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EX-31.1 - Vu1 CORPv167349_ex31-1.htm
EX-10.1 - Vu1 CORPv167349_ex10-1.htm
EX-32.1 - Vu1 CORPv167349_ex32-1.htm
EX-10.2 - Vu1 CORPv167349_ex10-2.htm
EX-31.2 - Vu1 CORPv167349_ex31-2.htm
EX-10.3 - Vu1 CORPv167349_ex10-3.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2009
 
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______________ to ______________
 
Commission File No. 0-21864
 
 
Vu1 CORPORATION
 (Exact name of registrant as specified in its charter)

California
84-0672714
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

557 ROY ST. SUITE 125 SEATTLE, WA 98109
 (Address of principal executive offices)

(888) 985-8881
(Issuer’s Telephone number, including area code)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No o

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

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

Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer ¨
 
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). Yeso  Nox

On November 23, 2009 there were 85,811,692 shares of the Registrant’s common stock, no par value, issued and outstanding.

 
 

 

Vu1 CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
Page
Number
PART I   Financial Information
 
   
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
 
Balance Sheets as of September 30, 2009 and December 31, 2008
1
Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2009 and 2008
2
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
3
Notes to Condensed Consolidated Financial Statements
4
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
ITEM 4T. Controls and Procedures
18
   
PART II  Other Information
 
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
19
ITEM 5. Other Information
19
ITEM 6. Exhibits
20
   
Signatures
21
 
 
 

 

EXPLANATORY NOTE

Unless otherwise indicated or the context otherwise requires, all references in this Report to “we,” “us,” “our,” and the “Company” are to Vu1 Corporation, Sendio, s.r.o., our Czech subsidiary, and our inactive subsidiary Telisar Corporation.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Forward Looking Statements
 
We are including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements. All statements other than statements of historical fact, including statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions, future results of operations or financial position, made in this Report are forward looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.
 
The forward-looking statements contained herein involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and are believed by management to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties; however, management’s expectations, beliefs and projections may not be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements:
 
·
our lack of working capital and lack of revenues;
 
·
the availability of capital to us, in the amount and time needed, to fund our development programs and operations, and the terms and dilutive effect of any such financings;
·
our ability be successful in our product development and testing efforts;
·
our ability to obtain commercial development for our planned products;
 
·
our ability to obtain manufacturing for our planned products in a cost-effective manner and at the times and in the volumes required, while maintaining quality assurance;
 
·
market demand for and acceptance of our planned products, and other factors affecting market conditions;
·
technological advances and competitive pressure by our competitors;
·
governmental regulations imposed on us in the United States and European Union; and
·
the loss of any of our key employees or consultants.
 
For additional factors that can affect these forward-looking statements, see the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2008.  The forward-looking statements contained in this Report speak only as of the date hereof.  We caution readers not to place undue reliance on any such forward-looking statements.  We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
 
 
 

 

PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements

Vu1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 
   
SEPTEMBER 30,
   
DECEMBER 31,
 
 
 
2009
   
2008
 
ASSETS 
           
Current assets
           
Cash
  $ 18,867     $ 2,486,609  
Tax refund receivable
    28,034       32,672  
Prepaid expenses
    128,915       17,669  
                 
Total current assets
    175,816       2,536,950  
                 
Non-current assets
               
Equipment, net of accumulated depreciation of $133,297 and $49,744, respectively
    167,527       240,742  
Construction in process
    498,816       399,859  
Deposit on building purchase
    439,606       212,800  
                 
Total assets
  $ 1,281,765     $ 3,390,351  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
Current liabilities
               
Accounts payable
  $ 641,017     $ 412,534  
Accrued payroll
    482,277       161,130  
Loan payable, current portion
    4,502       3,444  
Capital lease obligation, current portion
    5,154       4,465  
                 
Total current liabilities
    1,132,950       581,573  
                 
Long-term convertible note payable, net of discount of $1,123,054 and $0, respectively
    14,734       -  
Embeddeed derivative liability
    1,406,929       -  
Loan payable, net of current portion
    3,668       6,557  
Capital lease obligation, net of current portion
    16,147       18,173  
                 
Total liabilities
    2,574,428       606,303  
Stockholders' equity (deficit)
               
Preferred stock, $1.00 par value; 10,000,000 shares authorized; no shares issued and outstanding
    -       -  
Common stock, no par value; 200,000,000 shares authorized; 85,811,692 and 85,691,892 shares issued and outstanding, respectively
    62,210,821       61,165,545  
Stock and warrant subscription receivable
    -       (131,800 )
Accumulated deficit
    (63,673,820 )     (58,386,684 )
Accumulated other comprehensive income
    170,336       136,987  
Total stockholders' equity (deficit)
    (1,292,663 )     2,784,048  
                 
Total liabilities and stockholders' equity (deficit)
  $ 1,281,765     $ 3,390,351  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
1

 
 
Vu1 CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Operating expenses
                       
Research and development
  $ 615,203     $ 788,094     $ 2,074,707     $ 3,965,825  
General and administrative
    257,778       2,036,468       1,605,685       3,234,575  
Marketing
    80,477       122,972       274,823       251,660  
Total operating expenses
    953,458       2,947,534       3,955,215       7,452,060  
                                 
Loss from operations
    (953,458 )     (2,947,534 )     (3,955,215 )     (7,452,060 )
                                 
Other income
                               
Interest income
    234       3,580       2,571       9,070  
Interest expense
    (116,895 )     (1,809 )     (133,772 )     (1,809 )
Derivative valuation loss
    (1,200,720 )     -       (1,200,720 )     -  
                                 
Total other income
    (1,317,381 )     1,771       (1,331,921 )     7,261  
                                 
Loss before provision for income taxes
    (2,270,839 )     (2,945,763 )     (5,287,136 )     (7,444,799 )
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net loss
  $ (2,270,839 )   $ (2,945,763 )   $ (5,287,136 )   $ (7,444,799 )
                                 
Other comprehensive (loss) income:
                               
Foreign currency translation adjustments
    28,382       (27,696 )     33,349       186,552  
                                 
Comprehensive loss
  $ (2,242,457 )   $ (2,973,459 )   $ (5,253,787 )   $ (7,258,247 )
                                 
Basic and diluted:
                               
Loss per share
  $ (0.03 )   $ (0.04 )   $ (0.06 )   $ (0.11 )
Weighted average shares outstanding
    85,576,142       73,154,045       85,541,801       68,380,888  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
2

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
             
Net loss
  $ (5,287,136 )   $ (7,444,799 )
Adjustments to reconcile net loss to net cash flows from operating activities:
               
Depreciation
    71,434       18,813  
Share-based compensation
    (79,394 )     1,456,468  
Issuance of warrant for services
    38,839       216,780  
Amortization of discount and prepaid interest on long-term convertible note
    75,941       -  
Issuance of stock for services
    93,650       85,000  
Derivative valuation loss
    1,200,720       -  
Changes in assets and liabilities:
               
Tax refund receivable
    6,738       507,852  
Prepaid expenses
    (54,843 )     1,490,035  
Accounts payable
    214,023       199,309  
Accrued payroll
    273,104       (154 )
Net cash flows from operating activities
    (3,446,924 )     (3,470,696 )
                 
