SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES

EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

Commission file number 0-16819

CREATIVE VISTAS, INC.

 

(Exact name of registrant as specified in its charter)

 

Arizona (State or other jurisdiction of incorporation or organization

6770 (Primary Standard Industrial Classification Code Number)

86-0464104 (I.R.S. Employer Identification No.)

 

2100 Forbes Street
Unit 8-10
Whitby, Ontario, Canada L1N 9T3
(905) 666-8676
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

 

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¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨	Smaller Reporting Company x
(Do not check if a smaller reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

¨ Yes            x No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

At May 15, 2012, the number of shares outstanding of the registrant’s common stock, no par value (the only class of voting stock), was 37,488,714.

 

 

PART I.
Financial Information
Item 1.		Condensed Consolidated Financial Statements		1
Item 2.		Management's Discussion And Analysis of Financial Condition and Results of Operations		9
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		13
Item 4.		Controls and Procedures		13
PART II.
OTHER INFORMATION
Item 1.		Legal Proceedings		14
Item 1A.		Risk Factors		14
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		14
Item 3.		Defaults upon Senior Securities		14
Item 4.		Mine Safety Disclosures.		14
Item 5.		Other Information		14
Item 6.		Exhibits

 

 

PART I.             Financial Information

Item 1.      Financial Statements

 

Creative Vistas, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)		March 31, 2012				December 31, 2011
Assets
Current Assets
Cash and bank balances		$	883,109			$	906,982
Accounts receivable, net of allowance
for doubtful accounts $119,740 (2011 -$117,392)			1,319,345				895,193
Income tax recoverable			249,212				235,294
Inventory, net			354,946				374,997
Prepaid expenses			54,368				8,205
Total current assets			2,860,980				2,420,671
Property and equipment, net of depreciation			722,677				718,155
Deposits			20,000				19,608
Deferred income taxes			37,430				37,203
		$	3,641,087			$	3,195,637
Liabilities and Stockholders’ (Deficiency)
Current Liabilities
Bank indebtedness		$	246,509			$	-
Accounts payable and accrued liabilities			1,472,462				1,257,343
Deferred income			112,805				60,810
Deferred income taxes			25,858				25,858
Term note payable			1,548,207				1,548,207
Total current liabilities			3,405,841				2,892,218
Notes payable to related parties			1,500,000				1,500,000
Due to related parties			230,870				226,343
			5,136,711				4,618,561
Stockholders' (deficiency)
Share capital
Preferred stock no par value, 50,000,000 shares authorized,  none issued or outstanding
Common stock, no par value; 100,000,000 shares authorized  37,488,714 shares issued and outstanding at March 31, 2012 and December 31, 2011			6,555,754				6,555,754
Additional paid-in capital			14,338,226				14,338,226
Accumulated (deficit)			(22,064,635	)			(22,021,782	)
Accumulated other comprehensive (loss)			(324,969	)			(295,122	)
			(1,495,624	)			(1,422,924	)
		$	3,641,087			$	3,195,637

 

The accompanying notes are an integral part of these financial statements.

 

 

Creative Vistas, Inc.

Condensed Consolidated Statement of Operations and Comprehensive (Loss)

(Unaudited)

 

		Three months ended
		March 31
		2012				2011
Contract and service revenue
Contract		$	1,047,499			$	1,890,121
Service			431,677				386,170
			1,479,176				2,276,291
Direct Expenses (excluding depreciation and amortization)
Contract			502,915				1,061,731
Service			161,925				198,238
Project Expenses			220,271				292,624
Selling Expenses			204,492				227,771
General and administrative expenses			412,963				454,949
Depreciation expense			9,841				21,137
Amortization of intangible assets			-				2,714
			1,512,407				2,259,164
Income (loss) from operations			(33,231	)			17,127
Interest expenses and other expenses (income)
Net financing expenses			40,586				178,517
Amortization of deferred charges			-				2,179
Foreign currency translation (gain)			(30,964	)			(39,190	)
			9,622				141,506
Loss from continuing operations before income taxes			(42,853	)			(124,379	)
Income taxes			-				-
Loss from continuing operations			(42,853	)			(124,379	)
Income from discontinued operations, net of income taxes			-				194,190
Net income (loss)			(42,853	)			69,811
Other comprehensive income (loss) :
Foreign currency translation adjustment			(29,847	)			(375,836	)
Comprehensive loss		$	(72,700	)		$	(306,025	)
Basic weighted-average shares			37,488,714				37,488,714
Diluted weighted-average shares			37,488,714				42,445,175
Basic earnings (loss) per share
Continuing operations		$	(0.00	)		$	(0.00	)
Discontinued operations		$	0.00			$	0.01
Diluted earnings (loss) per share
Continuing operations		$	(0.00	)		$	(0.00	)
Discontinued operations		$	N/A			$	0.00

