10-K 1 visualant_10k-15341.htm VISUALANT, INC. 10-K visualant_10k-15341.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
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, 2012
 
o 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, INC.

(Exact name of registrant as specified in its charter)
 
 
 Nevada
 91-1948357
 (State or other jurisdiction of incorporation
 (I.R.S. Employer
 or organization)
 Identification No.)
   
 500 Union Street, Suite 420
 
 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:
 
   
 Common
 OTCBB
(Title of each class)
(Name of each exchange on which registered)
 
Securities registered pursuant to Section 12 (g) of the Exchange Act:
 
   
 None
 
(Title of Class)
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes    ý No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes    ý No
  

 
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Indicate by check mark whether the registrant (1) has 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.   ý Yes    o 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes   o No
 
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K  (§229.405) is not contained herein, and will not 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-K or any amendment to this Form 10-K.  ý
 
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
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
ý
       
(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).     o Yes    ý No

As of March 31, 2012 (the last business day of our most recently completed second fiscal quarter), based upon the last reported trade on that date, 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 $5,263,963.

As of November 13, 2012, the Company had 93,275,181 shares of common stock issued.




 
 
 










 




 
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TABLE OF CONTENTS
 
   
Page
PART 1
   
     
ITEM 1.
Description of Business
4
     
ITEM 1A.
Risk Factors
8
     
ITEM 1B
Unresolved Staff Comments
12
     
ITEM 2.
Properties
12
     
ITEM 3.
Legal Proceedings
12
     
ITEM 4.
Submission of Matters to Vote of Securities Holders
12
     
PART II
   
     
ITEM 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
13
     
ITEM 6.
Selected Financial Data
15
     
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
     
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
18
     
ITEM 8.
Financial Statements and Supplementary Data
18
     
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
18
     
ITEM 9A.
Controls and Procedures
18
     
ITEM 9B.
Other Information
19
     
PART III
   
     
ITEM 10.
Directors, Executive Officers and Corporate Governance
20
     
ITEM 11.
Executive Compensation
23
     
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
30
     
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
31
     
ITEM 14.
Principal Accounting Fees and Services
32
     
PART IV
   
     
ITEM 15.
Exhibits, Financial Statement Schedules
34
     
 
SIGNATURES
37
 

 

 

 

 
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PART I
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion, in addition to the other information contained in this report, should be considered carefully in evaluating us and our prospects. This report (including without limitation the following factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act") regarding us and our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as revenue projections, projected profitability, growth strategies, development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.

Forward-looking statements in this report reflect the good faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.

ITEM 1.    DESCRIPTION OF BUSINESS

THE COMPANY AND OUR BUSINESS

Visualant, Inc. (the “Company” or “Visualant”) 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. Our executive offices are located in Seattle, Washington.
 
We have developed a unique patented Visualant Spectral Pattern Matching™ "SPM" technology. This technology directs structured light onto a physical substance to capture a Visualant Spectral Signature ™ called a ChromaID™. When matched against existing databases, the ChromaID can be used to identify, detect, or diagnose markers invisible to the human eye. ChromaID scanners can be integrated into a variety of mobile or fixed-mount form factors, making it possible to effectively conduct analyses in the field that could only previously be performed by large and expensive lab-based tests.
 
We entered into a one year Joint Development Agreement on May 31, 2012 with Sumitomo Precision Products Co., Ltd. ("SPP"), which focuses on the commercialization of the SPM technology and a License Agreement providing SPP with an exclusive license of the SPM technology in identified Asian territories. For more information, visit: http://www.visualant.net.
 
SPP is publicly traded on the Tokyo and Osaka Stock Exchanges and has operations in Japan, United States, China, United Kingdom, Canada and other parts of the world. Additional information on SPP is available at http://www.spp.co.jp/English/index2-e.html.

Through our wholly owned subsidiary, TransTech based in Aurora, Oregon, we provide value added security and authentication solutions to corporate and government security and law enforcement markets throughout the United States.

CORPORATE INFORMATION
 
We were incorporated in Nevada on October 8, 1998. Our executive offices are located at 500 Union Street, Suite 420, Seattle, WA 98101. Our telephone number is (206) 903-1351 and its principal website address is located at www.visualant.net. The information on our website is not incorporated as a part of this Form 10-K.
 
THE COMPANY’S COMMON STOCK
 
Our common stock trades on the OTCBB Exchange under the symbol “VSUL.”
 
 
 
 
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INDUSTRY OVERVIEW

Visualant’s SPM technology resides in the general marketplace for spectroscopy (measurement of light according to its spectrum) and spectrometry (the measurement of the chemical or atomic components as a function of light reflected or absorbed by them).  These analytic tools are typically fragile and expensive often costing tens or hundreds of thousands of dollars.  The Visualant SPM technology is flexible, sturdy, and has a very low cost.

Visualant has identified a number of markets in which the benefits of the technology have particular application and promise:
 
 
-
Cosmetics: Measuring skin tone and other aspects of skin health and appearance.
 
-
Paint and furnishings: Identifying colors or determining the components needed to create a color.
 
-
Authentication: Determining the authenticity of inks and dyes, or underlying papers in financial and security documents (currency, passports, driver’s licenses, etc.).
 
-
Diagnostics: Screening foods for pathogens. Detecting the presence of illegal substances, and a myriad of other environmental, agricultural, and medical diagnostic applications. Visualant is exploring opportunities for ‘lead customers’ who are interested in being the first to exploit the unique benefits of the Visualant Spectral Pattern Matching technology and ChromaID profiles.

The Visualant SPM technology can be used to create low cost, ubiquitous analytic devices that can be used in numerous applications in the broad security and authentication market. There is no room for error in security and authentication, hence the industry requires layers of redundancies in order to provide hoped for failsafe security.   The security and authentication industry uses numerous tools in its pursuit of security.  These include RFID chips and holograms for access control cards, threads and holograms in currency, and other means of marking to thwart counterfeiting.  Visualant SPM technology provides a level of redundancy without the addition of any specific marking.  The SPM technology simply sees the colors present and determines the accuracy of those colors against the prescribed standard.  In this case, Visualant SPM technology exists in the broad industry of component manufacturers providing solutions for security and authentication.

Visualant has its own distribution channel (through TransTech, our wholly-owned subsidiary) into the authentication and security market.  TransTech is a secure identification and ID document authentication distribution company selling products to over 400 dealers in the United States. TransTech’s products include a secure identification and ID document authentication products including ID printers, access control devices and numerous components. Distribution is fragmented in the security and authentication marketplace. There are large companies, including Scan Source Security, Wynit, Inc. and Plasco ID, who increasingly sell directly to customers via the Internet and smaller regional and national distributors who sell to these same customers and provide value added services and support. Often called value added resellers or VARs, distributors such as TransTech work hard to maintain their customers through service and support.
 
DEVELOPMENT OF SPM TECHNOLOGY
 
Visualant Spectral Pattern Matching and the ChromaID profile were developed over a seven year period by Professors Dr. Tom Furness and Dr. Brian Showngerdt of RATLab LLC under contract to Visualant. The technology is now being transferred into products and a ScanHead module. Visualant has partnered with Sumitomo Precision Products to manufacture the ScanHead and reduce the technology to a reliable and cost effective form. The first demonstration of this is the Cyclops6 ChromaID Scanner which was demonstrated at the Japanese Instrumentation Manufacturing Association trade show in Tokyo in October 2012. The Cyclops 6 ChromaID Scanner can be used to evaluate the technology for flat surface applications and has sensitivity from 350nm to 1450nm.

Key advantages of the Visualant Spectral Pattern Matching approach include:

 
·
Uses inexpensive LEDs and Photodiodes. These components are manufactured in enormous quantities for the consumer electronics market, which keeps the cost low and quality high. These components are also very small, allowing Visualant’s scanner component to have a small form factor.
 
·
Does not require prisms or diffraction optical elements, which can be bulky, expensive, and fragile.
 
·
ScanHeads can be designed for specific applications, requiring only those emitters needed to provide the wavelength of light needed to characterize the types of samples that will be measured. Prototypes were developed with thirty four emitters but in many situations, only four or six emitters might be required.
 
·
There is the potential to integrate and miniaturize the emitter and detector components in custom silicon packages, which could be made very small and integrated into other devices. This could for example allow a smartphone type device to include Visualant Spectral Pattern Matching capability and use it to scan food for contaminants or add a biosecurity element to security applications.

The company is now focused on:

 
-
Engineering a Development Kit which is expected be used by customers to evaluate the technology. This kit is expected to be released in 2013.
 
-
Developing a ChromaID ScanHead Module which can be used in a first ‘exemplar’ product Visualant is pursuing an aggressive patent strategy to expand our unique intellectual property in the United States and Japan. The following patents have been issued to date:

 
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On September 6, 2011, we announced that the Company was issued US Patent No. 7,996,173, entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy,” by the United States Office of Patents and Trademarks.
 
On January 19, 2012, we announced that the Company was issued US Patent No. 8,081,304, entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks.

On March 20, 2012, we announced that the Company was issued US Patent No. 8,076,630, entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks.

On November 1, 2012, we announced that the Company was issued US Patent No. 8,285,510 entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks.

In addition to the immediate work described above, Visualant has contracted RATLab LLC to conduct further research and ‘skunkworks’ activity on SPM-related technologies. This includes work on an entry in the Qualcomm Tricorder X-prize. 

KEY MARKET PRIORITIES
 
Currently, our key market priorities are, among other things, to:

Develop Markets and Customers.

Develop markets and customers who have a need for discovery, verification and authentication of flat surface products such as paint, papers, inks, cosmetics, plastics for security cards and similar products.

The specific vertical markets we are pursuing are major industrial and commercial paint manufacturers, home improvement companies, currency paper and ink manufacturers, security card manufacturers, card reader and scanner manufacturers, major cosmetic companies and cosmetic retailers.

Future market opportunities will include powder analysis for law enforcement applications and pharmaceutical company applications for verification of illegal substances and verification of products as protection against contamination and counterfeiting.

Other markets that may utilize the ChromaID technology would be agriculture for fruit and vegetable ripeness, petrochemical for fluid analysis and verification or emissions analysis.

The Medical applications for the technology may include noninvasive skin analysis for discovery of certain diseases or conditions based on the ChromaID of the individual’s skin.

Commercialize the SPM Technology.

The current path to commercialization for those markets as stated above is to produce ChromaID spectral signature generating, scanning and storing hardware and software components with a hardware form factor of a scan head component device. These scan head component modules can range in size from that of a pencil eraser to the size of a quarter coin depending upon the amount and type of light required for an accurate ChromaID signature.

These scan head modules can then be incorporated into various products produced by third parties for the applications listed above.  Along with the sale of the component parts there is revenue potential from licensing the technology to partners as is the case with SPP. SPP is currently developing a scan head type device and has the rights to produce the components and market them in Asia. There may other partnership opportunities in Europe and North America and those are being investigated.

Another avenue to revenue is database administration and management services. The ChromaID profile must be stored, managed and readily accessible. In one model the database can be owned by the end customer but in the case of thousands of ChromaID profiles database management may be outsourced to Visualant or a third party provider.  These database services can be a source of revenue on a per access transaction basis or on a monthly or annual subscription basis.  By using a cell phone to access the database the actual storage location can be cloud based or local depending on the requirements of access and security as defined by the customer.

Complete work under the Joint Development Agreement with SPP.

 
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Accelerate business development in the United States and Japan.

We are coordinating the sales and marketing efforts of both Visualant and SPP to leverage market data and information and to focus on specific target verticals that have the greatest potential for early adoption.  These include the aforementioned flat surface but also gaming in Asia. With the successful launch of the Cyclops6 scan head at the JIMA instrument technology trade show in Japan we have become aware of a significantly expanded number of market opportunities from those who attended the show.

Develop license and royalty producing opportunities and partners, including major companies in the US, Europe and Asia.

Develop our patent portfolio by continually extending the reach and application of our intellectual property.

Engineer and release a Development Kit to enable potential customers to evaluate the SPM technology.

Launch an application product utilizing smartphone technology.

Improve our operations, including the following:

Improve TransTech revenue with new product lines for distribution, including radio frequency ID tracking products and new document authentication products. Visualant and TransTech are working together to expand and promote our capabilities, products and services to their respective markets.  TransTech has long standing business relationships in many sectors of the security industry and those relationships are being leveraged to introduce key industry personnel to the ChromaID technology.  Visualant sales efforts are also uncovering additional markets and customers that are of interest and potential revenue to Trans Tech. Additionally, as the Visualant technology is incorporated into more products TransTech expects to be able to pair these products with others to offer expanded solutions for distribution into the security market space improving the profitability of TransTech and the company.

