Attached files
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EX-21.1 - Vu1 CORP | v181140_ex21-1.htm |
EX-32.1 - Vu1 CORP | v181140_ex32-1.htm |
EX-31.2 - Vu1 CORP | v181140_ex31-2.htm |
EX-31.1 - Vu1 CORP | v181140_ex31-1.htm |
EX-10.18 - Vu1 CORP | v181140_ex10-18.htm |
EX-10.17 - Vu1 CORP | v181140_ex10-17.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT
OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 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 number 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
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98109
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(888)
985-8881
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Exchange Act: NONE.
Securities
registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, NO PAR
VALUE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes¨ No x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes¨ No x
Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yeso Nox
The
aggregate market value of the issuer’s voting stock held by non-affiliates on
June 30, 2009, the last business day of the registrant’s most recently completed
second fiscal quarter was $45,034,254 based on the average of the bid and ask
prices of such stock on that date of $0.77, as reported on the OTC Bulletin
Board.
On April
15, 2010 there were 86,152,246 shares of Registrant’s common stock, no par
value, issued and outstanding.
Documents Incorporated By
Reference: None
TABLE OF
CONTENTS
Page
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Number
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PART I | ||||
Item
1.
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Business
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1
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Item
1A
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Risk
Factors
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5
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Item
1B
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Unresolved
Staff Comments
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12
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Item
2.
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Properties
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12
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Item
3.
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Legal
Proceedings
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13
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Item
4.
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Reserved
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13
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PART
II
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||||
Item
5.
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Market
for Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
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14
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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20
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Item
8.
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Financial
Statements and Supplementary Data
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20
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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21
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Item 9A(T).
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Controls
and Procedures
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21
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Item
9B.
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Other
Information
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22
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PART
III
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||||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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23
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Item
11.
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Executive
Compensation
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25
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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29
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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30
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Item
14.
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Principal
Accountant Fees and Services
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31
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PART
IV
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||||
Item
15.
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Exhibits
and Financial Statement Schedules
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32
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Signatures
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34
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EXPLANATORY
NOTE
Unless
otherwise indicated or the context otherwise requires, all references in this
Annual Report on Form 10-K 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
We are
including the following cautionary statement in this Annual Report on Form 10-K
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 Annual Report on Form 10-K are forward looking.
In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” “target,” 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:
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·
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our
lack of working capital and lack of
revenues;
|
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·
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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;
|
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·
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our
ability be successful in our product development and testing
efforts;
|
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·
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our
ability to obtain commercial development for our planned
products;
|
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·
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our
ability to obtain manufacturing capability for our planned products in a
cost-effective manner and at the times and in the volumes required, while
maintaining quality assurance;
|
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·
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market
demand for and acceptance of our planned products, and other factors
affecting market conditions;
|
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·
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technological
advances and competitive pressure by our
competitors;
|
|
·
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governmental
regulations imposed on us in the United States and European Union;
and
|
|
·
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the
loss of any of our key employees or
consultants.
|
For a
discussion of these and other factors that may affect our business, results and
prospects, see “ITEM 1. OUR BUSINESS” and “ITEM 1A. RISK
FACTORS.” Readers are urged to carefully review and consider the various
disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission, and those described from time to time in our
press releases and other communications, which attempt to advise interested
parties of the risks and factors that may affect our business, prospects and
results of operations. Except as required by federal securities laws,
we do not undertake any obligation to update or revise any forward-looking
statements to reflect any future events or circumstances.
PART
I
ITEM
1. BUSINESS
Overview
Vu1 has
created a new energy efficient incandescent quality lighting technology we call
Electron Stimulated Luminescence™ (“ESL™”). ESL utilizes existing
light bulb shapes and is designed to be a cost effective, energy efficient light
bulb retro-fit solution. Vu1 Corporation is focused on developing, manufacturing
and selling energy efficient, mercury free, light bulbs based on our proprietary
light-emitting ESL 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. During 2008 and 2009, we 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 and anticipate that the
development efforts will continue in 2010. 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 are a
California corporation, originally incorporated on August 30, 1996 under the
name Telegen Corporation. On May 22, 2008 we amended our articles of
incorporation to change our name to Vu1 Corporation. Our shares of
common stock are presently quoted on the OTC Bulletin Board under the symbol
“VUOC”. Our corporate offices are located at 557 Roy Street Suite
125, Seattle, WA 98109 and our telephone number is 888-985-8881. Our
web site can be found at www.vu1.com.
Products
Under Development, Our Proprietary Technology and Our Research and Development
Efforts
In 2009,
we focused our U.S. and Czech Republic development efforts on the application of
ESL technology on the requirements of our initial planned product, an R30 sized
light bulb. The R30 size bulb is used primarily in lighting fixtures that are
recessed in the ceiling of commercial and residential buildings and are commonly
referred to as “recessed can fixtures”. During the third quarter of 2009, these
efforts have resulted in the production of our first R30 size light bulb
prototype utilizing ESL technology which is able to function in a standard
household lighting fixture. Upon achieving this milestone, our development
efforts were shifted to our Sendio manufacturing facility. We are continuing to
refine the prototype with the miniaturization of the electronics and
improvements to the efficiency of the bulb. We are presently working with an
independent laboratory in the Czech Republic regarding certification in the
European Union and have initiated discussions in the U.S. regarding
certification, although no formal submissions of a final product to these
laboratories have been made. Our primary focus is to continue to
refine the technology and develop the manufacturing processes for the R30 sized
light bulb; however, as resources allow, we are also initiating methods research
and manufacturing proof of concept prototypes on other bulb shapes such as R40,
R25, A19 and linear fluorescent tube utilizing our proprietary ESL
technology. The key design features of our planned light bulb are
that it be energy efficient, fully dimmable, illuminates immediately when
switched on and have a color quality that is warm and similar to incandescent
light. In addition, our light bulb does not contain mercury, a
feature which will ease disposal. In addition, our light bulb will
not have the drawbacks of the current energy-efficient light bulb
solutions.