 

The accompanying notes are an integral part of these financial statements

 

 

Creative Vistas, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three months ended March 31,
		2012				2011
Operating activities
Net cash used in operating activities		$	(249,347	)		$	(117,949	)
Financing activities
Proceeds from bank indebtedness			246,509				93,169
Repayment of term notes			-				(25,000	)
Net cash provided by financing activities			246,509				68,169
Effect of foreign exchange rate changes in cash			(21,035	)			(42,781	)
Net change in cash and cash equivalents			(23,873	)			(92,561	)
Cash and cash equivalents, beginning of period			906,982				1,779,345
Cash and cash equivalents, end of period		$	883,109			$	1,686,784

 

The accompanying notes are an integral part of these financial statements

 

 

Creative Vistas, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2012 (Unaudited)

 

1.

Summary of Accounting Policies

 

Basis of presentation

 

The accompanying unaudited condensed consolidated balance sheet as at March 31, 2012 and December 31, 2011, and the condensed consolidated statements of operations and cash flows for the periods ended March 31, 2011 and 2012, include the accounts of Creative Vistas, Inc. (“CVAS”), Creative Vistas Acquisition Corp. (“AC Acquisition”), AC Technical Systems Ltd. (“AC Technical”), Iview Holding Corp. (“Iview Holding”), Iview Digital Video Solutions Inc. (“Iview DSI”), 2221559 Ontario Inc. and 2300657 Ontario Inc. (collectively, the “Company”, or “we”, “us”, “our”). All material inter-company accounts, transactions and profits have been eliminated. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The accompanying condensed consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for such periods are not necessarily indicative of the results expected for 2012 or for any future period. These financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission.

 

Reclassifications

 

Certain amounts from the March 31, 2011 financial statements have been reclassified to conform to the current year’s presentation.

 

Discontinued Operations

 

As a result of the sale of Cancable Holding Corp. (“Cancable Holding”) and its subsidiaries on September 16, 2011, our condensed consolidated statement of operations for the three months ended March 31, 2011 presents income from Cancable Holdings as discontinued operations.

 

The Company has not had continuing operational involvement in Cancable Holding since the sale. However, during the three months ended March 31, 2011 the Company received approximately $115,000 from Cancable for fees that are not considered to be from operations.

 

The following table details Cancable Holding’s revenues and income from operations which have been reported as discontinued operations:

 

		January 1 to
		March 31
		2011
Service revenue		$	6,744,146
Cost of sales			5,412,024
General and administrative expenses			544,093
Depreciation expense			457,155
Amortization of intangible assets			8,127
			6,421,399
Income from operations			322,747
Net financing expenses			333,174
Amortization of deferred charges			38,191
Foreign currency transaction (gains)			(242,808	)
			128,557
Income from discontinued operations, net of income tax			194,190

 

 

Liquidity and going concern

 

Our consolidated financial statements were prepared using U.S. GAAP applicable to going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. We have an accumulated deficit of $22,064,635, a stockholders’ deficit of $1,495,624 and a working capital deficit of $544,861 at March 31, 2012, including current maturities of term loans due to Laurus of $1,548,207 (the “Iview Note”) which the Company does not currently have the ability to pay. As a result of the sale of Cancable Holding as discussed above, the Holders of the Iview Note terminated and cancelled all guarantees, security interests and other obligations of the Company and certain of its subsidiaries related to the Iview Note.