Enhance our investor relation activities.
 
PRIMARY RISKS AND UNCERTAINTIES
 
We are exposed to various risks related to our need for additional financing, the sale of significant numbers of our shares, a volatile market price for our common stock and our merger and acquisition activities. These risks and uncertainties are discussed in more detail below in Part I, Item 1A. 

DISTRIBUTION METHODS

Distribution is fragmented in the security and authentication marketplace.  There are large companies who increasingly sell directly to customers via the Internet and smaller regional and national distributors who sell to these same customers and provide value added services and support.  Often called value added resellers or VARs, distributors such as TransTech work hard to maintain their customer relationships through the provision of outstanding service and support.

The Visualant technology will be primarily sold as IP, licensing and component parts of third party solutions and products.  The sales and business development efforts are therefore focused on developing business relationships with those potential customers who have a need for faster, more accurate and lower cost discovery, authentication and verification of surfaces or substances via the spectral pattern creation, recording and storage capabilities provided by the Visualant ChromaID technology.  These applications may be in the industrial, commercial or government security sector  but the end user products most likely will be produced by  a third party incorporating the Visualant scan head component as a part of the overall product.

The Visualant SPM technology, as focused upon the security and authentication marketplace will provide TransTech with higher margin proprietary products.  Visualant will be able to leverage its built-in channel of distribution at TransTech and obtain speed to market advantage.  At the same time, where appropriate, Visualant will utilize broad global channels of distribution for its SPM technology.  We also expect to enter into joint ventures with co-development partners who may have their own channels of distribution.

COMPETITION

While we have not seen any direct competition to the patented ChromaID technology and we are not aware of any direct competitors using technology with capabilities of the Visualant SPM technology in the security and authentication marketplace there are several indirect competitors in the form of other methods for determining the authenticity of products and people.  These competitive products include the use of RFID chips, holograms, iris scans, fingerprints and other means of determining whether a person or product is authentic.  
 
 
 
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There are competitors who do use spectroscopy and IR light to sense and validate various substances. While these methods are not identical to Chroma ID technology they are functional, but at a relatively high price. The FDA recently developed an internal product for checking on illegal drugs and companies like Thermo Scientific and Centice are using Ramen light scattering technologies to analyze various substances confirming that the market is interested the light identification solutions. The previously mentioned products are however large, and expensive costing over $10,000. Many companies compete in the security and authentication marketplace with various solutions many of which perform with excellence.  We believe that we can provide an accurate, cost effective component which will add value to customers looking for additional inexpensive redundancies to solve their security and authentication problems.
    
As discussed above under “Distribution Methods,” TransTech does face direct competition from OEMs and manufacturers selling directly to end users/customers and from other distributors of both the same products as TransTech distributes and competing products.

GEOGRAPHICAL MARKETS

We primarily operate in the U.S. and Japan.   We are seeking partnerships in other markets, including Europe, in order to expand our reach to the global marketplace for ChromaID technology and products.
 
EMPLOYEES

As of September 30, 2012 we had sixteen full-time and three part-time employees. The Visualant senior management is based out of the Seattle, Washington office.

WEBSITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION REPORTS

We file annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.visualant.net that provides additional information about our Company and links to documents we file with the SEC. The Company's charters for the Audit Committee, the Compensation Committee, and the Nominating Committee; and the Code of Conduct & Ethics are also available on our website. The information on our website is not part of this Form 10-K.
 
ITEM 1A. RISK FACTORS

WE WILL NEED ADDITIONAL FINANCING TO SUPPORT OUR TECHNOLOGY DEVELOPMENT AND ONGOING OPERATIONS.
 
We had cash of $1.1 million, a net working capital deficit of approximately $2.4 million and total indebtedness of $1.6 million as of September 30, 2012.
  
We will need to obtain additional financing to implement our business plan and service our debt repayments. There can be no assurance that we will be able to secure funding, or that if such funding is available, the terms or conditions would be acceptable to us. If the Company is unable to obtain additional financing, we may need to restructure our operations, or divest all or a portion of our business.
 
Our recent efforts to generate additional liquidity, including through sales of our common stock, are described in more detail in the financial statement notes set forth in this Form 10K.
 
If we raise additional capital through borrowing or other debt financing, we will incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. When we raise more equity capital in the future, it will result in substantial dilution to our current stockholders.

THE SALE OF A SIGNIFICANT NUMBER OF OUR SHARES OF COMMON STOCK COULD DEPRESS THE PRICE OF OUR COMMON STOCK.
 
Sales or issuances of a large number of shares of common stock in the public market (including pursuant to the equity line of credit transaction that we entered into with Ascendiant Capital Partners, LLC as well as the convertible debentures and warrants that were sold to Ascendiant Capital Partners, LLC and Gemini Master Fund, Ltd.) or the perception that sales may occur could cause the market price of our common stock to decline. As of October 22, 2012, there were approximately 93.3 million shares of common stock issued and outstanding. On April 2, 2012, we registered 7,600,000 shares of common stock for resale.   In 2011, the Company also registered for resale up to 15,340,361 shares of common stock.   Therefore, the amount of shares registered for resale constitutes a significant percentage of the issued and outstanding shares of the Company, and the sale of all or a portion of these shares could have a negative effect on the market price of our common stock. Significant shares of common stock are held by our principal shareholders, other Company insiders and other large shareholders. As “affiliates” (as defined under Rule 144 of the Securities Act (“Rule 144”)) of the Company, our principal shareholders, other Company insiders and other large shareholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144.
 
 
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Some of the present shareholders have acquired shares at prices as low as $0.001 per share, whereas other shareholders have purchased their shares at prices ranging from $0.05 to $0.75 per share.
 
FUTURE ISSUANCE OF COMMON STOCK RELATED TO CONVERTIBLE NOTES PAYABLE AND RELATED WARRANTS WILL HAVE A DILUTING FACTOR ON EXISTING AND FUTURE SHAREHOLDERS.

On May 19, 2011, we entered into a Securities Purchase Agreement (“Agreement”) with Gemini Master Fund, Ltd. (“Gemini”) and Ascendiant Capital Partners, LLC (“Ascendiant”) (Gemini and Ascendiant are collectively referred to as the “Investors”), pursuant to which the Company issued $1.2 million in principal amount of 10% convertible debentures (the “Original Debentures”) which were due May 1, 2012.  The due date of the Original Debentures was extended to September 30, 2012 pursuant to a First Amendment to the Agreement on March 12, 2012, and further extended to September 30, 2013 pursuant to a Second Amendment to the Agreement on August 16, 2012. In addition, we issued 5-year warrants to the Investors to collectively purchase 2,400,000 shares of our common stock. The purchase price for the debentures was 83.3% of the face amount, resulting in the Company receiving $1.0 million, less legal fees, placement agent fees and expenses as set forth below. The Agreement includes an additional investment right granted to the Investors, pursuant to which the Investors have the right at any time until September 30, 2013, to purchase up to $1.2 million in principal amount of additional debentures (the “Additional Debentures”) on the same terms and conditions as the Original Debentures, except that the conversion price on the Additional Debentures may have a higher floor.  The conversion price on both the Original Debentures and the Additional Debentures are subject to a potential downward adjustment for any equity sales subsequent to the date of issuance. In conjunction with the purchase of the Additional Debentures, the Investors also have the right to purchase additional warrants.  The above description is only a summary of the transactions with Gemini and Ascendiant and are subject to the full terms of the transaction agreements, copies of which are filed with this 10-K as Exhibits 10.1 through 10.10.
 
On August 28, 2012, we entered into a Warrant Purchase Agreement with Gemini and acquired the Gemini Warrant covering the purchase of up to 1.8 million shares, subject to adjustment, by paying $250,000 on August 28, 2012 and agreeing to pay $250,000 on or before November 30, 2012.  
 
As of November 13, 2012, Gemini has $600,000 and Ascendiant has $100,000 remaining in principal amount of Original Debentures outstanding plus accrued interest thereon that is convertible into common shares. Ascendiant also has a warrant for the purchase of up to 600,000 shares of our common stock at an original exercise price of $.35 per share, which exercise price is subject to adjustment and which has been adjusted downward as of the date hereof.  See Exhibit 10.6 filed herewith. In addition, the additional investment and participation rights as defined in the Agreement granted to the Investors were extended from September 30, 2012 to September 30, 2013. 
 
The conversion of the convertible notes payable and the related warrants will likely result in a substantial dilution of the value of the common shares for all shareholders.  

RISKS ASSOCIATED WITH EQUITY LINE OF CREDIT WITH ASCENDIANT

The Securities Purchase Agreement dated June 17, 2011 with Ascendiant will terminate if our common stock is not listed on one of several specified trading markets (which include the OTCBB and Pink Sheets, among others), if we file protection from our creditors, or if a Registration Statement on Form S-1 or S-3 is not effective.

If the price or the trading volume of our common stock does not reach certain levels, we will be unable to draw down the remainder of our $3,000,000 equity line of credit with Ascendiant.

The maximum draw down amount every 8 trading days under our equity line of credit facility is the lesser of $100,000 or 20% of the total trading volume of our common stock for the 10-trading-day period prior to the draw down multiplied by the volume-weighted average price of our common stock for such period.  As of November 13, 2012, we have drawn down $483,141 under our equity line of credit with Ascendiant.  If our stock price and trading volume decline from current levels, we will not be able to draw down the remaining $2,516,859 available under the equity line of credit.

As of November 13, 2012, the Company has issued 6,358,933 shares for $483,141, or an average of $.076 per share, under the Securities Purchase Agreement with Ascendiant.  The Company has registered a total of 10,285,714 shares of common stock for resale by Ascendiant.  Additional shares may be issued under the Securities Purchase Agreement, which will have a further dilutive effect on the Company’s existing shareholders.
 

 
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WE MAY ENGAGE IN ACQUISITIONS, MERGERS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES THAT COULD RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED. 
 
In the normal course of business, we engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, joint ventures and divestitures. Such transactions are accompanied by a number of risks, including:

- Use of significant amounts of cash;
 
- Potentially dilutive issuances of equity securities on potentially unfavorable terms;
 
- Incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets; and

- The possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition.

The process of integrating any acquisition may create unforeseen operating difficulties and expenditures. The areas where we may face difficulties include:

- Diversion of management time, during the period of negotiation through closing and after closing, from its focus on operating the businesses to issues of integration;
 
- Decline in employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects or the direction of the business;

- The need to integrate each Company's accounting, management information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;
 
- The need to implement controls, procedures and policies appropriate for a public Company that may not have been in place in private companies, prior to acquisition;

- The need to incorporate acquired technology, content or rights into our products and any expenses related to such integration; and

- The need to successfully develop any acquired in-process technology to realize any value capitalized as intangible assets.
 
From time to time, we have also engaged in discussions with candidates regarding the potential acquisitions of our product lines, technologies and businesses. If a divestiture such as this does occur, we cannot be certain that our business, operating results and financial condition will not be materially and adversely affected. A successful divestiture depends on various factors, including our ability to:

- Effectively transfer liabilities, contracts, facilities and employees to any purchaser;

- Identify and separate the intellectual property to be divested from the intellectual property that we wish to retain;

- Reduce fixed costs previously associated with the divested assets or business; and

- Collect the proceeds from any divestitures.

In addition, if customers of the divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to the extent that these customers also purchase other products offered by us. All of these efforts require varying levels of management resources, which may divert our attention from other business operations.

If we do not realize the expected benefits or synergies of any divestiture transaction, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted.

WE MAY INCUR LOSSES IN THE FUTURE.

We have experienced net losses since inception. There can be no assurance that we will achieve or maintain profitability.
 
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
 
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:
 
 
10

 
 
 
Announcements by us regarding liquidity, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets;
 
Issuance of convertible or equity securities for general or merger and acquisition purposes;
 
Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes;
 
Sale of a significant number of shares of our common stock by shareholders;
 
General market and economic conditions;
 
Quarterly variations in our operating results;
 
Investor and public relation activities;
 
Announcements of technological innovations;
 
New product introductions by us or our competitors;
 
Competitive activities; and
 
Additions or departures of key personnel.
 
These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition and results of operations. 
   
