UNITED STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





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





For the quarterly period ended March 31, 2011








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





For the transition period from _______ to ________





Commission File number               000-30262








VISUALANT, INCORPORATED





(Exact name of registrant as specified in charter)








Nevada
91-1948357(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)500 Union Street, Suite 406, Seattle, Washington USA
98101(Address of principal executive offices)
(Zip Code)








206-903-1351(Registrant's telephone number, including area code)N/A(Former name, address, and fiscal year, if changed since last report)








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o





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





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





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





The number of shares of common stock, $.001 par value, issued and outstanding as of May 4, 2011: 44,143,001 shares














1


TABLE OF CONTENTSPage NumberPART I
FINANCIAL INFORMATION
3ITEM 1
Financial Statements (unaudited except as noted)
3Consolidated Balance Sheets as of March 31, 2011 and September 30, 2010 (audited)
3Consolidated Statements of Operations For the three and six months ended March 31, 2011 and 2010
4Consolidated Statements of Cash Flows For the six months ended March 31, 2011 and 2010
5Notes to the Financial Statements.
6ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operation
18ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
22ITEM 4
Controls and Procedures
22PART II
OTHER INFORMATION
23ITEM 1A.
Risk Factors
23ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
25ITEM 6
Exhibits and Reports on Form 8-K
26SIGNATURES
27



























































2





PART I - FINANCIAL INFORMATION





ITEM 1.
FINANCIAL STATEMENTS





VISUALANT, INCORPORATED AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMarch 31, 2011


September 30, 2010ASSETS

(unaudited)


(audited)CURRENT ASSETS:Cash and cash equivalents

$
1,025,485


$
83,937Accounts receivable, net of allowance of $16,750 and $16,750, respectively


641,538



883,567Prepaid expenses


104,650



54,386Inventories


502,240



622,770Refundable tax assets


6,172



8,581Total current assets


2,280,085



1,653,241EQUIPMENT, NET


549,080



588,060OTHER ASSETSIntangible assets, net


819,704



918,069Goodwill


983,645



983,645Investment in Novabeam, Inc.


50



50Other assets


1,091



1,091TOTAL ASSETS

$
4,633,655


$
4,144,156LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIES:Accounts payable - trade

$
2,173,517


$
1,432,074Accounts payable - related parties


25,917



149,932Accrued expenses


254,077



169,364Accrued expenses - related parties


775,886



766,284Convertible notes payable, net of debt discount of $11,153 at 9/30/10


350,000



288,847Note payable - current portion of long term debt


883,097



1,513,495Total current liabilities


4,462,494



4,319,996LONG TERM  LIABILITIES:Long term debt


1,670,014



1,675,978STOCKHOLDERS' DEFICIT:Preferred stock - $0.001 par value, 50,000,000 shares authorized, no sharesissued and outstanding


-



-Common stock - $0.001 par value, 200,000,000 shares authorized, 41,461,790and 38,229,374 shares issued and outstanding at 3/31/11 and 9/30/10, respectively


41,462



38,229Additional paid in capital


7,965,994



6,835,647Accumulated deficit


(9,554,048
)


(8,774,277
)Total stockholders' deficit


(1,546,592
)


(1,900,401
)Noncontrolling interest


47,739



48,583TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
4,633,655


$
4,144,156





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








3







VISUALANT, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSThree Months Ended,


Six Months Ended,March 31, 2011


March 31, 2010


March 31, 2011


March 31, 2010(unaudited)


(unaudited)


(unaudited)


(unaudited)REVENUE

$
2,866,289


$
-


$
4,934,154


$
-COST OF SALES


2,521,396



-



4,176,056



-GROSS PROFIT


344,893



-



758,097



-RESEARCH AND DEVELOPMENT EXPENSES


6,000



24,000



12,000



47,500SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


831,379



181,494



1,477,830



331,569OPERATING LOSS


(492,486
)


(205,494
)


(731,733
)


(379,069
)OTHER INCOME (EXPENSE):Interest expense


(40,973
)


(25,622
)


(101,726
)


(37,685
)Other income


14,384



-



55,252



-Total other expense


(26,589
)


(25,622
)


(46,474
)


(37,685
)LOSS BEFORE INCOME TAXES


(519,075
)


(231,116
)


(778,207
)


(416,754
)Income taxes - current benefit


(5,163
)


-



(6,172
)


-NET LOSS


(513,912
)


(231,116
)


(772,036
)


(416,754
)NONCONTROLLING INTEREST


6,089



-



7,737



-NET LOSS ATTRIBUTABLE TO VISUALANT, INC. AND SUBSIDIARIES COMMON SHAREHOLDERS

$
(520,001
)

$
(231,116
)

$
(779,773
)

$
(416,754
)Basic and diluted loss per common share  attributable to Visualant, Inc. and subsidiaries common shareholders-Basic and diluted loss per share

$
(0.01
)

$
(0.01
)

$
(0.02
)

$
(0.01
)Weighted average shares of common stock outstanding- basic and diluted


39,662,497



29,862,707



38,946,072



29,537,024


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

















4







VISUALANT, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSSix Months Ended,March 31, 2011


March 31, 2010(unaudited)


(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(779,773
)

$
(416,754
)Adjustments to reconcile net loss to net cash(used in) operating activitiesDepreciation and amortization


149,997



-Issuance of capital stock and warrants for services and expenses


530,827



49,000Stock based compensation


3,901



70,607Amortization of debt discount


-



18,378Loss on sale of assets


(2,671
)


-Changes in operating assets and liabilities:Accounts receivable


242,030



-Prepaid expenses


(50,265
)


(2,083
)Inventory


120,530



-Other assets


2,409



-Minority interest


(843
)Accounts payable - trade and accrued expenses


711,746



135,844CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES


927,888



(145,008
)CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures


(7,129
)


-Proceeds from sale of equipment


8,299



-NET CASH (USED IN) INVESTING ACTIVITIES:


1,170



-CASH FLOWS FROM FINANCING ACTIVITIES:Payments on line of credit


(642,462
)


-Proceeds from notes payable


22,479



-Proceeds from the issuance of common stock


548,852



-Repayments of capital leases


(16,379
)


-Proceeds from the issuance of convertible debt


100,000



250,000NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES


12,490



250,000NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


941,548



104,992CASH AND CASH EQUIVALENTS, beginning of period


83,937



5,325CASH AND CASH EQUIVALENTS, end of period

$
1,025,485


$
110,317Supplemental disclosures of cash flow information:Interest paid

$
27,441


$
-Taxes paid

$
-


$
-Non-cash investing and financing activities:Issuance of warrants in connection with convertible debt

$
-


$
61,336Debt converted to common stock

$
50,000


$
-





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




















5


VISUALANT, INCORPORATED AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.
ORGANIZATION





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





The Company closed the acquisition of TransTech Systems, Inc. (“TransTech”) of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011. As of June 8, 2010, the Company is no longer in the development stage.





This acquisition is expected to accelerate market entry and penetration through the acquisition of well-operated and positioned distributors of security and authentication systems like TransTech, thus creating a natural distribution channel for products featuring our proprietary Spectrum Pattern Matching (“SPM”) technology.





