________________________________________________________________________________
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 March 31, 2006
( ) 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 March 31, 2006
- --------------------------------------------------------------------------------
Common Stock, $0.001 per share 16,387,224
==========
1
INDEX
Page
Number
-------
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited) .................................. 4
Balance Sheet as of March 31, 2006 and December 31, 2005 .................. 4
Statement of Operations For the three months ended March 31, 2006
and 2005, and for the period from October 8, 1998 (Date of
Inception) to March 31, 2006 ............................................ 5
Statement of Changes in Stockholders' Equity For the period
October 8, 1998 (Date of Inception) to March 31, 2006 ................6 - 7
Statement of Cash Flows For the three months ended March 31, 2006
and 2005 and for the period from October 8, 1998 (Date of
Inception) to March 31, 2006 ............................................ 8
Notes to the Financial Statements ....................................... 9
ITEM 2 Management's Discussion and Analysis or Plan of Operation ......... 14
ITEM 3. Controls and Procedures .......................................... 20
PART 11. OTHER INFORMATION ........................................... 21
ITEM 1. Legal Proceedings ............................................... 21
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds ..... 21
ITEM 3. Defaults Upon Senior Securities ................................. 21
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 21
ITEM 5. Other Information ............................................... 21
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 March 31, 2006 and December 31, 2005 and the statement of operations
for the three months ended March 31, 2006 and 2005 and statement of cash flow
for the three months ended March 31, 2006 and 2005 and for the period from
October 8, 1998 (date of incorporation) to March 31, 2006, 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 March 31, 2006 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
March 31, 2006 and March 31, 2005
MARCH 31,2006 MARCH 31,2005
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 45,047 $ 35,947
Accounts receivable - related party -- --
----------- -----------
Total Current Assets 45,047 35,947
----------- -----------
EQUIPMENT - net of accumulated depreciation 9,846 11,168
LICENSE - net of amortization 6,875 --
$ 61,768 $ 47,115
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - related party $ -- --
Accrued interest payable - related party -- --
Accounts payable - related parties -- $ 10,053
Accounts payable 44,261 29,214
----------- -----------
Total Current Liabilities 44,261 39,267
----------- -----------
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 14,779
Capital in excess of par value 3,493,666 2,397,289
Deficit accumulated during the development stage (3,492,546) (2,404,220)
----------- -----------
Total Stockholders' Equity (Deficiency) 17,507 7,848
----------- -----------
TOTAL LIABILITIES & EQUITY $ 61,768 $ 47,115
=========== ===========
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 March 31, 2006 and 2005 and Period
October 8,1998 (Date of Inception) to March 31, 2006
Three Three October 8,
Months Months 1998
Ended Ended to
March 31, March 31, March 31,
2006 2005 2006
----------- ----------- -----------
REVENUES $ -- $ -- $ --
----------- ----------- -----------
EXPENSES
Research and development 138,732 37,822 394,611
Administrative 101,476 71,148 1,870,994
Compensation-incentive option -- -- 48,000
----------- ----------- -----------
NET LOSS - before other
Income & expenses (240,208) (108,970) (2,313,605)
OTHER INCOME AND EXPENSES
Settlement of debt -- -- 43,400
Interest -- -- (106,255)
Loss of deposit - note 7 -- -- (1,154,327)
----------- ----------- -----------
NET LOSS $ (240,208) $ (108,970) $(3,530,787)
=========== =========== ===========
NET LOSS PER COMMON SHARE
Basic and diluted $ (.01) $ (.01)
=========== ===========
AVERAGE OUTSTANDING SHARES
(stated in 1000,s)
Basic 16,347 14,779
=========== ===========
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 March 31, 2006
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 March 31, 2006
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 59,920 --
Net operating loss for the quarter
ended December 31, 2005 -- -- -- (227,926)
Balance December 31, 2005 16,387,224 $ 16,387 $ 3,493,656 $ (3,290,579)
Net operating loss for the quarter ============ ============= ============= =============
Ended March 31, 2006 -- -- -- (240,208)
Balance March 31, 2006 16,387,224 $ 16,387 $ 3,493,656 $ (3,530,787)
============ ============= ============= =============
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 March 31, 2006 and 2005 and the Period
October 8, 1998 (Date of Inception) to March 31, 2006
Oct 8, 1998
to
March 31 March 31 March 31
2006 2005 2006
------------- ------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $ (240,208) $ (210,210) $(3,530,787)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization -- 1,140 4,513