FUTURE ISSUANCE OF STOCK OPTIONS, WARRANTS AND/OR RIGHTS MAY 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 will likely result in a dilution of the value of our common shares for all shareholders.  We have 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, we 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 will likely result from such sales, which in turn could adversely affect the market price of our common stock.

TRADING IN THE COMPANY’S STOCK MAY BE RESTRICTED BY BLUE SKY ELIGIBILITY AND THE SEC’S PENNY STOCK REGULATIONS.
 
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 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.

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. These factors could have a material adverse effect on our business, financial condition and results of operations.

WE ARE DEPENDENT ON KEY PERSONNEL.

Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. We do not maintain key man life insurance covering certain of our officers. Our success will depend on the performance of our officers, our ability to retain and motivate our officers, our ability to integrate new officers into our operations and the ability of all personnel to work together effectively as a team. Other than the James Gingo Employment Agreement which expires June 8, 2013, our officers do not have employment agreements. Our failure to retain and recruit officers and other key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
 
 
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WE HAVE LIMITED INSURANCE.
 
We have limited director and officer insurance and commercial insurance policies. Any significant claims would have a material adverse effect on our business, financial condition and results of operations.  

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable. 
 
ITEM 2.     PROPERTIES

Corporate Offices
 
Our executive office is located at 500 Union Street, Suite 420, Seattle, Washington, USA, 98101. On August 1, 2012, we entered into a lease which expires August 31, 2014. The monthly lease rate is $1,944 for the year ending August 31, 2013 and $2,028 for the year ending August 31, 2014.
 
TransTech Facilities

TransTech leases a total of approximately 9,750 square feet of office and warehouse space for its administrative offices, product inventory and shipping operations, at a monthly rental of $4,292. The lease was extended from March 2011 for an additional five year term at a monthly rental of $4,751. There are two additional five year renewals with a set accelerating increase of 10% per 5 year term.  TransTech also leases additional 500 square feet of off-site space at $250 per month from a related party.
 
ITEM 3.    LEGAL PROCEEDINGS
 
There are no pending legal proceedings against us that are expected to have a material adverse effect on our cash flows, financial condition or results of operations. 
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Not applicable. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
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PART II
 
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on OTCBB Exchange under the symbol "VSUL". The following table sets forth the range of the high and low sale prices of the common stock for the periods indicated: 

Quarter Ended
 
High
   
Low
 
December 31, 2011
  $ 0.13     $ 0.05  
March 31, 2012
  $ 0.12     $ 0.05  
June 30, 2012
  $ 0.16     $ 0.08  
September 30, 2012
  $ 0.18     $ 0.07  
                 
December 31, 2010
  $ 0.74     $ 0.23  
March 31, 2011
  $ 0.70     $ 0.33  
June 30, 2011
  $ 0.57     $ 0.21  
September 30, 2011
  $ 0.24     $ 0.08  
                 
December 31, 2009
  $ 0.17     $ 0.04  
March 31, 2010
  $ 0.16     $ 0.05  
June 30, 2010
  $ 0.40     $ 0.05  
September 30, 2010
  $ 0.40     $ 0.14  
 
As of September 30, 2012, the closing price of the Company's common stock was $0.17 per share. As of November 13, 2012, there were 93,275,181 shares of common stock outstanding held by approximately 119 stockholders of record. The number of stockholders, including the beneficial owners' shares through nominee names is approximately 1,300.

DIVIDEND POLICY

We have never paid any cash dividends and intend, for the foreseeable future, to retain any future earnings for the development of our business. Our future dividend policy will be determined by the board of directors on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities.

RECENT SALES OF UNREGISTERED SECURITIES

During the three months ended September 30, 2012, we had the following sales of unregistered sales of equity securities.

Unless otherwise indicated, all of the following private placements of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, as noted below). All of the shares issued were issued in private placements not involving a public offering, are considered to be “restricted stock” as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.  

On July 31, 2012, the Company closed the acquisition of the environmental field of use of its SPM technology from. The Company acquired the Visualant related assets of Javelin for (i) 1,250,000 shares of our common stock at closing valued at thirteen ($0.13) per share, the price during the negotiation of this agreement; and (ii)  $100,000, with $20,000 payable at closing and $80,000 to be paid in four equal installments over a period of eight months. In addition,

On September 6, 2012, the Company signed a Settlement and Release Agreement (“Sparks Agreement”) with Mr. Sparks, the former CEO and Director and a cousin of Ronald Erickson. The Sparks Agreement required (i) payment of $50,750.00 (paid) and issuance of 513,696 shares of our common stock for full payment on a note and related accrued interest of $66,780; (ii) payment of $39,635.00 to Mr. Sparks for a note, accrued interest and other liabilities (paid); and (iii) issuance of 4,000,000 restricted shares of our common stock to Mr. Spark for unpaid compensation in the amount of $721,333. The above is full settlement of all outstanding liabilities due to Mr. Sparks.

On September 18, 2012 the Company issued 500,000 shares of restricted common stock to NVPR, LLC for services. The shares were valued at $0.13 per share. The shares do not have registration rights.

 
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On September 28, 2012 the Company issued 250,000 shares of restricted common stock to Clayton McKeekin for services. The shares were valued at $0.13 per share. The shares do not have registration rights.

During the three months ended September 30, 2012, 1,671,370 shares of the Company’s common stock have been issued to Gemini upon conversion of $75,000 of the convertible debentures and interest of $8,568 at an average of $0.05 per share.

During the three months ended September 30, 2012, 3,373,425 shares of the Company’s common stock have been issued to Ascendiant upon conversion of $150,000 of the convertible debentures and interest of $18,671 at an average of $0.05 per share.

On October 22, 2012, the Company filed an Amended Registration Statement on Form S-1 for 7,600,000 shares of common stock. The Registration Statement primarily registered shares for Ascendiant, Coventry Capital LLC and National Securities Corporation and affiliates and was declared effective by the SEC on October 25, 2012.

Performance Graph
Comparison of Cumulative Total Return
September 30, 2007-September 30, 2012

Among Visualant, Inc., Russell Microcap- Growth Index Without Dividend and the Russell Microcap
Index Without Dividend
 
 
The above assumes that $100 was invested in the common stock and each index on September 30, 2007. Although the company has not declared a dividend on its common stock, the total return for each index assumes the reinvestment of dividends. Stockholder returns over the periods presented should not be considered indicative of future returns. The foregoing table shall not be deemed incorporated by reference by any general statement incorporating by reference the Form 10-K  into any filing under the Securities Act or the Exchange Act, except to the extent the company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the acts.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of September 30, 2012 related to the equity compensation plan in effect at that time.

 
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(a)
   
(b)
   
(c)
 
               
Number of securities
 
               
remaining available
 
   
Number of securities
   
Weighted-average
   
for future issuance
 
   
to be issued upon
   
exercise price of
   
under equity compensation
 
   
exercise of outstanding
   
outstanding options,
   
plan (excluding securities
 
Plan Category
 
options, warrants and rights
   
warrants and rights
   
reflected in column (a))
 
Equity compensation plan
                 
approved by shareholders
    5,920,000       0.131       180,000  
Equity compensation plans
                       
not approved by shareholders
    5,000,000       0.100       -  
Total
    10,920,000       0.231       180,000  
 
ITEM 6.    SELECTED FINANCIAL DATA

In the following table, we provide you with our selected consolidated historical financial and other data. We have prepared the consolidated selected financial information using our consolidated financial statements for the years ended September 30, 2012 and 2011. When you read this selected consolidated historical financial and other data, it is important that you read along with it the historical financial statements and related notes in our consolidated financial statements included in this report, as well as Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

   
Years Ended September 30,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
(in thousands, except for per share data)
                             
STATEMENT OF OPERATIONS DATA:
                             
Revenue
  $ 7,924     $ 9,136     $ 2,543     $ -     $ -  
Net loss
    (2,726 )     (2,396 )     (1,147 )     (951 )     (945 )
Net loss applicable to Visualant, Inc. common shareholders
    (2,732 )     (2,410 )     (1,149 )     (951 )     (945 )
Net loss per share
    (0.04 )     (0.06 )     (0.04 )     (0.03 )     (0.05 )
                                         
BALANCE SHEET DATA:
                                       
Total assets
    5,320       4,313       4,144       12       2  
Stockholder's equity (deficiency)
    171       (1,610 )     (1,900 )     (1,366 )     (2,135 )
 
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview

We have developed a unique patented Spectral Pattern Matching "SPM" technology. This technology directs structured light onto a physical substance to capture a unique spectral signature. When matched against existing databases, the Spectral Signature can identify, detect, or diagnose markers invisible to the human eye. SPM scanners can be integrated into a variety of mobile or fixed-mount form factors, making it possible to effectively conduct analyses in the field that could only previously be performed by large and expensive lab-based tests.
 
We entered into a one year Joint Development Agreement on May 31, 2012 with Sumitomo Precision Products Co., Ltd. ("SPP"), which focuses on the commercialization of the SPM technology and a License Agreement providing SPP with an exclusive license of the SPM technology in identified Asian territories. For more information, visit: http://www.visualant.net.
 
SPP is publicly traded on the Tokyo and Osaka Stock Exchanges and has operations in Japan, United States, China, United Kingdom, Canada and other parts of the world. Additional information on SPP is available at http://www.spp.co.jp/English/index2-e.html.
 
On September 6, 2011, we announced that the Company was issued US Patent No. 7,996,173, entitled “Method, Apparatus and Article to Facilitate Distributed Evaluation of Objects Using Electromagnetic Energy,” by the United States Office of Patents and Trademarks.
 
On January 19, 2012, we announced that the Company was issued US Patent No. 8,081,304, entitled “Method, Apparatus and Article to Facilitate Evaluation of Objects Using Electromagnetic Energy” by the United States Office of Patents and Trademarks.

On March 20, 2012, we announced that the Company was issued US Patent No. 8,076,630, entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks.

 
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On November 1, 2012, we announced that the Company was issued US Patent No. 8,285,510 entitled “System and Method of Evaluating an Object Using Electromagnetic Energy” by the United States Office of Patents and Trademarks.

We are pursuing an aggressive patent strategy to expand our unique intellectual property in the United States and Japan.

Through our wholly owned subsidiary, TransTech based in Aurora, Oregon, we provide value added security and authentication solutions to corporate and government security and law enforcement markets throughout the United States.

RESULTS OF OPERATIONS

The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from year-to-year.

(dollars in thousands)
     
Year Ended September 30,
 
     
2012
   
2011
   
$ Variance
   
% Variance
 
                           
Revenue
  $ 7,924     $ 9,136     $ (1,212 )     -13.3 %
Cost of sales
    6,344       7,570       (1,226 )     16.2 %
Gross profit
    1,580       1,566       14       0.9 %
Research and development expenses
    177       134       43       -32.1 %
Selling, general and administrative expenses
    3,625       3,691       (66 )     1.8 %
Operating loss
    (2,222 )     (2,259 )     37       1.6 %
Other income (expense):
                               
 
Interest expense
    (464 )     (213 )     (251 )     -117.8 %
 
Loss on purchase of outstanding warrants
    (500 )     -       (500 )     -100.0 %
 
Gain on extinguishment of debt
    394       -       394       100.0 %
 
Other income
    37       67       (30 )     -44.8 %
Total other expense
    (533 )     (146 )     (387 )     -265.1 %
Loss before income taxes
    (2,755 )     (2,405 )     (350 )     -14.6 %
 
Income taxes - current benefit
    (29 )     (9 )     (20 )     -222.2 %
Net loss
    (2,726 )     (2,396 )     (330 )     -13.8 %
 
Non-controlling interest
    6       14       (8 )     57.1 %
Net loss attributable to Visualant, Inc. common shareholders
  $ (2,732 )   $ (2,410 )   $ (322 )     -13.4 %

YEAR ENDED SEPTEMBER 30, 2012 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 2011

SALES

Net revenue for the year ended September 30, 2012 decreased $1,212,000 to $7,924,000 as compared to $9,136,000 for the year ended September 30, 2011. The reduction was due to a large TransTech sale to an aerospace company in the year ended September 30, 2011, which was not repeated in the year ended September 30, 2012.
 
