carries no key-man insurance. In the event that either Mr.
Erickson, Mr. Brier, or Mr. Goldberg departed the Company or passed away, the
Company would not have the available funds to attract an individual of similar
experience. Management is considering obtaining key-man insurance once it has
sufficient funds to do so. 9. Limited full time employees The only director who
works full time for the Company is its President, Ralph Brier. The other
directors will devote time to the activities of the Company as required from
time to time. At the present time, the Company has no other full-time employees
other than Ralph Brier. 10. Future trading in the Company's stock may be
restricted by the SEC's Penny Stock Regulations which may limit a stockholder's
ability to buy and sell the Company's shares when, and if, the shares are
eventually quoted.
The SEC has adopted regulations which generally define "penny stock" to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. The Company's shares most likely will be covered by the penny stock
rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and "accredited investors." The
term "accredited investor" refers generally to institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC which provides information
about penny stocks and the nature and level of risks in the penny stock market.
18
RISK FACTORS - continued
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to broker-dealers to trade in the Company's securities. The
Company believes that the penny stock rules discourage investor interest in and
limit the marketability of, its common stock when, and if, it is called for
trading. The Company feels that its shares will be considered to be penny stock
when the shares are finally quoted.
11. Recently Enacted and Proposed Regulatory Changes
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules proposed by the SEC and NASDAQ could cause the Company to incur increased
costs as it evaluates the implications of new rules and responds to new
requirements. The new rules will make it more difficult for the Company to
obtain certain types of insurance, including directors and officers liability
insurance, and the Company may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for the
Company to attract and retain qualified persons to serve on the Company's board
of directors, or as executive officers. The Company is presently evaluating and
monitoring developments with respect to these new and proposed rules, and it
cannot predict or estimate the amount of the additional costs it may incur or
the timing of such costs.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
As of December 31, 2005, the Company had assets of $359,858, and $35,641 in
liabilities.
19
RISK FACTORS - continued
During the quarter, the Company has incurred the following expenses:
Expenditure Amount
--------------------------------------------------
Administrative expenses
-----------------------
Bank charges 346
Consulting fees i 159,005
Legal fees ii 11,974
Office iii 5,313
Other administrative expenses 14,107
Research and development iv 37,200
Interest expense (19)
---------
Total expenses $ 227,926
=========
i. The Company paid consulting fees to its Chief Executive Officer, Chief
Financial Officer, a Director, and several other independent contractors
during the quarter.
ii. Legal fees of $11,974 were incurred during the year. These fees included
activities related to its, legal and other filings, and other general legal
advisory services.
iii. Office expenses consist of rent, photocopy, fax and courier expenses and
other miscellaneous expenses incurred by the officers of the Company.
iv. Research and development fees of $37,200 were paid according to the terms
of an independent contractor agreement.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's controls and procedures (as
defined in the Securities Act of 1934 Rule 13a-15(e) or Rule 15d-15(e)) as of
the end of the Company's quarter ending December 31, 2005 (the "Evaluation
Date"), have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to it would be made known to it by others, particularly
during the period in which this quarterly report on Form 10-QSB was being made.
(b) Changes in Internal Control Over Financial Reporting
There were no significant changes in the Company's internal control over
financial reporting that occurred during the Company's last fiscal quarter that
could materially affect, or is reasonably likely to materially affect, the
Company's disclosure controls and procedures subsequent to the Evaluation Date,
nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions.
ITEM 8B. OTHER INFORMATION
There is no additional information that was not disclosed by the Company through
8K filings throughout the fiscal year.
20
PART 11. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party or to which its
property is subject, nor to the best of management's knowledge are any material
legal proceedings contemplated.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company sold 80,000 shares of common stock in November 2005, for $60,000 in
cash. Proceeds will be used for general corporate purposes.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits filed herewith as required by Item 601 of Regulation S-B, are as
follows:
(a) Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.1 Certificate Pursuant to 18 U.S.C Section 1350 signed by the Chief Executive
Officer
32.2 Certificate Pursuant to 18 U.S.C. Section 1350 signed by the Chief
Financial Officer
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VISUALANT, INCORPORATED
(FORMERLY STARBERRYS CORPORATION)
(Registrant)
By: /s/ Ralph Brier
-----------------------------------------
Ralph Brier
Chief Executive Officer, President,
and Director
Date: February 20, 2006
By: /s/ Jerry D. Goldberg
-------------------------------------------
Jerry D. Goldberg
Chief Financial Officer, and Secretary Treasurer
Date: February 20, 2006
22
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002
I, Ralph Brier, certify that:
1. I have reviewed this quarterly report on form 10-QSB of Visualant,
Incorporated.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
A) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
B) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "evaluation date"); and
C) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
A) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
B) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 20, 2006
/s/ Ralph Brier
-------------------------------------------
Ralph Brier
Chief Executive Officer, President and Director
23
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002
I, Jerry D. Goldberg, certify that:
1. I have reviewed this quarterly report on form 10-QSB of Visualant,
Incorporated.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "evaluation date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 20 , 2006
/s/ Jerry D. Goldberg
-------------------------------------------------
Jerry D. Goldberg
Chief Financial Officer
and Secretary Treasurer
24
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Visualant, Incorporated on Form
10-QSB for the period ending December 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Ralph Brier, Chief
Executive Officer, President and Director of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Ralph Brier
-------------------------------------------------
Ralph Brier
Chief Executive Officer, President and Director
Date: February 20, 2006
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Visualant, Incorporated on Form
10-QSB for the period ending December 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jerry Goldberg, Chief
Financial Officer and Secretary Treasurer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Jerry D. Goldberg
---------------------------------------------
Jerry D. Goldberg
Chief Financial Officer and Secretary-Treasurer
Date: February 20, 2006
25