10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]
Published on January 16, 2007
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
|
(x)
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(FEE REQUIRED)
|
For
the
fiscal year ended September
30,
2006
|
(
)
|
TRANSACTION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(NO FEE REQUIRED)
|
For
the
transaction period from ____________ to
____________
Commission
File number
0-25541
|
VISUALANT,
INCORPORATED
|
||
|
(Name
of small business issuer in its
charter)
|
||
|
Nevada
|
91-1948357
|
|
|
(State
or other jurisdiction of
incorporation
or
organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
500
Union Street, Suite 406
|
||
|
Seattle,
Washington
|
98101
|
|
|
(Address
of principal executive
offices)
|
(Zip
Code)
|
|
| Issuer’s telephone number, including area code |
206-903-1351
|
|
Securities
registered pursuant to section 12 (b) of the Exchange Act:
|
Title
of each class
|
Name
of each exchange on which
registered
|
|
|
Common
|
OTCBB
|
Securities
registered pursuant to Section 12 (g) of the Exchange Act:
|
None
|
|
(Title
of
Class)
|
Check
whether the Issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
|
(1)
Yes
[X]
No
[ ]
|
(2)
Yes
[X] No [
]
|
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
|
Yes
[ ]
No
[X]
|
|
State
issuer’s revenues for its most recent fiscal year: $
-0-
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked prices of such common equity, as of a
specific date within the past 60 days.
As
of
September 30, 2006, based upon the last reported trade on September 29, 2006,
the aggregate market value of the voting and non-voting common equity held
by
non-affiliates (for this purpose, all outstanding and issued common stock minus
stock held by the officers, directors and known holders of 10% or more of the
Company’s common stock) was $15,825,416.
(ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)
Check
whether the issuer has filed all documents and reports required to be filed
by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.
Not
applicable
(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
As
of
December 15, 2006, the Company had 16,503,891 shares of common stock issued
and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Exhibits
incorporated by reference are referred to under Part IV
Transitional
Small Business Disclosure Format (Check one): Yes
[ ] No
[X]
2
TABLE
OF CONTENTS
PART
1
|
Page
|
||
|
ITEM
1.
|
Description
of Business
|
4
|
|
|
||
|
ITEM
2.
|
Description
of Property
|
7
|
|
ITEM
3.
|
Legal
Proceedings
|
7
|
|
ITEM
4.
|
Submission
of Matters to Vote of Securities Holders
|
7
|
|
PART
II
|
||
|
ITEM
5.
|
Market
for Common Equity and Related Stockholder Matters
|
8
|
|
ITEM
6.
|
Management’s
Discussion and Analysis or Plan of Operations
|
8
|
|
ITEM
7.
|
Financial
Statements
|
10
|
|
ITEM
8.
|
Changes
in and Disagreements with Accountants on Accounting
and Financial Disclosure
|
10
|
|
ITEM
8A.
|
Controls
and Procedures
|
11
|
|
PART
III
|
||
|
ITEM
9.
|
Directors,
Executive Officers, Promoters, and Control Persons;
Compliance
with Section 16(a) of the Exchange Act
|
12
|
|
ITEM
10.
|
Executive
Compensation
|
15
|
|
ITEM
11.
|
Security
Ownership of Certain Beneficial Owners and Management
|
16
|
|
ITEM
12.
|
Certain
Relationships and Related Transactions
|
17
|
|
PART
IV
|
||
|
ITEM
13.
|
Exhibits
and Reports on Form 8-K
|
18
|
|
ITEM
14.
|
Principal
Accountant Fees and Services
|
20
|
|
SIGNATURES
|
21
|
3
PART
I
ITEM 1.
DESCRIPTION OF BUSINESS
History
and Organization
Visualant,
Incorporated (formerly Starberrys Corporation), a Nevada corporation (the
"Company"), was incorporated on October 8, 1998. The Company has no
subsidiaries and no affiliated companies. The Company's executive offices are
located in Seattle, Washington.
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 Preferred Shares. As at September 30, 2006 there were
16,503,891 Common Shares and no Preferred Shares outstanding. No additional
shares have been issued as of the date of this annual report on Form
10-KSB.
On
November 24, 1998 the Company acquired the exclusive rights to market high
quality cigars through a climate controlled kiosk merchandise display case,
known as the King Climate Control, by the payment of $50,000. The Company did
not proceed with this new business and in 2000 abandoned the
activity.
In
November 2002, the Company signed a Letter of Intent with eVision
Technologies Corporation (“eVision”) and Ken Turpin (founder / inventor) to
acquire 100% of the assets related to the business of Colour By Number ("CBN").
The CBN System is a digital color management system providing one color language
across industries and materials, empowering architects, designers, contractors,
retailers and consumers to take full control of their choice and use of color.
The Company was unsuccessful in raising the financing to complete this
acquisition and negotiations were terminated.
The
Company signed a Letter of Intent on 19 January 2003 with Malaremastarnas
Riksforening, the owner of all the shares of Skandinaviska Farinstituter AB
("SCI" or the Scandinavian Color Institute) which owns both the color notation
system Natural Color Systems ("NCS") and the Scandinavian Color School,
outlining the general terms of a proposed acquisition by the Company of all
of
the shares of SCI. NCS is the leading color notation system in Europe and is
also highly regarded around the world. It is the national standard for color
in
Sweden, Norway, Spain and South Africa. On April 9, 2003 the Company signed
a
Definitive Purchase Agreement to complete the acquisition, subject to certain
conditions, of all the shares of SCI for a price of SEK 35,000,000. Subsequent
to June 30, 2003 that Agreement was amended to change the Closing Date from
August 31, 2003 to November 30, 2003. However, the Company was unsuccessful
in
raising the financing to complete this acquisition, and negotiations were
terminated.
On
June
16, 2004, the Company entered into a research and development contract with
eVision 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 are then
matched against existing databases to detect and identify crime, forgery,
counterfeiting and other frauds. It is the intent of the Company to develop
this
technology 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 time of this filing, no commercial
products have been developed using this technology and no significant progress
has been made in such development. On February 22, 2006, the Company terminated
its contract with eVision in order to concentrate its resources on its primary
research and development relationship with RatLab LLC. For
more
information on RatLab LLC, please see ITEM
6,
MANAGEMENT’S DISCUSSION AND ANALYSIS.
The
Company changed its name to Visualant, Incorporated on August 18,
2004.
The
Company has no revenue to date from its operations, and its ability to effect
its plans for the future will depend on the availability of financing. Such
financing will be required to enable the Company to develop its technology.