We are
continuing to refine the design of our planned product to maximize its
efficiency, and we expect there will be adjustments to our current designs. We
may not be able to successfully develop the full feature set for our planned
light bulb, obtain the necessary certifications or commercially manufacture our
planned product.
Our
emphasis on the development of our planned product, the additional manufacturing
processes required and commercial manufacturing, distribution, marketing and
branding and the development of sales channels surrounding our light bulb will
command management’s primary attention during fiscal 2010. It will
also comprise the primary use of our limited financial resources. In 2010, our
success will depend on our ability to develop our planned product that meets
industry standards, obtain commercial manufacturing, generate market awareness
and acceptance of our planned products, protect our technology through patents
and trade secrets, and obtain funding to finance our operations. If
we are unable, for technological, financial, competitive, or other reasons, to
successfully meet these factors, our business and operations will be materially
adversely affected.
1
The
Lighting Industry
We
believe the primary market for our planned light bulb is the commercial and
residential General Illumination Market, where incandescent, halogen, compact
fluorescent (“CFL”) and Light Emitting Diode (“LED”) light emitters
are utilized. In recent years, the industry has shifted to more
energy efficient lighting solutions in an effort to conserve
electricity. This market shift is being mandated to some degree by
legislation in the U.S. and internationally. The U.S. has passed
legislation intended to phase out the use of the incandescent light bulb
beginning in 2012, with a full phase out in 2014. Similar legislation
has been passed by EU Energy Ministers, as well as in Canada, Australia and
Ireland.
Target
Markets
Initially,
Vu1 will intend to target the US R30/R40 reflector light bulb
market. According to recent reports, the U.S. residential market is
comprised of 800 million recessed can lights with over 140 million bulbs sold
per year (“CFL Market Profile”, U.S. Department of Energy, March 2009 and “A
Review of the Reflector Compact Fluorescent Lamps Technology Procurement
Program: Conclusions and Results” Pacific Northwest National Laboratory, May
2008).
Significant
lighting market drivers are size, shape, cost, brightness, color rendering,
mercury free, dimming capability and energy efficiency. We are
directing our product development efforts with awareness of these features.
Distribution in this market segment is primarily through distributors (typically
regional) or directly from manufacturers to larger retailers.
Our
Intellectual Property, Patents and Proprietary Rights
We are
developing the necessary documentation, and we have applied for patent
protection on our proprietary light-emitting technology. We have
filed a total of 9 U.S. patent applications and related international patent
filings, and we expect to apply for additional patent protection on our
technology and our manufacturing processes both domestically and internationally
in the future. We believe that our technology has unique aspects that
are patentable; however, there can be no assurances that any patent will be
issued or if issued that it will be defensible.
We
protect our intellectual property rights through a combination of trademark,
copyright, trade secret laws and other methods of restricting disclosure, and
requiring our independent consultants, strategic vendors and suppliers to sign
non-disclosure agreements as well as an assignment of inventions agreements when
appropriate.
Regulatory
Issues and Industry Certification
Any
commercial light bulb product that we develop will require certifications from
an independent third party testing laboratory prior to their
sale. There is presently no Energy Star® certification standard for
our ESL technology and we do not know if one will be developed or if we will
qualify under existing standards. In addition, we may be subject to
other certifying agencies and other regulatory approvals. The approvals and
certifications required will be determined based upon the market that we
enter. We are designing our light bulb to meet the standards for
certification from independent third party laboratories, and we intend to submit
an application to the appropriate testing laboratory once we have completed the
necessary development and manufacturing processes required to obtain
certification. We are presently working with an independent
laboratory in the Czech Republic regarding certification in the European Union
and have initiated discussions in the U.S. regarding certification, although no
formal submissions to these laboratories have been made. We cannot
predict whether we will obtain certification from an independent third party
testing laboratory or any other regulatory agency.
2
Competition
This
market segment is highly competitive and traditionally dominated by several
large competitors such as General Electric Company, Phillips Electronics NV,
Osram Sylvania. These entities possess far more substantial
financial, human and other resources than we do. There also are hundreds of
small manufacturers of low end products – many inexpensive and often poor
performing CFL bulbs. Many companies are now developing products
utilizing LED technology. Philips spent over $4
billion acquiring LED technology companies in 2008. As energy
efficient technologies are adopted it is likely that the industry will continue
to be dominated by large competitors who will often outsource manufacturing to
smaller companies. Research will continue on incandescent type technologies such
as Halogen Infrared Reflecting. Abandoned technologies such as
induction lighting may temporarily re-emerge. Over the last three
years in meetings with electric utilities, Department of Energy consultants,
electrical distributors and major retailers, we have not identified any
competitors with a similar technology to ESL.
Suppliers
Development
and production of our bulbs will require certain raw materials, including glass,
electronics, coatings, certain chemicals and chemical compounds, plastic, and
packaging. We have identified key targeted suppliers for these raw
materials, and we have entered into discussions with several of them regarding
supply arrangements. Currently, we do not have dedicated supply
agreements with all suppliers. We anticipate that most of our raw
material purchases will not be pursuant to a supply agreement but will be by
purchase order. In addition, we are continuing to identify
alternative suppliers for our raw material needs. We believe that we
will be able to obtain the supplies used in our development process from a
number of vendors.
Research
and Development
We have
spent an aggregate of approximately $7.86 million during fiscal 2009 and 2008 in
our development efforts. In addition, we have acquired manufacturing
equipment for approximately $0.6 million. See “Products Under
Development, Our Proprietary Technology and Our Research and Development
Efforts” above.
Manufacturing
Our
manufacturing facility is located in the Czech Republic, and is operated through
our wholly-owned subsidiary, Sendio s.r.o. We are using this facility
to develop our ESL technology and manufacturing processes. As of
December 31, 2009, we had 39 employees at our Sendio facility.
The
facility is a 75,000 square foot building located in the city of Olomouc in the
Czech Republic. We currently lease the premises, and in 2008 we
entered into an agreement with the landlord to purchase the facility, which we
amended in 2009. Before we can complete the purchase, we will need to obtain
adequate financing. See “Item 2. Properties” for a
discussion of our current lease and purchase agreement for this
facility.