 

Assuming that Laurus does not demand repayment of the Iview Note, management believes that its existing capital will be sufficient to sustain its operations. Management plans to seek additional capital in the future to fund operations, growth and expansion through additional equity, debt financing or credit facilities. The Company has had early stage discussions with investors about potential investment in the Company at a future date. No assurance can be made that such financing would be available and, if available, it may take either the form of debt or equity. In either case, the financing could have a negative impact on our financial condition and our shareholders. The Company has increased its rates for services provided by AC Technical to improve gross margins. This is in line with our competitors. The Company also expects to see the benefits of its research and development efforts within the next 12 months as it starts to introduce its own line of customized products to the industry. These products and technologies are expected to improve gross margins. The Company believes that it will be eligible for research and development tax credits at year end for its research and development efforts during the year, providing an additional source of cash flow for the Company. Finally, the Company is also negotiating longer credit terms with its suppliers from 45 days to 60 to 75 days. For all the reasons mentioned above, we believe that we have adequate capital and short term borrowing capability and that we will be able to sustain our operations and continue as a going concern for a reasonable period of time, although there can be no assurance of this. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

Inventory

 

Inventory consists principally of parts, materials and supplies and is stated at the lower of cost or market. Cost is generally determined on the first in, first out basis. The inventory is net of estimated obsolescence ($150,000 at March 31, 2012 and December 31, 2011), and excess inventory based upon assumptions about future demand and market conditions.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share (“EPS”) is computed in accordance with ASC 260, “Earnings Per Share”, using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares, determined using the treasury stock method, consist of common stock issuable upon exercise of stock options and warrants. During periods when losses are incurred, potentially dilutive common shares are not considered in the computation as their effect would be anti-dilutive.

 

2.

Bank Indebtedness and Letter of Credit

 

The Company has a credit facility with a Canadian chartered bank. The credit facility for AC Technical is $500,000 and bears interest at the bank’s domestic prime rate plus 1.5% for Canadian dollar amounts. Interest is payable monthly. The facility is secured by a first security interest in book debts, inventory, certain other assets and keyman life insurance. As at March 31, 2012, the interest rate of the Canadian dollar amount was 4.0%. At March 31, 2012, the borrowing outstanding under the facility was $246,509 and the average borrowing outstanding during the three months ended March 31, 2012 was $123,500. The agreements contain financial covenants pertaining to maintenance of tangible net worth and debt service coverage ratio. In the event of default, the bank could at its discretion cancel the facilities and demand immediate repayment of all outstanding amounts.

 

 

At March 31, 2012, the Company was contingently liable under an irrevocable letter of credit issued by our bank in October 2011 in the amount of $750,000 which will expire in October 2012. The letter of credit was issued to an insurance company as security for the bonding facility in the amount of $750,000 to AC Technical.

 

5.

Term Notes

 

In February 2006, Iview DSI issued to Laurus a secured term note (the “Iview Note”) in the amount of $2,000,000. The Iview Note bears interest at the prime rate plus 2% (7% at March 31, 2012) with a minimum rate of 7%. Interest is calculated on the basis of a 360-day year. Per the original terms of this note, the minimum monthly payments on the term note were $8,333 through the original maturity date (February 1, 2011), with the balance of $1,600,000 payable on such date. However, the Iview Note has not been repaid. As a result of the sale of Cancable Holding, the Iview Note is no longer guaranteed and secured by the Company.

 

 

Interest on the term notes for the three months ended March 31, 2012 was $26,614 (2011: $27,547.

 

		March 31, 2012
Iview Note, with interest at prime plus 2% (minimum of 7%; 7% at March 31, 2012)		$	1,548,207

 

6.

Net Financing Expenses

 

		Three months ended March 31,
		2012				2011
Interest on Iview Note			26,614				27,547
Interest on term note assigned to Cancable Holding			-				127,809
Interest on deferred principal repayment of term note			-				9,600
Related parties			13,972				13,561
		$	40,586			$	178,517

 

7.