The
Company anticipates obtaining such funds from its officers and directors,
financial institutions or by way of the sale of its capital stock through
private offerings. However, there can be no assurance that the Company will
be
successful in obtaining additional capital from the sale of its capital stock,
or in otherwise raising substantial capital.
4
During
the fiscal year ended September 30, 2006, the Company filed with the SEC various
documents such as Forms 10-KSB, 10-QSB and 8-K. The Company does not intend
to
distribute an annual report to its shareholders for the fiscal year ended
September 30, 2006.
The
shareholders may read and copy any materials filed by the Company with the
SEC
at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. The shareholders may obtain information on the operations of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information which the Company has filed electronically
with the SEC, by accessing the website using the following address: http://www.sec.gov.
The
Company is prepared to distribute, upon request from shareholders, any of the
material previously filed with the SEC. The Company also has a website at
www.visualant.net
from
which additional information about the Company can be obtained.
Special
Note Regarding Forward-Looking Statements
This
Form
10-KSB contains forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These statements relate to
future events or the Company’s future financial performance. In some cases, the
reader can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in
the
section entitled "Risk Factors", that may cause the Company or its industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, it cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements
to
actual results.
The
Company’s financial statements are stated in United States Dollars and are
prepared in accordance with United States Generally Accepted Accounting
Principles. In this annual report, unless otherwise specified, all dollar
amounts are expressed in United States Dollars.
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 in 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, 2006 of $4,094,689. 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, 2006 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.
5
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.
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 Combined Incentive and
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 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.
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 and their immediate family members, either directly
or
indirectly, own or control 1,961,875 shares. Even though this represents
only
11.9% 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 any of the Company’s
senior executive officers departed the Company or passed away, the Company
may
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 worked full time for the Company was its President, Ralph
Brier, who worked as a consultant to the Company until
his
resignation on November 10, 2006. 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 full-time employees.
| 10. |
Trading in the Company’s stock is
restricted by the SEC’s Penny Stock Regulations which limit a
stockholder’s ability to buy
and
sell the Company’s shares.
|
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.
Under the penny stock rules, additional sales practice requirements are imposed
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. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally
6
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 penny stock rules may discourage investor interest in and
limit
the marketability of, the Company’s common stock.
| 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.
ITEM 2.
DESCRIPTION OF PROPERTY
Offices
The
Company's executive offices are located at 500 Union Street, Suite 406, Seattle,
Washington, USA, 98101. The office is located in premises which are also used
by
the Chairman of the Board of the Company for other business interests. The
Company pays rent of $200.00 per month for using this office.
Other
Property
The
only
property owned by the Company is its intellectual property. During 2006,
the
Company filed additional patents covering work that the RatLab performed.
The patents focus on using photonics to establish a unique identifier for
objects, on communicating that identifier, and on comparing it against a
template. As of the report date, the Company has not received any
notification from the U.S. Patent and Trademark Office as to whether any
patents
will be granted.
ITEM 3.
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 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
last
annual meeting was on August 7, 2002. No matters have been submitted to a vote
of securities holders in the most recent fiscal year.
7
PART
II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The
Company’s common stock currently is quoted on the OTCBB. During the past year,
however, there has been a very limited trading market for the Company's common
stock. Since its inception, the Company has not paid any dividends on its common
stock, and the Company does not anticipate that it will pay dividends in the
foreseeable future. As at September 30, 2006 the Company had 16,503,891
shares of common stock issued and outstanding held by 94 shareholders of record.
In addition, the Company had either committed to or had outstanding options
to
purchase 1,880,000 shares of common stock at exercise prices ranging from $0.10
to $0.75 per share.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 at September 30,
2006 there were 16,503,891 Common Shares and no Preferred Shares
outstanding.
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 object. 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, process control, quality
monitoring, brand protection, and product tampering. Although progress has
been
made towards such development, the company has no current commercial
product.
On
February 22, 2006, the Company terminated its contract with eVision in order
to
concentrate its resources on its primary research and development relationship
with RatLab LLC.
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 is for Phase 1 and 2 research, and also provides for extension
of
the research agreement for additional phases. 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. If the Company is successful in
raising additional funds, it intends to extend the research and development
contract with RatLab LLC for additional research phases.
During
2006, the Company filed additional patents covering work that the RatLab
performed. The patents focus on using photonics to establish a unique
identifier for objects, on communicating that identifier, and on comparing
it
against a template. As of the report date, the Company has not received
any notification from the U.S. Patent and Trademark Office as to whether any
of
the patents will be granted.
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. 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 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.
8
On
September 20, 2006, the Company signed a Memorandum of Understanding with
Branded Asset Management Group LLC to form a joint venture for the purpose
of
establishing a new anti-counterfeiting standard in a range of branded products
and categories. The Company will own 50% of the joint venture, and will license
its technology to the joint venture for use in the development and sale of
anti-counterfeit products, systems and processes in certain agreed upon
markets.
Branded
Asset Management Group LLC (BAM) was founded in 2003 to provide objective
counsel, innovation and fulfillment to brand marketers seeking accelerated
organic growth. BAM helps companies optimize the economic value of their brands
and related assets through innovation in branding, marketing, product
development and security. BAM is headquartered in New York. Its principals
are
former senior executives from the fields of international brand management,
marketing innovation, investment banking, telecommunications and
biotechnology.
Liquidity
and Capital Resources
As
at
September 30, 2006 the Company had cash totaling $7,160 and current liabilities
totaling $547,435.
During
the year, the Company has incurred the following expenses:
|
Expenditure
|
Amount
|
||||||
|
Administrative
expenses
|
|||||||
|
Accounting
and audit
|
$
|
42,825
|
|||||
|
Bank
charges
|
2,039
|
||||||
|
Stock
Options
|
24,000
|
||||||
|
Consulting
and other administrative expenses
|
i.
|
254,429
|
|||||
|
Financing
Fees
|
ii
|
38,458
|
|||||
|
Legal
fees
|
iii
|
161,769
|
|||||
|
Gain
on foreign exchange
|
iv
|
(179
|
)
|
||||
|
Office
rent
|
2,400
|
||||||
|
Insurance
|
29,300
|
||||||
|
|
|||||||
|
Research
and development
|
v.
|
452,009
|
|||||
|
Depreciation,
amortization, asset impairment charge
|
16,721
|
||||||
|
Interest
expense
|
Ix
|
8,265
|
|||||
|
Total
expenses
|
$
|
1,032,036
|
|||||
| i. |
The
Company paid consulting fees to its Chief
Executive Officer, Chairman, Chief Financial Officer, a Director,
and
several other independent contractors during the year.
|
| ii. |
The
Company incurred expenses related to the
issuance of the notes payable and related to stock issued in exchange
for
finder’s fees.
|
| iii. |
Legal
fees were incurred during the year
related to the Company’s financing efforts, legal and other filings,
patent applications, and other general legal advisory
services.
|
| iv. |
Loss
on foreign exchange consists of the
difference between the US and Canadian dollar exchange rate on monies
expended by the Company in Canadian dollars.
|
| v. |
Research
and development fees were paid
according to the terms of an independent contractor agreement. In
addition, consulting fees paid to the technical scientists are included
in
research and development.
|
| vi. |
Interest
expense is calculated on the notes
payable due to a related party.
|
9
Results
of Operations
The
Company has had no revenues from operations since its inception.