The
Sendio facility includes development facilities and a customized production line
which, when all manufacturing processes are completed, we intend to use for the
production of our R30 size light bulb. We have estimated the existing
production line to have an annual capacity of up to 6 million
bulbs. In addition, we have planned future expansion capacity,
including two additional production lines, one with an estimated 10 million bulb
annual capacity and one with a further estimated 20 million bulb annual
capacity. Before we can initiate high volume manufacturing in this
facility, we anticipate that we will need to obtain and install additional
equipment.
We
currently plan to begin limited production of our bulbs for evaluation in the
third quarter of 2010. This schedule is subject to many factors
outside of our control including:
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●
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unanticipated
delays and expenses affecting our ongoing development
efforts;
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●
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our
ability to raise financing to fund operations and planned
commercialization;
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●
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results
of independent, third-party testing of our
bulbs;
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●
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the
availability of raw materials and equipment for
manufacturing.
|
3
Environmental
Compliance
We will
be subject to certain environmental requirements and laws in the Czech Republic
that have been identified related to our manufacturing processes. We
have obtained the necessary permits required for the current development
operations of the facility in the Czech Republic. We may be subject to
additional environmental requirements in the future.
Marketing,
Sales and Distribution
During
2009 we continued our marketing initiatives to determine our initial marketing
strategy and research and to begin branding and corporate positioning
issues. Our marketing efforts have included market research to
determine market size, competition, product features, consumer attitudes,
pricing, certifications, government agencies, grants, target channels and
retailers, branding and creation of initial marketing collateral. We have also
had strategic meetings with certain retailers, utilities and potential channel
and distribution partners to determine levels of interest in our light bulb and
the underlying technology. We believe that the results of these
meetings were positive but no agreements have been entered into.
Twenty
states have enacted Conservation Improvement Programs
(“CIP”). Through a CIP, electric and natural gas utilities are
required to invest a portion of their state revenues in projects designed to
reduce their customers' consumption of electricity and natural gas, and to
generally improve resource efficiency. One form of CIP investment is
conducting “give-aways” of energy efficient lighting
products. Alternatively, some states provide cash rebates to light
bulb manufacturers, stores or directly to the consumer. Vu1 has met with a
number of utilities and utility groups to determine interest in the promotion of
ESL energy efficient bulbs. We believe that the results of these
meetings were positive but no agreements have been entered into.
In March,
2009 we entered into an agreement with Integrated Sales Solutions, Inc. “ISS” to
enhance our capabilities in designing and establishing sales strategy and
distribution channels with retail, electrical utilities, electrical distributors
and government agencies. ISS will also advise and assist in defining logistics,
warehousing, finished good requirements, distribution, packaging, merchandising,
and support for our ESL bulbs, including product training within customer
organizations. We intend to work closely with ISS to develop programs
aimed at further developing these channels and potential distribution
partnerships.
Based on
the information we have obtained we believe that the technology could prove to
have a viable market, but can give no assurances that any such market will
develop. We believe that initial sales would most likely occur though
independent regional distributors and direct purchases by utility companies and
retailers. However, we currently do not have any distribution
relationships, and these may never develop.
Our
technology has been featured on the Discovery Channel web site, Popular Science
web site, CNET web site and on the New York Times web site.
Employees
As of
December 31, 2009 we had 39 full time employees in the Czech Republic through
our subsidiary Sendio. In addition, our Chief Marketing Officer, T.
Ron Davis was our only full time employee in the United States. Our other
executive officers, Richard Herring, R. Gale Sellers and Matthew DeVries are
consultants.
We have
routinely used consultants in our U.S. operations and strategic vendors on a
work for hire contract basis. Any additional full time employees in the United
States or the Czech Republic during 2010 will be dependent upon obtaining
additional funding.
4
ITEM
1A. RISK FACTORS
In
addition to the other information in this Annual Report on Form 10-K, the
following risk factors should be considered carefully in evaluating our business
and an investment in our stock.
Risk
Factors Relating to Our Company and Our Business
We
are a research and development company. We have a limited operating history, we
have generated no revenues, and it is difficult to evaluate our business and
prospects. We received a going concern qualification in our 2009
audit.
We have
been engaged in the research and development of our energy efficient, mercury
free light bulbs since May 2004, and have incurred significant operating
losses. We have not completed the design and manufacture of our
product prototype and have not commenced commercial manufacturing. We
have not generated any revenues and we depend on third-party financing to fund
operations. We have no operating history upon which an investor can evaluate our
business and prospects, and we may never be successful or achieve
profitability.
Peterson
Sullivan, LLP, our independent registered public accounting firm, in their
opinion on our financial statements for the year ended December 31, 2009, raised
substantial doubt about our ability to continue as a going concern due to our
net losses and negative cash flows from operations and other
factors. For further information, see Note 3 to our Consolidated
Financial Statements included in this Annual Report on Form 10-K.
As
a result of the Convertible Grid Promissory Notes we entered into with Full
Spectrum Capital, LLC (“Full Spectrum”) and Smith Asset
Management, LP (“SAM”), we have a
significant amount of debt. We may not be able to generate sufficient cash to
service or repay all of our indebtedness, and we may be forced to take other
actions to satisfy our obligations under our indebtedness, which may not be
successful. Our substantial indebtedness could adversely affect our business,
results of operations, cash flows and financial condition.
During
2009, we entered into Notes with Full Spectrum and SAM. As a result of
these Notes, we have significant indebtedness and substantial debt service
requirements. Our ability to meet our payment and other obligations under our
indebtedness depends on our ability to generate significant cash flows in the
future. Our ability to generate cash is subject to our ability to obtain
additional financing and our future operating performance
of technology still under development. If our cash flows are
insufficient to fund our debt service or repayment obligations, we may be forced
to reduce or delay future operating and capital expenditures, restructure or
refinance all or a portion of our indebtedness, or incur additional debt. There
is no assurance that we would be able to take any of these actions on
commercially reasonable terms or at all. There is also no assurance that these
actions would be successful and permit us to meet our scheduled debt service or
repayment obligations or that these actions would be permitted under the terms
of our existing or future debt agreements. Moreover, the Notes restrict our
ability to dispose of assets and use the proceeds from the
disposition.