Cash flows from investing activities:
               
Purchases of equipment
    (44,088 )     (80,802 )
Purchases of construction in process and deposit on building
    (184,972 )     (409,767 )
Net cash flows from investing activities
    (229,060 )     (490,569 )
                 
Cash flows from financing activities:
               
Proceeds from sales of units of common stock and warrants
    131,800       2,787,940  
Proceeds from issuance of convertible note payable and warrants
    1,088,792       -  
Proceeds from sales of common stock
    -       2,130,039  
Proceeds from note payable
            13,468  
Payments on note payable
    (2,428 )     (1,049 )
Payments on capital lease obligations
    (2,989 )     (1,342 )
Net cash flows from financing activities
    1,215,175       4,929,056  
                 
Effect of exchange rate changes on cash and cash equivalents
    (6,933 )     (12,776 )
                 
Net change in cash and cash equivalents
    (2,467,742 )     955,015  
                 
Cash and cash equivalents, beginning of period
    2,486,609       1,014,512  
                 
Cash and cash equivalents, end of period
  $ 18,867     $ 1,969,527  
                 
Cash paid for interest
  $ 2,998     $ 1,809  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 
 
Vu1 CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 1 - BUSINESS AND ORGANIZATION
 
General

All references in these consolidated financial statements to “we,” “us,” “our,” and the “Company” are to Vu1 Corporation, Sendio, s.r.o., our Czech subsidiary, and our inactive subsidiary Telisar Corporation unless otherwise noted or indicated by its context.

We are focused on developing, manufacturing and selling a line of mercury free, energy efficient light bulbs based on our proprietary light-emitting technology.

For the past several years, we have primarily focused on research and development efforts for our technology.  In September 2007, we formed Sendio, s.r.o. (“Sendio”) in the Czech Republic as a wholly-owned subsidiary for the purpose of operating a pilot manufacturing facility.

We have one inactive subsidiary, Telisar Corporation, a California corporation and majority-owned subsidiary. No noncontrolling interest is presented for the minority stockholders of Telisar due to its accumulated losses on a stand alone basis.
 
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated unaudited financial statements included in this Form 10-Q have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, these financial statements do not include all of the disclosures required by U.S. generally accepted accounting principles for complete financial statements.  These consolidated unaudited interim financial statements should be read in conjunction with the audited financial statements for the fiscal year ended December 31, 2008 in our Annual Report on Form 10-K.  The financial information furnished herein reflects all adjustments consisting of normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our financial position, the results of operations and cash flows for the periods presented.  Operating results for the period ended September 30, 2009 are not necessarily indicative of results for future quarters or periods in the fiscal year ending December 31, 2009.
 
Principles of Consolidation

The consolidated financial statements include the accounts of Vu1 and all of our wholly owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Translating Financial Statements

The functional currency of Sendio is the Czech Koruna (“CZK”).  The accounts of Sendio contained in the accompanying condensed consolidated balance sheets have been translated into United States dollars at the exchange rate prevailing during the periods presented. Translation adjustments are included in “Accumulated Other Comprehensive Income,” a separate component of stockholders’ equity (deficit). The accounts of Sendio in the accompanying condensed consolidated statements of operations have been translated using the average exchange rates for the periods presented.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
4

 

Cash and Cash Equivalents
 
Cash is comprised of deposits with a bank. For purposes of the statements of cash flows, we consider all investments purchased with original maturities of three months or less to be cash equivalents.  At September 30, 2009 and December 31, 2008, we had cash of $0 and $1,986,609, respectively, in excess of federally insured limits.
 
Equipment
 
Equipment is comprised primarily of equipment used in the testing and development of the manufacturing process of our light bulbs and is stated at cost. We provide for depreciation using the straight-line method over the estimated useful life of three to fifteen years. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of equipment are reflected in the statements of operations.

Construction in process

Construction in process is comprised of assets to be used in our operations in the Czech Republic not in service as of September 30, 2009 and December 31, 2008.  These assets, when placed in service will be reclassified to Property and Equipment and depreciated over their estimated useful lives.

Income Taxes

We recognize the amount of income taxes payable or refundable for the current year and recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement amounts of certain assets and liabilities and their respective tax bases. Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. A valuation allowance is required when it is less likely than not that we will be able to realize all or a portion of our deferred tax assets.

Long-Lived Assets

We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Fair Value of Financial Instruments

Financial instruments, as defined in the Topic 825-10 of the Accounting Standards Codification (“ASC”), consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, receivables, payables and accrued liabilities, derivative financial instruments, notes payable and convertible debt. We carry cash and cash equivalents, receivables, payables and accrued liabilities and notes payable at historical costs; their respective estimated fair values approximate carrying values due.

Derivative financial instruments, as defined in ASC 815 “Accounting for Derivative Financial Instruments and Hedging Activities” consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the conversion feature in our convertible promissory notes is not afforded equity classification because it embodies risks not clearly and closely related to host contract. As required by ASC 815-10, these features are required to be bifurcated and carried as derivative liabilities, at fair value, in our financial statements.

 
5

 

We carry convertible debt at historical cost. The fair value of our convertible debt in its hybrid form is determined, for disclosure purposes only, based upon its forward cash flows, at credit risk adjusted rates, plus the fair value of the conversion feature. As of September 30, 2009, the fair value of our face value $1,137,788 convertible debt amounted to approximately $2,555,000.

Fair Value Measurements

ASC 820 “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Significant fair value measurements resulted from the application of ASC 815 to our convertible promissory note and warrant financing arrangements and ASC 718-10 for our share-based payment arrangements.
 
Revenue Recognition
 
Revenues are recognized when (a) persuasive evidence of an arrangement exists, (b) delivery has occurred and no significant obligations remain, (c) the fee is fixed or determinable and (d) collection is determined to be probable.   We have not recognized any revenues in the accompanying financial statements.
 
Research and Development Costs
 
For financial reporting purposes, all costs of research and development activities performed internally or on a contract basis are expensed as incurred. For the three and nine months ended September 30, 2009 and 2008, research and development expenses were comprised primarily of salary, rent, technical consulting expenses, supplies and travel, and other costs of the research related operations in the Czech Republic through our wholly-owned subsidiary, Sendio.

Share-Based Payments

We account for share-based compensation expense to reflect the fair value of share-based awards measured at the grant date.  This expense is recognized over the requisite service period and is adjusted each period for anticipated forfeitures. We estimate the fair value of each share-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Comprehensive Income
 
Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. Other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments.
 
Loss Per Share
 
Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of shares of common stock outstanding, excluding unvested stock. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common shares, including unvested stock, had been issued and if the additional common shares were dilutive.
 
The following potentially dilutive common shares are excluded from the computation of diluted net loss per share for all periods presented because the effect is anti-dilutive:

 
6

 

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Warrants
    8,284,359       3,762,225       8,284,359       3,762,225  
Convertible debt
    2,844,470       -       2,844,470       -  
Stock options
    4,121,875       4,650,000       4,121,875       4,650,000  
Unvested stock
    190,750       381,000       190,750       381,000  
                                 
Total potentially dilutive securities
    15,441,454       8,793,225       15,441,454       8,793,225  

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (“ASC”), as the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related accounting literature. The use of the FASB ASC was effective for financial statements issued for interim and annual periods ending after September 15, 2009. Its adoption did not have any impact on the Company’s consolidated financial statements. The FASB ASC is updated through the FASB’s issuance of Accounting Standards Updates, or ASUs.
 