The accompanying unaudited consolidated financial statements of the Company and our subsidiaries have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements for the periods ended March 31, 2011 and 2010 are unaudited and include all adjustments necessary to a fair statement of the results of operations for the periods then ended. All such adjustments are of a normal, recurring nature. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for a full fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 as filed with the Securities and Exchange Commission (the “SEC”) on December 30, 2010.





2.
GOING CONCERN





The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses of $1,148,920 and $950,609 for the years ended September 30, 2010 and 2009, respectively. Our current liabilities exceeded our current assets by approximately $2.2 million as of March 31, 2011.  Our net cash used in operating activities was $440,968 for the year ended September 30, 2010.





As of March 31, 2011, the Company had $1,025,485 in cash. The Company needs to obtain additional financing to implement the business plan, service our debt repayments and acquire new businesses..  However, there can be no assurance that financing or additional funding will be available to the Company on favorable terms or at all. If the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders.





The Company anticipates that it will record losses from operations for the foreseeable future. As of March 31, 2011, our accumulated deficit was $9.6 million.  The Company has limited capital resources, and operations to date have been funded with the proceeds from private equity and debt financings. These conditions raise substantial doubt about our ability to continue as a going concern. The audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended September 30, 2010 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.





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





3.
SIGNIFICANT ACCOUNTING POLICIES: ADOPTION OF ACCOUNTING STANDARDS





PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Inter-Company items and transactions have been eliminated in consolidation.





CASH AND CASH EQUIVALENTS - The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.





ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable consists primarily of amounts due to the Company from normal business activities. The Company maintains an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific risks identified within the portfolio. If the financial condition of the customers were to deteriorate resulting in an impairment of their ability to make payments, or if payments from customers are significantly delayed, additional allowances might be required.


6





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.  The company records a provision for excess and obsolete inventory whenever an impairment has been identified. There is no provision for impaired inventory as of March 31, 2011.





EQUIPMENT - Equipment consists of machinery, leasehold improvements, furniture and fixtures and software, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 3-10 years, except for leasehold improvements which are depreciated over 20 years.





INTANGIBLE ASSETS / INTELLECTUAL PROPERTY - The Company amortizes the intangible assets and intellectual property acquired in connection with the acquisition of TransTech, over thirty-six months on a straight - line basis, which was the time frame that the management of the Company was able to project forward for future revenue, either under agreement or through expected continued business activities.





GOODWILL – Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. With the adoption of ASC 350, goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but are combined when reporting units within the same segment have similar economic characteristics. Under the criteria set forth by ASC 350, the Company has one reporting unit based on the current structure.  An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit.  The Company performs annual assessments and has determined that no impairment is necessary.





LONG-LIVED ASSETS - The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.





FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has adopted FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, for assets and liabilities measured at fair value on a recurring basis. Topic 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, Topic 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:





Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities.Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market dataLevel 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.





All cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable as of March 31, 2011. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.





The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, accounts payable, taxes payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments. The Company’s notes payable approximates the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for a similar financial arrangement at March 31, 2011.





In addition, Topic 820 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value option for any of its qualifying financial instruments.


7


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 Company recorded deferred revenue of $0 as of March 31, 2011 and September 30, 2010, respectively.





ADVERTISING COSTS - Advertising costs are expensed as incurred. Such costs generally consist of major industry trade shows cooperatively with vendors and some advertising in industry publications.   Advertising costs were insignificant during the six months ended March 31, 2011 and 2010.





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





INCOME TAXES - Income tax benefit is based on reported loss before income taxes. Deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws where that company operates out of. The Company recognizes refundable and deferred assets to the extent that management has determined their realization. As of March 31, 2011 and September 30, 2010, the Company had refundable tax assets related to TransTech of $6,172 and $8,581, respectively.





NET LOSS PER SHARE – Under the provisions of ASC 260, “Earnings Per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. The common stock equivalents have not been included as they are anti-dilutive. As of March 31, 2011, there were options outstanding for the purchase of 4,955,000 common shares, warrants for the purchase of 833,333 common shares, 1,666,667 shares of common stock related to convertible debt, which could potentially dilute future earnings per share. As of March 31, 2010, there were options outstanding for the purchase of 1,310,000 common shares, warrants for the purchase of 833,333 common shares and 1,666,667 shares of common stock related to convertible debt which could potentially dilute future earnings per share.





DIVIDEND POLICY - The Company has never paid any cash dividends and intends, 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.





USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





RECLASSIFICATION - Certain reclassifications have been made to the Company’s financial statements for prior periods to conform to the current presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.





RECENT ACCOUNTING PRONOUNCEMENTS





Recent accounting pronouncements applicable to the Company are summarized below.





In April 2010,  the FASB issued  Accounting  Standard  Update  ("ASU")  2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based  Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial  position,  results of operations  or cash flows of the  Company. In March 2010, the FASB issued ASU No.2010-11, which is included in the Certification under ASC 815. This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements.  Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption.  This guidance became effective for the Company's interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on the Company's financial statements.


8





A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.





4.
DEVELOPMENT OF SPECTRUM PATTERN MATCHING TECHNOLOGY





The Company develops low-cost, high speed, light-based security and quality control solutions for use in homeland security, anti-counterfeiting, forgery/fraud prevention, brand protection and process control applications.  Its patent-pending technology uses controlled illumination with specific bands of light, to establish a unique spectral signature for both individual and classes of items.  When matched against existing databases, these spectral signatures allow precise identification and authentication of any item or substance.  This breakthrough optical sensing and data capture technology is called Spectral Pattern Matching (SPM). SPM technology can be miniaturized and is easily integrated into a variety of hand-held or fixed mount configurations, and can be combined in the same package as a bar-code or biometric scanner.





On October 23, 2008, the Company and RATLab entered into definitive agreements which provide for a non-commercial non-exclusive license of the Company’s technology to RATLab for the purpose of continuing research and development with a license back to the Company for enhancements that are developed.  Further, an exclusive license was entered into between the Company and RATLab for four fields of use:  medical, agricultural, environmental and jewelry.  This exclusive license provides for certain performance milestones, a market-rate royalty to the Company and an equity participation in an entity to be formed by RATLab to commercialize the Company’s technology in the enumerated fields of use.  In accordance with the definitive agreements, RATLab formed Novabeam, Inc.(“Novabeam”), an affiliate for purposes of commercializing the intellectual property, of which 10% was sold and transferred to the Company for $50.  Finally, in satisfaction of outstanding matters, a total of 1,850,000 shares of the Company’s common stock was issued, subject to certain restrictions, to current and former RATLab employees and consultants.





As of March 31, 2011, the Company had three family patent applications with the U.S. Patent Office and one patent pending in Japan. As of the report date, the Company has not received any notification from the U.S. Patent and Trademark Office as to whether any of the patents filed in 2007 will be granted.





LICENSE AGREEMENT WITH JAVELIN LLC (“Javelin”)





On January 3, 2011, the Company signed a Commercial License Agreement (“License Agreement”) with Seattle based Javelin for development of environmental diagnostic applications of its SPM technology.