If we
cannot make scheduled payments on our debt, or if we otherwise breach the terms
of the Notes or related agreements, we will be in default and, as a
result:
|
•
|
our debt holders could declare
all outstanding principal and interest to be due and
payable;
|
|
•
|
our debt holders could exercise
their rights and remedies against the collateral securing the debt;
and
|
|
•
|
we
could be forced into bankruptcy or
liquidation.
|
5
We
need significant additional financing in fiscal 2010. Our business
may fail if we are unable to obtain financing for our working capital
needs.
Our cash
of $366,303 as of December 31, 2009 is not sufficient to support our operations
through fiscal 2010 and we need additional financing. During 2010, we
expect to continue to incur operating losses as we continue development
expenditures on our light bulb technology, pursue product production, and seek
to establish marketing and sales and distribution capabilities. Our
ability to implement our business plan for 2010 and our future operations will
be significantly impaired or delayed if we are unable to secure financing in the
amounts and at the times needed to fund our working capital. We may
seek to obtain funds through equity or debt financings, as well as through
strategic financial partners. Such financing may not be available to
us, or may only be available on financially unattractive terms or in
insufficient amounts. 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. Our auditors added an explanatory paragraph to
their opinion on our fiscal 2009 financial statements stating that there was
substantial doubt about our ability to continue as a going concern.
We
have a number of technology issues to resolve before we will be able to
manufacture a commercially viable product.
Although
we have completed initial engineering of our light bulb, further development
work and third-party testing will be necessary before the technology can be
deployed and we can commence production. Specifically, we are continuing to work
on our R30 bulb, including to obtaining acceptable life and output
specifications. If we are unable to solve current and future
technology issues, we will not be able to manufacture a commercially viable
product. In addition, if we encounter difficulty in solving technology issues,
our research and development costs could increase substantially and our
development and production schedules could be significantly
delayed.
We
have no experience manufacturing our ESL light bulbs on a commercial
basis.
Our
future operating results will depend on our ability to manufacture our products.
To do so, we will have to develop manufacturing processes and the manufacturing
capability that will allow us to produce high volumes of products at
commercially viable yields. Although we have developed manufacturing
processes, we have no experience in manufacturing our products, on a small-scale
or commercial scale. We do not know whether the processes we have
developed or our manufacturing capabilities will be capable of supporting
large-scale manufacturing, or whether we will be able to develop the other
processes necessary for large-scale manufacturing of bulbs that meet the
requirements for cost, schedule, quality, engineering, design, production
standards and volume requirements. Because we have no experience with
manufacturing our products, we may not be able to establish manufacturing
capacity at a reasonable cost, maintain the quality of our products as
production increases, or develop the administrative and operational
infrastructure necessary to support expanded operations. If we fail to develop
or obtain the necessary manufacturing capabilities, or if we fail to achieve
volume production of our products with competitive yields at acceptable costs,
it will significantly alter our business plans and could have a material adverse
effect on our business, prospects, financial condition, and results of
operations.
We
have experienced significant delays in executing our business plan, and further
delays will reduce the likelihood that we will be able to manufacture products
or generate sufficient revenue to stay in business.
We have
experienced significant delays in executing our business plan. These
delays are attributable to a number of factors, including:
●
|
unanticipated
difficulties and increased expenses in developing our
technology;
|
●
|
unanticipated
difficulties in our manufacturing processes;
and
|
●
|
our
inability to obtain funding in a timely
manner.
|
6
In the
future, we may experience delays caused by these and other
factors. Our business must be viewed in light of the problems,
expenses, complications and delays frequently encountered in connection with the
development of new technologies, products, markets and operations. If we are
unable to anticipate or manage challenges confronting our business in a timely
manner, we may be unable to continue our operations.
We
must fulfill our obligation under the real estate purchase agreement for the
Sendio facility. If we cannot pay the balance of the purchase price,
we may lose our manufacturing facility.
Under our
purchase agreement for the Sendio manufacturing facility in the Czech Republic,
Sendio is required to make significant payments totaling approximately $9
million by June 30, 2011. We currently do not have the funds to pay
the balance of the purchase price, and we will need to obtain financing to
fulfill our obligations under the purchase agreement. If we are
unable to obtain the financing, we will need to negotiate with the landlord to
extend the closing date of the building or extend the lease beyond its current
term of June 30, 2011.
We
must successfully develop, introduce, manufacture, market, and sell products and
manage our operating expenses.
To be a
viable business, we must successfully develop commercial applications for our
technology, introduce, manufacture, market, and sell products and manage our
operating expenses. Our products are in development and are subject to the risks
inherent in the development of technology products, including unforeseen delays,
expenses, patent challenges and complications frequently encountered in the
development and commercialization of technology products, the dependence on and
attempts to apply new and rapidly changing technology, and the competitive
environment of the industry. Many of these events are beyond our control, such
as unanticipated development requirements, delays and difficulties with
obtaining third-party certification, delays in submitting documentation for and
being granted patents and manufacturing problems. Our success also
depends on our ability to maintain high levels of employee utilization, manage
our production costs, sales and marketing costs and general and administrative
expenses, and otherwise execute on our business plan. We may not be
able to effectively and efficiently manage our development and
growth. Any inability to do so could increase our expenses and
negatively impact our results of operations.
We rely heavily on a few consultants
and employees, the loss of which could have a material adverse effect on our business,
operating results and financial condition.
Our
future success will depend in significant part upon the continued services of
our officers and directors and certain key consultants, and our ability to
attract, assimilate and retain highly qualified technical, managerial and sales
and marketing personnel when needed. Competition for quality personnel is
intense, and there can be no assurance that we can retain our existing key
personnel or that we will be able to attract, assimilate and retain such
employees in the future when needed. The loss of key personnel or the inability
to hire, assimilate or retain qualified personnel in the future could have a
material adverse effect upon our business.
We
rely on outside suppliers to manage certain key business processes, and any
failure to perform will negatively affect our business.