NOTE 3 - GOING CONCERN MATTERS
 
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate our continuation as a going concern. During the nine months ended September 30, 2009, we had no revenues, incurred a net loss of $5.3 million and had negative cash flows from operations of $3.4 million. In addition, we had an accumulated deficit of $63.7 million at September 30, 2009.
 
These factors raise substantial doubt about our ability to continue as a going concern.
 
Recovery of our assets is dependent upon future events, the outcome of which is indeterminable. Our attainment of profitable operations is dependent upon our obtaining adequate debt or equity financing, developing products for commercial sale, and achieving a level of sales adequate to support our cost structure. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.
 
Our efforts to raise additional funds will continue during fiscal 2009 to fund our planned operations and research and development activities, through one or more debt or equity financings.  We have engaged an investment banker to assist us in our fundraising efforts. Unless we obtain sufficient additional financing, we expect that we will need to continue to continue to curtail or even cease operations indefinitely, or at least until we can obtain sufficient financing.  Even if we are able to raise sufficient additional capital to continue our operations, we expect to continue to seek additional financing through the remainder of fiscal 2009 and into fiscal 2010. See additional information in Note 11.
 
NOTE 4 – TAX REFUND RECEIVABLE 
 
Tax refund receivable represents the 19% value added tax receivable from the government of the Czech Republic.  No allowance for doubtful accounts has been provided as we believe the amounts are fully collectible.
 
NOTE 5 - COMMITMENTS AND CONTINGENCIES
 
On May 28, 2008 Sendio entered into a lease contract for certain facilities located in the city of Olomouc in the Czech Republic (the “Lease”).  We intend to utilize the facilities to continue our assessment of the feasibility of manufacturing of our energy efficient, mercury free line of light bulbs.  The Lease term was one year, effective from July 1, 2008 and terminated on June 30, 2009.  The rent for the one year term was CZK 10,000,000, plus mandatory VAT.  The rent, after the reduction for amounts paid by other tenants, was payable monthly in the amount of CZK 455,310 for each month from January through June, 2009.  On May 29, 2008 Sendio paid a deposit of CZK 4,000,000 to the landlord.

 
7

 

Effective December 9, 2008 Sendio entered into an agreement (the “Purchase Agreement”) to purchase the facilities in the Lease from the landlord. The purchase price for the Premises is CZK 179,000,000 (approximately $9.0 million USD) (the “Purchase Price”) and the scheduled closing date for ownership transfer anticipated in the Purchase Agreement was July 1, 2009. The deposit Sendio paid on May 29, 2008 under the Lease for CZK 4,000,000 was considered an advance on the Purchase Price. We have recorded this amount as a non-current asset as a deposit on building purchase in the accompanying balance sheets as of September 30, 2009 and December 31, 2008. The remaining balance of the Purchase Price was payable by means of an escrow account, with payments totaling CZK 175,000,000 originally scheduled to be made to an escrow account in installments, all of which were due June 30, 2009.

Sendio did not make the first payment of CZK 11,000,000 due on February 28 and, on March 3, 2009 Sendio and the landlord of the building premises in the Czech Republic amended the payment terms under the Purchase Agreement.  Under the amendment, Sendio paid CZK 1,000,000 into the escrow account on March 10, 2009 and deferred the payment under the original payment schedule.  Sendio did not make the payments under the revised payment schedule, and we entered into negotiations with the seller to revise the terms of the Purchase Agreement.
Pursuant to these negotiations, Sendio has obtained month to month extensions for each month of the lease pursuant to these ongoing negotiations and Sendio agreed to pay CZK 722,556 per month for rent and CZK 645,834 per month for an escrow payment for July and September, 2009.

Under the original Purchase Agreement, in the event Sendio does not make the payments required under Purchase Agreement, the landlord is entitled to claim a contractual fine in the amount of CZK 17,500,000 and seek indemnification for up to an additional CZK 8,500,000. See Note 10.
 
Also effective December 9, 2008, as additional inducement for the landlord to enter into the Purchase Agreement, Vu1 entered into a Deed of Guarantee with the landlord under which it guaranteed up to CZK 13,500,000 of  the CZK 175,000,000 aggregate payments by Sendio under the Purchase Agreement.  The guarantee expires upon full payment by Sendio of this amount.
 
In February, 2009 we entered into a five month lease for our current office space in Seattle, Washington.  Monthly rent is $1,530.  Upon the conclusion of the lease term the lease became month to month on the same terms.
 
Total rent expense was $276,886 and $1,967,876 for the nine months ended September 30, 2009 and 2008, respectively.
 
In March, 2009 we signed an exclusive investment banking agreement with an investment banker to assist us with our fundraising efforts.  During the term of the agreement, upon the closing of a transaction, we will pay the investment bank financing fees ranging from 5% to 7% of the value of the transaction as defined in the agreement.  In addition, upon the closing of any sale of equity securities, we will be required to issue the investment bank warrants to purchase our common stock ranging from 2% to 4% of the amount raised on terms equal to the offering price or on terms equal to those sold to investors.  In addition, the investment bank will be entitled to a fee of 3.5% of any gross proceeds raised by us under certain circumstances as defined in the agreement.  No fees have been paid under this agreement as of September 30, 2009.
 
NOTE 6 – CONVERTIBLE NOTE PAYABLE
 
On June 8, 2009, Vu1 issued a Secured Convertible Grid Promissory Note to Full Spectrum Capital LLC (“Full Spectrum”), as amended August 31, 2009 (the “Note”). The Note provides that Full Spectrum may make one or more loans to Vu1, at such times and in such amounts as determined by Full Spectrum in its sole discretion, but not to exceed $7 million. Principal amounts under the Note are presently convertible at any time into shares of our common stock at a price of $0.40 per share and is secured by all of our assets. The Note also provides that in conjunction with each advance from Full Spectrum, we will issue three-year warrants to purchase common stock at an exercise price of $0.75 per share equal to 50% of the shares into which each advance is convertible. The Note bears interest at 18%.

If Full Spectrum loans a total of $3 million to Vu1, Vu1 has agreed to file a registration statement with the Securities and Exchange Commission for all of the shares of common stock issuable under the Note upon conversion and upon exercise of the warrants.  Full Spectrum is a recently formed LLC that is managed by R. Gale Sellers, an executive officer and director of Vu1.

 
8

 
 
Full Spectrum retains out of each advance an amount equal to one interest payment (three months’ accrued interest) (the “Interest Prepayment”), to be applied by Full Spectrum either to the final quarterly payment of interest due under the Note, or as payment of accrued and unpaid interest upon an event of default or prepayment of the Note. The amount retained as interest was treated as a component of the face value of the Notes and as prepaid interest, subject to amortization.Vu1 may prepay the Note at any time, but any such prepayment must include payment of an amount equal to the interest that would have accrued on such prepaid principal amount from the prepayment date through the maturity date of the Note but that has not yet been paid to or retained by the LLC.