Plan
of Operation.
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. The Company does not have
sufficient funds to cover existing operations and has been required to borrow
funds from Coach Capital LLC to cover its operating expenses for the past four
months. The Company
will
need to raise immediate, substantial funds in order to continue its operations
for the next year. The Company intends to raise the required funds through
the
sale of common shares in 2007. If the Company is successful in raising
additional funds, the Company’s research and development efforts will
continue.
If
the
Company is successful in raising additional funds, it intends to accelerate
its
research and development program through the RatLab and complete the development
of its technology, as well as file additional patents and initiate marketing
programs. The Company expects to have a product available for demonstration
within the next six months. 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 the following items:
(i) Securing
patent protection for the Company’s intellectual property. The Company has filed
multiple patent applications on its core technology, but has not received any
notification from the U.S. Patent and Trademark Office as to whether any patents
will be granted.
(ii) Development
of any 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.
ITEM 7.
FINANCIAL STATEMENTS
The
financial statements of the Company are included following the signature page
to
this Form 10-KSB.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The
reports of the Company’s independent accountants, Madsen & Associates, CPA's
Inc., for the financial statements as of September 30, 2005 and 2006 are
included herein. To the Company’s knowledge, there are no disputes with our
auditors.
10
ITEM
8A. 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 Fiscal Year covered by this annual report on Form 10-KSB (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 annual report on Form 10-KSB was
being made.
(b) Changes
in Internal Controls
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly 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.
11
PART
III
ITEM 9.
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT
The
following table sets forth as of September 30, 2006, the name, age, and
position of each executive officer and director and the term of office of each
director of the Company.
|
Name
|
|
Age
|
|
Position
Held
|
|
Term
as
Director
Since
|
|
Ronald
P. Erickson
|
62
|
Chairman
of the Board and Director
|
April
24, 2003
|
|||
|
Ralph
Brier1
|
56
|
Chief
Executive Officer, President and Director
|
Aug.
31, 2004
|
|||
|
Jerry
D. Goldberg2
|
|
42
|
|
Secretary-Treasurer
and Chief Financial Officer
|
|
n/a
|
|
Robert
Dougherty3
|
63
|
Director
|
April
19, 2006
|
|||
|
Jon
Pepper
|
55
|
Director
|
April
19, 2006
|
|||
|
Dr.
Masahiro Kawahata
|
67
|
Director
|
April
19, 2006
|
|||
|
William
E. Gordon, III
|
56
|
Director
|
June
16, 2006
|
|||
Each
director of the Company serves for a term of one year and until his successor
is
elected at the Company's annual shareholders' meeting and is qualified, subject
to removal by the Company's shareholders. Each officer serves, at the pleasure
of the Board of Directors, for a term of one year and until his successor is
elected at the Annual General Meeting of the Board of Directors and is
qualified.
Set
forth
below is certain biographical information regarding each of the Company's
executive officers and directors.
RONALD
P. ERICKSON has
been
a director and officer of the Company since April 24, 2003. He was appointed
President and Chief Executive Officer of the Company on September 29, 2003,
and
resigned from this position on August 31, 2004 at which time he was appointed
Chairman of the Board. Resident in Seattle, he is a seasoned executive with
more
than 20 years of expertise in the high technology, telecommunications and
microcomputer industries. Mr.
Erickson is a co-founder of Blue Frog Mobile, a Seattle mobile media
entertainment company. Mr. Erickson was formerly Chairman of Intrinsyc
Software Inc., a Vancouver-based publicly-traded company providing proprietary
software and solutions which enable the development and networking of
intelligent devices such as PDA's. Mr. Erickson is the current chair, and former
CEO of eCharge, an electronic payment systems developer, where he played a
major
role in raising approximately US $100 million in equity capital from major
international investors. Mr. Erickson previously was co-founder, Chairman,
President and CEO of GlobalTel Resources, Inc., a provider of telecommunication
services, messaging and intranet solutions. During his career Mr. Erickson
has
also held executive positions at Egghead Software Inc, NBI Inc and MicroRim,
Inc. With a law degree from the University of California, Davis, he maintains
an
active license to practice law in the State of Washington and the District
of
Columbia.
_____________________
1
Effective November 10, 2006, Ralph Brier resigned as Chief Executive Officer,
President and a Director of the Company. Mr. Brier’s resignation was not related
to any disagreement with the Company or the Company’s operations, policies or
practices.
2
Effective December 27, 2006, Jerry Goldberg resigned as Chief Financial Officer,
Secretary and Treasurer of the Company.
3
Effective September 21, 2006, Robert Dougherty resigned from the Board of
Directors. Mr. Dougherty’s resignation was not related to any disagreement with
the Company or with the Company’s operations, policies or
practices.
12
RALPH
BRIER was
appointed CEO, President and Director of the Company on August 31, 2004 and
served until November 10, 2006. He has over 25 years of diverse experience
in
marketing, sales, business development and strategic planning, with a focus
in
the security and biometrics sector. Ralph was Executive Vice President Strategic
Sales with Applied DNA Sciences, a Los Angeles based biotechnology security
firm. He was previously employed by Sagem Morpho, a division of Groupe SAGEM
in
France, a global leader in the provisioning of biometric solutions for business
and government. During his tenure there, he doubled commercial sales revenues,
serving as the senior commercial, channel and OEM business executive of
biometric software, smart card implementation and hardware.
JERRY
D. GOLDBERG
was
appointed Chief Financial Officer and Secretary/Treasurer on August 31, 2005
and
served until December 27, 2006. He has more than 15 years of experience in
financial and operational management of emerging and early-stage companies.
Most
recently, he was CFO and President of Emanation Software Inc., a start-up
software development firm focused on digital media distribution. Prior to that,
Mr. Goldberg was Director of Finance for The Ackerley Group, a major
publicly-traded media and entertainment firm. He also spent nearly 10 years
as
CFO and principal of Strategic Capital Corp, an investment banking advisory
firm, through which he performed many interim-CFO assignments and was involved
in dozens of merger and acquisition and financing transactions. During his
career, Mr. Goldberg has also held financial management positions with such
companies as AT&T Wireless Services.