Issuance of capital stock for expenses -- -- 45,456
Changes in accounts and notes payable 58,510 (99,506) 1,570,559
Capital contributions - expenses -- -- 10,950
Incentive stock options -- 12,000 48,000
Loss of deposit -- -- 1,154,327
------------- ------------- -------------
Net Changes in Cash from Operations (298,718) (296,576) (696,982)
------------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment -- (12,308) (28,008)
Purchase of investment - deposit -- -- (1,154,327)
-- (12,308) (1,182,335)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital stock subscriptions received -- 120,000 15,000
Net - proceeds from issuance of common stock -- 212,000 1,957,892
------------- ------------- -------------
Net Changes in Cash (298,718) 7,589 45,047
Cash at Beginning of Period 343,765 12,831 --
------------- ------------- -------------
Cash at End of Period $ 45,047 $ 20,420 $ 45,047
============= ============= =============
The accompanying notes are an integral part of these financial statements
8
VISUALANT INCORPORATED
(Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2006
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 anti-dilutive 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
VISUALANT INCORPORATED
( Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
March 31, 2006
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 March 31, 2006 the Company had a net operating loss available for
carryforward of $3,530,787. The tax benefit of approximately $1,059,000 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
VISUALANT INCORPORATED
(Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
March 31, 2006
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
VISUALANT INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
March 31, 2006
4. COMMON CAPITAL STOCK
During the fiscal year ended September 30, 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.
During the quarter ended December 31, 2005, the Company issued 80,000 common
shares for cash of $60,000.
Subsequent to March 31, 2006, the Company issued 50,000 common shares to
consultants for services to be rendered.
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.
During the first two quarters of fiscal 2006, the Company issued stock options
to purchase 406,000 common shares at $0.75, which will expire in March 2010 to
certain consultants involved in research and development for the Company.
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 March 31, 2006 would not have been materially
different.
12
VISUALANT INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
March 31, 2006
6. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Officers, 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 and 2, expected to last approximately six months
through June 2006. 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 $60,000 per month, and the Company has sufficient funds to cover
existing operations for approximately two (2) months. The Company will need to
raise additional funds in order to continue its existing operations as well as
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").
The Company's financial statements are stated in United States Dollars and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
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 March 31, 2006 of $3,530,787. 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. The Company has established a Non-Qualified Stock
Option Plan 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.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
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 are 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.
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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
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 March 31, 2006, the Company had assets of $61,768, and $44,261 in
liabilities.
During the quarter, the Company has incurred the following expenses:
Expenditure Amount
---------------------------- ----------
Administrative expenses
-----------------------
Bank charges 737
Consulting fees i 72,245
Legal fees ii 10,000
Office iii 4,639
Other administrative expenses 8,780
Accounting fees iv 5,075
Research and development v 138,732
-----------
Total expenses $ 240,208
===========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued
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 $10,000 were incurred during the quarter. 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. Accounting fees were incurred during the quarter to pay for the
Company's 2005 fiscal audit.
v. Research and development fees of $138,732 were paid according to the
terms of an independent contractor agreement and remaining fees under the
Company's prior research contracts.
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 March 31, 2006 (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 is 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: May 11, 2006
By: /s/ Jerry D. Goldberg
--------------------------------
Jerry D. Goldberg
Chief Financial Officer, and
Secretary Treasurer
Date: May 11, 2006
22