The License Agreement, which is exclusive for environmental applications, is perpetual and lasts until the Visualant IP expires. It provides for payments of 5% of Javelin’s revenues, market-rate royalties of $15,000 in year one (which was prepaid) and increasing to $47,407 in year five and profit sharing of 25% of license or transfer of technology. Javelin has certain performance milestones by year 2 and 3. The License Agreement can be terminated by Visualant for failure of Javelin to meet the performance milestones and by Javelin with thirty days notice.





PROPOSED ACQUISITION OF RATLab LLC (“RATLab”)





On October 1, 2010, the Company signed a Letter of Intent to acquire all Visualant related assets of the RATLab.





The RATLab is a Seattle based research and development laboratory created by Dr. Tom Furness, founder and Director of the HITLab International, with labs at Seattle, University of Canterbury in New Zealand, and the University of Tasmania in Australia. Guided by Dr. Tom Furness and Dr. Brian Schowengerdt, a research scientist in the field of optics and vision science, who developed the Spectral Pattern Matching (“SPM”) technology under contract for Visualant.





With this acquisition, the Company will consolidate all intellectual property relating to the SPM technology.  In addition to its current authentication and security applications of SPM, the Company will now own all other applications including the important fields of medicine, agriculture, and the environment and begin the creation of the Visualant Laboratory.





Upon the closing of this asset acquisition transaction, Dr. Tom Furness and Dr. Brian Schowengerdt will continue to provide technology leadership to us, under terms that are still subject to negotiation.








9


The Company is proposing to acquire the Visualant related assets of the RATLab as follows:
 
 a.         One million shares (1,000,000) of our common stock at closing valued at twenty cents ($0.20) per share, the price during the negotiation of this agreement.





b.         Two hundred and fifty thousand dollars ($250,000), with one hundred thousand dollars ($100,000) payable at closing and one hundred and fifty thousand dollars ($150,000) to be paid no later than the first anniversary of closing.





c.         The outstanding promissory note owing to Tom Furness in the amount of $65,000 with accrued interest is to be paid at closing.  The interest is to be calculated on a 7% annualized basis beginning September 1, 2006.





On November 28, 2010 and January 31, 2011, the parties signed Extensions of the Letter of Intent. The acquisition is expected to close May 1, 2011.





PROPOSED ACQUISITION OF EAGLE TECHNOLOGIES USA (“Eagle”)





On January 24, 2011, the Company signed a Letter of Intent to acquire Eagle (www.eagletechnologiesusa.com) of Brea, California.





Eagle, founded by card industry leaders Greg and Ryan Hawkins and Jeff Fulmer in 2008, has rapidly emerged as the premier provider of blank PVC and polyester composite cards to the identification market.





With this acquisition, Visualant will continue with its strategic initiative to consolidate relevant security and authentication assets.  At the same time, Visualant will provide Eagle and its management the human and capital resources necessary to rapidly accelerate its growth.  Upon the closing of this acquisition, the Eagle team will continue to manage Eagle with full profit and loss responsibility.





Under the terms of the Letter of Intent, Eagle will be acquired for $1 million, consisting of 1.2 million shares of restricted VSUL common stock valued at $.4167 per share, the price during the period of the negotiations, and a promissory note in the amount of $500,000 payable as follows:





1)
$150,000 will be paid in cash to Seller on the earlier of the one-year anniversary of the closing date of the Acquisition or upon the closing of more than Two Million Five Hundred Thousand in financing.2)
$150,000 will be paid in cash to Seller on the earlier of the two-year anniversary of the closing date of the Acquisition or upon the closing of more than Five Million in aggregate financing since closing.3)
$200,000 on the earlier of the third anniversary of closing date of the Acquisition or upon the closing of more than Seven Million Five Hundred Thousand in aggregate financing since closing.





The promissory note is collateralized by the stock and assets of Eagle until paid in full. In addition, consideration will be provided post closing to the ownership and senior management in Eagle in form of the creation of a bonus pool.  The bonus pool will be comprised of one million shares of VSUL common stock which shall be escrowed at closing and released to Eagle ownership and management if they generate $4 million in cash flow positive gross revenues within two years of closing of this transaction. The shares shall be distributed at the sole discretion of the ownership and senior management of Eagle.





The letter of intent is subject to (i) approval of the acquisition by the Board of Visualant and Eagle; (ii) completion of due diligence; and, (iii) agreement to customary terms and conditions. On April 4, 2011, the Company signed an Extension to the Letter of Intent. The acquisition is expected to close by June 30, 2011.





5.
ACQUISITION OF TRANSTECH





The Company closed the acquisition of TransTech of Aurora, OR on June 8, 2010. On this date, the Company entered into a Stock Purchase, Security and Stock Pledge Agreements which are included as Exhibits to the Form 10-Q filed with the SEC on August 12, 2010.





TransTech, founded in 1994, is a distributor of access control and authentication systems serving the security and law enforcement markets.   With recorded revenues of $10 million in 2009, TransTech has a respected national reputation for outstanding product knowledge, sales and service excellence.





This acquisition is expected to accelerate market entry and penetration through the acquisition of well-operated and positioned distributors of security and authentication systems like TransTech, thus creating a natural distribution channel for products featuring the company’s proprietary SPM technology.





10


The Company acquired its 100% interest in TransTech by issuing a Promissory Note (“Note”) to James Gingo, the President of TransTech, in the amount of $2,300,000, plus interest at the rate of three and one-half percent (3.5%) per annum from the date of the Note. The Note is secured by a security interest in the stock and assets of TransTech, and is payable over a period of three (3) years as follows:





(i)        The sum of $650,000, the amount of any accrued interest due on the Bonderson debt of $600,000 owed by James Gingo to the Bonderson Family Living Trust (“Bonderson Debt”) and interest on the unpaid balance, shall be paid to Seller on the earlier of: (A) the one (1) year anniversary of the closing date; or (B) on the closing of $2,500,000 or more in aggregate financing (whether debt, equity or some combination thereof) after the closing date;





(ii)       The sum of $650,000, the amount of any accrued interest due on the Bonderson debt owed by James Gingo and interest on the unpaid balance shall be paid to Seller on the earlier of: (A) the two (2) year anniversary of the closing date; or (B) on the closing of $5,000,000 or more in aggregate financing (whether debt, equity or some combination thereof) after the closing date; and





(iii)      The remaining balance of the Note and interest thereon shall be paid to Seller on the earlier of: (A) the three year anniversary of the closing date; or (B) on the closing of $7,500,000 or more in aggregate financing (whether debt, equity or some combination thereof) after the closing date.





On June 8, 2010, the Company issued a total of 3,800,000 shares of restricted common stock of the Company to James Gingo, Jeff Kruse and Steve Waddle, executives of TransTech, and Paul Bonderson, a TransTech investor.  The parties valued the shares in this transaction at $76,000 or $0.02 per share, the closing bid price during negotiations.





The cost to acquire these assets has been preliminarily allocated to the assets acquired according to estimated fair values and is subject to adjustment when additional information concerning asset valuations is finalized, but no later than June 8, 2011. The preliminary allocation is as follows:





Purchace price-Common stock

$
76,000Notes payable


2,300,000Accounts receivable, net


(755,836
)Inventories


(444,105
)Equipment, net


(590,955
)Other assets


(141,870
)Accounts payable - trade


921,183Notes payable - current portion of long term debt


499,680Other liabilities


103,193Total purchase price

$
1,967,290Portion allocated to identifiable intangible assets

$
983,645Portion allocated to goodwill


983,645Total

$
1,967,290





The results of operations of TransTech were included in the Consolidated Statements of Operations for the period June 9, 2010 to March 31, 2011.