ROBERT
DOUGHERTY served
briefly on the Board of Directors from April 19, 2006 until September 21, 2006.
Mr. Dougherty is an
experienced executive with over 25 years of experience in the Medical industry,
is currently an independent consultant in the human resources business. During
his career, Mr. Dougherty has been President of Coopervision, Cilco Division,
a
producer of specialty medical products serving the vision care and women’s
healthcare markets; President and CEO of Pharmacia US, Inc., a manufacturer
of
diagnostic
tools for accurate diagnosis of common childhood respiratory diseases; and
Vice
President for Advocacy for the American Academy of Ophthalmology, the largest
national membership association of ophthalmologists. Mr. Dougherty holds a
B.A.
from the University of Minnesota.
JON
PEPPER
is the
co-founder of Pepcom [www.pepcom.com],
an
industry leader in producing press-only technology showcase events around the
country. Prior to that, Pepper started the DigitalFocus newsletter, a
ground-breaking newsletter on digital imaging that was distributed to industry
leaders and opinion makers worldwide. Mr. Pepper has been closely involved
with
the high technology revolution since the beginning of the personal computer
era.
He was a well-regarded former journalist and columnist, and his work on
technology subjects appeared in The
New York Times, Fortune, PC Magazine, Men’s Journal, Working Woman, PC Week,
Popular Science,
and
many other well known publications. Mr. Pepper was educated at Union College
in
Schenectady, New York and the Royal Academy of Fine Arts in
Copenhagen.
DR.
MASAHIRO KAWAHATA is
the
former Director of the Fujitsu Research Institute. Dr. Kawahata has taught
at
Tokai University, is a Consulting Professor at Stanford University, Provost’s
Distinguished Professor at the University of Southern California and Visiting
Professor at the University of Washington. He is known in Japan as “the father
of multimedia” for his work as National Program Director in developing the
nationwide fiber optic network. Early in 2005, the U.S. government officially
acknowledged him as “Non-U.S. Scientist of Extraordinary Ability.” He has served
as a Director of numerous technology companies, and has received several
prestigious awards in the United States and Japan.
DR.
WILLIAM E. GORDON
III, PhD is
a
partner with Branded Asset Management Group (BAM), LLC of NY in their new
Branded Asset Security Practice which he will help lead. Dr. Gordon is an
experienced financial and technology executive as well as entrepreneur, having
managed multi-billion dollar investment portfolios with Alliance Capital
Management in NY, and co-founded a partnership that built up a 20 million
franchise home, 12 million customer, broadband footprint in four countries
of
Europe between 1996 and 2001. He currently is an angel investor, board member
and Acting CEO and President of Tetragenetics, Inc., a startup biotech firm
specializing in novel approaches to vaccine development, especially potential
pandemic forms of influenza. His original training prior to his business career
was in the fields of molecular and cellular biology. Dr. Gordon holds a BS
in
Biological Sciences from Wayne State University in Detroit, a Ph.D. in Zoology
from UC Berkeley where he specialized in molecular and cellular biology of
cultured mammalian cells, and an MBA from the Wharton School with a
specialization in finance. Dr. Gordon spent five years at Cold Spring Harbor
Laboratories in New York working in the laboratory of Dr. James Watson spanning
three years of the research for his UC Berkeley Ph.D. as well as two years
of
post-doctoral work as a fellow of the Muscular Dystrophy
Association.
13
To
the
knowledge of management, during the past five years, no present or former
director, executive officer or person nominated to become a director or an
executive officer of the Company:
(1)
filed
a petition under the federal bankruptcy laws or any state insolvency law, nor
had a receiver, fiscal agent or similar officer appointed by the court for
the
business or property of such person, or any partnership in which he was a
general partner at or within two years before the time of such
filings;
(2)
was
convicted in a criminal proceeding or named subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses);
(3)
was
the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from or otherwise limiting, the following
activities:
(i)
acting as a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker, leverage transaction merchant,
associated person of any of the foregoing, or as an investment advisor,
underwriter, broker or dealer in securities, or as an affiliate person, director
or employee of any investment company, or engaging in or continuing any conduct
or practice in connection with such activity;
(ii)
engaging in any type of business practice; or
(iii)
engaging in any activities in connection with the purchase or sale of any
security or commodity or in connection with any violation of federal or state
securities laws or federal commodities laws;
(4)
was
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any federal or state authority barring, suspending
or
otherwise limiting for more than 60 days the right of such person to engage
in any activity described above under this Item, or to be associated with
persons engaged in any such activities;
(5)
was
found by a court of competent jurisdiction in a civil action or by the
Securities and Exchange Commission to have violated any federal or state
securities law, and the judgment in such civil action or finding by the
Securities and Exchange Commission has not been subsequently reversed,
suspended, or vacated.
(6)
was
found by a court of competent jurisdiction in a civil action or by the Commodity
Futures Trading Commission to have violated any federal commodities law, and
the
judgment in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or vacated.
Audit
Committee Financial Expert
The
Board
of Directors elected Mr. William E. Gordon III as the Audit Committee chairman.
The Company believes that Mr. Gordon is independent. For further information
regarding Mr. Gordon, see his biographical information above.
Compliance
with Section 16 (a) of the Exchange Act
The
Company knows of no director, officer, beneficial owner of more than ten percent
of any class of equity securities of the registrant registered pursuant to
Section 12 ("Reporting Person") that failed to file any reports required to
be furnished pursuant to Section 16(a). Other than those disclosed below,
the registrant knows of no Reporting Person that failed to file the required
reports during the most recent fiscal year.
14
The
following table sets forth as at September 30, 2006, the name and position
of each Reporting Person that failed to file on a timely basis any reports
required pursuant to Section 16 (a) during the most recent fiscal
year.
|
Name
|
|
Position
|
|
Report
to be Filed
|
| Ralph Brier | CEO, President and Director |
Form
5
|
||
|
Jerry
D. Goldberg
|
Chief
Financial Officer
|
Form
5
|
||
| Robert Dougherty | Director |
Form
3
|
||
| Jon Pepper | Director |
Form
3
|
||
| Dr. Masahiro Kawahata | Director |
Form
3
|
||
|
William
E. Gordon III
|
Director |
Form
3
|
Code
of Ethics
The
Company’s Code of Ethics is attached as Exhibit 14.1 to this Form
10-KSB.
ITEM 10.