Note Payable to Related Parties

 

Notes payable to related parties consists of two notes payable for $750,000, each bearing interest at 3% per annum and having no fixed terms of repayment. However, pursuant to the Laurus Financing, these notes have been subordinated to the Company’s obligations to Laurus and they are classified as non-current. The notes are due to Malar Trust Inc. (the Company’s chairman is the shareholder of Malar Trust Inc.).

 

Interest expense recognized for the three month period ended March 31, 2012 was $13,972 (2011 - $13,561).

 

8.

Stockholders’ Deficiency

 

Options

  

The Company’s Stock Option Plan is intended to provide incentives for key employees, directors, consultants and other individuals providing services to the Company by encouraging their ownership of the common stock of the Company and to aid the Company in retaining such key employees, directors, consultants and other individuals upon whose efforts the Company’s success and future growth depends and in attracting other such employees, directors, consultants and individuals.

 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, using the following assumptions. Expected volatility is based on the historical volatility of the Company’s stock, and other factors. The Company uses historical data to estimate employee termination within the valuation model. The Company has assumed that the life of the options will be equal to one-half of the combined vesting period and contractual life (i.e., that employees will exercise the options at the midpoint between the vesting and expiry date of the options). The risk-free rates used to value the options are based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is 0%.

 

At March 31, 2012, options to purchase 260,000 shares of common stock were outstanding. These options vest ratably in annual installments, over the four year period from the date of grant. As of March 31, 2012, there was $15,216 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a remaining weighted average period of 2.36 years. The cost recognized for the three months ended March 31, 2012 was $1,500 (2011: $2,714) which was recorded as general and administrative expenses.

 

A summary of option activity under the Plan during the three months ended March 31, 2012 is presented below:

 

		Options				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term				Intrinsic Value
Outstanding at December 31, 2011			360,000			$	0.72				1.93				-
Granted			-				-				-				-
Exercised			-				-				-				-
Forfeited or expired			(100,000	)		$	0.90				-				-
Outstanding at March 31, 2012			260,000			$	0.65				2.36				-
Exercisable at March 31, 2012			165,000			$	0.65				2.35				-

 

As of March 31, 2012, the aggregate intrinsic value of all stock options outstanding and expected to vest was $0 and the aggregate intrinsic value of currently exercisable stock options was $0.  The intrinsic value of each option is the difference between the fair market value of the common stock and the exercise price of such option to the extent it is “in-the-money”.  Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day.  The intrinsic value calculation is based on the $0.02 closing stock price of the common stock on March 31, 2012. There were no in-the-money options outstanding and exercisable as of March 31, 2012.

 

Because there were no options exercised during the three months ended March 31, 2012, there was no intrinsic value of options exercised.

 

The total fair value of options granted during the three months ended March 31, 2012 was $0, as no options were granted in 2012.   

 

The following table summarizes information about fixed price stock options outstanding at March 31, 2012:

 

Exercise Price				Number Outstanding				Weighted Average Contractual Life				Weighted Average Exercise Price				Number Exercisable				Exercise Price
$	0.63				250,000				2.41			$	0.63				157,500			$	0.63
$	1.12				10,000				1.23			$	1.12				7,500			$	1.12
					260,000												165,000

 

 

The number and weighted average grant-date fair value of options non-vested at the beginning of the year, non-vested at the end of March 31, 2012 and granted, vested or canceled during the three month period ended March 31, 2012 was as follows:

 

		Number of Options				Weighted-Average Grant Date Fair Values
Non-vested at January 1, 2012			127,500			$	0.17
Granted			-				-
Vested			(32,500	)		$	0.22
Canceled			-				-
Non-vested at March 31, 2012			95,000			$	0.14

 

Warrants

The Company uses a binomial option pricing model to value warrants issued to non-employees, based on the market price of our common stock at the time the warrants are issued. All outstanding warrants may be exercised by the holder at any time. Total outstanding warrants as of March 31, 2012 were 200,000 at an exercise price of $0.03 per share, issued to a non-employee for consulting service with an expiry date of December 31, 2014.

 

10.

