Know Labs - 10-Q quarterly report FY

x     QUARTERLY  REPORT  UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2009

o      TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT

For the transition period from _______ to ________

Commission File number               000-30262

 

 

(Exact name of registrant as specified in charter)

 

 

 

 

 

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), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). 

 

Large accelerated filer  o            Accelerated filer  o            Non-accelerated filer  o            Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

 

The number of shares of common stock, $.001 par value, issued and outstanding as of January 12, 2010:  29,262,707 shares

 

 

 

 

 

         

 

 

The accompanying balance sheets of Visualant, Incorporated (development stage company) at December 31, 2009 and September 30, 2009, the statements of operations for the three months ended December 31, 2009 and 2008, the statements of cash flows for the three months ended December 31, 2009 and 2008 and for the period from October 8, 1998 (date of incorporation) to December 31, 2009, 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 three month period ended December 31, 2009 are not necessarily indicative of the results that can be expected for the year ending September 30, 2010.

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

 

 

Visualant, Inc. was incorporated under the laws of the State of Nevada on October 8, 1998 with authorized common stock of 200,000,000 shares at $0.001 par value. On September 13, 2002 50,000,000 shares of preferred stock with a par value of $0.001 were authorized by the shareholders.  There are no preferred shares issued and the terms have not been determined.

The Company is in the development stage and has not commenced operations.

 

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred net losses of approximately $186,000 and $529,000 for the three months ended December 31, 2009 and 2008, respectively. Our current liabilities exceeded our current assets by approximately $1.4 million as of December 31, 2009.  Our net cash used in operating activities approximated $42,000 for the three months ended December 31, 2009.

As of December 31, 2009, the Company had $212,884 in cash.  The Company is considered illiquid as this cash is not considered sufficient to fund the recurring operating and associated financing costs. The Company needs to raise additional funding to continue its operations.  However, there can be no assurance that financing or additional funding will be available to the Company on favorable terms or at all. If the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders.

 

We anticipate that we will generate significant losses from operations for the foreseeable future. As of December 31, 2009, our accumulated deficit was $7.8 million.  We have limited capital resources, and operations to date have been funded with the proceeds from private equity and debt financings. These conditions raise substantial doubt about our ability to continue as a going concern. The audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended September 30, 2009 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.

Continuation of the company as a going concern is dependant upon obtaining additional working capital.  The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

 

The Financial Accounting Standards Board modified the hierarchy of Generally Accepted Accounting Principles, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with Generally Accepted Accounting Principles in the United States (the GAAP hierarchy). The new Accounting Standards Codification (ASC) became the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles.  The ASC became effective for interim and annual periods ending after September 15, 2009, and did not have an impact on the Company's financial statements other than changing the references to authoritative accounting literature.

 

In June 2009, ASC Topic 810 was also amended to improve financial reporting by enterprises involved with variable interest entities.  This topic addresses (1) the effects on certain provisions regarding the consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in ASC Topic 860 regarding the accounting for transfers of financial ssets, and (2) concern about the application of certain key provisions of FASB Interpretation No. 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise's involvement in a variable interest entity. This statement is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

 

 

 

In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures" ("ASU 2010-06")which provides amendments to Subtopic 820-10 that require new disclosures regarding (1) transfers in and out of Levels 1 and 2 fair value measurements and (2) activity in Level 3 fair value measurements. Additionally, ASU 2010-06 clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The guidance in ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this statement is not expected to have a material effect on the Company's financial statements.

 

The significant accounting policies used in the preparation of our Condensed Financial Statements are disclosed in our Form 10-K for the year ended September 30, 2009, as filed with the Securities and Exchange Commission.

Accounting for Share Based Compensation

The Company has share-based compensation plans under which employees and non-employee directors may be granted restricted stock, as well as options to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit.  Grants of stock options and stock to non-employees and other parties are accounted for in accordance with the ASC 505.

Adoption of SFAS No. 157, Fair Value Measurements

 

ASC Topic 820 "Fair value measurement and Disclosures" establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date.  The standard establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

*   Level 1 - Unadjusted observable quoted prices for identical instruments in active markets.

*   Level 2 - Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

*   Level 3 - Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

As of December 31, 2009, there are no financial assets or liabilities requiring additional fair value disclosure. 