EXECUTIVE COMPENSATION
Cash
Compensation
The
following table sets forth compensation paid or accrued by the Company for
the
last three years ended September 30, 2004, 2005 and 2006 with regard to
individuals who served as the Company’s Chairman and Chief Executive Officer
during this period.
Summary
Compensation Table (2004, 2005 and 2006)
|
Long
Term Compensation (US
Dollars)
|
|||||||
|
Annual
Compensation
|
Awards
|
Payouts
|
|||||
|
|
|||||||
|
(a)
|
(b)
|
(c)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
|
|
|||||||
|
Name
and Principal
position
|
Year
|
Salary
|
Other
Annual
Comp.
($)
|
Restricted
Stock
awards
($)
|
Options/
SAR
(#)
|
LTIP
payouts
($)
|
All
other
compen-
sation
($)
|
|
Ronald
Erickson
Chairman
of the Board and Director
|
2004
2005
2006
|
-0-
-0-
-0-
|
$10,000
$19,445
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
-0-
|
|
Ralph
Brier
CEO,
President and
Director
|
2004
2005
2006
|
-0-
0
-0-
|
$10,000
$83,625
$185,000
|
-0-
-0-
-0-
|
300,000
-0-
-0-
|
-0-
-0-
-0-
|
-0-
-0-
$10,812
|
None
15
Compensation
Pursuant to Plans
None
Pension
Table
None
Other
Compensation
All
amounts listed under column (e) above are consulting fees paid to the company’s
Board members.
Options/Stock
Appreciation Rights
None
of
the executive officers listed in the Summary Compensation table above received
any options or stock appreciation rights during the fiscal year ended September
30, 2006.
Compensation
of Directors
On
August
15, 2004 the Company granted stock options to Ralph Brier, its President
and a
Director, of 300,000 common shares at $.10 per share, which will expire August
15, 2009. On the date of the grant, the fair market value of the shares was
$0.50 per share. Mr. Brier resigned as an officer and director effective
November 10, 2006. As of the date of his resignation, options for 250,000
shares
had vested.
In
June
2005, the Company granted to Dr. Kawahata options for 100,000 shares of common
stock at $0.75 per share. 25,000 of the options vested immediately with the
remainder vesting at the rate of 25,000 each year thereafter. In
September 2006, the Company granted Dr. Kawahata an additional 100,000 shares
of
common stock at $0.75 per share. These options are fully
vested.
In
June
2006 the Company granted to each of Jon Pepper and William Gordon options
for
35,000 shares of common stock at $0.75 per share, which options are fully
vested.
Termination
of Employment
There
are
no compensatory plans or arrangements, including payments to be received from
the Company, with respect to any person named in Cash Compensation set out
above
which would in any way result in payments to any such person because of his
resignation, retirement, or other termination of such person's employment with
the Company or its subsidiaries, or any change in control of the Company, or
a
change in the person's responsibilities following a change in control of the
Company.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth as of the date of the filing of this Form 10K-SB,
the
name and address and the number of shares of the Company's common stock, with
a
par value of $0.001 per share, held of record or beneficially by each person
who
held of record, or was known by the Company to own beneficially, more than
5% of
the issued and outstanding shares of the Company's common stock, and the name
and shareholdings of each director and of all officers and directors as a group.
16
|
Name
and Address of
Beneficial Owner
|
|
Nature
of
Ownership(1)
|
|
Amount
of
Beneficial
Ownership
|
|
Percent
of
Class
|
|
|
DIRECTORS
and OFFICERS:
|
|
|
|||||
|
Ronald
P. Erickson
9437
NE Coral Court
Bainbridge
Island, Washington
USA
98110
|
|
Direct
|
600,000(2)
|
3.6%
|
|
||
|
Ralph
Brier
12918
50th
Ave Court NW
Gig
Harbor, Washington
USA
98332
|
Direct
|
250,000(3)
|
1.9%
|
|
|||
|
Jerry
Goldberg
4815
91st
Avenue SE
Mercer
Island, Washington
USA
98040
|
Direct
|
125,000(4)
|
0.75%
|
|
|||
|
Dr.
Masahiro Kawahata
Tokyo,
Japan
|
Direct
|
211,875(5)
|
1.27%
|
|
|||
|
Jon
Pepper
c/o
500 Union Street, Suite 406
Seattle,
WA 98101
|
Direct
|
35,000(6)
|
0.21%
|
|
|||
|
William E. Gordon
c/o
500 Union Street, Suite 406
Seattle,
WA 98101
|
Direct
|
35,000(7)
|
0.21%
|
|
|||
|
All
Directors and Officers as a Group (6 persons)
|
|
|
1,256,875
|
7.4%
|
|
_____________________
(1)
All
shares owned directly are owned beneficially and of record, and such shareholder
has sole voting, investment and dispositive power, unless otherwise noted.
(2)
In
addition to these shares, Mr. Erickson’s adult children own 1,300,000 shares.
Mr. Erickson disclaims any beneficial ownership or control of such
shares.
(3)
Stock
options for 250,000 shares of common stock at $0.10 per share, expiring on
August 15, 2009.
(4)
Stock
options for 125,000 shares of common stock at 0.75 per share, expiring on
August
25, 2008.
(5)
This
figure includes stock options for 150,000 shares of common stock exercisable
at
$0.75 per share on or before April 15, 2007.
(6)
Stock
options for 35,000 shares of common stock exercisable at $0.75 per share,
which
are fully vested.
(7)
Stock
options for 35,000 shares of common stock exercisable at $0.75 per share,
which
are fully vested.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions
with Management and Others
Except
as
indicated below, there were no material transactions, or series of similar
transactions, during the Company’s last two fiscal years ended September 30,
2006, or any currently proposed transactions, or series of similar transactions,
to which the Company was or is to be a party, in which the amount involved
exceeds $30,000,and in which any director or executive officer, or any security
holder who is known by the Company to own of record or beneficially more than
5%
of any class of the Company's common stock, or any member of the immediate
family of any of the foregoing persons, has an interest.
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 is for Phase 1 and 2 research, with options to extend the research
agreement for additional phases. 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. If the Company is successful in raising additional funds,
it intends to extend the research and development contract with RatLab LLC
for
additional research phases.
17
Dr.
Thomas Furness, a 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, is the founder and
a
principal of RatLab LLC. 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. Dr. Furness and some of his research associates hold
options to purchase shares of the Company’s common stock.
On
September 20, 2006, the Company signed a Memorandum of Understanding with
Branded Asset Management Group LLC to form a joint venture for the purpose
of
establishing a new anti-counterfeiting standard in a range of branded products
and categories. The Company will own 50% of the joint venture, and will license
its technology to the joint venture for use in the development and sale of
anti-counterfeit products, systems and processes in certain agreed upon markets.