We have
outsourced certain of our key business processes. In particular, in
2009 we retained Integrated Sales Solutions to help develop our sales, marketing
and distribution strategies and channels. If any of these service
providers fail to perform or at a satisfactory level, our business development
will be negatively affected and delayed, and our reputation may be
harmed.
We
have incurred historical losses and as a result, may not be able to generate
profits, support our operations, or establish a return on invested
capital.
We
incurred losses in fiscal 2009 of $7,582,690 and have an accumulated deficit of
$65,873,319 as of December 31, 2009. We cannot predict when or
whether we will ever generate a profit or otherwise establish a return on
invested capital. We may never be profitable. Our business
strategies may not be successful and we may never generate significant revenues
or profitability, in any future fiscal period or at all.
7
Our
future operating results are difficult to predict.
Due to
our limited operating history and the significant development and manufacturing
objectives that we must achieve to be successful, our quarterly and annual
operating results are difficult to predict and are expected to vary
significantly from period to period. In addition, the amount and duration of
losses will be extended if we are unable to develop and manufacture our products
in a timely manner. Factors that could inhibit our product and manufacturing
development and future operating results include:
|
·
|
failure
to solve existing or future technology-related issues in a timely
manner;
|
|
·
|
failure
to obtain sufficient financing when
needed;
|
|
·
|
failure
to secure key manufacturing or other strategic partnerships;
and
|
|
·
|
competitive
factors, including the introduction of new products, product enhancements
and the introduction of new or improved technologies by our competitors,
the entry of new competitors into the lighting markets and pricing
pressures.
|
In
addition, we could experience significant changes in fair value measurements
resulting 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.
We
face currency risks associated with fluctuating foreign currency
valuations.
With our
operations in the Czech Republic through Sendio, Sendio’s accounts, which
currently primarily consist of lease payments, compensation, and other R&D
and administration expenses, are denominated in the Czech Koruna (CZK) and the
EUR. An increase in the value of the CZK and EUR in relation to the
U.S. dollar would have an adverse effect on our operating
expenses. In addition, we may engage in business in other countries,
including in the European Union, and our operating results will be subject to
fluctuations in the value of those currencies against the U.S.
dollar. In addition, the financial statements for our Czech
subsidiary are denominated in the CZK; accordingly, on a consolidated financial
statement reporting basis, these numbers are translated into U.S. dollars and
are affected by currency conversion rates. As of December 31,
2009, we have not entered into foreign currency contracts or other currency
related derivatives to mitigate the potential impact of foreign currency
fluctuations.
Risk
Factors Related to Our Industry
Our
ability to manufacture products will depend on the continuous supply and
availability of raw materials and our business will be susceptible to shortages,
unavailability, or price fluctuations.
The
principal raw materials that we expect to use in manufacturing our light bulbs
include glass, electronic components and other required
materials. Our business will be adversely affected by any impairment
in the supply of these raw materials or by price increases. Although
we have identified suppliers for these materials, we do not have supply
agreements in place for raw materials, and we will be subject to risk of
fluctuations in supply and price. In addition, while we believe that
in many instances there are alternative suppliers for these components,
replacement suppliers may not be available. If we are unable to
secure sufficient quantities of the materials we will need to manufacture our
light bulbs, if we encounter delays or contractual or other difficulties in our
relationships with suppliers, or if we cannot find replacement suppliers at an
acceptable cost, then the manufacture of our light bulbs may be disrupted, which
would increase our costs, delay our production schedule and have a material
adverse effect on our business.
8
We
face intense competition.
The
lighting industry is very competitive and we expect this competition to continue
to increase. The General Illumination Market segment within the
lighting industry is dominated by a number of well-funded multi-national
companies, such as General Electric Company, Phillips Electronics NV and Osram
Sylvania, that have established products and are developing new products that
compete with the products we are developing. We may not be able to compete
effectively against these or other competitors, most of whom have substantially
greater financial resources and operating experience than us. Many of our
current and future competitors may have advantages over us,
including:
|
·
|
well
established products that dominate the
market;
|
|
·
|
longer
operating histories;
|
|
·
|
established
customer bases;
|
|
·
|
substantially
greater financial resources;
|
|
·
|
well
established and significantly greater technical, research and development,
manufacturing, sales and marketing resources, capabilities, and
experience; and
|
|
·
|
greater
name recognition.
|
Our
current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third-parties that would increase their market dominance and negatively impact
our ability to compete with them. In addition, competitors may be able to adapt
more quickly than we can to new or emerging technologies and changes in customer
needs, or to devote more resources to promoting and selling their products. If
we fail to adapt to market demands and to compete successfully with existing and
new competitors, our results of operations could be materially adversely
affected.
The
market for lighting technology is changing rapidly and there can be no assurance
that we will be able to compete, especially in light of our limited resources.
There can be no assurance that any products that we develop and technologies can
compete successfully on a cost, quality or market acceptance basis with these
other products and technologies.
We
depend on our intellectual property. If we are unable to protect our
intellectual property, we may be unable to compete and our business may
fail.
Our
success and ability to develop our technology and create products and become
competitive depends to a significant degree on our ability to protect our
proprietary technology, particularly any patentable material. We rely
on a combination of trade secret and other intellectual property law,
nondisclosure agreements and other protective measures to preserve our rights
pertaining to our technology. In addition, any intellectual property
protection we seek may not preclude competitors from developing products similar
to ours. In addition, the laws of certain foreign countries do not
protect intellectual property rights to the same extent as do the laws of the
United States.
We do not
have sufficient available resources to defend a lawsuit challenging our
intellectual property rights or to prosecute others who may be infringing our
rights. Accordingly, even if we have strong intellectual property
rights and patent rights, we may not be able to afford to engage in the
necessary litigation to enforce our rights.