Segment Information

 

We determine and disclose our segments in accordance with ASC 280”Segment Information”, which uses a “management” approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the reportable segments. Our management reporting structure provides for the following segments:

 

AC Technical

 

A.C. Technical Systems Ltd. (“AC Technical”), a corporation incorporated under the laws of the Province of Ontario, is engaged in the engineering, design, installation, integration and servicing of various types of security systems.

 

Iview DSI

 

Iview Digital Video Solutions Inc. (“Iview DSI”) is a corporation incorporated under the laws of Canada and its wholly owned subsidiary 2221559 Ontario Inc. is a corporation incorporated under the laws of the Province of Ontario and provide video surveillance products and technologies to the market.

 

All of our sales for the periods presented were generated in Canada.

 

		March 31, 2012				March 31, 2011
Sales:
AC Technical			1,479,176				2,238,200
Iview			-				37,535
Creative Vistas, Inc.			-				555
Consolidated Total		$	1,479,176			$	2,276,290
Depreciation and amortization:
AC Technical			9,841				10,577
Iview			-				10,560
Consolidated Total		$	9,841			$	21,137
INTEREST EXPENSE:
Iview			26,614				27,825
AC Technical			13,972				13,561
Creative Vistas, Inc.			-				137,131
Consolidated Total		$	40,586				178,517
Net Income (Loss):
AC Technical			(74,174	)			(13,895	)
Iview			4,014				13,154
Corporate (1)			27,307				(123,638	)
Consolidated Total		$	(42,853	)		$	(124,379	)
TOTAL ASSETS
AC Technical			2,832,048				3,633,806
Iview			22,909				623,892
Creative Vistas, Inc.			786,130				806,165
Consolidated Total		$	3,641,087			$	5,063,863
CAPITAL ASSETS
AC Technical			722,677				781,904
Iview			-				11,858
Consolidated Total		$	722,677			$	793,762
Capital Expenditures
AC Technical			-				-
Consolidated Total		$	-			$	-

 

(1)

Corporate expenses primarily include certain stock-based compensation for consulting and advisory services and amortization of intangible assets, which we do not internally allocate to our segments because they are related to our common stock and are non-cash in nature.

 

 

Item 2.

Management's Discussion And Analysis of Financial Condition and Results of Operations

 

The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties related to the need for additional funds, the rapid growth of the operations and our ability to operate profitably a number of new projects. Except as required by law, we do not intend to publicly release the results of any revisions to those forward-looking statements that may be made to reflect any future events or circumstances.

 

Overview and Recent Developments

 

Creative Vistas, Inc. (“Creative Vistas”, the “Company”, “we”, “us”, or “our”) is a leading provider of security-related technologies and systems. We primarily operate through our subsidiary AC Technical Systems Ltd. (“AC Technical Systems”) to provide integrated electronic security-related technologies and systems. AC Technical Systems is responsible for all of our revenues in the security sector for 2012. It provides its systems to various high profile clients including: government, school boards, retail outlets, banks, and hospitals.

 

On September 16, 2011, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Cancable Holding Corp. (“Cancable Holding”) and Cancable and Dependable Hometech, LLC (“Purchaser”), pursuant to which we sold our equity interest in Cancable Holding to Purchaser for a consideration of US$1.00 on such date.  In connection with such sale, we assigned certain of our liabilities and obligations to Cancable Holding, including (i) a secured term note of the Company dated February 13, 2006, for an original principal amount of US$8.25 million, which is currently held by Valens U.S. SPV I, LLC (“VUS”), Valens Offshore SPV I, Ltd. and PSource Structured Debt Limited (“PSource”), (ii)  a secured term note of the Company dated June 24, 2008, for an original principal amount of US$800,000, which is currently held by VUS, and (iii) a secured term note of the Company dated June 24, 2008, for an original principal amount of US$1,700,000. which is currently held by Valens Offshore SPV II, Corp. (such holders of the term notes listed in clauses (i) to (iii), collectively, the “Holders”, and such term notes, collectively, the “Notes”).  The aggregate outstanding amount owed under the Notes (including accrued and unpaid interest) was approximately US$9,800,000 as of September 16, 2011.  The Holders also (a) terminated and cancelled all guarantees, security interest and other obligations of the Company and certain of its subsidiaries related to approximately US$1,500,000 of indebtedness owed to the Holders by certain other subsidiaries of the Company, (b) cancelled their warrants and options to purchase approximately 15,600,000 shares of common stock of the Company, as well as the stock of certain of the Company’s subsidiaries, and (c) terminated and cancelled all guarantees, security interest and other obligations of the Company and certain of its subsidiaries related to approximately US$5,100,000 of indebtedness owed to the Holders by Cancable Inc. and its subsidiaries.  In addition, in connection with the sale of Cancable Holding to Purchaser, we assigned our rights in certain receivables owed to us by certain wholly-owned subsidiaries of Cancable Holding, totaling approximately US$4,800,000 as of September 16, 2011. The Holders are affiliates of Laurus Master Fund, Ltd. (“Laurus”).