6.
ACCOUNTS RECEIVABLE/CUSTOMER CONCENTRATION





Accounts receivable were $641,538 and $883,567, net of allowance, as of March 31, 2011 and September 30, 2010, respectively. The Company had two customers in excess of 10% (23% and 12%) of our consolidated revenues for the six months ended March 31, 2011. The Company has no customers with accounts receivable in excess of 10% as of March 31, 2011. The Company does expect to have customers with consolidated revenues or accounts receivable balances of 10% of total accounts receivable in the foreseeable future.





7.
INVENTORIES





Inventories were $502,240 and $622,770 as of March 31, 2011 and September 30, 2010, respectively. Inventories consist primarily of printers and consumable supplies, including ribbons and cards, badge accessories, capture devices, and access control components held for resale. There is no provision for impaired inventory as of March 31, 2011 and September 30, 2010.


11


8.
FIXED ASSETS





Fixed assets, net of accumulated depreciation, was $549,080 and $588,060 as of March 31, 2011 and September 30, 2010, respectively. Accumulated depreciation was $518,738 and $599,784 as of March 31, 2011 and September 30, 2010, respectively. Total depreciation expense was $40,479 and $0 for the six months ended March 31, 2011 and 2010, respectively. All equipment is used for selling, general and administrative purposes and accordingly all depreciation is classified in selling, general and administrative expenses





Property and equipment as of March 31, 2011 was comprised of the following:





Estimated

March 31, 2011Useful Lives

Purchased


Capital Leases


TotalMachinery and equipment
3-10 years

$
124,882


$
87,039


$
211,921Leasehold improvements
20 years


600,000



-



600,000Furniture and fixtures
3-10 years


45,676



101,260



146,936Software and websites
3- 7 years


64,112



44,849



108,961Less: accumulated depreciation



(350,028
)


(168,710
)


(518,738
)$
484,642


$
64,438


$
549,080





Property and equipment as of September 30, 2010 was comprised of the following:


Estimated

September 30, 2010Useful Lives

Purchased


Capital Leases


TotalMachinery and equipment
3-10 years

$
211,131


$
87,038


$
298,169Leasehold improvements
20 years


600,000



-



600,000Furniture and fixtures
3-10 years


71,758



101,260



173,018Software and websites
3- 7 years


69,403



47,254



116,657Less: accumulated depreciation



(442,977
)


(156,807
)


(599,784
)$
509,315


$
78,745


$
588,060




9.
INTANGIBLE ASSETS





Intangible assets as of March 31, 2011 and September 30, 2010 consisted of the following:


Estimated

March 31,


September 30,Useful Lives

2010


2010Customer contracts
5 years

$
983,645


$
983,645Less: accumulated amortization



(163,941
)


(65,576
)Intangible assets, net


$
819,704


$
918,069
 Total amortization expense was $98,365 and $0 for the three months ended March 31, 2011 and 2010, respectively.





The fair value of the TransTech intellectual property acquired was $983,645, estimated by using a discounted cash flow approach based on future economic benefits associated with agreements with customers, or through expected continued business activities with its customers. In summary, the estimate was based on a projected income approach and related discounted cash flows over five years, with applicable risk factors assigned to assumptions in the forecasted results.


12


10.
ACCOUNTS PAYABLE
 
 Accounts payable were $2,173,518 and $1,432,074 as of March 31, 2011 and September 30, 2010, respectively. Such liabilities consisted of amounts due to vendors for inventory purchases and technology development, external audit, legal and other expenses incurred by the Company.





11.
CONVERTIBLE NOTES PAYABLE





On December 7, 2009, the Company obtained $250,000 of financing from Coach Capital (“Coach”) pursuant to a Convertible Promissory Note. Interest accrues at 8% and the $250,000 may be converted into common stock on November 27, 2010 at $0.15 per share or 1,666,667 shares.  This financing placed certain restrictions on the Company In addition, Coach received warrants to purchase 833,333 shares of the Company’s common stock at $0.15 per share.  The warrant expires 3 years from the date of issuance. On April 1, 2011, Coach converted $250,000 and interest of $28,758 into 1,858,387 shares of common stock.





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





On July 14, 2010, November 9, 2010 and January 3, 2011 the Company obtained $50,000 of financing from Asher Enterprises, Inc. (“Asher”) pursuant to a Securities Purchase Agreement and Convertible Promissory Note. Interest is accrued at 8% and the $50,000 is convertible into restricted common stock on or before April 19, 2011, August 11, 2011and September 30, 2011 at Asher’s request at a 39% discount to the three lowest close bid prices during the ten days prior to conversion.   This financing places certain restrictions on the Company. The Company expensed $1,518 during the six months ended March 31, 2011.  On February 14 and 17, 2011, Asher converted $50,000 into 173,378 shares of common stock at $.2884 per share.





12.
NOTES PAYABLE, CAPITALIZED LEASES AND LONG TERM DEBT





Notes payable, capitalized leases and long term debt as of March 31, 2011 and September 30, 2010 consisted of the following:





BFI Finance Corp Secured Credit Facility





On December 9, 2008 TransTech entered into a $1,000,000 secured credit facility with BFI Finance Corp to fund its operations.  The rate is prime interest + 2.5%, with a floor for prime interest of 5.5%.  On December 12, 2010, the secured credit facility was renewed for 6 months, with a floor for Prime of 4.5%. The eligible borrowing is based on 80% of eligible trade accounts receivable, not to exceed $700,000, and 35% of inventory value, not to exceed $300,000, for a total cap of $1,000,000. As of March 31, 2011, the outstanding balance under this facility was $873. The secured credit facility is guaranteed by James Gingo, the President of TransTech.





Capitalized Leases





TransTech has capitalized leases for equipment. The leases have a remaining lease term of 1-55 months. The aggregate future minimum lease payments under capital leases, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:




Years Ended March 31,

Total2012

$
18,0442013


15,4902014


8,3342015


3,3122016


1,104Total


46,284Less current portion of capitalized leases


(8,226
)Long term capital leases

$
38,058




The imputed interest rate in the capitalized leases is approximately 10.5%.





13




Related Party Notes Payable




The Company acquired its 100% interest in TransTech by issuing a Promissory Note (“Note”) to James Gingo, the President of TransTech, in the amount of $2,300,000, plus interest at the rate of three and one-half percent (3.5%) per annum from the date of the Note. The Note is secured by a security interest in the stock and assets of TransTech, and is payable over a period of three (3)years as follows:





(i)        The sum of $650,000, the amount of any accrued interest due on the Bonderson debt of $600,000 owed by James Gingo to the Bonderson Family Living Trust (“Bonderson Debt”) and interest on the unpaid balance, shall be paid to Seller on the earlier of: (A) the one (1) year anniversary of the closing date; or (B) on the closing of $2,500,000 or more in aggregate financing (whether debt, equity or some combination thereof) after the closing date.