We
compete in industries where competitors pursue patent prosecution worldwide and
patent litigation is customary. At any given time, there may be one or more
patent applications filed or patents that are the subject of litigation, which,
if granted or upheld, could impair our ability to conduct our business without
first obtaining licenses or granting cross-licenses, which may not be available
on commercially reasonable terms, if at all. We have several patent applications
pending in the U.S. and internationally and we expect to file additional patent
application; however, none of these patents may ever be issued. We do
not perform worldwide patent searches as a matter of custom and, at any given
time, there could be patent applications pending or patents issued that may have
a material adverse effect on our business, financial condition, and results of
operations.
Other
parties may assert intellectual property infringement claims against us, and our
products may infringe upon the intellectual property rights of third parties.
Intellectual property litigation is expensive and time consuming and could
divert management’s attention from our business and could result in the loss of
significant rights. If there is a successful claim of infringement, we may be
required to develop non-infringing technology or enter into royalty or license
agreements which may not be available on acceptable terms, if at all. In
addition, we could be required to cease selling any of our products that
infringe upon the intellectual property rights of others. Successful claims of
intellectual property infringement against us may have a material adverse effect
on our business, financial condition, and results of operations. Even successful
defense and prosecution of patent suits is costly and time
consuming.
9
We rely
in part on unpatented proprietary technology, and others may independently
develop the same or similar technology or otherwise obtain access to our
unpatented technology. To protect our trade secrets and other proprietary
information, we require employees, consultants, advisors and strategic partners
to enter into confidentiality agreements. These agreements may not provide
meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure
of those trade secrets, know-how or other proprietary information. In
particular, we may not be able to protect our proprietary information as we
conduct discussions with potential strategic partners. If we are unable to
protect the proprietary nature of our technologies, it may have a material
adverse effect on our business, financial condition, and results of
operations.
Any
commercial products we develop will be subject to extensive regulation, which
will be costly.
If our
research and development efforts are successful, any commercial products that we
develop will be subject to extensive regulation, both in the U.S. and
internationally. Compliance with these laws and regulations will be costly and
will incur significant management time. Failure to comply with applicable laws
and regulations could have a material adverse effect on our
business.
If
we fail to obtain or maintain industry certification for our products, our
business will be harmed.
We are
designing our products to be UL® or ETL compliant and intend to seek Energy
Star® certification, as well as appropriate certifications in the European Union
and in other countries. UL® or ETL compliance certification is a key
standard in the lighting industry, and if we fail to obtain and maintain this
standard we may not have any market interest for our products. We may
not obtain this certification or we may be required to make changes to our light
bulbs, which would delay our commercialization efforts and would negatively harm
our business and our results of operations.
We
may be materially disadvantaged if we fail to keep pace with technological
changes.
The
lighting industry is characterized by rapid technological change and evolving
industry standards and is highly competitive with respect to timely product
innovation. The introduction of products embodying new technology and the
emergence of new industry standards can render existing products and
technologies obsolete and unmarketable. Our success will depend in part on our
ability to successfully develop commercial applications for our technology,
anticipate and respond to technology developments and changes in industry
standards, and obtain market acceptance on any products we introduce. We may not
be successful in the development of our technology, and we encounter technical
or other serious difficulties in our development or commercialization that would
materially adversely affect our results of operations.
Risks
Relating to our Common Stock
We do not intend to pay
dividends, so any return
on investment must come from appreciation.
We have
never declared or paid any cash dividends on our capital stock and do not intend
to pay dividends in the foreseeable future. We intend to invest all future
earnings, if any, to fund our growth. Therefore, any investment return in our
common stock must come from increases in the fair market value and trading price
of our common stock.
Our
common stock is thinly traded.
The
trading volume of our common stock is thin. Therefore, there may not be a large
number of potential purchasers ready to buy shares whenever a shareholder
desires to sell. The public stock markets generally, and our shares
specifically, are volatile and unpredictable. There can be no assurance that a
shareholder will be able to dispose of his or her shares at the time he or she
desires to do so or at the desired selling price.
10
We
have the right to issue up to 10,000,000 shares of “blank check” preferred
stock, which may adversely affect the voting power of the holders of other of
our securities and may deter hostile takeovers or delay changes in management
control.
Our
Articles of Incorporation allow 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. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. In addition, the issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire control of, or of discouraging bids for control of our company.
This could limit the price that certain investors might be willing to pay in the
future for shares of common stock. We have no current plans to issue any shares
of preferred stock.
The
Convertible Grid Promissory Notes we entered into with Full Spectrum and SAM
contain conversion rights which contain a “down round” provision, which if
triggered, may dilute our shareholders.
The Notes
issued to Full Spectrum and SAM are convertible at the lesser of $0.40 per share
or on the same terms as a future equity or convertible debt financing approved
by the Board. If this down round provision is triggered in a future financing,
our shareholders percentage interest in the Company will be
diluted.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to Rule 144, a stockholder who is
not affiliated with us and has satisfied a six-month holding period may sell its
shares without restriction. An affiliate of our Company may also,
under certain circumstances, sell within any three-month period a number of
shares which does not exceed 1% of the then outstanding shares of common stock
following the six month holding period. Any substantial sale of common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse
effect on the market price of our securities.
Any
equity-based financings will dilute our stockholders.
We need
to raise additional financing in fiscal 2010. If we raise funds
through the issuance of equity, equity-related or debt securities, these
securities may have rights, preferences or privileges senior to those of the
rights of the common stock. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.
Our
common stock is considered a “penny stock.”
Our
common stock is subject to certain rules and regulations relating to “penny
stock.” A “penny stock” is generally defined as any equity security that has a
price less than $5.00 per share and that is not quoted on a national securities
exchange. Being a penny stock generally means that any broker who wants to trade
in our shares (other than with established clients and certain institutional
investors) must comply with certain “sales practice requirements,” including
delivery to the prospective purchaser of the penny stock a risk disclosure
document describing the penny stock market and the risks associated therewith.
These penny stock rules make it more difficult for broker-dealers to recommend
our common stock, and as a result, our stock holders may have difficulty in
selling their shares in the secondary trading market. This lack of liquidity may
also make it more difficult for us to raise capital in the future through the
sale of equity securities.
11
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
Applicable.
ITEM
2. PROPERTIES
We own no
real property.