COST OF SALES
 
Cost of sales for the year ended June 30, 2012 decreased $1,226,000 to $6,344,000 as compared to $7,570,000 for the year ended September 30, 2011. The reduction was due to a large TransTech sale to an aerospace company in the year ended September 30, 2011, which was not repeated in the year ended September 30, 2012.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
 
Selling, general and administrative expenses for the year ended September 30, 2012 decreased $66,000 to $3,625,000 as compared to $3,691,000 for the year ended September 30, 2011. We recorded $195,000 in expenses related to the SPP transactions during the year ended September 30, 2012.

During the year ended September 30, 2012, we recorded non-cash expenses of $1,196,000 and other business development and investor relation expenditures to expand the business.
 
The selling, general and administrative expenses consisted primarily of research and development expenses, employee and independent contractor expenses, overhead, equipment and depreciation, amortization of identifiable intangible assets and intellectual property, professional and consulting fees, investor relation, public relation, legal, patent, stock option and other general and administrative costs.
 
 
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OTHER INCOME/EXPENSE
 
Other expense for the year ended September 30, 2012 was $533,000 as compared to other expense of $145,000 for the year ended September 30, 2011. The expenses for the year ended September 30, 2012 included $464,000 for interest expense and a $500,000 loss on the purchase of the Gemini warrants, offset by $37,000 in other income and a gain on extinguishment of debt of $394,000. The expenses for the year ended September 30, 2011 included $213,000 for interest expense, offset by $67,000 in other income.

NET LOSS
 
Net loss for the year ended September 30, 2012 was $2,732,000 as compared to a net loss of $2,410,000 for the year ended September 30, 2011 for the reasons discussed above. The net loss included non-cash expenses of $1,302,000 and other business development and investor relation expenditures to expand the business.

LIQUIDITY AND CAPITAL RESOURCES

We had cash of $1.1 million, a net working capital deficit of approximately $2.4 million and total indebtedness of $1.6 million as of September 30, 2012.
  
We will need to obtain additional financing to implement our business plan and service our debt repayments. There can be no assurance that we will be able to secure funding, or that if such funding is available, the terms or conditions would be acceptable to us. If the Company is unable to obtain additional financing, we may need to restructure our operations, or divest all or a portion of our business.
 
Our recent efforts to generate additional liquidity, including through sales of our common stock, are described in more detail in the financial statement notes set forth in this Form 10K.
 
If we raise additional capital through borrowing or other debt financing, we will incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. When we raise more equity capital in the future, it will result in substantial dilution to our current stockholders.

OPERATING ACTIVITIES
 
Net cash used in operating activities for the year ended September 30, 2012 was $58,000. This amount was primarily related to a net loss of $2,732,000, offset by depreciation and amortization and other non-cash expenses of $1,302,000 and an increase in accounts payable and accrued expenses of $749,000 and deferred revenue of $667,000.

INVESTING ACTIVITIES
Net cash used in investing activities was $100,000. This amount was primarily related to capital expenditures of $109,000.

FINANCING ACTIVITIES
 
Net cash provided by financing activities for the year ended September 30, 2012 was $1,207,000. This amount was primarily related to proceeds from the sale of common stock of $2,627,000, offset by the repayment of debt of $957,000 and the purchase of outstanding warrants from Gemini.

Our contractual cash obligations as of September 30, 2012 are summarized in the table below:

         
Less Than
               
Greater Than
 
Contractual Cash Obligations
 
Total
   
1 Year
   
1-3 Years
   
3-5 Years
   
5 Years
 
Operating leases
  $ 240,511     $ 78,396     $ 138,360     $ 23,755     $ 0  
Note payable
    1,635,918       1,631,903       4,015       0       0  
Capital expenditures
    525,000       125,000       150,000       125,000       125,000  
    $ 2,401,429     $ 1,835,299     $ 292,375     $ 148,755     $ 125,000  
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances.
 
Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 2 to the financial statements set forth in this report), the following policies involve a higher degree of judgment and/or complexity:
 
 
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INVENTORIES

Inventories consist primarily of printers and consumable supplies, including ribbons and cards, badge accessories, capture devices, and access control components held for resale and are stated at the lower of cost or market on the first-in, first-out (“FIFO”) method.  Inventories are considered available for resale when drop shipped and invoiced directly to a customer from a vendor, or when physically received by TransTech at a warehouse location.  We record a provision for excess and obsolete inventory whenever an impairment has been identified. There is a $10,000 reserve for impaired inventory as of September 30, 2012 and 2011.

REVENUE RECOGNITION

TransTech revenue is derived from other products and services. Revenue is considered realized when the services have been provided to the customer, the work has been accepted by the customer and collectability is reasonably assured. Furthermore, if an actual measurement of revenue cannot be determined, we defer all revenue recognition until such time that an actual measurement can be determined. If during the course of a contract management determines that losses are expected to be incurred, such costs are charged to operations in the period such losses are determined. Revenues are deferred when cash has been received from the customer but the revenue has not been earned. The Sumitomo Precision Products License fee is being recorded as revenue over the life the Joint Development Agreement. We recorded deferred revenue of $666,667 and $0 as of September 30, 2012 and 2011, respectively.

There is no SPM revenue during the year ended September 30, 2012.

STOCK BASED COMPENSATION

We have share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares our common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by us at the grant date, based on the fair value of the award, over the requisite service period. For options issued to employees, we recognize 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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to our consolidated financial statements beginning on page F-1 of this report.
 
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

a) Evaluation of Disclosure Controls and Procedures
 
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management to allow for timely decisions regarding required disclosure.
  
As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and our management necessarily was required to apply its judgment in evaluating and implementing our disclosure controls and procedures. Based upon the evaluation described above, our management concluded that they believe that our disclosure controls and procedures were not effective, as of September 30, 2012, in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Management identified the weaknesses discussed below.
 
 
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Identified Material Weakness
 
A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Management identified material weaknesses during its assessment of internal controls over financial reporting as of September 30, 2012.
 
While we have an audit committee, the financial expert is not independent and attended 50% of the committee meetings during 2012. The Company expects to replace the Audit Committee Chairman in November 2012 with a qualified, independent Audit Committee Chairman.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.

The effectiveness of our internal control over financial reporting as of September 30, 2012 has not been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm.
 
CHANGES IN INTERNAL CONTROL
 
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected or is likely to materially affect our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
There were no disclosures of any information required to be filed on Form 8-K during the three months ended September 30, 2012 that were not filed.  














 





 
19

 

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth, as of September 30, 2012, the name, age, and position of each executive officer and director and the tenure in office of each director of the Company.  
 
Name
Age
Positions and Offices Held
Since
       
Directors-
     
Ronald P. Erickson
68
Chief Executive Officer, Management Director
April 24, 2003
       
Jon Pepper
61
Independent Director
April 19, 2006
       
Dr. Masahiro Kawahata
76
Independent Director
April 19, 2006
       
Marco Hegyi
54
Chairman of the Board, Independent Director
February 14, 2008
       
Yoshitami Arai
81
Independent Director
October 8, 2008
       
James Gingo
60
Management Director
June 8, 2010
       
Management-
     
Mark Scott
59
Chief Financial Officer and Secretary
May 1, 2010
       
Richard Mander, Ph.D.
52
Vice President, Product Management and Technology
June 26, 2012
       
Todd Martin Sames
58
Vice President of Business Development
September 5, 2012
 
Business Experience Descriptions

Set forth below is certain biographical information regarding each of the Company's executive officers and directors.

Our Management Directors

RONALD P. ERICKSON has been a director and officer of the Company since April 24, 2003. He currently serves as the Company’s Chief Executive Officer and President.  He was appointed to the positions of CEO and President on November 10, 2009. Earlier, 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. A seasoned executive with more than 30 years of experience in the high technology, telecommunications, micro-computer, and digital media industries, Mr. Erickson was the founder of Visualant. In addition to his Visualant responsibilities he also serves as Chairman of Tristit Global,, Inc., a mobile application development and distribution company and eCharge Corporation an Internet based transaction processing company. He is formerly Chairman, CEO and Co-Founder of Blue Frog Media, a mobile media and entertainment company; Chairman, CEO and Co-founder of GlobalTel Resources, a provider of telecommunications services; Chairman, Interim President and CEO of Egghead Software, Inc. the large software reseller where he was an original investor; Chairman and CEO of NBI, Inc.; and Co-founder of MicroRim, Inc. the database software developer. Earlier, Mr. Erickson practiced law in Seattle and worked in public policy in Washington, DC and New York, NY. Additionally, Mr. Erickson has been an angel investor and board member of a number of public and private technology companies.  In addition to his business activities Mr. Erickson serves on the Board of Trustees of Central Washington University where he received his BA degree. He also holds a MA from the University of Wyoming and a JD from the University of California, Davis. He is licensed to practice law in the State of Washington.

JAMES GINGO has served as a director since June 8, 2010.  He is the President and founder of TransTech Systems, Inc. (“TransTech”), since it was founded. TransTech is a distributor of access control and authentication systems serving the security and law enforcement markets. TransTech was acquired by the Company on June 8, 2010 and is a wholly owned subsidiary. James Gingo is a highly regarded industry veteran and one of the early members of the Document Security Alliance, an organization co-founded by the United States Secret Service and concerned industry representatives after the events of 9/11. He sits on the Board of the Security Industry Association.

Our Independent Directors

JON PEPPER has served as an independent director since April 19, 2006. Mr. Pepper is the co-founder of Pepcom [www.pepcom.com], an industry leader at 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 went to leading influencers worldwide. Pepper has been closely involved with the high technology revolution since the beginning of the personal computer era. He was formerly a well-regarded journalist and columnist; 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. Pepper was educated at Union College in Schenectady, New York and the Royal Academy of Fine Arts in Copenhagen.
 
 
 
 
20

 
 
DR. MASAHIRO KAWAHATA has served as an independent director since April 19, 2006. Dr. Kawahata is the former Director of the Fujitsu Research Institute. 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". 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 has served as a Director of numerous technology companies, and has received several prestigious awards in the United States and Japan.

MARCO HEGYI has served as an independent director since February 14, 2008 and as Chairman of the Board since May 2011. Mr. Hegyi has been a principal with the Chasm Group since 2006, where he combines his expertise in, and passion for helping companies expand their businesses with innovative technologies and collaborative partnership strategies using mobile and wireless platforms, service business models and Internet marketing programs. Prior to working as a strategic advisor, Mr. Hegyi served as Senior Director, Global Product Management, at Yahoo Search Marketing during 2006. Prior to Yahoo, Mr. Hegyi was at Microsoft leading program management for Microsoft Windows and Office beta releases aimed at software developers from 2001 to 2006. While at Microsoft, he formed new service concepts and created operating programs to extend the depth and breadth of the company’s unparalleled developer eco-system, including managing offshore, outsource teams in China and India, and US 7,904,875 patent inventor of Microsoft business process in service delivery. Mr. Hegyi has also filed eight other patents in the last two years.  Mr. Hegyi earned a Bachelor of Science degree in Information and Computer Sciences from the University of California, Irvine, and has completed advanced studies in innovation marketing, advanced management, and strategy at Harvard Business School, Stanford University, UCLA Anderson Graduate School of Management, and MIT Sloan School of Management.  

YOSHITAMI ARAI has served as an independent director since October 8, 2008. Mr. Arai brings strategic experience, a broad global business network, and sophisticated business acumen to the board. He has performed in many professional and civic capacities throughout Japan and abroad, and has served as Director and Senior Executive of international organizations including 7-Eleven, Tokyo Hotels, Systems International, Catalina Marketing and Sony.   
 
Other Executive Officers
 
MARK SCOTT has significant financial, capital market and experience in public microcap companies. Mr. Scott serves as (i) Chief Financial Officer, Secretary and Treasurer of Visualant, Inc., a position he has held since May 2010 and (ii) Chief Financial Officer, Secretary and Treasurer of WestMountain Gold, Inc. since December 8, 2010. Mr. Scott also provides consulting financial services to other public companies.

Mr. Scott previously served as Chief Financial Officer and Secretary of IA Global, Inc. from October 2003 to June 2011. Previously, he held executive financial positions with Digital Lightwave; Network Access Solutions; and Teltronics, Inc. He has also held senior financial positions at Protel, Inc., Crystals International, Inc., Ranks Hovis McDougall, LLP and Brittania Sportswear, and worked at Arthur Andersen. Mr. Scott is also a certified public accountant and received a Bachelor of Arts in Accounting from the University of Washington.

RICHARD MANDER, Ph.D. joined the Company as Vice President of Product Management and Technology on June 26, 2012. He is known as an inspiring leader with a track record of building innovative and high quality consumer electronic products. In the 1990s, he worked at Apple for seven years developing future technologies and products, and served as Engineering Group Manager of the immersive photo visualization technology QuickTimeVR. He then worked for six years with Zanzara, a consulting company which helps companies make new technology products easy to use.
 