William E. Gordon, one of the directors of the Company, is a partner with
Branded Asset Management.
PART IV
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
(a)
(1)
Financial
Statements.
The
following financial statements are included in this report:
|
Title
of Document
|
|
Page
|
|
Report
of Madsen & Associates, Certified Public Accountants
|
|
22
|
|
Balance
Sheet as at September 30, 2006
|
|
23
|
|
Statement
of Operations for the Years ended September 30, 2006 and 2005 and
the period from October 8, 1998 (inception) to September 30,
2006.
|
|
24
|
|
Statement of
Changes in Stockholders' Equity from inception through the Year
Ended September 30, 2006.
|
|
25
|
|
Statement
of Cash Flows for the Years Ended September 30, 2006 and 2005 and
the period from October 8, 1998 (inception) to September 30,
2006.
|
|
27
|
|
Notes
to the Financial Statements
|
|
28
|
(a)
(2)
Financial
Statement Schedules
The
following financial statement schedules are included as part of this report:
None.
18
(a)
(3)
Exhibits
The
exhibits required to be filed herewith by Item 601 of Regulation S-B, as
described in the following index of exhibits, are attached hereto unless
otherwise indicated as being incorporated herein by reference, as
follows:
| 3.1 |
Amended
and Restated Articles of Incorporation, filed as an exhibit to the
Company’s annual report on Form 10-KSB filed on February 9, 2006, and
incorporated herein by reference.
|
| 3.2 |
Bylaws
incorporated herein by reference to the Company's Registration Statement
on Form 10-SB filed on March 11,
1999.
|
| 4.1 |
2005
Combined Incentive and Non-Qualified Stock Option Plan of the
Company,
filed as an exhibit to the Company’s Registration Statement on Form SB-2
filed on August 1, 2005, File No. 333-127100, and incorporated
herein by
reference.
|
| 10.1 |
Intellectual
Property Agreement dated June 16, 2004 between the Company and Kenneth
Turpin, filed
as an exhibit to the Company’s Registration Statement on Form SB-2 filed
on August 1, 2005, File No. 333-127100, and incorporated herein by
reference.
|
| 10.2 |
Independent
Contractor Agreement dated June 16, 2004 between the Company
and eVision
Technologies Inc. to provide research and development services
with
respect to the Company’s color technology, filed as an exhibit to the
Company’s Registration Statement on Form SB-2 filed on August 1, 2005,
File No. 333-127100, and incorporated herein by
reference.
|
| 10.3 |
Worldwide
Licensing Agreement dated April 21, 2005 between the Company
and eVision
Technologies Inc. granting the Company exclusive rights to the
CBN coding
system, filed as an exhibit to the Company’s Registration Statement on
Form SB-2 filed on August 1, 2005, File No. 333-127100, and incorporated
herein by reference.
|
| 10.4 |
Letter
Agreement dated August 26, 2004 between the Company and Ralph
Brier, CEO,
regarding CEO compensation package, filed as an exhibit to the
Company’s
Registration Statement on Form SB-2 filed on August 1, 2005,
File No.
333-127100, and incorporated herein by
reference.
|
| 10.5 |
Letter
Agreement dated August 28, 2005 between the Company and Jerry
Goldberg
regarding CFO compensation package, filed as an exhibit to Post-Effective
Amendment No. 1 to the Company’s Registration Statement on Form SB-2 filed
on December 12, 2005, File No. 333-127100, and incorporated herein
by
reference.
|
| 14.1 |
Code
of Ethics for Employees and
Directors.
|
| 31.1 |
Certification
by Chief Executive Officer pursuant to Rule
13a-14(a).
|
| 31.2 |
Certification
by Chief Financial Officer pursuant to Rule
13a-14(a).
|
| 32.1 |
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
| 32.2 |
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
| (b) |
Reports
on Form 8-K
|
19
| (i) |
Form
8-K filed on February 27, 2006 and incorporated herein by reference,
announcing the termination of the Company’s research and development
contract with eVision Technologies Inc. and announcing the termination
of
Ken Turpin as Chief Science Officer of the
Company.
|
| (ii) |
Form
8-K filed on April 26, 2006 and incorporated herein by reference,
announcing the appointment of Dr. Masahiro Kawahata as a director
of the
Company, and announcing the appointment of Jon Pepper and Robert
Dougherty
to fill two newly-created Board
seats.
|
| (iii) |
Form
8-K filed on June 21, 2006 and incorporated herein by reference,
announcing an increase in the number of directors of the Company
from five
members to six members, and announcing the appointment of William
E.
Gordon III to fill the newly-created Board
seat.
|
| (iv) |
Form
8-K filed on September 21, 2006 and incorporated herein by reference,
announcing the resignation of Robert Dougherty as a director of the
Company.
|
| (v) |
Form
8-K filed on October 10, 2006 and incorporated herein by reference,
announcing the Company’s signing of a Memorandum of Understanding with
Branded Asset Management Group LLC to form a joint
venture.
|
| (vi) |
Form
8-K filed on November 15, 2006 and incorporated herein by reference,
announcing the resignation of Ralph Brier as Chief Executive Officer,
President, and a director of the Company, and announcing the appointment
of Bradley Sparks as the new Chief Executive Officer and President
as well
as a director of the Company.
|
| (vii) |
Form
8-K filed on January 3, 2007 and incorporated herein by reference,
announcing the resignation of Jerry Goldberg as Chief Financial Officer,
Secretary and Treasurer of the Company, and announcing the appointment
of
Bradley Sparks as the Chief Financial Officer, Secretary and Treasurer
of
the Company.
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
| (1) |
Audit
Fees
|
The
aggregate fees billed by the independent accountants for the last two fiscal
years for professional services for the audit of the Company’s annual financial
statements and the review included in the Company’s Form 10-QSB and services
that are normally provided by the accountants in connection with statutory
and
regulatory filings or engagements for those fiscal years were
$8,425.
| (2) |
Audit-Related
Fees
|
The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to
the
performance of the audit or review of the Company’s financial statements and are
not reported under Item 9 (e)(1) of Schedule 14A was NIL.
| (3) |
Tax
Fees
|
The
aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountants for tax compliance, tax advice,
and tax planning was $400.
| (4) |
All
Other Fees
|
During
the last two fiscal years there were no other fees charged by the principal
accountants other than those disclosed in (1) and (2) above.