Through September 30, 2009, the total outstanding principal balance under the Note was $1,137,788 (which includes $48,996 as the Interest Prepayment) which is currently convertible at $0.40 per share into 2,844,470 shares of common stock.   We issued three year warrants to purchase 1,422,235 shares of our common stock at an exercise price of $0.75 per share.

The amendment to the Note dated August 31, 2009 extended the due date of the first interest payment to December 1, 2009, extended the date that Full Spectrum could make advances, if any under the Note until October 31, 2009, and extended the due date of the Note to April 30, 2011.  The amendment also contains a down round provision that enables the Note holders to convert to our common stock at the lesser of $0.40 per share or the per share price of any future convertible debt or equity offering approved by the Board of Directors.  The modifications did not substantially change the cash flows associated with the Note or the fair value of the embedded conversion options. However, the modifications require bifurcation of the embedded conversion options and classification in derivative liabilities at fair value because they are no longer considered indexed to the Company’s common stock.

The following is a summary of our accounting for the Note, including the modification:

   
Pre-Modification
   
Post-Modification
       
Date during 2009
 
June 8
   
July 1
   
September
15
   
September
16
   
September
21
   
Total
 
Face value
  $ 522,500     $ 418,000     $ 87,563     $ 57,475     $ 52,250     $ 1,137,788  
Proceeds
    500,000       400,000       83,792       55,000       50,000       1,088,792  
Initial allocation:
                                               
Prepaid interest
  $ (22,500 )   $ (18,000 )   $ (3,771 )   $ (2,475 )   $ (2,250 )   $ ( 48,996 )
Notes payable
                    694                   694  
Warrants
    235,918       153,113       20,540       16,183       14,958       440,712  
Beneficial conversion
    286,582       264,887                         551,469  
Derivative liabilities
                66,329       74,286       74,064       214,679  
Day one loss
                      (32,994 )     (36,772 )     (69,766 )
    $ 500,000     $ 400,000     $ 83,792     $ 55,000     $ 50,000     $ 1,088,792  
                                                 
Modification adjustment:
                                               
Derivative liabilities
  $ 293,906     $ 235,125                       $ 529,031  
Day one loss
  $ (255,483 )   $ (212,251 )                     $ (467,734 )
                                                 
Aggregate inception and modification date:
                                               
Derivative liabilities
  $ 293,906     $ 235,125     $ 66,329     $ 74,286     $ 74,064     $ 743,710  
Day one losses
  $ (255,483 )   $ (212,251 )         $ (32,994 )   $ (36,772 )   $ (537,500 )
 
Our accounting for the Note modifications provided for bifurcation of the derivative liability at fair value. Since insufficient basis was available in the modification date carrying value, a day one derivative loss was recognized in the statement of operations. We will continue to carry the derivative liabilities at fair value, with charges or credits to the statement of operations for changes in fair value, until the Notes are settled through payment or conversion.
 
The Warrants issued in the Financing have strike prices of $0.75 and terms of three years from the issuance date. Warrants achieved equity classification because they met all of the requisite criteria and conditions therefore. However, the initial accounting for the Financing requires allocation of proceeds among the Notes and the warrants based upon relative fair values. The estimated fair value of the Warrants was calculated using the Black-Scholes option pricing model with the following assumptions:

 
9

 

 
Date during 2009
 
June 8
   
July 1
   
September
15
   
September
16
   
September
21
   
Total
 
Linked common shares
    653,125       522,500       109,453       71,844       65,313       1,422,235  
Trading market price
  $ 0.88     $ 0.70     $ 0.60     $ 0.80     $ 0.91          
Expected dividend
                                     
Expected life
    3.0       3.0       3.0       3.0       3.0          
Volatility
    145 %     123 %     130 %     178 %     178 %        
Risk free rate
    2.0 %     1.57 %     1.57 %     1.57 %     1.57 %        
 
See also Note 11, Subsequent Events.

NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments represent the embedded conversion features in our Notes that required bifurcation from the host debt agreements. Derivative financial instruments are classified as liabilities and carried at fair value, with changes reflected in the statement of operations. The following table summarizes the components of changes in our derivative financial instruments during the three months ended September 30, 2009:

   
Amount
 
Balance at July 1, 2009
  $  
         
Modifications and issuances:
       
Derivatives recognized upon modification of Notes, discussed in Note 6
    529,031  
Derivatives recognized upon issuance of post-modification Notes
    214,679  
         
Unrealized fair value changes, included in income
    663,219  
         
Balance at September 30, 2009
  $ 1,406,929  

The following table summarizes the affect on our statement of operations related to derivative financial instruments for the three and nine months ended September 30, 2009:
 
Income (expense):
 
 
Amount
 
       
Day one derivative losses
  $ 537,501  
Fair value changes
    663,219  
     $ 1,200,720  

We value our derivative financial instruments using a Monte Carlo Simulation Technique (“MCST”). The MCST was selected because this technique embodies all of the types of inputs that we expect market participants would consider in determining the fair value of equity linked derivatives embedded in hybrid debt agreements. Those inputs include equity-related inputs, as well as credit risks, interest risks and redemption behaviors. The following table summarizes the significant inputs and equivalent amounts across ranges of simulations resulting from the calculations:

   
Inception or Modification Date Calculations
       
 
Date during 2009
 
June 8
   
July 1
   
September
15
   
September
16
   
September
21
   
September
30
 
Linked common shares
    1,306,250       1,045,000       218,908       143,688       130,625       2,844,470  
Trading market price
  $ 0.88     $ 0.70     $ 0.60     $ 0.80     $ 0.91     $ 0.80  
Expected life (years)
    1.73       1.66       1.62       1.62       1.61       1.58  
Equivalent volatility
    97.05 %     97.05 %     98.44 %     109.64 %     111.38 %     111.62 %
Risk adjusted yield
    12.00 %     12.00 %     11.09 %     11.09 %     11.09 %     11.09 %
Risk adjusted interest rate
    14.44 %     14.44 %     14.54 %     18.00 %     18.00 %     18.00 %
 
 
10

 
 
NOTE 8 – LOAN PAYABLE
 
On May 15, 2008 Sendio entered into a three-year note payable for the purchase of a vehicle.  The note bears interest at a rate of 24.5% and is payable in 36 equal monthly installments of principal and interest of approximately $575 plus mandatory VAT and insurance.  The note is secured by the vehicle.
 
NOTE 9 – CAPITAL LEASE OBLIGATION
 
On May 30, 2008 Sendio entered into a five-year lease agreement for the purchase of certain equipment.  The capital lease obligation bears interest at a rate of 7.7% and requires payments of principal and interest of approximately $630 plus mandatory VAT and insurance over the 60-month term of the leases. The assets acquired under the capital lease obligation are being depreciated over the five-year term of the lease.
 
NOTE 10 – STOCKHOLDERS’ EQUITY
 
Preferred Stock
 
Our Amended and Restated Articles of Incorporation allows us to issue up to 10,000,000 shares of preferred stock without further stockholder approval and upon such terms and conditions, and having such rights, preferences, privileges, and restrictions as the Board of Directors may determine.  No preferred shares are currently issued and outstanding.