Originally from New Zealand, Mr. Mander returned there in 2004 as Chief Technology Officer for Navman, a designer and manufacturer of car and boat GPS products. In 2006, he became CEO at HumanWare, a company that designs and manufactures information access devices for blind, low vision and learning disabled people. In 2008, he returned to the US as CEO of BigScreenLive, a Seattle-based company developing a software-as-a-service platform to make the Internet more accessible for seniors. In 2009, Mr. Mander spent six months as Entrepreneur in Residence at the University of Washington commercializing opportunities for Faculty in the Computer Science, iSchool, and Medical School. From 2009 to 2012, he was VP Product Management at Contour, the 7th fastest growing company in the US, where he led the development of Contour’s wearable cameras integrating video GPS data and video.
 
Mr. Mander holds a number of patents relating to computer and imaging technologies. In 2004, was awarded the World Class New Zealander award for helping New Zealand companies improve their products for the US market. He was awarded the Company Leader of the Year award in 2007 for his work at HumanWare. Mr. Mander earned a PhD in Educational Psychology from Stanford University, MA from the University of Auckland, and BA from University of Canterbury.
 
 
21

 
 
TODD MARTIN SAMES joined the Company as Vice President, Business Development on September 5, 2012.  Mr. Sames is responsible for driving new licensing agreements for the company’s SPM technology with a wide-range of original device manufacturers.
 
Mr. Sames brings over 25 years of industry experience to the expanding Visualant team. From 2010 to 2012, Mr. Sames held an executive position at INX, where he ultimately led in the creation of a new Business Unit. The project resulted in a successful new line of video conferencing, telecommunication, and security solutions for Cisco. From 2007 to 2010, Mr. Sames held an executive position at BT Conferencing.

Mr. Sames has also established partnerships with other well-known companies such as Polycom, LifeSize, and TANDBERG. During his tenure conducting corporate sales at Egghead Software, Todd closed and managed Fortune 1000 accounts with Disney, Unocal, Lockheed and General Electric, among many others.

Family Relationships
 
There are no family relationships among our directors and executive officers.
 
Involvement in Certain Legal Proceedings
 
None of our directors or executive officers has, during the past five years:
 
Had any petition under the federal bankruptcy laws or any state insolvency law filed by or against, or had a receiver, fiscal agent, or similar officer appointed by a 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 filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
 
 
Been convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
     
 
Been 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:
     
 
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
     
 
Engaging in any type of business practice; or
     
 
Engaging in any activity 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;
     
 
Been 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 in (i) above, or to be associated with persons engaged in any such activity;
     
 
Been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated; or
     
 
Been 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, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.
 
Committees of the Board of Directors
 
The Board has three standing committees to facilitate and assist the Board in the execution of its responsibilities. The committees are currently the Audit Committee, the Nominations and Governance Committee and the Compensation Committee. The Committees were formed January 27, 2011. The Compensation Committee is comprised solely of non-employee, independent directors. The Nominations and Governance Committee has one management director, James Gingo as Chairman. The Audit Committee is comprised solely of non-employee, independent directors. The Company expects to appoint an Independent Audit Chairman in November 2012 who is a financial expert. Charters for each committee are available on the Company’s website at www.visualant.net. The table below shows current membership for each of the standing Board committees.
 
 
 
22

 
 
Audit
 
Compensation
 
Nominating
Marco Hegyi (Chairman)
 
Marco Hegyi  (Chairman)
 
James Gingo (Chairman)
Jon Pepper
 
Yoshitami Arai
 
Dr. Kawahata
   
Jon Pepper
   
 
Compensation Committee Interlocks and Insider Participation
 
No member of the Compensation Committee during the fiscal year that ended on September 30, 2012 served as an officer, former officer, or employee of the Company or participated in a related party transaction that would be required to be disclosed in this document. Further, during this period, no executive officer of the Company served as: 

 
a member of the Compensation Committee (or equivalent) of any other entity, one of whose executive officers served as one of our directors or was an immediate family member of a director, or served on our Compensation Committee; or
     
 
a director of any other entity, one of whose executive officers or their immediate family member served on our Compensation Committee.
 
Code of Conduct and Ethics
 
We have adopted conduct and ethics standards titled the Code of Conduct and Ethics (the “Code of Conduct”), which are available at www.visualant.net. These standards were adopted by the Board to promote transparency and integrity. The standards apply to the Board, executives and employees. Waivers of the requirements of the Code of Conduct or associated polices with respect to members of the Board or executive officers are subject to approval of the full Board.
 
The Company’s Code of Conduct includes the following:
 
- promotes honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest;- promotes the full, fair, accurate, timely and understandable disclosure of the Company’s financial results in accordance with applicable disclosure standards, including, where appropriate, standards of materiality;
 
- promotes compliance with applicable SEC and governmental laws, rules and regulations;
 
- deters wrongdoing; and
 
- requires prompt internal reporting of breaches of, and accountability for adherence to, the Code of Conduct.
 
On an annual basis, each director and executive officer is obligated to complete a Director and Officer Questionnaire which requires disclosure of any transactions with the Company in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Pursuant to the Code of Conduct, the Audit Committee and the Board are charged with resolving any conflict of interest involving management, the Board and employees on an ongoing basis.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis
 
Overview of Compensation Program
 
This Compensation Discussion and Analysis describes the material elements of compensation awarded to, earned by or paid to each of our named executive officers who served during the year that ended on September 30, 2012. This compensation discussion primarily focuses on the information contained in the following tables and related footnotes and narrative for the last completed fiscal year. We also describe compensation actions taken after the last completed fiscal year to the extent that it enhances the understanding of our executive compensation disclosure.

The Compensation Committee of the Board has responsibility for overseeing, reviewing and approving executive compensation and benefit programs in accordance with the Compensation Committee’s charter.  The members of the Compensation Committee are Marco Hegyi (Chairman) and Jon Pepper.

 
23

 

On November 17, 2009, Mr. Erickson assumed the positions of CEO, President and interim CFO, Secretary and Treasurer as a result of the resignation of Mr. Bradley E. Sparks from those positions.  Mr. Sparks continued to serve as a Director of the Company until his resignation effective September 6, 2012.  On May 10, 2010, Mr. Erickson resigned from the positions of CFO, Secretary and Treasurer and Mark Scott was appointed to those positions.  

The Company closed the acquisition of TransTech on June 8, 2010. James Gingo joined the Board of Directors on June 8, 2010.

Compensation Philosophy and Objectives
 
The major compensation objectives for named executive officers are as follows:

     
 
to attract and retain highly qualified individuals capable of making significant contributions to the long-term success of the Company;
     
 
to motivate and reward named executive officers whose knowledge, skills, and performance are critical to the Company’s success;
     
 
to closely align the interests of the Company’s named executive officers and other key employees with those of its shareholders; and
     
 
to utilize incentive based compensation to reinforce performance objectives and reward superior performance; and

Role of Chief Executive Officer in Compensation Decisions
 
The Board approves all compensation for the chief executive officer. The Compensation Committee makes recommendations on the compensation for the chief executive officer and approves all compensation decisions, including equity awards, for the named executive officers of the Company. The Company’s chief executive officer makes recommendations regarding the base salary and non-equity compensation of other named executive officers that are approved by the Compensation Committee in its discretion.

Setting Executive Compensation
 
The Compensation Committee believes that compensation for named executive officers must be managed to what the Company can afford and in a way that allows for the Company to meet its goals for overall performance. During 2012, the Compensation Committee and the Board compensated its Chief Executive Officer with a monthly consulting fee of $12,500 effective May 1, 2012 and an annual salary of $180,000 effective June 1, 2012. During 2012, the Committee compensated its Chief Financial Officer with a $8,000 monthly consulting fee effective February 1, 2011 and an annual salary of $120,000 effective June 1, 2012. This compensation reflected the financial condition of the Company. Other named executive officers were paid by the Company or TransTech during 2012. The Compensation Committee does not use a peer group of publicly-traded and privately-held companies in structuring the compensation packages.
 
Executive Compensation Components for the Year Ended September 30, 2012
 
The Compensation Committee did not use a formula for allocating compensation among the elements of total compensation during the fiscal year that ended on September 30, 2012. The Compensation Committee believes that in order to attract and retain highly effective people it must maintain a flexible compensation structure. For fiscal 2012, the principal components of compensation for named executive officers were base salary and consulting fees.

Base Salary
 
Base salary is intended to ensure that the Company’s employees are fairly and equitably compensated. Generally, base salary is used to appropriately recognize and reward the experience and skills that employees bring to the Company and provides motivation for career development and enhancement. Base salary ensures that all employees continue to receive a basic level of compensation that reflects any acquired skills which are competently demonstrated and are consistently used at work.

Base salaries for the Company’s named executive officers are initially established based on their prior experience, the scope of their responsibilities and the applicable competitive market compensation paid by other companies for similar positions. During 2012, the Compensation Committee and the Board compensated its Chief Executive Officer with a monthly consulting fee of $12,500 effective May 1, 2012 and an annual salary of $180,000 effective June 1, 2012. During 2012, the Committee compensated its Chief Financial Officer with a $8,000 monthly consulting fee effective February 1, 2011 and an annual salary of $120,000 effective June 1, 2012. Mr. Erickson and Mr. Scott were compensated as described based on the financial condition of the Company.  The Board established a base salary for Mr. Gingo based on competitive market compensation paid by other companies for similar positions.

 
24

 

Performance-Based Incentive Compensation
 
The Compensation Committee believes incentive compensation reinforces performance objectives, rewards superior performance and is consistent with the enhancement of stockholder value. All of the Company’s named executive officers are eligible to receive performance-based incentive compensation. The Compensation Committee did not recommend or approve payment of any performance-based incentive compensation to the named executive officers during 2012 based on the financial condition of the Company and the awards issued in 2010.

Mr. Gingo was not paid incentive compensation during the fiscal year ended September 30, 2012.

Ownership Guidelines
 
The Compensation Committee does not require our named executive officers to hold a minimum number of the Company’s shares. However, to directly align the interests of executive officers with the interests of the stockholders, the Compensation Committee encourages each named executive officer to maintain an ownership interest in the Company.
 
Stock Option Program
 
Stock options are an integral part of our executive compensation program. They are intended to encourage ownership and retention of the Company’s common stock by named executive officers and employees, as well as non-employee members of the Board. Through stock options, the objective of aligning employees’ long-term interest with those of stockholders may be met by providing employees with the opportunity to build a meaningful stake in the Company.
The Stock Option Program assists the Company by:

- enhancing the link between the creation of stockholder value and long-term executive incentive compensation;

- providing an opportunity for increased equity ownership by executive officers; and

- maintaining competitive levels of total compensation.

Stock option award levels are determined by the Compensation Committee and vary among participants’ positions within the Company. Newly hired executive officers or promoted executive officers are generally awarded stock options, at the discretion of the Compensation Committee, at the next regularly scheduled Compensation Committee meeting on or following their hire or promotion date. In addition, such executives are eligible to receive additional stock option on a discretionary basis after performance criteria are achieved.

Options are awarded at the closing price of the Company's common stock on the date of the grant or last trading day prior to the date of the grant. The Compensation Committee’s policy is not to grant options with an exercise price that is less than the closing price of the Company's common stock on the grant date.

Generally, the majority of the options granted by the Compensation Committee vest quarterly over two to three years or annually over five years of the 5-10-year option term. Vesting and exercise rights cease upon termination of employment and/or service, except in the case of death (subject to a one year limitation), disability or retirement. Stock options vest immediately upon termination of employment without cause or an involuntary termination following a change of control. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

Mr. Erickson, the Company’s Chief Executive Officer, Mr. Scott, the Company’s Chief Financial Officer and Mr. Gingo, the Chief Executive Officer of TransTech Systems, Inc. did not receive a stock option grant during the year then ended September 30, 2012.

Retirement and Other Benefits
 
The Company has no other retirement, savings, long-term stock award or other type of plans for the named executive officers.

Perquisites and Other Personal Benefits
 
During the year then ended September 30, 2012, the Company provided the named Chief Executive and Financial Officers with medical insurance. No other personal benefits were provided. Mr. James Gingo was provided perquisites and other personal benefits, including medical insurance and a 401 plan that the Company and the Compensation Committee believe are reasonable and consistent with its overall compensation program to better enable the Company to attract and retain superior employees for key positions. The committee expects to review the levels of perquisites and other personal benefits provided to named executive officers.
 