(ii)       The sum of $650,000, the amount of any accrued interest due on the Bonderson debt owed by James Gingo and interest on the unpaid balance shall be paid to Seller on the earlier of: (A) the two (2) year anniversary of the closing date; or (B) on the closing of $5,000,000 or more in aggregate financing (whether debt, equity or some combination thereof) after the closing date; and





(iii)      The remaining balance of the Note and interest thereon shall be paid to Seller on the earlier of: (A) the three year anniversary of the closing date; or (B) on the closing of $7,500,000 or more in aggregate financing (whether debt, equity or some combination thereof) after the closing date.





On February 27, 2007, the Company entered into a demand note with former CEO and President, Bradley E. Sparks totaling $50,000 plus loan fees of $750.  As of March 31, 2011, the outstanding note payable totaled $50,750 consisting of the note payable to Mr. Sparks.  Interest expense accrues on the note at a rate of 18% per annum.  Accrued interest of $37,566 as of March 31, 2011 on the note payable is recorded in the balance sheet in accrued expenses and other liabilities.





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





On September 30, 2009, the Company entered into a second demand note with former CEO and President, Bradley E. Sparks totaling $22,478.  As of March 31, 2011, the outstanding note payable totaled $22,478 consisting of the note payable to Mr. Sparks.  Interest expense accrues on the note at a rate of 8% per annum.  Accrued interest of $2,695 as of March 31, 2011 on the notes payable is recorded in the balance sheet in accrued expenses and other liabilities.





On April 30, 2009, accounts payable owed to Lynn Felsinger, a consultant, totaling $82,000 was converted into a demand note. Ms. Felsinger has not demanded repayment of the note as of the date of this filing.





Mr. Ronald Erickson, our Chief Executive Officer, converted outstanding debt with accrued interest in the amount of $152,971 into 1,019,806 shares of common stock of the Company valued at $0.15 per share on March 27, 2009. In addition, an affiliate of Mr. Erickson’s, JulizI Limited Partnership, loaned the Company operating funds during fiscal 2009.  The balance outstanding at March 31, 2011 is $34,630 plus interest of $6,239.  Additionally, Mr. Erickson incurred expenses on behalf of the Company for a total of $24,322 during the 2009 fiscal year.  This balance was converted into a loan as of September 30, 2009 which bears interest at 8%.  Accrued interest was $2,916 as of March 31, 2011.





Aggregate maturities for notes payable, capitalized leases and long term debt by year are as follows:





Years Ended March 31,

Total2012

$
883,0972013


662,7372014


1,003,6462015


2,7232016


908Total

$
2,553,111




13.
EQUITY





The following equity issuances occurred during the six months ended March 31, 2011 and for the period subsequent to March 31, 2011.





On November 17, 2010, the Company issued 20,000 shares of restricted shares of the Company’s common stock to Robert Jones for advisory services. The shares were valued at $.24 per share, the closing price on November 17, 2010.


14





On December 23, 2010, the Company entered into a Securities Purchase Agreement (“Agreement”) with Seaside pursuant to which Seaside agreed to purchase restricted shares of the Company’s common stock from time to time over a 12-month period, provided that certain conditions are met.





Under the terms of the Agreement, the Company has the right to sell and issue to Seaside restricted shares of the Company’s common stock over a 12-month period commencing on the closing date. Visualant will be entitled to sell shares each month during the following 12 months, subject to certain conditions and limitations.  With respect to each subsequent closing, Visualant will not be obligated to sell any of its common stock to Seaside at a price lower than $0.25 per share, and Seaside’s beneficial ownership of the Company’s common stock will not exceed 4.99%. Seaside is not permitted to short sale the Company’s common stock.





Visualant paid Seaside’s legal fees and expenses in the amount of $25,000 for the initial closing, and agreed to pay $2,500 for each subsequent closing.  Visualant also has agreed to pay 7.0% in finder’s fees to brokers (to be paid in connection with each draw down) and issue common stock warrants.





The Agreement may be terminated by Seaside (i) upon written notice to the Company if the initial closing has not been consummated on or before December 31,2010; or (ii) upon written notice to the Company, if at any time prior to the final subsequent closing the Company consummates a financing to which Seaside is not a party.





The Agreement also contains certain representations and warranties of Visualant and Seaside, including customary investment-related representations provided by Seaside, as well as acknowledgements by Seaside that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Company’s issuance of the shares has not been registered with the SEC or qualified under any state securities laws.  Visualant provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations.  Seaside’s representations and warranties are qualified in their entirety (to the extent applicable) by the Company’s disclosures in the reports it files with the SEC.  Visualant also delivered confidential disclosure schedules qualifying certain of its representations and warranties in connection with executing and delivering the Agreement.





As of March 31, 2011, the Company sold to Seaside 1,829,314 restricted shares at a purchase price of $.303 per share, or an aggregate price of $553,860. In addition, the Company issued warrants for the purchase of 128,050 shares of common shares at the purchase price of $.303 per share.





As of May 4, 2011, the Company sold to Seaside 2,529,314 shares at a purchase price of $.302 per share, or an aggregate price of $763,650. In addition, the Company issued warrants to brokers to for the purchase of 177,050 shares of common shares at the purchase price of $.302 per share.





On January 27, 2011, the Company issued 275,000 restricted shares of the Company’s common stock to directors for services provided during 2010. The shares were valued at $.448 per share, the closing price for the thirty days prior to January 27, 2011.





On January 27, 2011, the Company entered into a Contract for Corporate Advisory Services with Core consulting Group. Under the agreement dated December 6, 2010, the Company issued 381,500 of restricted shares of the Company’s common stock at $.45 per share, the closing price on December 6, 2010. In addition, the Company agreed to issue in ninety days an additional 381,500 of restricted shares of the Company’s common stock at $.45 per share, the closing price on December 6, 2010,





On January 27, 2011, Monahan & Biagi, PLLC converted $136,726 of accrued legal bills into 341,815 shares of the Company common stock at $.40 per share, the closing price on January 22, 2011, the date the conversion was requested.





On February 14 and 17, 2011, Asher converted $50,000 of convertible debentures into173,378 shares of common stock at $.2884 per share.





On February 23, 2011, Masahiro Kawahata, a director converted $90,906 of accrued expenses into 211,409 shares of the Company common stock at $.43 per share, the closing price on February 23, 2011, the date the conversion was requested.





On April 1, 2011, the Company entered into a Consulting Agreement with Cerillion N4 Partners. Under the agreement, the Company agreed to issue 4,000 shares at $.51 per share, the price on March 31, 2011.





On April 1, 2011, the Company entered into an Agreement with InvestorIdeas.com. Under the agreement, the Company agreed to issue 58,824 shares at $.51 per share, the price on March 31, 2011.




On April 1, 2011, the Company entered into an Agreement with National Securities Corporation. Under the agreement, the Company agreed to issue 60,000 shares at $.51 per share, the price on March 31, 2011. In addition, the Company agreed to issue a Form of Warrant for 100,000 shares at $.55 per share.


15





14.
STOCK OPTIONS





Description of Stock Option Plan





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





Determining Fair Value Under ASC 505





The Company records compensation expense associated with stock options and other equity-based compensation using the Black-Scholes-Merton option valuation model for estimating fair value of stock options granted under our plan. The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding.  The Company estimates the volatility of our common stock based on the historical volatility of its own common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model and adjust share-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.