20
| (5) |
Audit
Committee’s Pre-approval Policies and
Procedures
|
At
the
present time, there are not sufficient directors, officers and employees
involved with the Company to make any pre-approval policies meaningful. Once
the
Company has elected more directors and appointed directors and non-directors
to
the Audit Committee it will have meetings and function in a meaningful
manner.
| (6) |
Audit
hours incurred
|
The
principal accountants spent approximately 50 percent of the total hours expended
on auditing the Company’s financial statements for the most recent fiscal year.
The hours were about equal to the hours spent by the Company’s internal
accountant.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| VISUALANT, INCORPORATED | ||
| (the "Registrant") | ||
| |
|
|
| By: | /s/ Bradley Sparks | |
|
Bradley Sparks
President,
Chief Executive Officer
and
Director
|
||
Date:
January 16, 2007
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Ronald P. Erickson | |
|
Ronald P. Erickson
Chairman of the Board and
Director
|
||
Date: January 16, 2007
| By: | /s/ Bradley Sparks | |
|
Bradley
Sparks
Chief
Financial Officer and Secretary
Treasurer
|
||
Date:
January 16, 2007
21
| MADSEN & ASSOCIATES, CPA’s INC. |
684
East Vine St. #3
|
| Certified Public Accountants and Business Consultants |
Murray,
Utah 84107
|
|
Telephone
801-268-2632
|
Board
of
Directors
Visualant
Incorporated
Seattle,
Washington
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
audited the accompanying balance sheet of Visualant
Incorporated (development
stage company) at September 30, 2006
and the
related statement of operations, stockholders' equity, and cash flows for the
years ended September 30, 2006 and 2005 and the period October 8, 1998 (date
of
inception) to September 30, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall balance sheet presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Visualant
Incorporated
at
September 30, 2006 and the
results of operations, and cash flows for
the
years ended September 30, 2006 and 2005 and the period October 8, 1998 (date
of
inception) to September 30, 2006,
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company will need additional working
capital for its planned activity and to service its debt, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in the notes to the financial
statements. These financial statements do not include any adjustments that
might
result from the outcome of this uncertainty.
/s/
Madsen & Associates, CPA’s Inc.
Salt
Lake
City, Utah,
January
16, 2007
22
VISUALANT
INCORPORATED
(Development
Stage Company)
BALANCE
SHEET
September
30, 2006
|
ASSETS
|
|
|||
|
Current
Assets
|
|
|||
|
Cash
|
$
|
7,160
|
||
|
|
|
|||
|
Total
current assets
|
7,160
|
|||
|
|
|
|||
|
Fixed
Assets, net
|
--
|
|||
|
|
|
|||
|
License,
net
|
--
|
|||
|
|
|
|||
|
Total
assets
|
$
|
7,160
|
||
|
|
|
|||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|||
|
Current
Liabilities
|
|
|||
|
Accounts
payable
|
$
|
306,424
|
||
|
Accrued
expenses
|
8,247
|
|||
|
Notes
payable - related party
|
165,705
|
|||
|
|
|
|||
|
Total
current liabilities
|
480,376
|
|||
|
|
|
|||
|
Commitments
and Contingencies
|
|
|||
|
|
|
|||
|
Shareholders'
Deficit
|
|
|||
|
Preferred
stock - $.001 par value, 50,000,000 shares authorized, no shares
issued
and outstanding
|
-
|
|||
|
Common
stock - $.001 par value, 100,000,000 shares authorized, 16,503,891
shares
issued and outstanding
|
16,504
|
|||
|
Additional
paid-in capital
|
3,604,969
|
|||
|
Accumulated
deficit
|
(4,094,689
|
)
|
||
|
|
|
|||
|
Total
shareholders' equity (deficit)
|
(473,216
|
)
|
||
|
|
|
|||
|
Total
liabilities and stockholders' deficit
|
$
|
7,160
|
||
The
accompanying notes are an integral part of these financial
statements.
23
VISUALANT
INCORPORATED
(Development
Stage Company)
STATEMENTS
OF OPERATIONS
For
the Years Ended September 30, 2006 and 2005 and Period
October
8, 1998 (Date of Inception) to September 30, 2006
|
Years
Ended
September
30,
|
Period
from
October
8, 1998
(Inception)
to September 30,
|
|||||||||
|
2006
|
2005
|
2006
|
||||||||
|
Revenues:
|
$ |
—
|
$ |
—
|
$ |
—
|
||||
|
Operating
expenses:
|
|
|
|
|||||||
|
Research
and development
|
468,730
|
153,579
|
687,409
|
|||||||
|
Administrative
|
531,041
|
678,540
|
2,109,814
|
|||||||
|
Compensation
- incentive stock options
|
24,000
|
24,000
|
72,000
|
|||||||
|
Total
operating expenses
|
1,023,771
|
856,119
|
2,869,223
|
|||||||
|
Loss
from operations
|
(1,023,771
|
)
|
(856,119
|
)
|
(2,869,223
|
)
|
||||
|
Other
income (expense):
|
|
|
|
|||||||
|
Settlement
of debt
|
—
|
—
|
43,400
|
|||||||
|
Interest
expense
|
(8,265
|
)
|
(12,524
|
)
|
(114,539
|
)
|
||||
|
Loss
on deposit
|
—
|
—
|
(1,154,327
|
)
|
||||||
|
Net
loss
|
(1,032,036
|
)
|
(868,643
|
)
|
(4,094,689
|
)
|
||||
|
Net
loss applicable to common stockholders
|
||||||||||
|
Net
loss per share applicable to common stockholders — basic and
diluted
|
$ |
(0.06
|
)
|
$ |
(0.13
|
)
|
|
|||
|
Weighted
average shares used in computing basic and diluted loss per
share
|
16,422,503
|
16,090,000
|
|
|||||||
The
accompanying notes are an integral part of these financial
statements.
24
VISUALANT
INCORPORATED
(Development
Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY
For
the Period October 8, 1998 (Date of Inception)
to
September 30, 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 at $.002 - November 20, 1998 | 4,500,000 | 4,500 | 4,500 | - | |||||||||
| 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 | ) | ||||||||
25
VISUALANT
INCORPORATED
(Development
Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY - continued
For
the Period October 8, 1998 (Date of Inception)
to
September 30, 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
$0.75 - October 2005 to
September
2006
|
146,667 | 147 | 109,853 | - | |||||||||
| Issuance of common stock for services at $.75 - May 2006 | 50,000 | 50 | 37,450 | - | |||||||||
| Compensation - incentive stock options | - | - | 24,000 | - | |||||||||
| Net operating loss for the year ended ended September 30, 2006 | - | - | - | (1,032,036 | ) | ||||||||
| Balance September 30, 2006 | 16,503,891 | $ | 16,504 | $ | 3,604,969 | $ | (4,094,689 | ) | |||||
The
accompanying notes are an integral part of these financial
statements.
