Published on April 13, 2017
500 Union Street, Suite 420
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Seattle, Washington 98101
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April
13, 2017
Mr.
Kevin J. Kuhar, Accounting Branch Chief
Securities
and Exchange Commission
Division
of Corporation Finance
100 F
Street N.E.
Washington,
D.C. 20549
Re:
Visualant,
Inc.
Form
10-K for the Fiscal Year Ended September 30, 2016
Filed
January 13, 2017
Form
10-Q for the Quarterly Period Ended December 31, 2016
Filed
February 21, 2017
File
No. 001-37479
Dear
Mr. Kuhar:
Visualant,
Incorporated, a Nevada corporation (the “Company”), has
received and reviewed your letter dated March 17, 2017 (the
“Comment Letter”), pertaining to Company’s
Form10-K for the year ended September 30, 2016 as filed with the
Securities & Exchange Commission (the “Commission”)
on January 31, 2017 and Form 10-Q for the quarterly period ended
December 31, 2016 as filed with the Commission on February 21,
2017, File No. 001-37479.
Specific to your
comments, please find our responses below, our responses below are in addition to those filed
via the Edgar system. The following numbered responses
correspond to those numbered comments as set forth in the comment
letter dated March 17, 2017.
Form 10-K for the Fiscal Year Ended September 30, 2016
Item 9A. Controls And Procedures, page 30
1.
We note that while you disclose that your management identified
material weaknesses in your internal control over financial
reporting as of September 30, 2016, you have not provided a
Management Report on Internal Control over Financial Reporting that
includes all of the disclosures required by Item 308(a) of
Regulation S-K, including a definitive statement that internal
control over financial reporting was not effective as of September
30, 2016. Please amend your filing to provide your
management’s report as of the end of the period covered by
the report.
Response: We have
amended ITEM 9A of our Form 10-K in response to your comment as
outlined below.
“ITEM
9A. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls
and procedures.
1
Our
Chief Executive Officer ("CEO") and the Chief Financial Officer
("CFO") evaluated our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the
filing of this Form 10-K. Based on that evaluation, our CEO and CFO
concluded that, as of September 30, 2016, our disclosure controls
and procedures were not effective. Disclosure controls and procedures are controls and
other procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management,
including our CEO and our CFO, to allow timely decisions regarding
required disclosure. A material weakness in our internal
control over financial reporting is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the financial
statements will not be prevented or detected.
During the year ended September 30, 2016,
management identified the following weaknesses, which were deemed
to be material weaknesses in internal controls over financial
reporting:
●
Audit Committee: While we have an audit committee, we lack a
financial expert. During 2017, the Board expects to appoint an
additional independent Director to serve as Audit Committee
Chairman who is an “audit committee financial
expert” as defined by the Securities and Exchange Commission
(“SEC”) and as adopted under the Sarbanes-Oxley Act of
2002. In addition, this Director is expected to strengthen our
governance processes. We are using external service providers to
ensure compliance with the Securities and Exchange Commission
requirements until we appoint the Audit Committee
Chairman.
(b)
Management's Report on Internal
Control Over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a
process designed by, or under the supervision of, our CEO and CFO,
or persons performing similar functions, and effected by our board
of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America (GAAP). Our internal control
over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and
that receipts and expenditures of the Company are being made only
in accordance with authorization of management and directors of the
Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a
material effect on the financial statements.
Management assessed
the effectiveness of the Company’s internal control over
financial reporting as of September 30, 2016. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in
the 2013 Internal
Control-Integrated Framework. Based on its
evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as of
September 30, 2016.
Pursuant to
Regulation S-K Item 308(b), this Annual Report on Form 10-K does
not include an attestation report of our company’s registered
public accounting firm regarding internal control over financial
reporting.
2
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate. A control system, no matter
how well designed and operated can provide only reasonable, but not
absolute, assurance that the control system’s objectives will
be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their cost.
(c)
Changes in internal controls over
financial reporting.
There
have been no changes in our internal control over financial
reporting in the fiscal year ended September 30, 2016, which
were identified in connection with our management’s
evaluation required by paragraph (d) of rules 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.”
Report of Independent Registered Public Accounting Firm, page
F-1
2.
We note that your auditor’s report is dated January 13, 2016,
a date prior to the end of your fiscal year. Please amend your
filing to have your auditor provide a properly dated report in
accordance with Rule 2-02(a) of Regulation S-X. Also refer to
AS3110.01 of the PCAOB Standards.
Response: The report
of our Independent Registered Public Accounting Firm for the year
ended September 30, 2016 and 2015 as filed on page F-1 of our
Annual Report on Form 10-K was inadvertently dated “January
13, 2016”. The auditor’s report was issued on January
13, 2017. We have amended the filing accordingly.
Note 14 – Equity
Series B Redeemable Convertible Preferred Stock, page
F-19
3.
In the consolidated statements of stockholders’ deficit you
present in separate captions the issuance and the cancellation of
Series B Redeemable Convertible Preferred Stock. Tell us how you
accounted for the termination of the Stock Purchase Agreement with
the institutional investor, including where the related payment is
reflected in your financial statements. Please cite the accounting
guidance you followed.