Common stock

On May 5, 2009 we entered into an engagement letter with a vendor pursuant to which we issued 75,000 shares of common stock valued at $71,250 based on the closing market price as of that date of $0.95 per share. The fair value was recognized as general and administrative expense on the date of issuance. In addition, the engagement letter specifies the issuance of an additional 75,000 shares of common stock upon the achievement of certain performance goals by November 5, 2009.  These performance goals had not been achieved as of September 30, 2009.
 
Subscription Receivable
 
During January and February, 2009 we collected net proceeds of $131,800 pursuant to subscription agreements for 164,750 Units under our Unit Offering.  Each Unit consists of two shares of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $0.60 per share. A total of 329,500 shares of common stock and two-year warrants to purchase 164,750 shares of common stock at an exercise price of $0.60 per share were issued.

Stock and Stock Options issued pursuant to the 2007 Stock Incentive Plan

On January 2, 2009 we made the following grants to an employee under the 2007 Stock Compensation Plan based on the closing market price as of that date of $1.10 per share:

 
·
We issued 100,000 shares of common stock valued at $110,000.  The shares will vest based upon the achievement of certain performance milestones.  These shares were forfeited on September 30, 2009.

 
·
We granted five-year options to purchase 150,000 shares of common stock valued at $132,707 which was calculated using the Black Scholes method and the following assumptions: volatility of 113.6%, risk free interest rate of 1.72% and an estimated life of five years.  These options were forfeited on September 30, 2009.

 
11

 

For the nine months ended September 30, 2009 and 2008 we recognized ($79,394) and $1,456,468, respectively, as share-based compensation related to the vesting of outstanding grants of stock and stock options.  A total of 2,250,000 unvested stock options were forfeited during the nine months ended September 30, 2009, resulting in the reversal of previously recorded share based compensation expenses on options which were forfeited. No awards were exercised during the nine months ended September 30, 2009.

There are no unvested stock options as of September 30, 2009.  We have 95,375 shares of unvested restricted stock issued in 2007 which we anticipate will vest in November, 2009 and 95,375 shares of unvested restricted stock issued in 2007 which will vest in November, 2010.  Total unrecognized compensation expense related to these unvested shares is $11,882 of which $4,570 will be recognized upon vesting in the fourth quarter of 2009 and $7,312 will be recognized ratably over the four quarters in 2010.

Warrants

On January 27, 2009 we issued a two-year warrant to a vendor to purchase 25,000 shares of common stock at an exercise price of $1.00 per share based on the closing market price as of that date.  The warrant vested monthly over the period of service from January to May, 2009.  The value of the warrant of $15,876 was recognized as marketing expense over the period of service and was calculated using the Black Scholes method and the following assumptions: volatility of 127.3%, risk free interest rate of 0.87% and an estimated life of two years.  A total of $15,876 was recognized as sales and marketing expense for the nine months ended September 30, 2009.

On March 17, 2009 we issued a three-year warrant to a vendor to purchase 150,000 shares of common stock at an exercise price of $0.75 per share based on the closing market price as of that date.  A total of 75,000 shares vest over the one year life of the agreement, with the remaining shares vesting upon the achievement of certain performance milestones.  The performance milestones were not achieved during the nine months ended September 30, 2009. The value of the warrant of $79,163 was calculated using the Black Scholes method and the following assumptions: volatility of 119.0%, risk free interest rate of 1.45% and an estimated life of three years. A total of $22,963 was recognized as an expense for the nine months ended September 30, 2009.

As discussed in Note 6, from June 6 to September 30, 2009 we issued three year warrants to purchase 1,422,235 shares of common stock at an exercise price of $0.75 per share to Full Spectrum Capital, LLC, which is controlled by R. Gale Sellers, a director and our Chief Executive Officer.

NOTE 11 – SUBSEQUENT EVENTS

We have evaluated all subsequent events through November 23, 2009, the date the nine-month period ending September 30, 2009 financial statements were issued.

See Note 5 – Commitments and Contingencies. As discussed in Note 5, Sendio did not make the payments required under the Purchase Agreement by June 30, 2009 and Sendio is in ongoing negotiations with the landlord regarding the lease agreement and the purchase agreement.  For October and November, 2009, Sendio obtained extensions of the lease pursuant to these ongoing negotiations and Sendio agreed to pay CZK 722,556 per month for rent and CZK 645,834 per month for an escrow payment. In addition, Sendio has obtained a waiver of claims against the Vu1 Guarantee, the contractual penalty and indemnification claims described in Note 5 through November 30, 2009. Although these negotiations are continuing, there can be no assurances that these negotiations will be successful.  If these negotiations are not successful, our financial condition and operations will be adversely effected.

On November 3, 2009 we issued an unsecured 10% note payable to an investor for cash in the amount of GBP 70,000 (approximately $115,000).  The note is due on November 30, 2009.

See Note 6 – Convertible Note Payable. From October 6 through November 19, 2009, Full Spectrum made additional advances under its Note for additional principal of $291,555 (including $12,555 as the Interest Prepayment and reimbursed expenses of $15,000) under the Note which is currently convertible at $0.40 per share into 728,889 shares of our common stock.  In conjunction with the advances, we issued a three-year warrant to purchase 364,444 shares of our common stock at an exercise price of $0.75 per share.

 
12

 

On November 19, 2009, (a) we entered into an Amended and Restated Secured Convertible Grid Promissory Note with Full Spectrum and (b) we entered into a new Secured Convertible Grid Promissory Note with SAM Special Opportunity Fund, LP (“SAM”) on the same terms as the Full Spectrum note.  Each note contemplates that Full Spectrum and SAM may make one or more cash advances to Vu1 prior to December 31, 2009, for a total potential loan not to exceed $7 million, with the exact amount to be determined by each of Full Spectrum and SAM in its sole discretion.  Also on November 19, 2009, we amended and restated our Security Agreement with Full Spectrum to add SAM as an additional secured creditor, extending to both lenders a first priority security interest in our assets as collateral security for repayment of their notes.

On November 19 and 20, 2009, we received cash advances from SAM under its note for an aggregate principal amount of $1,229,181 (including $52,931 as the Interest Prepayment and $15,000 of expenses reimbursed) which is currently convertible at $0.40 per share into 3,072,954 shares of common stock.  In connection with the loan advance from SAM, we issued to SAM three-year warrants to purchase 1,536,476 shares of Vu1 common stock at an exercise price of $0.75 per share.

The terms of the SAM note are substantially the same as the Full Spectrum note, as amended and restated.  In amending and restating the Full Spectrum note, we made the following amendments to the Full Spectrum note:

 
we extended until December 31, 2009 the date by which the holder is permitted to make additional advances to us under note;
 
we extended the date of the first required interest payment to February 1, 2010;
 
we fixed the maturity date at June 30, 2011 or such later date as mutually agreed;
 
we agreed to provide 30 days’ notice prior to any “change of control” (as defined in the note);
 
regarding events of default, we extended to 30 days (from 10 days) the grace period for delinquent interest payments, and we included a cross-default for a payment default on either the Full Spectrum note or the SAM note;
 
we clarified our obligation to prepare and file a registration statement (for the shares underlying the notes and warrants) upon an aggregate of $3 million being advanced under the Full Spectrum note and the SAM note;
 
we deleted the provision granting the holder a transferable and assignable right to make a “second loan” to us;
 
we deleted the provision granting the holder a right of first refusal regarding future financings;
 
we restricted any future transfer or assignment of the note without our prior written consent; and
 
we extended the $30,000 expense reimbursement to be not limited to attorneys fees.