26
VISUALANT
INCORPORATED
(Development
Stage Company)
STATEMENT
OF CASH FLOWS
For
the Years Ended September 30, 2006 and 2005 and the Period
October
8, 1998 (Date of Inception) to September 30, 2006
|
Years
Ended
September
30,
|
Period
from
October
8, 1998
(Inception)
to September 30,
|
||||||||
|
2006
|
2005
|
2006
|
|||||||
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
|
(1,032,036
|
)
|
$
|
(868,643
|
)
|
$
|
(4,094,689
|
)
|
|
Reconciliation
of net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and tangible and intangible asset impairments
|
|
16,721
|
|
|
3,087
|
|
|
19,808
|
|
|
Issuance
of capital stock for expenses
|
|
37,500
|
|
|
58,406
|
|
|
82,956
|
|
|
Stock
compensation
|
|
24,000
|
|
|
24,000
|
|
|
72,000
|
|
|
Loss
of deposit
|
|
—
|
|
|
—
|
|
|
1,154,327
|
|
|
Capital
contributions - expenses
|
|
—
|
|
|
—
|
10,950
|
|||
|
Increase
(decrease) in cash resulting from changes in assets and
liabilities:
|
|
|
|||||||
|
Prepaid
expenses
|
|
(50,000
|
)
|
|
—
|
|
|
(50,000
|
)
|
|
Accounts
payable and accrued expenses
|
|
183,322
|
|
|
(5,364
|
)
|
|
1,741,907
|
|
|
Net
Cash used in Operating Activities
|
|
(770,493
|
)
|
|
(788,514
|
)
|
|
(1,012,741
|
)
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
—
|
|
|
(12,308
|
)
|
|
(12,308
|
)
|
|
Purchase
of investment - deposit
|
|
—
|
|
|
—
|
|
|
(1,154,327
|
)
|
|
Net
Cash provided by (used in) Investing Activities
|
|
—
|
|
|
(12,308
|
)
|
|
(1,166,635
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
95,000
|
|
|
1,307,000
|
|
|
2,022,892
|
|
|
Proceeds
from issuance of notes payable to related party
|
|
163,644
|
|
|
—
|
|
|
163,644
|
|
|
Net
Cash (used in) provided by Financing Activities
|
|
258,644
|
|
|
1,307,000
|
|
|
2,186,536
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
(511,849
|
)
|
|
506,178
|
|
|
7,160
|
|
|
Cash
and cash equivalents at beginning of period
|
|
519,009
|
|
|
12,831
|
|
|
—
|
|
|
Cash
and cash equivalents at end of period
|
$
|
7,160
|
|
$
|
519,009
|
|
$
|
7,160
|
|
|
Supplemental
disclosure of cash flow information —
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
$
|
—
|
|
$
|
12,524
|
|
$
|
106,274
|
|
The
accompanying notes are an integral part of these financial
statements.
27
VISUALANT
INCORPORATED
(Development
Stage Company)
NOTES
TO FINANCIAL STATEMENTS
September
30, 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 and on August 18, 2004 the name 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 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.
Stock-based
Compensation
SFAS
No.
123, “Accounting for Stock-Based Compensation,” establishes accounting and
reporting standards for stock-based employee and director compensation plans.
SFAS No 123 requires the recognition of compensation cost using a fair value
based method whereby compensation cost is measured at the grant date based
on
the value of the award and is recognized over the service period, which is
usually the vesting period. 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.
28
VISUALANT
INCORPORATED
(
Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS (Continued)
September
30, 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
September 30, 2006 the Company had a net operating loss available for
carryforward of $4,094,689. The
tax
benefit of approximately $1,228,000 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 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 otherwise maintains cash in banks with good reputations and 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.
29
VISUALANT
INCORPORATED
(Development
Stage Company)
NOTES
TO FINANCIAL STATEMENTS (Continued)
September
30, 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. Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Gains and losses on those foreign currency transactions are included in determining net income or loss for the period in which exchange rates change. US dollars are considered to be the functional currency.
Recent
Accounting Pronouncements
Statement
of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
Share-Based Payments (“SFAS 123R”) eliminates the option to apply the
intrinsic value measurement provisions of Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for Stock Issued to Employees, to stock
compensation awards issued to employees. The Company is continuing to evaluate
the transition method to be adopted.
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 semi
monthly.
30
VISUALANT
INCORPORATED
(A
Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS (Continued)
September
30, 2006
4.
NOTES
PAYABLE
During
the year ended September 30, 2006, the Company entered into agreements with
Coach Capital, LLC for three demand notes payable to Coach Capital, LLC totaling
$163,644 for purposes of financing ongoing operations. Interest expense accrues
on these notes at a rate of 18% per annum. In connection with these notes,
the
Company accrued loan fees totaling $2,061
5.
COMMON CAPITAL STOCK
During
the fiscal year ended September 30, 2006 the Company issued the following
private placement common shares of capital stock.
146,667
shares for cash of $110,000 of which $15,000 was received in fiscal year
2005.
50,000
shares for services of $37,500.
During
fiscal year 2006, the Company entered into an agreement to issue an additional
25,000 shares for services. These services were performed during first quarter
2007; however, the related shares have not been issued.
6.
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.
On
August
15, 2004 the Company granted 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
June and August 2005 the Company granted stock options to related parties to
purchase 600,000 common shares at $.75 per share, which will expire in June
and
August 2009. On the date of the grants, the fair market value was $.75 per
share.
During
the fiscal year ended September 30, 2006, the Company issued stock options
or
authorized management to grant stock options to purchase 955,000 shares of
common stock. On the date of the grants, the fair market value was $0.75 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, 2006 would not have been materially
different.
31
VISUALANT
INCORPORATED
(A
Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS (Continued)
September
30, 2006
7.
SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
Officer-directors
have acquired or control 11.9% of the outstanding common stock and have received
the stock options outlined in note 5.
8. 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.
9. 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.
10. SUBSEQUENT
EVENTS
Personnel
Effective
November 10, 2006, the Chief Executive Officer and President resigned. Further,
effective December 27, 2006, the Chief Financial Officer resigned. The Company
has entered into a severance agreement with the former Chief Executive Officer.
During
November 2006 and January 2007, Bradley Sparks was appointed as the new Chief
Executive Officer and Chief Financial Officer, respectively.
Notes
Payable
During
first quarter 2007, the Company entered into an additional demand note payable
agreement with Coach Capital, LLC totaling $54,888. The note accrues interest
at
18% per annum.
32