Stock Option Activity





On November 17, 2010, the Board of Directors authorized to TransTech employees, the grant of non-qualified options to purchase 220,000 shares of the Company’s common stock at $0.24 per share. The non- qualified stock option grants vest quarterly over three years and expire in five (5) years. The Company expensed $3,021 during the six months ended March 31, 2011.





There are currently 1,955,000 options to purchase common stock at $.495 per share outstanding at March 31, 2011 under the 2005 Stock Option Plan. The Company recorded $0 of compensation expense, net of related tax effects, relative to stock options for the six months ended March 31, 2011 and 2010 in accordance with ASC 505. Net loss per share (basic and diluted) associated with this expense was approximately ($0.00). In addition, on May 10, 2010, the Board of Directors authorized to Ron Erickson or his designee the grant of non-qualified options to purchase 3,000,000 shares of the Company’s common stock at $0.15 per share. The non- qualified stock option grant vests quarterly over two (2) years and expires in ten (10) years.





15.
OTHER SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES





See Note 12 for discussion of notes payable issued to the Company’s former CEO and President during the quarter ended March 31, 2007.   Other than the note payable, related interest and payroll related accruals, all amounts are recorded in the related party accounts payable balance.  As of the filing date, Mr. Erickson beneficially owns 6,506,473 shares of common stock.





Mr. Sparks is owed $721,333 of accrued salary plus $57,998 which has been accrued to pay applicable payroll taxes, FUTA, etc.  Additionally, interest of $40,261 is owed Mr. Sparks for the note payable described in Note 11 to these Notes to Financial Statements.  Mr. Sparks is also owed $6,315 for cash amounts advanced by him to Visualant to fund operating expenses since his employment and $5,136 for medical expenses.




16.
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS





LEGAL PROCEEDINGS





There are no pending legal proceedings against the Company that are expected to have a material adverse effect on its cash flows, financial condition or results of operations.





EMPLOYMENT AGREEMENTS





Agreement with Mark Scott





On May 10, 2010, the Board of Directors approved the appointment of Mr. Scott as Chief Financial Officer based on the (i) cash compensation of $8,000 per month; (ii) bonus cash compensation; shall be at the discretion of the senior executive and the board of directors; (iii) benefits after the closing of funding at discretion of Mr. Scott and equivalent to other employees in the company; and (iv) 1,000,000 shares of restricted common stock to be granted upon signing at the closing bid price of $.02 per share on May 7, 2010.


16


Agreement with James Gingo





On June 8, 2010, the Company entered into an Employment Agreement (“Gingo Agreement”) with Mr. James Gingo, Founder and President of TransTech. 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 based upon performance criteria to be determined by the Company’s Compensation Committee based on criteria under development up to 50% of his annual salary. 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.





LEASES





The Company is obligated under various non-cancelable operating leases for their various facilities and certain equipment.





The Company’s executive office is located at 500 Union Street, Suite 406, Seattle, Washington, USA, 98101. On January 1, 2011, the Company entered into a lease with a party affiliated with the Chairman of the Board of the Company. We pay $799 per month. The lease is cancellable with ten days notice.





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 $4,721. 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.





The aggregate future minimum lease payments under operating leases, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:





Years Ended March 31,

Total2012

$
57,0122013


57,0122014


57,0122015


57,0122016


52,261Beyond


0Total

$
280,309




17.
SUBSEQUENT EVENTS





The Company evaluates subsequent events, for the purpose of adjustment or disclosure up to the date the financial statements were issued.




17




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 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 as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they 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.


THE COMPANY AND OUR BUSINESS


We were 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 develop low-cost, high speed, light-based security and quality control solutions for use in homeland security, anti-counterfeiting, forgery/fraud prevention, brand protection and process control applications.  Our patent-pending technology uses controlled illumination with specific bands of light, to establish a unique spectral signature for both individual and classes of items.  When matched against existing databases, these spectral signatures allow precise identification and authentication of any item or substance.  This breakthrough optical sensing and data capture technology is called Spectral Pattern Matching (SPM). SPM technology can be miniaturized and is easily integrated into a variety of hand-held or fixed mount configurations, and can be combined in the same package as a bar-code or biometric scanner. As of March 31, 2011, we had three family patent applications with the U.S. Patent Office and one patent pending in Japan.





Through our wholly owned subsidiary, TransTech, we provide security and authentication solutions to security and law enforcement markets throughout the United States.





ACQUISITION OF TRANSTECH





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





TransTech, founded in 1994, is a distributor of access control and authentication systems serving the security and law enforcement markets.   With recorded revenues of $10 million in 2009, TransTech has a respected national reputation for outstanding product knowledge, sales and service excellence.





This acquisition is expected to accelerate market entry and penetration through the acquisition of well-operated and positioned distributors of security and authentication systems like TransTech, thus creating a natural distribution channel for products featuring our proprietary SPM technology.





Our strategy for the next 18 to 24 months is to generate substantially increased revenues through the further acquisition of other high quality companies complementary to TransTech, growth of TransTech and the sale and license of SPM products.





LICENSE AGREEMENT WITH JAVELIN





On January 3, 2011, we signed a Commercial License Agreement (“License Agreement”) with Seattle based Javelin for development of environmental diagnostic applications of our SPM technology.





The License Agreement, which is exclusive for environmental applications, is perpetual and lasts until the Visualant IP expires. It provides for payments of 5% of Javelin’s revenues, market-rate royalties of $15,000 in year one (which was prepaid) and increasing to $47,407 in year five and profit sharing of 25% of license or transfer of technology. Javelin has certain performance milestones by year 2 and 3. The License Agreement can be terminated by Visualant for failure of Javelin to meet the performance milestones and by Javelin with thirty days notice.





PROPOSED ACQUISITION OF RATLAB





On October 1, 2010, we signed a Letter of Intent to acquire all Visualant related assets of the RATLab.





The RATLab is a Seattle based research and development laboratory created by Dr. Tom Furness, founder and Director of the HITLab International, with labs at Seattle, University of Canterbury in New Zealand, and the University of Tasmania in Australia. The RATLab is guided by Dr. Tom Furness and Dr. Brian Schowengerdt, a research scientist in the field of optics and vision science, who developed the Spectral Pattern Matching (“SPM”) technology under contract for Visualant.





With this acquisition, we will consolidate all intellectual property relating to the SPM technology in the Company.  In addition to its current authentication and security applications of SPM, we will now own all other applications including the important fields of medicine, agriculture, and the environment and begin the creation of the Visualant Laboratory.





Upon the closing of this asset acquisition transaction, Dr. Tom Furness and Dr. Brian Schowengerdt will continue to provide technology leadership to us, under terms that are still subject to negotiation.





On November 28, 2010 and January 31, 2011, the parties signed Extensions of the Letter of Intent. The acquisition is expected to close May 1, 2011.





18


PROPOSED ACQUISITION OF EAGLE





On January 24, 2011, we signed a Letter of Intent to acquire Eagle (www.eagletechnologiesusa.com) of Brea, California. On April 1, 2011, we signed an Extension to the Letter of Intent. The acquisition is expected to close by June 30, 2011.