The following table shows, as of November 23, 2009, (i) the net amount of cash received on advances made by Full Spectrum and SAM under their respective notes, (ii) the outstanding principal amount of each note, (iii) the total number of shares of common stock into which the notes are convertible (assuming a conversion rate of $0.40 per share) and (iv) the total number of warrants issued to Full Spectrum and SAM.  For each cash advance made under either note, the lender retains the Interest Prepayment, to be applied by the lender to the final quarterly payment of interest due under the note, or as payment of accrued and unpaid interest upon an event of default or prepayment of the note; accordingly, the outstanding principal amount for each note is calculated as the sum of the total amount of cash advances, plus the Interest Prepayments and retained expenses.

   
Advances
   
Total Principal
   
Conversion Shares
   
Warrants
 
Full Spectrum
    1,367,792       1,429,343       3,573,359       1,786,679  
SAM
    1,161,250       1,229,181       3,072,954       1,536,476  
      2,529,042       2,658,524       6,646,313       3,323,155  

Neither Full Spectrum nor SAM is obligated to make any additional advances to us and there are no assurances when or whether we will receive any additional amounts from either lender.

 
13

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.

Overview

We are focused on developing, manufacturing and selling a line of mercury free, energy efficient light bulbs based on our proprietary light-emitting technology.  For the past several years, we have primarily focused our efforts on research and development efforts for our ESL technology. In 2007 we formed Sendio s.r.o. (“Sendio”) in the Czech Republic as a wholly owned subsidiary for continued development of the bulb, and to design the manufacturing processes required for commercialization and manufacturing.  We have continued our development work on the technology and have initiated the design and implementation of the processes required to manufacture the bulb. Our efforts are presently focused on our initial planned product, the R30 sized light bulb. We also have filed a patent in October, 2009 for a linear fluorescent tube replacement, but no significant development work has begun. The continuation of our development efforts during 2009 and into 2010 depends upon our ability to raise additional capital.  The commercial viability of our ESL™ technology will largely depend on these development results, our ability to manufacture our product at commercially feasible levels, market acceptance of the product and other factors. We have no commercial products and no revenues.

We have curtailed operations in an effort to conserve cash and our development activities were significantly reduced. Although we received net loan proceeds of approximately $1.5 million in October and November, our current cash and cash equivalents are not sufficient to support our planned operations through January 2010, even at reduced levels. See “Liquidity and Capital Resources” below.

Our independent registered public accounting firm has issued a “going concern” statement in its report on our financial statements for the fiscal year ended December 31, 2008, stating that we had a net loss and negative cash flows from operations in fiscal 2008, and that we have an accumulated deficit. Accordingly, those conditions raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from this going-concern uncertainty.

Plan of Operations

Our efforts are primarily focused on our initial planned product, the R30 sized light bulb. We hope to continue our development efforts through 2009 and into 2010; however, the continuation of these efforts depends upon our ability to secure additional financing. Curtailing our operations has indefinitely delayed some of our planned development expenditures. Although we received net proceeds of $1.5 million subsequent to the end of the quarter from loans through November 23, 2009 (see Note 11 to Financial Statements), our operations have been and continue to be curtailed. We are unable to predict whether and when we will be able to resume our development or commercialization efforts as planned. The commercial viability of our ESL™ technology will largely depend on these development results, our ability to manufacture our product at commercially feasible levels, market acceptance of the product and other factors. We have no commercial products and no revenues. If we are able to secure financing, we expect to continue to make significant expenditures developing our planned product and the related manufacturing processes in fiscal 2009 and into 2010. Our future success and operating results will depend in large part on the results of these efforts.

We previously entered into an agreement to purchase the facility presently leased by Sendio in the Czech Republic. We are using this facility to develop our ESL technology and manufacturing processes. The lease expired by its terms on June 30, 2009 and Sendio has not made any of the payments required under the Purchase Agreement from June 30, 2009 (as discussed in Notes 5 and 11 of our condensed consolidated financial statements). We will need additional funding to complete the purchase of this building. We are presently in negotiations with the seller and landlord of the building, but there can be no assurances that these negotiations will be successful. If we are not successful with these negotiations, the extension that we have obtained on our lease will expire on November 30, 2009.  This will have a material adverse effect on our operations.

Sendio had 36 engineering, technical and administrative employees at September 30, 2009 and the US Operations had one employee.

 
14

 

Our anticipated expenditures related to our operations for the remainder of fiscal 2009 and into 2010 will primarily depend on our ability to get financing, as well as on personnel costs and equipment needs for continued development of our light bulb and the manufacturing processes.  In addition, if we obtain financing, we anticipate we may incur additional costs related to purchases of raw materials and supplies, marketing, sales and distribution related costs, and increased administrative costs. An overall estimate of our capital expenditures is primarily dependant upon the success of our development and manufacturing results for our prototype, and as such cannot presently be estimated.  Our capital expenditures depend upon our ability to obtain additional financing.

Our anticipated costs in fiscal 2009 and into 2010 for work on our light bulb cannot be reasonably estimated due to the inherent uncertainty of the research and feasibility of the manufacturing processes. An additional project for a linear fluorescent tube replacement is planned, but its development is contingent upon the receipt of additional financing.  There can be no assurances that this development process will be successful or, if successful, that the technology will find a market and achieve sales that can sustain our operations without additional funding.

Our office space in Seattle, WA is presently leased on a month to month basis.
 
Results of Operations
 
Comparison of Results for the three months ended September 30, 2009 and 2008
 
Revenues
 
We had no revenues for the three months ended September 30, 2009 and 2008.

Research and Development Expenses
 
For the three months ended September 30, 2009 and 2008, we were involved in a single project to develop and commercialize our proprietary technology.  For the comparable quarters, research and development expenses were comprised primarily of salary, rent, technical consulting expenses, supplies and travel, and other costs of the research related operations in the Czech Republic through our wholly-owned subsidiary, Sendio. Research and development expenses decreased approximately $173,000 to $615,000 for the three months ended September 30, 2009 compared to $788,000 for the three months ended September 30, 2008.   The decrease is related to a decrease in salaries and attendant costs and consulting fees related to the curtailing of our operations.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2009 and 2008 consisted of salaries and attendant costs, share based compensation expenses, professional and legal fees, consulting expenses, insurance, travel and general corporate related overhead and office expenses. General and administrative expenses decreased by approximately $1,779,000 to $258,000 for the three months ended September 30, 2009 compared to $2,036,000 for the three months ended September 30, 2008.  This decrease was due primarily to decreases in share based compensation costs which were ($268,000) for the three months ended September 30, 2009 compared to $1,185,000 for the three months ended September 30, 2008.  The remaining decrease is due to reductions in salaries and consulting fees related to the curtailing of our operations.

Marketing Expenses

Marketing expenses for the three months ended September 30, 2009 and 2008 were comprised of salaries, consulting fees, market and branding research and office related expenses. Marketing expenses decreased by approximately $43,000 to $80,000 for the three months ended September 30, 2009 compared to $123,000 for the three months ended September 30, 2008.  This decrease was due primarily to decreases in consulting fees for the quarter ended September 30, 2009.