Response: We have
amended our 10-K filing to include the following disclosure of the
termination of the Series B Redeemable Convertible Preferred
Stock:
“On August 5, 2016, the Company closed the
First Amendment to Stock Purchase Agreement with the institutional
investor. As a result of this amendment agreement the Company paid
the sum of $505,000 to the institutional investor, issued 52,000
restricted shares of common stock valued at $169,000 for the
conversion of the remaining preferred shares that the investor had
purchased, cancelled the remaining 204 shares of Series B Preferred
Stock that had not been purchased, and the parties terminated the
relationship and all aspects of the Stock Purchase Agreement
described above in its entirety. We recorded an expense of $674,000 related to this
Amendment Agreement during the three months ended September 30,
2016.”
3
The
Company issued the 204 shares of preferred shares to the
institutional investor, however, we determined the events that
would trigger payment under the share purchase agreement were
remote. The shares were canceled as part of the First Amendment and
thus no payment was reflected in our financial
statements.
We have
adjusted our Statements of Changes in Stockholders’ (Deficit)
and Statements of Changes in Cash flows to properly reflect the
conversion and the Series B Redeemable Convertible Preferred Stock
and the payment to the institutional investor to amend the Stock
Purchase Agreement.
Form 10-Q for the Quarterly Period Ended December 31,
2016
Statements of Operations, page 4
4.
In future filings, please revise this statement to present your
goodwill impairment charges separately from selling, general and
administrative expenses, consistent with ASC
350-20-45-2.
Response: In future
filings we will revise out financial statements to present goodwill
impairment charges separately from selling, general and
administrative expenses, consistent with ASC
350-20-45-2.
Note 8 – Notes Receivable, page 13
5.
We note that you purchased a convertible promissory note from
BioMedx, Inc. on November 1, 2016 for a payment of $260,000 and
that you received 150,000 shares of Pulse Biologics’ common
stock as partial consideration for purchasing the note. Further, on
page 32 within management’s discussion and analysis, we note
the $250,000 impairment of your investment in this note receivable.
Please explain to us how you accounted for the purchase of the
note, the receipt of Pulse Biologics’ common stock and the
subsequent impairment of the note in your financial statements,
including the captions of your balance sheet, statements of
operations and statements of cash flows where these transactions
are presented.
Response: We made an
inadvertent error in our disclosure of the amount of the impairment
charge we recorded relating to the BioMedX Note. The actual
impairment charge was $260,000 the full purchase price of the Note;
we will revise our future filings to correct this mistake. In
addition, we believe we incorrectly netted the purchase of the Note
and the impairment on the Statement of Cash Flows instead of
showing the purchase as a financing activity and the impairment as
an operating activity. Due to the early stage operations of BioMedX
and the lack of contributed capital we did not allocate any value
to the common stock.
Due to
the same factors discussed above we did not assign any value to the
common shares of BioMedX. The 150,000 shares represent lass then 2%
of the outstanding equity with very little contributed capital. Our
understanding is BiomedX is currently raising capital which will
further reduce our ownership percentage.
You
will also note that the Note was repaid in February 2017 after we
filed out Form 10-Q for the period ended December 31, 2016. We did
not have any indication payment was eminent at the time of our
filing. We made inquiries about the payment status up until the
time of our filing. We will revise our future filings
accordingly.
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Note 11 – Goodwill, page 14
6.
We note that you recorded an impairment of goodwill associated with
TransTech resulting from your review of its “operations based
on its overall financial constraints” in the amount of
$483,645 and that you still have $500,000 of goodwill related to
this entity recorded within your financial statements. Please tell
us how your goodwill impairment testing complied with the guidance
in ASC 350-20-35-4 through 35-19 and describe the event or
circumstances that triggered the testing in accordance with ASC
350-20-35-30.
Response: Per the
guidance of ASC 350-20-35-65 we evaluate our goodwill valuation
at each year end or when there has been change in the business that
is likely to cause a change in the Goodwill valuation. In
December2016, we began discussions with TransTech management and a
third party about a possible sale of the TransTech business. During
December 2016 and January 2017 these discussions were in the early
stages and the price negotiations were at a level that would
support the $983,645 goodwill valuation. In late January and early
February 2017, due to the capital limitations at TransTech and the
more information about the difficulty in raising capital for a
management buyout of TransTech, we reduced the offering price for
Transtech. This change in the value of the business triggered an
evaluation of Goodwill per ASC 350-20-35-66. In February, 2017, we
signed a non-binding letter of intent to sell 80% of Transtech to
the Transtech management team for $600,000. The $600,000 can be
reduced to $400,000 if paid within a year and $500,000 if repaid
within two years. We valued the goodwill using the $400,000 for 80%
for a total value of $500,000.
In
connection with the Company’s responding to the comments set
forth in the March 29, 2016 letter, the Company acknowledges
that:
●
The Company is
responsible for the adequacy and accuracy of the disclosure in the
Filing;
●
Staff comments or
changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
Filing; and,
●
The Company may not
assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of
the United States.
A
copy of this letter and any related documents have also been filed
via the EDGAR system. Thank you for your courtesies.
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Very
truly yours,
/s/ Jeff T. Wilson
Jeff T.
Wilson
Chief
Financial Officer
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