Eagle, founded by card industry leaders Greg and Ryan Hawkins and Jeff Fulmer in 2008, has rapidly emerged as the premier provider of blank PVC and polyester composite cards to the identification market.  Eagle will provide an immediate additional $1 million in annual revenue to Visualant and is projected to grow to $3 to $4 million in revenues over the next two years as Eagle increases the range and technical sophistication of its product line.





With this acquisition, we will continue with its strategic initiative to consolidate relevant security and authentication assets.  At the same time, we will provide Eagle and its management the human and capital resources necessary to rapidly accelerate its growth.  Upon the closing of this acquisition, the Eagle team will continue to manage Eagle with full profit and loss responsibility.





THE COMPANY’S COMMON STOCK





Our common stock trades on the OTCBB Exchange under the symbol “VSUL.OB.”





KEY MARKET PRIORITIES





Currently, our key market priorities are, among other things, as follows to:





•
Commercialize the Visualant technology and close sales in the United States and Japan.





•
Implement synergies between TransTech acquisition and the Company.





•
Develop license and royalty producing opportunities for the SPM technology outside the core security and authentication marketplace to include medical, agricultural and environmental diagnostics.•
Close the acquisition of the Visualant related assets of the RATLab LLC and Eagle.•



•



•
Pursue additional acquisitions which extend the product range and geographic reach of TransTech.



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



Pursue grants from governmental and private sources to fund the exploration of new and unique applications of the SPM technology.•
Improve profitability of the Company by increasing sales and managing expenses.





•
Acquire growth businesses at discounted prices in our target sectors and markets in conjunction with business partners. We expect to focus on growth opportunities with distressed businesses that require improvements in management, financial processes and liquidity to be successful.





•
Leverage our presence in Asia utilizing our Japanese directors.





•
Enhance our investor relations services.





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 II, Item 1A.


19





RESULTS OF OPERATIONS





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





(dollars in thousands)


Three Month Ended March 31,2011


2010


$ Variance


% VarianceRevenue


$
2,866


$
-


$
2,866



100.0
%Cost of sales


2,521



-



2,521



-100.0
%Gross profit


345



-



345



100.0
%Research and development expenses


6



24



(18
)


75.0
%Selling, general and administrative expenses


831



181



650



-359.1
%Operating loss


(492
)


(205
)


(287
)


-140.0
%Other income (expense):Interest expense


(41
)


(26
)


(15
)


-57.7
%Other income


14



-



14



100.0
%Total other expense


(27
)


(26
)


(1
)


-3.8
%Loss before income taxes


(519
)


(231
)


(288
)


-124.7
%Income taxes - current benefit


(5
)


-



(5
)


100.0
%Net loss



(514
)


(231
)


(283
)


-122.5
%Non-controlling interest


6



-



6



-100.0
%Net loss attributable to Visualant, Inc. common shareholders

$
(520
)

$
(231
)

$
(289
)


-125.1
%


THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2010





SALES





Net revenue for the three months ended March 31, 2011 increased $2,886,000 to $2,886,000 as compared to $0 for the three months ended March 31, 2010.





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





COST OF SALES





Cost of sales for the three months ended March 31, 2011 increased $2,521,000 to $2,521,000 as compared to $0 for the three months ended March 31, 2010.





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





SELLING, GENERAL AND ADMINISTRATIVE EXPENSE





Selling, general and administrative expenses for the three months ended March 31, 2011 increased $650,000 to $831,000 as compared to $181,000 for the three months ended March 31, 2010.





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





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, legal, stock option and other general and administrative costs.





OTHER INCOME/EXPENSE





Other expense for the three months ended March 31, 2011 was $27,000 as compared to other expense of $26,000 for the three months ended March 31, 2010. The expenses for the three months ended March 31, 2011 included $41,000 for interest expense, offset by $14,000 in other income.





The 2009 other expense was primarily related to interest expense of $26,000.







20


NET LOSS





Net loss for the three months ended March 31, 2011 was $520,000 as compared to a net loss of $231,000 for the three months ended March 31, 2010 for the reasons discussed above.





(dollars in thousands)


Six Month Ended March 31,2011


2010


$ Variance


% VarianceRevenue


$
4,934


$
-


$
4,934



100.0
%Cost of sales


4,176



-



4,176



-100.0
%Gross profit


758



-



758



100.0
%Research and development expenses


12



47



(35
)


74.5
%Selling, general and administrative expenses


1,478



332



1,146



-345.2
%Operating loss


(732
)


(379
)


(353
)


-93.1
%Other income (expense):Interest expense


(101
)


(38
)


(63
)


-165.8
%Other income


55



-



55



100.0
%Total other expense


(46
)


(38
)


(8
)


-21.1
%Loss before income taxes


(778
)


(417
)


(361
)


-86.6
%Income taxes - current benefit


(6
)


-



(6
)


100.0
%Net loss



(772
)


(417
)


(355
)


-85.1
%Non-controlling interest


8



-



8



-100.0
%Net loss attributable to Visualant, Inc. common shareholders

$
(780
)

$
(417
)

$
(363
)


-87.1
%





SIX MONTHS ENDED MARCH 31, 2011 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2010





SALES





Net revenue for the six months ended March 31, 2011 increased $4,934,000 to $4,934,000 as compared to $0 for the six months ended March 31, 2010.





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





COST OF SALES





Cost of sales for the six months ended March 31, 2011 increased $4,176,000 to $4,176,000 as compared to $0 for the six months ended March 31, 2010.





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





SELLING, GENERAL AND ADMINISTRATIVE EXPENSE





Selling, general and administrative expenses for the six months ended March 31, 2011 increased $1,146,000 to $1,478,000 as compared to $332,000 for the six months ended March 31, 2010.





We closed the acquisition of TransTech of Aurora, OR on June 8, 2010 and recorded the results from June 8, 2010 to March 31, 2011.





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, legal, stock option and other general and administrative costs.





OTHER INCOME/EXPENSE





Other expense for the six months ended March 31, 2011 was $46,000 as compared to other expense of $38,000 for the six months ended March 31, 2010. The expenses for the six months ended March 31, 2011 included $101,000 for interest expense, offset by $55,000 in other income.





The 2009 other expense was primarily related to interest expense of $38,000.





NET LOSS





Net loss for the six months ended March 31, 2011 was $780,000 as compared to a net loss of $417,000 for the six months ended March 31, 2010 for the reasons discussed above.


21





LIQUIDITY AND CAPITAL RESOURCES





We had cash of $1.0 million, a net working capital deficit of approximately $2.2 million and total indebtedness of $2.6  million as of March 31, 2011.





We will need to obtain additional financing to implement the business plan, service our debt repayments and acquire new businesses. There can be no assurance that we will be able to secure funding, or that if such funding is available, whether the terms or conditions would be acceptable to us.





Volatility and disruption of financial markets could affect our access to credit. The current difficult economic market environment is causing contraction in the availability of credit in the marketplace. This could potentially reduce or eliminate the sources of liquidity for the Company.





If the Company is unable to obtain additional financing, we may need to restructure our operations, divest all or a portion of our business or file for bankruptcy.