 

 

Today, we mainly focus on security and surveillance products and services. Through our technology integration team of engineers we integrate various security related products to provide a single source solution to our growing customer base. Our design, engineering and integration facilities are located in Ontario, Canada.

 

Results of Operations

Comparison of Three Months Ended March 31, 2011
with Three Months Ended March 31, 2011

 

Discontinued Operations

During 2011, we discontinued certain operations. In accordance with FASB ASC 360, our consolidated financial information presents the net effect of discontinued operations separate from the results of our continuing operations. During the three month period ended March 31, 2011, we recognized income from discontinued operations of approximately $194,190.

 

Revenue: Sales for the three months ended March 31, 2012 decreased 35% to $1,479,200 from $2,276,300 for the three months ended March 31, 2011. All revenue generated from AC Technical Systems was in Canadian dollars.  Contract revenue was $1,047,500 for the three months ended March 31, 2012 compared to $1,890,100 for the three months ended March 31, 2011. The year-over-year decrease in revenue was mainly due to the decrease in the number of subcontracts for the provision of services to fewer government and commercial contracts. Service revenue was $431,700 for the three months ended March 31, 2012, compared with $386,200 in the corresponding period of 2011.

 

Direct Expenses (excluding depreciation): Direct expenses for the three months ended March 31, 2012 was $664,800 or 44.9% of revenues compared to $1,259,900 or 55.4% of revenues for same period in 2011. The material cost was $387,100, or 26.2% of the revenue, for the three months ended March 31, 2012 compared to $911,600, or 40.0% of revenues, in the same period of fiscal 2011. The decrease in the percentage of material costs to revenues was primarily the result of certain contracts having lower material needs. On the other hand, the labor and subcontractor cost decreased to $276,100, or 18.6% of revenues, for the three months ended March 31, 2012 compared to $324,500, or 14.3% of AC Technical revenues, for the same period of fiscal 2011. The decrease in labor and subcontractor cost was mainly due to the decrease in revenue. The increase in percentage of the labor and subcontractor cost to revenues was due to the result of certain contracts having more labor requirement.

 

Project expenses: Project expenses decreased to $220,300, or 14.9% of revenues, for the three months ended March 31, 2012, compared to $292,624, or 12.9% of revenues, for the same period in 2011. These costs include mainly the salaries and benefits of indirect staff amounting to $134,600 in the first quarter of fiscal 2012 compared to $168,000 for the same period of fiscal 2011 with no significant fluctuations. Automobile and travel expenses decreased to $66,800 for the three months ended March 31, 2012 compared to $89,200 for the same period of fiscal 2011. The decrease in this cost was mainly due to the decrease in repair and maintenance expenses.

 

Selling expenses: Selling expenses were $204,500, or 13.8% of revenues, for the first quarter of fiscal 2012 compared to $227,800, or 10.0% of revenues, for the same period in 2011. The balance for the three months ended March 31, 2012 is mainly comprised of salaries and commissions to salespersons of $83,900 compared to $115,700 for the same period of fiscal 2011. Advertising and promotion and trade show expenses were $34,520 in the first quarter of fiscal 2012compared to $21,800 for the same period of fiscal 2011.