 
15

 

Other Income and Expense
 
Other income and expense for the three months ended September 30, 2009 was comprised of interest income, interest expense and derivative valuation loss.  Interest income was approximately $234 compared to $3,600 for the three months ended September 30, 2008. The decrease is due to lower average cash balances and lower interest rates for the current period.  Interest expense for the three months ended September 30, 2009 increased $115,000 to $117,000 and relates to the accrued interest and amortization of discount on the Note, Sendio’s loan and capital lease obligations as discussed in Notes 6, 7 and 8. Included in interest expense is discount amortization of $66,000 for the three months ended September 30, 2009 related to the Note.  Interest expense for the three months ended September 30, 2008 of $2,000 was related to Sendio’s loan and capitalized lease obligations.

Derivative valuation loss amounted to $1,201,720 during the three months ended September 30, 2009 (none for the three months ended September 30, 2008). Derivative valuation loss results from embedded derivative financial instruments that are required to be measured at fair value.

The following table summarizes the effect on our statement of operations related to derivative financial instruments for the three months ended September 30, 2009:
 
Income (expense):
 
 
Amount
 
       
Day one derivative losses
  $ 537,501  
Fair value changes
    663,219  
    $ 1,200,720  

The changes in the fair value of our derivatives are significantly influenced by changes in our trading stock price and changes in interest rates in the public markets. Further, certain elements of the fair value techniques require us to make estimates about the outcome of certain events, such as defaults. We value our derivative financial instruments using a Monte Carlo Simulation Technique (“MCST”). The MCST was selected because this technique embodies all of the types of inputs that we expect market participants would consider in determining the fair value of equity link derivatives embedded in hybrid debt agreements. Those inputs include equity-related inputs, as well as credit risks, interest risks and redemption behaviors. Changes in these inputs will affect the carrying value of our derivative liabilities and therefore the amount of derivative valuation gain (loss) that we are required to record.
 
Comparison of Results for the nine months ended September 30, 2009 and 2008
 
Revenues
 
We had no revenues for the nine months ended September 30, 2009 and 2008.

Research and Development Expenses
 
For the nine months ended September 30, 2009 and 2008, we were involved in a single project to develop and commercialize our proprietary technology.  For the comparable quarters, research and development expenses were comprised primarily of salary, rent, technical consulting expenses, supplies and travel, and other costs of the research related operations in the Czech Republic through our wholly-owned subsidiary, Sendio. Research and development expenses decreased approximately $1,891,000 to $2,075,000 for the nine months ended September 30, 2009 compared to $3,966,000 for the nine months ended September 30, 2008.   The decrease is related primarily to a decrease in rent expense at Sendio as well as the decrease in salaries and attendant costs and consulting fees related to the curtailing of our operations.  In the nine months ended September 30, 2008 we incurred a non-cash charge of approximately $1,571,000 resulting from the 6,100,000 shares we issued as payment for the initial term under the former lease of Sendio’s premises, for which no comparable current year charge exists.
 
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General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2009 and 2008 consisted of salaries and attendant costs, share based compensation expenses, professional and legal fees, consulting expenses, insurance, travel and general corporate related overhead and office expenses. General and administrative expenses decreased by approximately $1,629,000 to $1,606,000 for the nine months ended September 30, 2009 compared to $3,235,000 for the nine months ended September 30, 2008.  This decrease was due primarily to decreases in share based compensation costs related to the issuance and vesting of stock options to employees.  Share based compensation expense was ($93,000) compared to $1,492,000 for the nine months ended September 30, 2009 and 2008, respectively.  The remaining decrease was due to decreases in consulting fees for the nine months ended September 30, 2009.

Marketing Expenses

Marketing expenses for the nine months ended September 30, 2009 and 2008 were comprised of salaries, consulting fees, market and branding research and office related expenses. Marketing expenses increased by approximately $23,000 to $275,000 for the nine months ended September 30, 2009 compared to $252,000 for the nine months ended September 30, 2008.  This increase was due primarily to increases in non-cash costs of $23,000 related to a warrant issued to a consultant, partially offset by decreases in consulting fees for the nine months ended September 30, 2009.

Other Income and Expense
 
Other income and expense for the nine months ended September 30, 2009 was comprised of interest income, interest expense and derivative valuation loss.  Interest income was approximately $3,000 compared to $9,000 for the nine months ended September 30, 2008. The decrease is due to lower average cash balances and lower interest rates for the current period.  Interest expense for the nine months ended September 30, 2009 was $134,000 and relates to the interest and amortization of discount on the Note, Sendio’s loan and capital lease obligations as discussed in Notes 6, 7 and 8.  Included in interest expense is discount amortization of $75,000 for the nine months ended September 30, 2009 related to the Note. Interest expense for the nine months ended September 30, 2008 of $2,000 was related to Sendio’s loan and capitalized lease obligations.

Derivative valuation loss amounted to $1,200,720 during the nine months ended September 30, 2009 (none for the nine months ended September 30, 2008). Derivative valuation loss results from embedded derivative financial instruments that are required to be measured at fair value.

The following table summarizes the effect on our statement of operations related to derivative financial instruments for the nine months ended September 30, 2009:
 
Income (expense):
 
 
Amount
 
       
Day one derivative losses
  $ 537,501  
Fair value changes
    663,219  
    $ 1,200,720  

The changes in the fair value of our derivatives are significantly influenced by changes in our trading stock price and changes in interest rates in the public markets. Further, certain elements of the fair value techniques require us to make estimates about the outcome of certain events, such as defaults. We value our derivative financial instruments using a Monte Carlo Simulation Technique (“MCST”). The MCST was selected because this technique embodies all of the types of inputs that we expect market participants would consider in determining the fair value of equity link derivatives embedded in hybrid debt agreements. Those inputs include equity-related inputs, as well as credit risks, interest risks and redemption behaviors. Changes in these inputs will affect the carrying value of our derivative liabilities and therefore the amount of derivative valuation gain (loss) that we are required to record.
 
Liquidity and Capital Resources
 
Our cash and cash equivalents were approximately $19,000 as of September 30, 2009 and are not sufficient to support our reduced levels of operations.  In October and November, 2009 Full Spectrum advanced an additional $279,000 under their Note. In addition, we received net proceeds of $115,000 from the issuance of an unsecured note payable and net proceeds of $1,161,250 from SAM. These are described more fully in Note 11 to the condensed consolidated financial statements.

 
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We anticipate that with our remaining cash and cash equivalents and the loan proceeds described above, we will be able to fund our curtailed operations into January, 2010. In March 2009, we engaged an investment banker to assist us with our fundraising efforts, but we have not yet been successful in obtaining financing.
 
We expect to continue to seek additional financing in 2009 and into 2010 to fund our planned operations and research and development and manufacturing activities, through one or more debt or equity financings.  Our efforts to raise sufficient capital may not be successful, and even if we are able to obtain additional financing, the terms of any such financing may be unfavorable to us and may be highly dilutive to existing stockholders. There can be no assurances that further cash advances, when and if made, will be sufficient to sustain our required levels of operations.
 