Corporate
Headquarters – Seattle, Washington
Our
corporate headquarters consisting of approximately 1,300 square feet, are
located in Seattle, Washington which we lease on a month-to-month basis for
total rent per month of $1,530.
Manufacturing
Facility – Olomouc, Czech Republic
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”). 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.
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 December 31, 2009 and
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.
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.
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 (“Amendment No.
1”). Under Amendment No. 1, 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 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 through November, 2009.
12
On
December 2, 2009 Sendio executed a new lease agreement (the “New Lease
Agreement”) for its existing office and manufacturing facilities in the Czech
Republic. The New Lease Agreement commenced on December 1, 2009 and specifies
annual rent of CZK 13,365,000 plus applicable VAT taxes (CZK 1,113,750 per
month), less amounts paid by existing tenants in the building. The
present rent is CZK 719,556 per month after offset of the amounts paid by
existing tenants and will increase should the existing tenants vacate the
premises by the amount paid by the vacating tenant. The New Lease
Agreement expires on June 30, 2011. Sendio is responsible for utilities,
maintenance and certain other costs as defined in the lease.
In
addition on December 2, 2009 Sendio executed an amendment to the purchase
agreement (“Amendment No. 2”) for the facilities. Under Amendment No.
2, Sendio agreed to payments of the remaining purchase price of CZK 170,770,830
as follows:
|
·
|
Payment
of CZK 2,167,668 to the escrow account related to the purchase of the
building. This payment was made by
Sendio.
|
|
·
|
Payments
totaling CZK 12,270,846 payable in 19 monthly installments beginning
December 1, 2009 of CZK 645,834 through June 30, 2011 into the escrow
account. The first installment of 645,834 was made by Sendio in
December 2009. If any required installment is not made timely
as defined in the agreement, the seller is entitled to claim a contractual
fine of 60% per year on the past-due
amount.
|
|
·
|
Payment
of the remaining purchase price of CZK 156,332,316 into the escrow account
on or prior to June 30, 2011. If any required installment is
not made timely as defined in the agreement, the seller is entitled to
claim a contractual fine of 36% per year on the past-due
amount.
|
Under the
Amendment No. 2, the seller specifically waived any claims for contractual
penalties, damages or other costs arising out of any defaults by Sendio under
the purchase agreement occurring prior to November 30, 2009. However,
in the event of future breaches or claims under the purchase agreement by
Sendio, Amendment No. 2 provides that the seller may be able to claim
contractual penalties of CZK 17,500,000 for defaults prior to June 30,
2009.
Amendment
No. 2 also specifies that the seller has the right to withdraw from the purchase
agreement and impose contractual fines in the aggregate amount of up to CZK
26,000,000 (which amount includes the CZK17,500,000 for defaults prior to June
30, 2009 described above) in the event that Sendio does not make any installment
payment timely. The seller has the right to collect these from
amounts deposited in escrow.
ITEM
3. LEGAL PROCEEDINGS
We have
no pending legal proceedings.
ITEM
4. RESERVED
13
PART
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
shares of common stock are presently quoted on the OTC Bulletin Board under the
symbol VUOC. Listed below are the high and low sale prices for the shares of our
common stock during the years ended December 31, 2009 and 2008. These quotations
reflect inter-dealer prices, without mark-up, mark-down or commission and may
not represent actual transactions.
High
|
Low
|
|||||||
Fiscal 2008
|
||||||||
First
Quarter (ended March 31, 2008)
|
$ | 0.53 | $ | 0.27 | ||||
Second
Quarter (ended June 30, 2008)
|
0.60 | 0.29 | ||||||
Third
Quarter (ended September 30, 2008)
|
1.44 | 0.49 | ||||||
Fourth
Quarter (ended December 31, 2008)
|
1.40 | 0.90 | ||||||
Fiscal 2009
|
||||||||
First
Quarter (ended March 31, 2009)
|
$ | 1.13 | $ | 0.70 | ||||
Second
Quarter (ended June 30, 2009)
|
1.41 | 0.70 | ||||||
Third
Quarter (ended September 30, 2009)
|
0.91 | 0.40 | ||||||
Fourth
Quarter (ended December 31, 2009)
|
0.80 | 0.47 |
As of
December 31, 2009, there were 86,152,246 shares issued and outstanding and
approximately 733 holders of record of our common stock. We believe that a
significant number of beneficial owners of our common stock hold shares in
street name. No dividends have ever been paid to holders of our common stock,
and we do not anticipate paying dividends in the future.
Securities
Authorized for Issuance Under Equity Compensation Plans
On
October 26, 2007, our Board of Directors approved the Vu1 Corporation 2007 Stock
Incentive Plan (the “Plan”). The stockholders approved the Plan
on May 22, 2008. A total of 10,000,000 shares of our common stock
were authorized for issuance under the Plan. The following table
gives information as of December 31, 2009, the end of the most recently
completed fiscal year, about shares of common stock that may be issued upon the
exercise of options, warrants and rights under the Plan.
Equity Compensation Plan Information
|
||||||||||||
Plan category
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Equity
compensation plans approved by security holders
|
4,796,875 | $ | 0.61 | 2,991,875 | ||||||||
Totals
|
4,796,875 | $ | 0.61 | 2,991,875 |
14
A
description of the Plan can be found in Note 12 to the financial statements
contained in this report on Form 10-K.
Sales
of Unregistered Securities
The
following provides information regarding sales of equity securities by us during
the fiscal year ended December 31, 2009, which were not registered under the
Securities Act.
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. The shares were offered and sold pursuant to the
exemption from registration under Regulation D of the Securities
Act.
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 shares were offered and sold pursuant
to the exemption from registration under Section 4(2) of the Securities
Act.
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. The shares were offered and sold pursuant to the
exemption from registration under Section 4(2) of the Securities
Act.
On May 5,
2009 we issued 75,000 shares of common stock to a vendor for services valued at
$71,250 based on the closing market price as of that date of $0.95 per share.
The shares were offered and sold pursuant to the exemption from registration
under Section 4(2) of the Securities Act.