 

General and administrative expenses: General and administrative expenses were $413,000, or 27.9% of revenues, for the first quarter of fiscal 2012 compared to $455,000, or 20.0% of revenues, for the same period in 2011. For the three months ended March 31, 2012 these costs were mainly comprised of $72,800 of professional fees related to preparation of the quarterly reports and other corporate matters, compared to $153,600 for the same period in 2011. Total consulting fees and salaries and benefits to administrative staff were $172,900 for the first quarter of fiscal 2012 compared to $172,800 for the corresponding period of 2011. Total expenses for research and development were $77,900 for the three month period ended March 31, 2012, compared with $116,900 for the same period in 2011. The decrease in general and administrative cost was mainly due to a higher employee headcount in 2011.

 

 

Depreciation: Total depreciation of property and equipment was $9,800 for the first quarter of fiscal 2012 compared to $21,100 for the same period in 2011. The decrease in balance was primarily due to certain assets acquired in 2006 and 2007 being fully amortized.

 

Amortization of intangible assets: Amortization of customer relationships and trade name was $2,700 for the three months ended March 31, 2011 and there was no such balance for the three months ended March 31, 2012. The decrease was mainly due to the trade name, which was acquired in 2006, being fully amortized.

 

Interest and other expenses: Interest and net other expenses for the three months ended March 31, 2012 were $9,600 or 0.7% of revenues compared to net expenses of $141,500 or 6.2% of revenues for the same period in 2011. The net financing expenses decreased to $40,600 or 2.7% of revenues compared to $178,500 or 7.8% of revenues for the same period in 2011. The interest due with respect to the Company’s credit facilities was $26,600 for the three months ended March 31, 2012 compared to $155,400 for the same period in 2011. The decrease in expense was mainly due to the decrease of term loans in the amount of $7,287,500 after the sale of Cancable in September 2011.

 

Additionally, the foreign currency transaction gain was $30,900 for the three months ended March 31, 2012, compared with foreign currency transaction gains of $39,000 for same period of 2011. The change was related to the foreign currency translation of term notes which resulted because the Canadian dollar was trading higher than the U.S. dollar as at March 31, 2012 as compared to the same period of 2011.

 

Income taxes: No income taxes were paid and/or owed during the three months ended March 31, 2012 and 2011, which was mainly due to the Company’s previous losses carried forward to offset all income generated by the Company. Because of this and because we have fully reserved substantially all our deferred income tax assets, there was no provision and/or benefit for income taxes.

 

Loss from operations: Loss from operations for the three months ended March 31, 2012 was $33,200 compared with income from operations of $17,100 for the three months ended March 31, 2011. The loss from operations was attributable to the decrease in revenue for the first quarter of fiscal 2012.

 

Net loss from continuing operations: Net loss from continuing operations for the three months ended March 31, 2012 was $42,900, compared with $124,400 for the same period in 2011. Net loss from continuing operations for the three months ended March 31, 2012 was lower, due primarily to the decrease in financing expenses and other reasons described above.

 

Net Income/Loss: Net loss for the first quarter of fiscal 2012 was $42,900 compared to a net income of $69,800 for the same period in 2011. The net income for the three months ended March 31, 2011 includes income from discontinued operations of $194,200 and there was no such balance for the three months ended March 31, 2012.

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations through bank debt, loans and equity from our principals, loans from third parties and funds generated by our business. At March 31, 2012, we had $883,109 in cash. We believe that cash from operations and our credit facilities with Laurus will continue to be adequate to satisfy our ongoing working capital needs as we do not expect Laurus to demand acceleration of the outstanding loan extended to the Company. We do not currently have the ability to repay the note in the event of a demand by the holder. During fiscal year 2012, our primary objectives in managing liquidity and cash flows will be to ensure financial flexibility to support growth and entry into new markets and improve inventory management and to accelerate the collection of accounts receivable.

 

In addition, we have introduced cost cutting initiatives within the Administration, Project and Selling departments to improve efficiency and also to improve cash flow. We have also increased our rates for services provided by AC Technical to improve gross margins. This is in line with our competitors. Finally, we expect to realize additional benefits from our research and development efforts within the next 12 months as we start to introduce our own line of customized products to the industry. These products and technologies are expected to improve gross margins. We plan to seek additional capital in the future to fund operations, growth and expansion including through additional equity or debt financing or credit facilities. We have had early stage discussions with investors about potential investment in our company at a future date; however, no assurance can be made that such financing would be available, and if available that it would be on terms acceptable to us.