If necessary, we may explore strategic alternatives, which may include a merger, asset sale, joint venture or another comparable transaction.  If we are unable to obtain sufficient cash to continue to fund operations or if we are unable to locate a strategic partner, we may be forced to seek protection from creditors under the bankruptcy laws or cease operations.  Any inability to obtain additional cash as needed would have a material adverse effect on our financial position, results of operations and our ability to continue in existence.  Our auditors added an explanatory paragraph to their opinion on our fiscal 2008 financial statements stating that there was substantial doubt about our ability to continue as a going concern.
 
All of our assets are currently held as collateral to secure repayment of the promissory notes payable to Full Spectrum and SAM.  (See Note 6 and 11 to our consolidated financial statements).  In the event that we cease operations or are otherwise unable to repay the note as it becomes due, Full Spectrum and SAM will have full rights as secured creditors with respect to our assets, including the right to take control of our assets, sell the assets at a public or private sale, or take any other action permitted by applicable law.
 
If we cease operations or file for protection under the bankruptcy laws, any cash and assets we have would be used first to satisfy claims of creditors and to discharge liabilities.  We cannot predict whether our stockholders would receive any return on their shares.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 
ITEM 4T. CONTROLS AND PROCEDURES
 
As required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of management, including our chief executive officer and chief financial officer.  Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective at September 30, 2009.

In connection with its review of our quarterly results for the period ended September 30, 2009, our independent auditor identified a material adjustment that was required to recognize the effect of the down round provision of the Note as discussed in Note 6 to the condensed consolidated financial statements.  As a result, we have concluded that there is a material weakness regarding the process surrounding the identification and analysis of potential derivative elements contained in our agreements and contracts.  We are currently evaluating how to effectively remediate this material weakness.  In this regard, we continue to review our disclosure controls and procedures, including our internal control over financial reporting, and intend to make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
 
There have been no changes in our internal controls over financial reporting in connection with this evaluation that occurred during the third quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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 (a) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 
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PART II - OTHER INFORMATION
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On September 30, 2009 we issued 44,800 shares of common stock to an employee upon their termination for services valued at $22,400.
 
ITEM 5. OTHER INFORMATION

On November 19, 2009, (a) we entered into an Amended and Restated Secured Convertible Grid Promissory Note with Full Spectrum Capital LLC (“Full Spectrum”), and (b) we entered into a new Secured Convertible Grid Promissory Note with SAM Special Opportunity Fund, LP (“SAM”) on the same terms as the Full Spectrum note.  Each note contemplates that Full Spectrum and SAM may make one or more cash advances to Vu1 prior to December 31, 2009, for a total potential loan not to exceed $7 million, with the exact amount to be determined by each of Full Spectrum and SAM in its sole discretion.  Also on November 19, 2009, we amended and restated our Security Agreement with Full Spectrum to add SAM as an additional secured creditor, extending to both lenders a first priority security interest in our assets as collateral security for repayment of their notes.

On November 19 and 20, 2009, we received cash advances from SAM under its note for an aggregate $1,229,181 including $52,931 of prepaid interest and $15,000 of expenses reimbursed which is currently convertible at $0.40 per share into 3,072,954 shares of common stock..  In connection with the loan advance from SAM, we issued to SAM a three-year warrant to purchase 1,536,476 shares of Vu1 common stock at an exercise price of $0.75 per share.

The terms of the SAM note are substantially the same as the Full Spectrum note, as amended and restated.  In amending and restating the Full Spectrum note, we made the following amendments to the Full Spectrum note:

 
we extended until December 31, 2009 the date by which the holder is permitted to make additional advances to us under note;
 
we extended the date of the first required interest payment to February 1, 2010;
 
we fixed the maturity date at June 30, 2011 or such later date as mutually agreed;
 
we agreed to provide 30 days’ notice prior to any “change of control” (as defined in the note);
 
regarding events of default, we extended to 30 days (from 10 days) the grace period for delinquent interest payments, and we included a cross-default for a payment default on either the Full Spectrum note or the SAM note;
 
we clarified our obligation to prepare and file a registration statement (for the shares underlying the notes and warrants) upon an aggregate of $3 million being advanced under the Full Spectrum note and the SAM note;
 
we deleted the provision granting the holder a transferable and assignable right to make a “second loan” to us;
 
we deleted the provision granting the holder a right of first refusal regarding future financings;
 
we restricted any future transfer or assignment of the note without our prior written consent; and
 
we extended the $30,000 expense reimbursement to be not limited to attorneys fees.

Copies of the amended and restated Full Spectrum note, the SAM note and the Amended and Restated Security Agreement are included as Exhibits 10.1, 10.2 and 10.3, respectively, to this Form 10-Q.  The foregoing summary of the amendments to the notes is qualified in its entirety to the complete text of the notes.  Readers are also encouraged to review our prior filings with the Securities and Exchange Commission that describe the other material terms of the note, security agreement and warrants, including, without limitation, our Form 8-K dated June 8, 2009 and Form 8-K dated September 1, 2009.

The following table shows, as of November 23, 2009, (i) the total amount of cash advances made by Full Spectrum and SAM under their respective notes, (ii) the outstanding principal amount of each note, (iii) the total number of shares of common stock into which the notes are convertible (assuming a conversion rate of $0.40 per share) and (iv) the total number of warrants issued to Full Spectrum and SAM.  For each cash advance made under either note, the lender retains an amount equal to one interest payment (three months’ interest), to be applied by the lender to the final quarterly payment of interest due under the note, or as payment of accrued and unpaid interest upon an event of default or prepayment of the note; accordingly, the outstanding principal amount for each note is calculated as the sum of the total amount of cash advances, plus the retained interest payments.

 
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Advances
   
Total Principal
   
Conversion Shares
   
Warrants
 
Full Spectrum
    1,367,792       1,429,343       3,573,359       1,786,679  
SAM
    1,161,250       1,229,181       3,072,954       1,536,476  
      2,529,042       2,658,524       6,646,313       3,323,155  

Neither Full Spectrum nor SAM is obligated to make any additional advances to us and there are no assurances when or whether we will receive any additional amounts from either lender.
 
ITEM 6.
  EXHIBITS
   
10.1
Amended and Restated Secured Convertible Grid Promissory Note dated November 19, 2009 by and between the Company and Full Spectrum Capital LLC
   
10.2
Secured Convertible Grid Promissory Note dated November 19, 2009 by and between the Company and SAM Special Opportunity Fund L.P.
   
10.3
Amended and Restated Security Agreement dated November 19, 2009 by and among the Company, Full Spectrum Capital LLC and SAM Special Opportunity Fund L.P.
   
31.1
Rule 13a-14(a)/15d-14(a) Certification of R. Gale Sellers, Chief Executive Officer
   
31.2
Rule 13a-14(a)/15d-14(a) Certification of Matthew DeVries, Chief Financial Officer
   
32.1
Certification of R. Gale Sellers, CEO, and Matthew DeVries, CFO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
VU1 CORPORATION
 
 
 (Registrant)
 
       
 
Dated: November 23, 2009
 
       
 
By:
/s/ R. Gale Sellers
 
 
R. Gale Sellers
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
       
 
By:
/s/ Matthew DeVries
 
 
Matthew DeVries
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 

 
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