OPERATING ACTIVITIES





Net cash provided by operating activities for the six months ended March 31, 2011 was $.9 million. This amount was primarily related to a net loss of $.8 million, offset by depreciation and amortization and other non-cash expenses of $.6 million, a decrease in accounts receivable of $.2 million and an increase in accounts payable and accrued expenses of $.7 million.





FINANCING ACTIVITIES





Net cash used in financing activities for the six months ended March 31, 2011 was $.0 million. This amount was primarily related to payments on the line of credit of $.6 million, offset by proceeds from the sale of common stock of $.5 million and the proceeds from the issuance of convertible debt of $.1 million.





The Company’s contractual cash obligations as of March 31, 2011 are summarized in the table below:





Contractual Cash Obligations

Total


1 Year


1-3 Years


3-5 Years


5 YearsOperating leases

$
280,309


$
57,012


$
114,024


$
109,273


$
0Capital lease obligations


0



0



0



0



0Note payable


2,553,111



883,097



1,666,383



3,631



0Capital expenditures


345,000



80,000



105,000



80,000



80,000Acquisitions


815,000



315,000



500,000



0



0$
3,993,420


$
1,335,109


$
2,385,407


$
192,904


$
80,000




ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





This item is not applicable.





ITEM 4.
CONTROLS AND PROCEDURES





Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2011. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2011, our disclosure controls and procedures were effective in ensuring that (1) information to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act and (2) information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to the principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.






22





PART II.     OTHER INFORMATION





ITEM 1A.
RISK FACTORS





There are certain inherent risks which will have an effect on the Company’s development in the future and some of these risk factors are noted below but are not all encompassing since there may be others unknown to management at the present time which might have an impact in the future on the development of the Company.





WE WILL NEED ADDITIONAL FINANCING TO SUPPORT OUR TECHNOLOGY DEVELOPMENT, ACQUIRING OR INVESTING IN NEW BUSINESSES AND ONGOING OPERATIONS.





We will need to obtain additional financing to implement the business plan, service our debt repayments and acquire new businesses. 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, divest all or a portion of our business or file for bankruptcy.





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 report.





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 or the perception that sales may occur could cause the market price of our common stock to decline. As of March 31, 2011, there were 41.5 million shares of common stock issued and outstanding. 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.





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 $0.15 to $0.75 per share.





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,


23


- 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 MAY 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:





•
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 our common stock by shareholders,•
General market and economic conditions,•
Quarterly variations in our operating results,•
Investor 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 the Company’s common shares for all shareholders.  The Company has established a Combined Incentive and Non-Qualified Stock Option Plan and may in the future issue further stock options to officers, directors and consultants which will dilute the interest of the existing and future shareholders.  Moreover, the Company may seek authorization to increase the number of its authorized shares and sell additional securities and/or rights to purchase such securities at any time in the future.  Dilution of the value of the common shares will likely result from such sales, which in turn could adversely affect the market price of our common stock.


24


OUR CHIEF EXECUTIVE OFFICER HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY.





As of March 31, 2011, Mr. Erickson and his immediate family members, either directly or indirectly, own or control 6,506,473 shares as of the filing date or approximately15.7% of our common stock. These Controlling Shareholders have stated in a Schedule 13D that they may be deemed to constitute a “group” for the purposes of Rule 13d-3 under the Exchange Act. Mr. Ronald P. Erickson, our Chief Executive officer, controls each of our Controlling Shareholders.





This group, could cause a change of control of our board of directors, if in combination with another large shareholder elects candidates of their choice to the board at a shareholder meeting, and approve or disapprove any matter requiring stockholder approval, regardless of how our other shareholders may vote. Further, under Nevada law, the group could have a significant influence over our affairs, if in combination with another large shareholder, including the power to cause, delay or prevent a change in control or sale of the Company, 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. 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.





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 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On December 23, 2010, we entered into a Securities Purchase Agreement with Seaside pursuant to which Seaside agreed to purchase restricted shares of our common stock from time to time over a 12-month period, provided that certain conditions are met.





As of March 31, 2011, we sold to Seaside 1,829,314 restricted shares at a purchase price of $.303 per share, or an aggregate price of $553,860. In addition, we issued warrants for the purchase of 128,050 shares of common shares at the purchase price of $.303 per share.


25





As of May 4, 2011, we sold to Seaside 2,529,314 shares at a purchase price of $.302 per share, or an aggregate price of $763,650. In addition, the Company issued warrants to brokers to for the purchase of 177,050 shares of common shares at the purchase price of $.302 per share.





On January 27, 2011, we issued 275,000 restricted shares of our common stock to directors for services provided during. The shares were valued at $.448 per share, the closing price for the thirty days prior to January 27, 2011.





On January 27, 2011, we entered into a Contract for Corporate Advisory Services with Core consulting Group. Under the agreement dated December 6, 2010, we issued 381,500 of restricted shares of our common stock at $.45 per share, the closing price on December 6, 2010. In addition, we agreed to issue in ninety days an additional 381,500 of restricted shares of the our common stock at $.45 per share, the closing price on December 6, 2010,





On January 27, 2011, Monahan & Biagi, PLLC converted $136,726 of accrued legal bills into 341,815 shares of our common stock at $.40 per share, the closing price on January 22, 2011, the date the conversion was requested.





On February 14 and 17, 2011, Asher converted $50,000 of convertible debentures into173,378 shares of common stock at $.2884 per share.





On February 23, 2011, Masahiro Kawahata, a director converted $90,906 of accrued expenses into 211,409 shares of the Company common stock at $.43 per share, the closing price on February 23, 2011, the date the conversion was requested.





ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K





The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:





(a)        Exhibits





10.1
Commercial License Agreement dated January 3, 2011 by and between Visualant, Inc. and Javelin, LLC. (2)




10.2
Letter of Intent dated January 24, 2011 by and between Visualant, Inc. and Eagle Technologies USA. (3)
 
 10.3
Extension to Letter of Intent dated January 31, 2011 by and between Visualant, Inc. and the RATLab LLC. (5)




14.1
Code of Conduct & Ethics dated January 27, 2011. (4)




31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (1)
  31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer (1)


32
Section 906 Certifications (1)





99.1
Audit Committee Charter dated January 27, 2011. (4)





99.2
Compensation Committee Charter dated January 27, 2011. (4)





99.3
Nominations and Governance Committee Charter dated January 27, 2011. (4)





__________________





(1)    Filed herewith.


(2)
Attached as an exhibit to the Company’s Form 8-K dated January 3, 2011 and filed with the SEC on January 7, 2011.


(3)
Attached as an exhibit to the Company’s Form 8-K dated January 24, 2011 and filed with the SEC on January 31, 2011.


(4)
Attached as an exhibit to the Company’s Form 8-K dated January 27, 2011 and filed with the SEC on January 31, 2011.


(5)
Attached as an exhibit to the Company’s Form 8-K dated January 31, 2011 and filed with the SEC on February 2, 2011.











26





SIGNATURES





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











VISUALANT, INCORPORATED


(Registrant)





Date: May 4, 2011
By:
/s/ Ronald P. EricksonRonald P. EricksonChief Executive Officer, President, and Director(Principal Executive Officer)





Date: May 4, 2011
By:
/s/ Mark ScottMark ScottChief Financial Officer, Secretary and Treasurer( Principal Financial and Accounting Officer)
































27