 

 

Comparison of the balance sheet as at March 31, 2012 to December 31, 2011

 

Accounts Receivable

 

Our accounts receivable increased to $1,319,300 as of March 31, 2012 from $895,200 as of December 31, 2011. The increase was mostly due to the timing of payment by our customers and an increase in revenue during the first quarter of fiscal 2012 from the fourth quarter of 2011.

 

Inventory

 

Inventory on hand at March 31, 2012 was approximately $354,900 compared to $375,000 as at December 31, 2011. There was no material fluctuation.

 

Accounts Payable and Accrued Liabilities

 

Accounts payable increased to approximately $1,472,500 as at March 31, 2012 from $1,257,300 as at December 31, 2011. The increase was mainly due to fluctuations in the timing of payments to our suppliers.

 

Deferred Revenue

 

Deferred revenue increased to approximately $112,800 as at March 31, 2012 compared to $60,800 as at December 31, 2011. Deferred revenue primarily relates to maintenance contracts which are paid in advance and for which revenue is recognized over the term of the contract.

 

Net Cash Used in Operating Activities. Net cash used in operating activities amounted to $249,300 for the three months ended March 31, 2012 compared to $117,900 for the corresponding period of 2011. The change was primarily a result of an increase in accounts receivable during the three months ended March 31, 2012.

 

Net Cash Provided By Investing Activities

 

There was no change in year over year net cash provided by investing activities.

 

Net Cash Provided By Financing Activities. Net cash provided by financing activities was approximately $246,500 for the three months ended March 31, 2012 compared to net cash provided by financing activities $68,200 for the three months ended March 31, 2011. The change was primarily because we had net inflows of approximately $246,500 for the three months ended March 31, 2012 under our lines of credit compared with $93,200 for the three months ended March 31, 2011. Moreover, the repayment of term loans was $25,000 during the period ended March 31, 2011 and there was no such repayment of term loans for the period ended March 31, 2012.

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

Off Balance Sheet Arrangements

 

None

 

DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

 

Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified the following critical accounting estimates: accounts receivable allowances, contract revenues, inventory reserves, stock-based compensation. See our Form 10-K for the year ended December 31, 2011, for a discussion of our critical accounting estimates.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements about our company that are not historical facts but, rather, are statements about future expectations. When used in this document, the words “anticipates,” “believes,” “expects,” “intends,” “should” and similar expressions as they relate to us, or to our management, are intended to identify forward-looking statements. However, forward-looking statements in this document are based on management’s current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond our control, could cause actual results, performance or events to differ materially from those in the forward-looking statements. These factors include impact of general economic conditions in North America, changes in laws and regulations, fluctuation in interest rates and access to capital markets.

 

Our actual results or performance could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, we cannot predict whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on our results of operations and financial condition.

 

For further information about these and other risks, uncertainties and factors, please review the disclosure included in our December 31, 2011 Annual Report on Form 10-K under the caption “Risk Factors.”

 

You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements or risk factors, whether as a result of new information, future events, changed circumstances or any other reason after the date of this quarterly report.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

This item is not applicable to the Company because we are a smaller reporting company.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow timely decisions regarding required disclosure. As of March 31, 2012, the end of the period covered by this quarterly report on Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our disclosure controls and procedures, as such terms are defined under rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this assessment, our management concluded that our disclosure controls and procedures were effective as of the end period covered by this quarterly report.

 

Changes in Internal Control Over Financial Reporting There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

None.

 

Item 1A.

Risk Factors

 

This item is not applicable to the Company because we are a smaller reporting company.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

During the period covered by this quarterly report, there has been no material change in the nomination process for directors.

 

Exhibits

 

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CREATIVE VISTAS, INC.
By:	/s/ Dominic Burns
	Dominic Burns, CEO

 

By:	/s/ Heung Hung Lee
	Heung Hung Lee, CFO

 

Dated: May 15, 2012