 
25

 
 
Currently, the Company has Employment Agreements with James Gingo which is discussed at page 28. The James Gingo Employment Agreement contains potential payments upon termination which are discussed at page 29.

There are no other employment agreements.

Tax and Accounting Implications
 
Deductibility of Executive Compensation
 
Subject to certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") generally denies a deduction to any publicly held corporation for compensation paid to its chief executive officer and its three other highest paid executive officers (other than the principal financial officer) to the extent that any such individual's compensation exceeds $1 million. “performance-based compensation” (as defined for purposes of Section 162(m)) is not taken into account for purposes of calculating the $1 million compensation limit, provided certain disclosure, shareholder approval and other requirements are met. We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exceptions to Section 162(m). However, we may authorize compensation payments that do not comply with the exceptions to Section 162(m) when we believe that such payments are appropriate and in the best interests of the stockholders, after taking into consideration changing business conditions or the officer's performance.

Section 409A is a relatively recent provision of the Code. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A of the Code, and such benefits do not comply with Section 409A of the Code, the executive would be subject to adverse tax treatment, including accelerated income recognition (in the first year that benefits are no longer subject to a substantial risk of forfeiture) and an additional income tax of 20% of the amount so recognized.
 
Accounting for Stock-Based Compensation
 
Beginning on January 1, 2006, the Company began accounting for stock-based payments including its Stock Option Program in accordance with the requirements of ASC 718, “Compensation-Stock Compensation.”

COMPENSATION COMMITTEE REPORT
 
The Compensation Committee, composed entirely of independent directors in accordance with the applicable laws and regulations, sets and administers policies that govern the Company's executive compensation programs, and incentive and stock programs. The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
 
THE COMPENSATION COMMITTEE

Marco Hegyi, Chairman
Jon Pepper

REMUNERATION OF EXECUTIVE OFFICERS
 
The following table provides information concerning remuneration of the chief executive officer, the chief financial officer and another named executive officer for the fiscal years then ended September, 2012, 2011 and 2010.
 
 
 
 
26

 
 
Summary Compensation Table
 
                         
Non-Equity
                   
                         
Incentive
                   
                   
Stock
   
Plan
   
Option
   
Other
       
       
Salary
   
Bonus
   
Awards
   
Compensation
   
Awards
   
Compensation
   
Total
 
Name
Principal Position
   
($) (1)
   
($)
   
($) (2)
   
($)
   
($) (3)
   
($) (4)
   
($)
 
Salary-
                                             
Ronald P. Erickson
Chief Executive Officer
9/30/2012
  $ 60,000     $ -     $ -     $ -     $ -     $ 89,500     $ 149,500  
   
9/30/2011
  $ -     $ -     $ -     $ -     $ -     $ 62,500     $ 62,500  
   
9/30/2010
  $ -     $ -     $ 40,000     $ -     $ 52,662     $ -     $ 92,662  
                                                             
Mark Scott
Chief Financial Officer
9/30/2012
  $ 40,000     $ -     $ -     $ -     $ -     $ 64,000     $ 104,000  
 
Secretary
9/30/2011
  $ -     $ -     $ -     $ -     $ -     $ 74,000     $ 74,000  
   
9/30/2010
  $ -     $ -     $ 20,000     $ -     $ -     $ 10,000     $ 30,000  
                                                             
James Gingo
Chief Executive Officer,
9/30/2012
  $ 200,016     $ -     $ -     $ -     $ -     $ 8,001     $ 208,017  
 
TransTech Systems, Inc.
9/30/2011
  $ 200,016     $ -     $ -     $ -     $ -     $ 8,001     $ 208,017  
   
9/30/2010
  $ 62,649     $ -     $ -     $ -     $ -     $ -     $ 62,649  
                                                             
Richard Mander, Ph.D.
Vice President of Product Management
9/30/2012
  $ 43,615     $ -     $ -     $ -     $ -     $ -     $ 43,615  
 
and Technology
9/30/2011
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
   
9/30/2010
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                             
Todd Martin Sames
Vice President of Business Development
9/30/2012
  $ 10,000     $ -     $ -     $ -     $ -     $ -     $ 10,000  
   
9/30/2011
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
   
9/30/2010
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
 
(1)    The amount for 2009 for Mr. Gingo includes salary from June 8, 2010 to September 30, 2010.   TransTech was acquired June 8, 2010.

(2)    The 2010 amount for Mr. Erickson reflects 2,000,000 shares of restricted common stock issued by the Company on May 10, 2010. The restricted common stock was issued at the closing bid price of $.02 per share on May 7, 2010. The 2010 amount for Mr. Scott reflects 1,000,000 shares of restricted common stock issued by the Company on May 10, 2010. The restricted common stock was issued at the closing bid price of $.02 per share on May 7, 2010.

(3)   These amounts reflects the dollar amount recognized for financial statement reporting purposes for the fiscal years then ended September 30, 2010, in accordance with FASB ASC Topic 718 of awards pursuant to the 2005 Stock Option Plan. Assumptions used in the calculation of this amount are included in footnotes to the Company's audited financial statements for the fiscal years then ended September 30, 2011, 2010 and 2009. There were no grants issued in 2011 and 2012.

(4)   The 2010 amount for 2010 for Mr. Scott includes consulting fees paid from May 5, 2010 to September 30, 2010. During 2011, the Compensation Committee and the Board compensated Mr. Erickson with a monthly consulting fee of $12,500 effective May 1, 2011.  Mr. Scott was paid consulting income of $8,000 per month. During 2012, the Compensation Committee and the Board compensated Mr. Erickson with a monthly consulting fee of $12,500 through May 31, 2011.  Mr. Scott was paid consulting income of $8,000 per month through May 31, 2012. Mr. James Gingo was provided perquisites and other personal benefits, including medical insurance and a 401 plan.

Grants of Stock Based Awards in Fiscal Year Then Ended September 30, 2012

The Compensation Committee did not provide performance-based incentive compensation paid to the named executive officers during 2012 based on the financial condition of the Company and the awards issued in 2010.

Outstanding Equity Awards as of Fiscal Year Then Ended September 30, 2012

   
Option Awards (1)
 
Stock Awards
   
Number of
   
Number of
   
Number of
                     
Number of
  Market or
   
Securities
   
Securities
   
Securities
           
Number of
  Market Value  
Unearned Shares,
  Payout Value of
   
Underlying
   
Underlying
   
Underlying
           
Shares or Units
  of Shares or  
Units or Other
  Unearned Shares,
   
Unexercised
   
Unexercised
   
Unexercised
  Option      
of Stock
  Units of  
Rights That
  Units, or Other
   
Options
   
Options
   
Unearned
  Exercise  
Option
 
That Have Not
  Stock That  
Have Not
  Rights That Have
   
Exercisable
   
Unexerciseable
   
Options
  Price  
Expiration
 
Vested
  Have Not Vested  
Vested
  Not Vested
Name
  (#)     (#)     (#)   ($)  
Date
  (#)   ($)   (#)   ($)
                                                         
Ronald P.  Erickson
    3,000,000       -       -   $
0.15
 
5/9/2020
    -   $
-
    -   $
-

(1)
Mr. Erickson’s stock option grant vested quarterly over two years.
 
 
27

 
 
Option Exercises and Stock Vested
 
The Company’s named executive officers did not exercise any stock options during the year ended March 31, 2012, 2011 and 2010.
 
Pension Benefits
 
The Company does not provide any pension benefits.
 
Nonqualified Deferred Compensation

The Company does not have a nonqualified deferral program. 

EMPLOYMENT AGREEMENT
 
On November 17, 2009, Mr. Erickson assumed the positions of CEO, President and interim CFO, Secretary and Treasurer as a result of the resignation of Mr. Bradley E. Sparks from those positions.  Mr. Sparks continued to serve as a Director of the Company until his resignation on September 6, 2012.  On May 10, 2010, Mr. Erickson resigned from the positions of CFO, Secretary and Treasurer and Mark Scott was appointed to those positions.  

The Company closed the acquisition of TransTech on June 8, 2010. James Gingo joined the Board of Directors on June 8, 2010.

Mr. Erickson, Mr. Scott and other named executive officers of Visualant do not have employment agreements.

Agreement with James Gingo

On June 8, 2010, we entered into an Employment Agreement (“Gingo Agreement”) with Mr. Gingo. The Gingo Agreement has a three year term beginning on June 8, 2010 at the annual base salary of $200,000 per year. The Gingo Agreement provides for participation in the Company’s benefit programs available to other employees (including group insurance arrangements). Also under the Gingo Agreement, Mr. Gingo is eligible for discretionary performance bonuses up to 50% of his annual salary based upon performance criteria to be determined by the Company’s Compensation Committee based on criteria under development. If Mr. Gingo’s employment is terminated without Cause (as defined in the Gingo Agreement), Mr. Gingo will be entitled to a payment equal to one year’s annual base salary paid over the next year.   
 
Definitions Used in Employment Agreements

For purposes of the Gingo Agreement described above, the following definitions apply:
 
As used herein, “Cause” is defined as any of the following events which occur during the term of this agreement: (i) your repeated failure, in the reasonable, good faith judgment of the Board, to substantially perform your reasonable assigned duties or responsibilities as a Service Provider (defined below) as directed or assigned by the Board (other than a failure resulting from your Disability) continuing for a period of thirty (30) days or more following written notice thereof from the Board to you describing in reasonable detail those duties and/or responsibilities that the Board believes you have failed to perform; (ii) your engaging in knowing and intentional illegal conduct that was or is reasonably likely to be materially injurious to TransTech or the Company or its affiliates; (iii) your violation of a federal or state law or regulation, which was known or should have been known to you, applicable to TransTech or the Company’s business which violation was or is likely to be materially injurious to TransTech or the Company; (iv) your breach of a material term of this offer letter or any confidentiality agreement or invention assignment agreement between you and TransTech or the Company following written notice thereof from the Board to you and your failure to cure such breach within twenty (20) days of receipt of such notice; (v) your being convicted of, or entering a plea of nolo contendere to, a felony; or (vi) your committing any material act of dishonesty or fraud against, or the misappropriation of material property belonging to TransTech, the Company or its affiliates.

As used herein, “Change of Control” is defined as any one of the following occurrences: (a) Company is party to a merger or consolidation with or into another entity (or group of entities) (except a merger or consolidation in which the holders of capital stock of the Company immediately prior to such merger or consolidation continue to hold (solely in respect of their interests in the Company’s capital stock immediately prior to such merger or consolidation) at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity); (b) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series of related transactions, to a corporation, person or group of affiliated persons (other than an underwriter of the Company’s securities), of the Company’s securities if, after such closing, such person or group of affiliated persons would hold 50% or more of the outstanding voting stock of the Company, or (c) a sale, lease, assignment, transfer or disposal of all or substantially all of the assets of the Company (other than a pledge of such assets or grant of a security interest therein to a commercial lender in connection with a commercial lending or similar transaction); provided that the following shall not be considered a Change of Control: an equity financing of the Company in which the Company issues shares of its Common Stock or Preferred Stock.

As used herein, “Constructive Termination” is defined as any of the following, without your express written consent:  (i) a change in your title or position or a material reduction of your duties or responsibilities relative to your duties or responsibilities in effect immediately prior to such reduction, or your removal from such title, position, duties and responsibilities, unless you are provided with comparable title, duties, position and responsibilities; provided, however, that a reduction in duties or responsibilities solely by virtue of the Company being acquired and made part of a larger entity (as, for example, when the President of the Company remains as such following a change of control of the Company but is not made the President of the acquiring corporation) shall not constitute “Constructive Termination”; (ii) a reduction by the Company of your fixed cash compensation as in effect immediately prior to such reduction (unless such reduction constitutes a Board-approved, across-the-board salary reduction applicable to all similarly-situated employees at the Company); (iii) a reduction by the Company in the kind or level of employee benefits to which you are entitled immediately prior to such reduction with the result that your overall benefits package is significantly reduced (unless such reduction constitutes a Board-approved, across-the-board benefits reduction applicable to all similarly-situated employees at the Company); (iv) your relocation to a facility or a location more than 100 miles from Aurora, Oregon; or (v) the failure of the Company to obtain the assumption of this offer letter by any successor.
 