 

The Company is in the business of researching, developing, acquiring, and commercializing products and services related to illumination and detection of electromagnetic energy, typically in the visible and near-visible portions of the electromagnetic spectrum, using specialized illumination and sensing systems and spatial analysis software modeling which allow for pattern recognition.  This technology involves specialized and proprietary information and trade secrets, which the Company considers to be among its most sensitive, confidential, and proprietary information.

 

 

 

In October 2008, the Long Term Note Payable and accrued interest outstanding with Coventry Capital LLC was converted into 3,213,967 shares of common stock at $0.15 per share.  The amount converted of $482,095 was comprised of the entire principal balance of $425,340 and accrued interest of $56,755.

 

.In February 2007, the Company entered into a demand note with former CEO and President, Bradley E. Sparks totaling $50,000 plus loan fees of $750.  As of December 31, 2009, the outstanding note payable totaled $50,750 consisting of the note payable to Sparks.  Interest expense accrues on the note at a rate of 18% per annum.  Accrued interest on the notes payable is recorded in the balance sheet in accrued expenses and other liabilities.

 

Any delays in repayment of the principal and accrued interest on the note payable upon demand result in a penalty interest rate of 30% per annum.  The interest due to Sparks became in arrears on February 16, 2008 and has not been paid as of the date of this filing.  Sparks has not demanded repayment of the note as of the date of this filing.

On April 30, 2009, accounts payable totaling $82,000 has been converted into a promissory note.

On September 30, 2009, accounts payable totaling $24,322 arising primarily from operating cash advances to the Company from Ronald Erickson, the Company’s Chairman of the Board, has been converted into a demand note.   Interest expense accrues on the note at a rate of 8% and is recorded in accrued liabilities from related parties.

   

 

On December 7, 2009, the Company obtained $250,000 of financing from Coach Capital pursuant to a Convertible Promissory Note earning interest at 8% and convertible in one year at $0.15 per share.  Additionally, Coach Capital received warrants to purchase 833,333 shares of the Company’s common stock at $0.15 per share.  The warrant expires 3 years from the date of issuance.

 

Upon issuing the Note to Coach Capital, the Company recognized the note and warrants based on their relative fair values of $250,000 and $81,000, respectively.  The fair value of the note was determined using the Black-Scholes option pricing model. The relative fair value of the warrants was classified as a component of additional paid-in capital with the corresponding amount reflected as a contra-liability to the debt.  The fair value of the warrants was determined using the Black Scholes model, assuming a term of three years, volatility of 267%, no dividends, and a risk-free interest rate of 1.34%.

During the quarter ended December 31, 2009, the company issued 300,000 shares of common stock as grants to directors, 100,000 shares of common stock as grants to a consultant, and 300,000 shares to RatLab, LLC. upon meeting the first milestone pursuant to the letter of intent disclosed in Note 5 above.

 

 

In 2005, our Board of Directors adopted a combined incentive and nonqualified stock option plan for our employees and consultants (“2005 Stock Option Plan”).   On October 9, 2006 the Board of Directors authorized an increase in shares available for grant from 2 million to 4 million, subject to stockholder approval.

 

 

 

 

 

 

A summary of activity relating to our stock option plan is as follows:

 

No options have been granted during the three months ended December 31, 2009.

 

 

 

See Note 6 for discussion of notes payable issued to the Company’s former CEO and President during the quarter ended March 31, 2007.   Other than the note payable, related interest and payroll related accruals; all amounts are recorded in the related party accounts payable balance.  As of the filing date, the directors and officers of the Company beneficially own an aggregate 4,881,875 shares of common stock.

Mr. Sparks is owed $721,333 of accrued salary plus $57,998 which has been accrued to pay applicable payroll taxes, FUTA, etc.  Additionally, interest of $26,179 is owed Mr. Sparks for the note payable described in Note 6 to these Notes to Financial Statements.  Mr. Sparks is also owed $33,929 for cash amounts advanced by him to Visualant to fund operating expenses since his employment.

Dr. Kawahata, one of the Company’s directors, is owed $90,000 by the Visualant for services rendered to the Company.

 

 

 

 

 

This item is not applicable.

(a)           Evaluation of Disclosure Controls and Procedures

 

 (b)           Changes in Internal Control Over Financial Reporting

 

 

 

 

 

(a)        Exhibits

 

 

 

(Registrant)