 
 
28

 
 
Potential Payments Upon Termination or Change in Control

The Company’s Employment Agreements with the named executive officers have provisions providing for severance payments as discussed below.

James Gingo Termination Payments

Assuming Mr. Gingo’s Employment Agreement does not expire on June 8, 2013, the following table shows the potential payments as of September 30, 2012 if James Gingo was terminated:

         
Early
   
Not For Good
   
Change in
       
Executive
 
For Cause
   
or Normal
   
Cause
   
Control
   
Disability
 
Payments Upon
 
Termination
   
Retirement
   
Termination
   
Termination
   
or Death
 
Separation
 
on 9/30/12
   
on 9/30/12
   
on 9/30/12
   
on 9/30/12
   
on 9/30/12
 
Compensation:
                             
Base salary (1)
  $ -     $ -     $ 200,000     $ 400,000     $ -  
Performance-based incentive
                                       
    compensation
  $ -     $ -     $ -     $ -     $ -  
Stock options
  $ -     $ -     $ -     $ -     $ -  
                                         
Benefits and Perquisites:
                                       
Health and welfare benefits (2)
  $ -     $ -     $ 3,199     $ 12,796     $ -  
Accrued vacation pay (3)
  $ 3,846     $ 3,846     $ 3,846     $ 3,846     $ 3,846  
                                         
Total
  $ 3,846     $ 3,846     $ 207,045     $ 416,642     $ 3,846  

(1)   Reflects twelve month’s severance to be paid upon termination without cause and twenty four months upon termination in a change of control, less any months worked.

(2)   Reflects six and twenty four month’s group insurance based on our cost paid for Mr. Gingo, respectively, without cause or upon termination in a change of control.

(3)   Reflects the value of vacation pay accrued as of September 30, 2012.

DIRECTOR COMPENSATION

The Company uses stock options grants to incentive compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Company considers the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by the Company of members of the Board. During year then ended September 30, 2012, Ronald Erickson and James Gingo did not receive any compensation for his service as a director.  The compensation disclosed in the Summary Compensation Table on page 27 represents the total compensation.

Director Summary Compensation Table

The table below summarizes the compensation paid by the Company to non-employee directors during the year then ended September 30, 2012.

 
29

 

   
Stock
   
Option
       
Name
 
Awards (1)
   
Awards (1)
   
Total
 
Bradley E. Sparks (2)
  $ 4,000     $ -     $ 4,000  
Marco Hegyi
    -       190,000       190,000  
Dr. Masahiro Kawahata
    8,000       -       8,000  
Jon Pepper
    6,000       -       6,000  
Yoshitami Arai
    8,000       -       8,000  
James Gingo
    -       -       -  
Paul R. Bonderson Jr. (3)
    6,000       -       6,000  
                         
Total
  $ 32,000     $ 190,000     $ 222,000  

(1)   Reflects the dollar amount recognized for financial statement reporting purposes for the year then ended September 30, 2012 in accordance with FASB ASC Topic 718. The assumptions used in the valuation of options is included in the Footnotes of the Form 10-K as filed with the SEC on November 13, 2012.  On February 24, 2012, the Board of Directors authorized to Marco Hegyi, our Chairman of the Board, the grant of qualified and non-qualified options to purchase 1,900,000 shares of the Company’s common stock at $0.10 per share. The stock option grants vested 750,000 on February 24, 2012 and 250,000 shares per quarter over two years and expire in ten (10) years. If there is a change in control, the stock option grant is fully vested.

(2)   Mr. Sparks resigned from the Board of Directors effective September 6, 2012.  On September 6, 2012, the Company entered into a Settlement and Release Agreement with Mr. Sparks pursuant to which the Company agreed to (i) pay to Mr. Sparks the sum of $50,750 and issue 513,696 shares of the Company’s common stock as satisfaction in full of amounts owed pursuant to a note issued in 2007 and related accrued interest; and (ii) pay to Mr. Sparks the sum of $39,635 and issue 4,000,000 shares of the Company’s common stock as satisfaction in full of amounts owed to pursuant to a note issued in 2009, related accrued interest, and other liabilities, including accrued compensation of $721,333.  The full Settlement and Release Agreement was filed as Exhibit 10.1 to Form 8-K/A1 filed by the Company on September 12, 2012.

(3)  Mr. Bonderson resigned from the Board of Directors effective April 21, 2012.

Compensation Paid to Board Members

Our independent non-employee directors are not compensated in cash.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the ownership of our common stock as of November 13, 2012 by:

     
 
each director and nominee for director;
     
 
each person known by us to own beneficially 5% or more of our common stock;
     
 
each officer named in the summary compensation table elsewhere in this report; and
     
 
all directors and executive officers as a group.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. Under these rules more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

Unless otherwise indicated below, each beneficial owner named in the table has sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise indicated, the address of each beneficial owner of more than 5% of common stock is Visualant, Inc., 500 Union Street, Suite 420, Seattle, Washington 98101.

 
30

 

   
Shares Outstanding
 
   
Amount
   
Percentage
 
Directors and Officers-
           
Ronald P. Erickson
   
5,423,773
     
5.8
%
Mark Scott
   
1,068,500
     
1.1
%
Marco Hegyi
   
375,000
     
*
 
Dr. Masahiro Kawahata
   
1,003,784
     
1.1
%
Jon Pepper
   
450,000
     
*
 
Yoshitami Arai
   
325,000
     
*
 
James Gingo
   
3,100,000
     
3.3
%
Richard Mander     -          
Todd Sames     -          
Total Directors and Officers (9 in total)
   
11,746,057
     
12.6
%
 
               
Shares Outstanding with
 
   
Shares Outstanding
   
Stock options and Warrants
 
   
Number
   
Percentage
   
Amount
   
Percentage
 
Greater Than 5% Ownership
                       
                         
Sumitomo Precision Products Co., Ltd.     17,307,693       18.6 %     17,307,693       14.0 %
1-10 Fuso-cho                                
Amagasaki                                
Hyogo 660-0891 Japan                                
                                 
                                 
Ronald P. Erickson
   
5,423,773
     
5.8
%
   
8,423,773
     
6.8
%
500 Union Street , Suite 406
                               
Seattle, WA 98101
                               
   
(1)
Reflects the shares beneficially owned by Ronald Erickson as stated in a Schedule 13D filed with the SEC on May 19, 2010, and which has subsequently confirmed the ownership.
   
(2)
 
Reflects the shares beneficially owned by Sumitomo Precision Products Co., Ltd as stated in a Schedule 13D filed with the SEC on June 23, 2012, and which has subsequently confirmed the ownership.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

Related party transactions for the year ended September 30, 2012 are detailed in Footnotes to Form 10K.

Review and Approval of Related Person Transactions  
 
The Company has operated under a Code of Conduct for many years. The Company’s Code of Conduct requires all employees, officers and directors, without exception, to avoid the engagement in activities or relationships that conflict, or would be perceived to conflict, with the Company’s interests or adversely affect its reputation. It is understood, however, that certain relationships or transactions may arise that would be deemed acceptable and appropriate upon full disclosure of the transaction, following review and approval to ensure there is a legitimate business reason for the transaction and that the terms of the transaction are no less favorable to the Company than could be obtained from an unrelated person.
 
The Audit Committee is responsible for reviewing and approving all transactions with related persons. The Company has not adopted a written policy for reviewing related person transactions. The Company reviews all relationships and transactions in which the Company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. As required under SEC rules, transactions that are determined to be directly or indirectly material to the Company or a related person are disclosed.

Director Independence
 
The Board has affirmatively determined that each of Messrs. Pepper, Kawahata, Hegyi  and Arai is an independent director.  For purposes of making that determination, the Board used NASDAQ’s Listing Rules even though the Company is not currently listed on NASDAQ.

 
31

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Dismissal of Madsen & Associates CPA's, Inc.
 
On September 29, 2012, the Company dismissed Madsen & Associates CPA's, Inc. (“Madsen”) as our independent registered public accounting firm. The decision to change accountants was approved by our Audit Committee.
 
The Madsen reports on our consolidated financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the audit report of Madsen on our financial statements for fiscal years 2010 and 2011 contained an explanatory paragraph which noted that there was substantial doubt about our ability to continue as a going concern.
 
During our fiscal years ended December 31, 2010 and 2011 and through September 29, 2012, (i) there were no disagreements with Madsen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Madsen’s satisfaction, would have caused Madsen to make reference to the subject matter of such disagreements in its reports on our consolidated financial statements for such years, and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K other than: At September 30, 2010, we reported no material weakness in internal control over financial reporting. At September 30, 2011 and during the interim periods through June 30, 2012, we reported a material weakness in internal control. While we have an audit committee, the financial expert is not independent and attended 50% of the committee meetings. The Company is currently reviewing the financial expert situation.

Engagement of PMB Helin Donovan LLP
 
On September 29, 2012 the Company, upon the Audit Committee’s approval, engaged the services of PMB Helin Donovan LLP (“PMB”) as the Company’s new independent registered public accounting firm to audit the Company’s consolidated financial statements as of September 30, 2012 and for the year then ended. PMB will be performing reviews of the unaudited consolidated quarterly financial statements to be included in the Company’s quarterly reports on Form 10-Q going forward.

During each of the Company’s two most recent fiscal years and through the date of this report, (a) the Company has not engaged PMB as either the principal accountant to audit the Company’s financial statements, or as an independent accountant to audit a significant subsidiary of the Company and on whom the principal accountant is expected to express reliance in its report; and (b) the Company or someone on its behalf did not consult PMB with respect to (i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, or (ii) any other matter that was either the subject of a disagreement or a reportable event as set forth in Items 304(a)(1)(iv) and (v) of Regulation S-K.

Audit Committee Pre-Approval Policy

The Audit Committee has established a pre-approval policy and procedures for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee subject to certain restrictions. The policy sets out the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit the Company's financial statements is not impaired. The pre-approval policy does not include a delegation to management of the Audit Committee’s responsibilities under the Exchange Act. During fiscal year ended September 30, 2012, the Audit Committee pre-approved all audit and permissible non-audit services provided by our independent auditors.

Service Fees Paid to the Independent Registered Public Accounting Firm
 
The Audit Committee engaged Madsen & Associates CPA’s, Inc. to perform an annual audit of the Company’s financial statements for the fiscal years ended September 30, 2011, 2010 and 2009. The following is the breakdown of aggregate fees paid to the auditors for the Company for the last three fiscal years:
 
   
Year Ended
   
Year Ended
   
Year Ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2010
 
Audit fees
  $ 23,085     $ 47,972     $ 7,070  
Audit related fees
    7,830       10,505       7,310  
Tax fees
    7,000       3,300       350  
All other fees
    -       -       35,842  
                         
    $ 37,915     $ 61,777     $ 50,572  
 

 
32

 

- “Audit Fees” are fees paid for professional services for the audit of our financial statements.

- “Audit-Related fees” are fees billed by Madsen & Associates CPA’s, Inc. to us for services not included in the first two categories, specifically, SAS 100 reviews, SEC filings and consents, and accounting consultations on matters addressed during the audit or interim reviews, and review work related to quarterly filings.

- “Tax Fees” are fees primarily for tax compliance in connection with filing US income tax returns.

- “All other fees for 2010 related to the acquisition audit of TransTech Systems, Inc. as of June 8, 2010. The audit was completed by Madsen & Associates CPA’s.

SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
The Company’s executive officers, directors and 10% stockholders are required under Section 16(a) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Copies of these reports must also be furnished to the Company.

Based solely on a review of copies of reports furnished to the Company, or written representations that no reports were required, the Company believes that during the fiscal year ended September 30, 2012 its executive officers, directors and 10% holders complied with all filing requirements, with the following possible exceptions:

 
1.
A Form 4/A for Yoshitami Arai dated February 27, 2012 and required to be filed on February 29, 2012 was filed on March 5, 2012.
 
2.
A Schedule 13D for Bradley E. Sparks dated September 6, 2012 and required to be filed on September 12, 2012 has not been filed.









































 
33

 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) FINANCIAL STATEMENTS:

Our financial statements, as indicated by the Index to Consolidated Financial Statements set forth below, begin on page F-1 of this Form 10-K, and are hereby incorporated by reference. Financial statement schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Title of Document
 
Page
     
Report of PMB Helin Donovan, LLP
 
F-1
     
Report of Madsen & Associates, CPA’s Inc.
 
F-2
     
Consolidated Balance Sheets as of September 30, 2012 and 2011
 
F-3
     
Consolidated Statements of Operations for the years ended September 30, 2012 and 2011
 
F-4
     
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended September 30, 2012 and 2011
 
F-5
     
Consolidated Statements of Cash Flows for the years ended September 30, 2012 and 2011
 
F-6
     
Notes to the Financial Statements
 
F-7

 
(b)
Exhibits
 
NO. 
EXHIBIT DESCRIPTION
   
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, File No. 000-30262, and incorporated herein by reference.
   
3.2
Certificate of Amendment to Articles of Incorporation for Nevada Profit Corporations dated August 18, 2004. Filed as an exhibit to Form 10-Q dated June 30, 2012 and filed with the SEC on May 1, 2012, and incorporated by reference.
   
3.3
Bylaws incorporated herein by reference to the Company's Registration Statement on Form 10-SB filed on March 11, 1999, File No. 000-25541.
   
3.4
Amended and Restated Bylaws. Filed as an exhibit to the Company’s Form 8-K dated August 10, 2012 and filed with the SEC on August 17, 2012, and incorporated by reference.
   
4.1
Visualant, Inc. 2011 Stock Incentive Plan filed as an exhibit to the Company’s Definitive Proxy Statement on Schedule 14A  filed on January 31, 2011, File No. 000-30262-11560322, and incorporated herein by reference.
   
10.1
Securities Purchase Agreement dated May 19, 2011 by and between Visualant, Inc. and Gemini Master Fund Ltd and Ascendiant Capital Partners, LLC. Filed herewith.
   
10.2
Registration Rights Agreement dated May 19, 2011 by and between Visualant, Inc. and Gemini Master Fund Ltd and Ascendiant Capital Partners, LLC. Filed herewith.
   
10.3
Convertible Debenture dated May 19, 2011 by and between Visualant, Inc. and Gemini Master Fund Ltd. Filed herewith.
 
 
10.4
Convertible Debenture dated May 19, 2011 by and between Visualant, Inc. and Ascendiant Capital Partners, LLC. Filed herewith.
 
 
 
34

 
 
 
10.5
Warrant dated May 19, 2011 by and between Visualant, Inc. and Gemini Master Fund Ltd. Filed herewith.
   
10.6
Warrant dated May 19, 2011 by and between Visualant, Inc. and Ascendiant Capital Markets LLC. Filed herewith.
   
10.7
Warrant dated May 19, 2011 by and between Visualant, Inc. and Ascendiant Capital Markets LLC. Filed herewith.
   
10.8
Extension Agreement dated March 12, 2012 by and between Visualant, Inc. and Gemini Master Fund Ltd and Ascendiant Capital Partners, LLC. Filed herewith.
   
10.9
Second Amendment to Securities Purchase Agreement and Debentures dated August16 , 2012 by and between Visualant, Inc. and Gemini Master Fund Ltd and Ascendiant Capital Partners, LLC. Filed herewith.
   
10.10
Warrant Purchase Agreement dated August 28, 2012 by and between Visualant, Inc. and Gemini Master Fund Ltd. Filed herewith.
   
10.11
Memorandum of Understanding dated November 9, 2011 by and between Visualant, Inc. and Susan Winston Diamond Marketing Group. Attached as an exhibit to the Company’s Form 8-K dated November 9, 2011 and filed with the SEC on November 14, 2011, and incorporated by reference.
   
10.12
Letter of Intent dated February 14, 2012 by and between Visualant, Inc. and Javelin LLC. Filed as an exhibit to Form 10-Q dated June 30, 2012 and filed with the SEC on May 1, 2012, and incorporated by reference.
 
10.13
License Agreement dated May 31, 2012 by and between Visualant, Inc. and Sumitomo Precision Products Co., Ltd. Filed as an exhibit to the Company’s Form 8-K dated May 31, 2012 and filed with the SEC on June 4, 2012, and incorporated by reference.
   
10.14
Joint Research and Product Development Agreement dated May 31, 2012 by and between Visualant, Inc. and Sumitomo Precision Products Co., Ltd. Filed as an exhibit to the Company’s Form 8-K dated May 31, 2012 and filed with the SEC on June 4, 2012, and incorporated by reference.
   
10.15
Stock Purchase Agreement dated May 31, 2012 by and between Visualant, Inc. and Sumitomo Precision Products Co., Ltd. Filed as an exhibit to the Company’s Form 8-K dated May 31, 2012 and filed with the SEC on June 4, 2012, and incorporated by reference.
   
10.16
Asset Purchase Agreement dated July 31, 2012 by and between Visualant, Inc. and the Javelin LLC. Attached as an exhibit to the Company’s Form 8-K dated July 31, 2012 and filed with the SEC on August 22, 2012, and incorporated by reference.
   
10.17
Business Development Agreement dated July 31, 2012 by and between Visualant, Inc. and Javelin LLC. Attached as an exhibit to the Company’s Form 8-K dated July 31, 2012 and filed with the SEC on August 22, 2012, and incorporated by reference.
   
10.18
Settlement and Release Agreement dated September 6, 2012 by and between Visualant, Inc. and Bradley E. Sparks. Attached as an exhibit to the Company’s Form 8-K dated September 6, 2012 and filed with the SEC on September 11, 2012, and incorporated by reference.
   
21.1
Subsidiaries of the Registrant. Filed as an exhibit to the Company’s Form 10-K dated September 30, 2012. Filed herewith.
   
31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
   
31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
   
32.1
Section 906 Certifications.
   
32.2
Section 906 Certifications.
   
 
 
 
35

 
 
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF XBRL Taxonomy Extension Definition Linkbase
   
101.LAB XBRL Taxonomy Extension Label Linkbase
   
101.PRE XBRL Extension Presentation Linkbase
   
99.1
TransTech Systems, Inc. audited consolidated financial statements as of and for the years ended December 31, 2009 and 2008, together with the Report of Independent Registered Public Accounting Firm. Filed as an exhibit to the Company’s Form 8-K/A dated June 8, 2010 and filed with the SEC on August 23, 2010 and March 7, 2012, respectively, and incorporated by reference.
   
99.2
The unaudited Pro Forma Combined Condensed Consolidated Balance Sheet of the Company as of September 30, 2009 and TransTech as of December 31, 2009 and the unaudited Pro Forma Condensed Consolidated Statement of Operations of the Company and TransTech for the twelve months ended September 30, 2009 and December 31, 2009, respectively. Filed as an exhibit to the Company’s Form 8-K/A dated June 8, 2010 and filed with the SEC on August 23, 2010 and March 7, 2012, respectively, and incorporated by reference.
   
99.3
The unaudited Pro Forma Condensed Consolidated Statement of Operations of the Company and TransTech for the nine months ended June 30, 2010. The unaudited Consolidated Balance Sheet of the Company as of June 30, 2010 is consolidated with TransTech and is included in the Company’s Form 10-Q dated June 30, 2010 and filed with the SEC on August 12, 2010 and March 7, 2012, respectively, and incorporated by reference.
 


 
 










 




















 
36

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Visualant, Inc.:
 
We have audited the accompanying balance sheets of Visualant, Inc. (the “Company”) as of September 30, 2012 and the related statements of operations, stockholders’ equity (deficit), and cash flows for the year ended September 30, 2012.  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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also 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 financial statement 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, Inc. as of September 30, 2012, and the results of its operations and its cash flows for the year ended September 30, 2012, in conformity with generally accepted accounting principles in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has sustained a net loss from operations and has an accumulated deficit since inception.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in this regard are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  
 
PMB Helin Donovan, LLP
 
/s/ PMB Helin Donovan, LLP
 
November 10, 2012
Seattle, Washington


 
 
 
 
 
 
 
 
 
 


 
F-1

 

MADSEN & ASSOCIATES CPA’S, INC.
Certified Public Accountants and Business Consultants  
 684 East Vine St.  #3
Murray, Utah 84107
Telephone 801-268-2632
 
Board of Directors
Visualant, Incorporated and Subsidiaries
Seattle, Washington

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying balance sheets of Visualant, Incorporated and subsidiaries. as of September 30, 2011 and the related statements of operations, stockholders' equity, and cash flows for the year ended September 30, 2011. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 financial statement presentation. We believe that our audits provide 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 and subsidiaries as of September 30, 2011 and the results of operations, and cash flows the year September 30, 2011, 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/s Madsen & Associates CPA’s, Inc.
Madsen & Associates CPA’s, Inc., Salt Lake City, Utah,
November 29, 2011



















 
F-2

 
 
 
VISUALANT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
September 30, 2012
   
September 30, 2011
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 1,141,165     $ 92,313  
Accounts receivable, net of allowance of $16,750 and $16,750, respectively
    1,012,697       823,724  
Prepaid expenses
    222,978       283,204  
Inventories
    344,692       454,588  
Refundable tax assets
    29,316       9,080  
Total current assets
    2,750,848       1,662,909  
                 
EQUIPMENT, NET
    469,001       522,668  
                 
OTHER ASSETS
               
Intangible assets, net
    1,110,111       1,143,090  
Goodwill
    983,645       983,645  
Other assets
    6,161       1,091  
                 
TOTAL ASSETS
  $ 5,319,766     $ 4,313,403  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES:
               
Accounts payable - trade
  $ 1,593,861     $ 1,206,100  
Accounts payable - related parties
    73,737       8,093  
Accrued expenses
    391,311       155,267  
Accrued expenses - related parties
    5,849       783,732  
Deferred revenue
    666,667       -  
Convertible notes payable
    750,000       1,175,000  
Note payable - current portion of long term debt
    1,631,903       1,537,191  
Total current liabilities
    5,113,328       4,865,383  
                 
LONG TERM  LIABILITIES:
               
Long term debt
    4,015       1,014,582  
                 
STOCKHOLDERS' EQUITY (DEFICIT):
               
Preferred stock - $0.001 par value, 50,000,000 shares authorized, no shares
               
 issued and outstanding
    -       -  
Common stock - $0.001 par value, 200,000,000 shares authorized, 90,992,954
               
and 49,065,669 shares issued and outstanding at 9/30/12 and 9/30/11, respectively
    90,993       49,066  
Additional paid in capital
    13,995,554       9,524,577  
Accumulated deficit
    (13,915,931 )     (11,184,033 )
Total stockholders' equity (deficit)
    170,616       (1,610,390 )
Noncontrolling interest
    31,807       43,828  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  $ 5,319,766     $ 4,313,403  
 
The accompanying notes are an integral part of these consolidated financial statements.

 

 
F-3

 

VISUALANT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Year Ended,
 
   
September 30, 2012
   
September 30, 2011
 
             
REVENUE
  $ 7,923,976     $ 9,136,216  
COST OF SALES
    6,344,247       7,570,006  
GROSS PROFIT
    1,579,729       1,566,209  
RESEARCH AND DEVELOPMENT EXPENSES
    176,944       133,941  
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    3,624,711       3,691,760  
OPERATING LOSS
    (2,221,926 )     (2,259,491 )
                 
OTHER INCOME (EXPENSE):
               
Interest expense
    (463,735 )     (212,571 )
Loss on purchase of outstanding warrants
    (500,000 )     -  
Gain on extinguishment of debt
    394,057       -  
Other income
    36,597       67,458  
Total other expense
    (533,081 )     (145,113 )
                 
LOSS BEFORE INCOME TAXES
    (2,755,007 )     (2,404,604 )
                 
Income taxes - current benefit
    (29,315 )     (9,080 )
                 
NET LOSS
    (2,725,692 )     (2,395,524 )
                 
NONCONTROLLING INTEREST
    6,206       14,231  
                 
NET LOSS ATTRIBUTABLE TO VISUALANT, INC. AND SUBSIDIARIES COMMON SHAREHOLDERS
  $ (2,731,898 )   $ (2,409,756 )
                 
Basic and diluted loss per common share  attributable to Visualant, Inc. and subsidiaries common shareholders-
               
Basic and diluted loss per share
  $ (0.04 )   $ (0.06 )
                 
Weighted average shares of common stock outstanding- basic and diluted
    65,557,376       42,682,795  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 








 
F-4

 

VISUALANT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
 
                           
Total
 
                Additional  
 
   
Stockholders'
 
   
Common Stock
   
Paid in
   
Accumulated
   
Equity
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
(Deficit)
 
Balance as of September 30, 2010
    38,229,374     $ 38,229     $ 6,835,647     $ (8,774,277 )   $ (1,900,401 )
                                         
Stock compensation expense - employee options
    -