On
September 30, 2009 we issued 44,800 shares of common stock to an employee upon
their termination for services valued at $22,400. The shares were offered and
sold pursuant to the exemption from registration under Section 4(2) of the
Securities Act.
On
December 3, 2009 we issued 158,750 shares of common stock valued at $103,188 or
$0.65 per share based on the closing market price for our common stock as of
that date to three vendors as compensation for services. The shares
were offered and sold pursuant to the exemption from registration under Section
4(2) of the Securities Act.
On
December 3, 2009 we issued 174,054 shares of common stock at a price of $0.40
per share to six vendors in settlement of past due accounts payable totaling
$69,622. The shares were offered and sold pursuant to the exemption
from registration under Section 4(2) of the Securities Act.
We made
the following stock option grants and stock awards for the year ended December
31, 2009 from the Plan. These option grants were made to employees,
directors and consultants pursuant to the exemption from registration under
Section 4(2) of the Securities Act.
|
·
|
On
January 2, 2009 we issued 100,000 shares of common stock to an employee
valued at $110,000 or $1.10 per share based on the closing market price as
of that date. The shares did not vest and the stock was
returned to the Plan.
|
|
·
|
On
January 2, 2009 we granted five-year options to purchase 150,000 shares of
common stock at an exercise price of $1.10 per share based on the closing
market price as of that date. The options expired unexercised
during 2009.
|
15
|
·
|
On
December 18, 2009 we granted ten-year options to purchase 250,000 shares
of common stock to a consultant for services at an exercise price of $0.63
per share based on the closing market price as of that
date.
|
|
·
|
On
December 18, 2009 we granted 54,000 shares of common stock to employees
for services valued at $34,020 or $0.63 per share based on the closing
market price for our common stock as of that
date.
|
|
·
|
On
December 30, 2009 we granted ten-year options to purchase 375,000 shares
of common stock to certain officers and directors as compensation at an
exercise price of $0.65 based on the closing market price as of that
date.
|
|
·
|
On
December 30, 2009 we granted ten-year options to purchase 150,000 shares
of common stock to certain officers in lieu of cash compensation at an
exercise price of $0.65 based on the closing market price as of that
date.
|
ITEM
6. SELECTED FINANCIAL DATA
Not
Applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Report. Except for historical information, the following discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See “FORWARD LOOKING STATEMENTS” and “RISK
FACTORS.”
At
December 31, 2009 our independent registered public accounting firm, Peterson
Sullivan, LLP has raised substantial doubt about our ability to continue as a
going concern. See Note 3 to our Consolidated Financial Statements.
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. During 2008 and 2009, 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 anticipate that the development efforts will continue in 2010. 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. During fiscal 2009, we had
no commercial products and no revenues.
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, 2009, stating that we had a net loss and negative cash flows from
operations in fiscal 2009, 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.
Our cash
as of December 31, 2009 are not sufficient to support our operations through
fiscal 2009 and it will be necessary for us to seek additional
financing. See “Liquidity and Capital Resources”
below.
16
Plan
of Operations
Our
efforts are presently focused on our initial planned product, the R30 sized
light bulb. We anticipate that the development efforts will continue in 2010 to
support initial production for evaluation that is planned to begin in the third
quarter of 2010. 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. During fiscal 2009, we had no commercial products and no
revenues. We expect to continue to make significant expenditures
developing our planned product, obtaining product certification and the related
manufacturing processes in fiscal 2010. Our future success and operating results
will depend in large part on the results of these efforts.
We will
need to raise additional capital through debt or equity financings in 2010 to
support our operations. We have entered into an agreement to purchase the
facility presently leased by Sendio in the Czech Republic. See Item
2, Properties. We are using this facility to develop our ESL
technology and manufacturing processes. We will need additional
funding to complete the purchase of this building.
Our
anticipated expenditures related to our operations in fiscal 2010 will primarily
depend on personnel costs and additional equipment needs for continued
development of our light bulb and the manufacturing processes. In
addition, we anticipate we will incur substantial costs related to the planned
production in third quarter of 2010 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 dependent upon the success of our development and manufacturing
results for our prototype, and as such cannot presently be
estimated. Any additional capital expenditures will be dependent upon
our ability to obtain additional financing.
Sendio
had 39 engineering, technical and administrative employees at December 31, 2009
and the US Operations had a single employee.
Any
employees added for either Sendio or in the US operations will be determined
primarily by our ability to successfully develop the technology and our
available funding to hire employees.
Our
anticipated costs in fiscal 2010 for the completion of our light bulb cannot be
reasonably estimated due to the inherent uncertainty of the research and
feasibility of the manufacturing processes. No additional projects are planned,
but there can be no assurances that changes to this plan will not
occur. 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.
Results
of Operations for the Fiscal Years ended December 31, 2009 and 2008
No
Revenues
We
recognized no revenues in either of fiscal 2009 or 2008
Research
and Development Expenses
For the
years ended December 31, 2009 and 2008 we were involved in a single project to
develop and commercialize our proprietary technology. Research and
development expenses decreased approximately $1,943,000 to $2,958,000 for the
year ended December 31, 2009 compared to $4,901,000 for the year ended December
31, 2008. For the years ended December 31, 2009 and 2008, research and
development expenses consisted primarily of rent, salaries and related costs,
plant utility and operating costs, technical consulting expenses and stock
compensation expense. Rent expense decreased approximately $1,412,000
to $359,000 in fiscal 2009 compared to $1,771,000 in fiscal 2008. Included in
rent expense for the fiscal 2008 were non-cash charges of approximately
$1,511,000 resulting from the 6,100,000 shares we issued in 2007 as payment for
Sendio’s former facility lease for which no current year comparable expense
exists. Salary and related costs decreased approximately $202,000 to
$1,360,000 in fiscal 2009 compared to $1,562,000 in fiscal 2008 primarily due to
reductions in the number of salaried employees during the third and fourth
quarters of 2009. Plant utility and operating costs decreased
approximately $230,000 to $528,000 in fiscal 2009 compared to $756,000 in fiscal
2008. Technical consulting expenses decreased approximately $191,000 to $490,000
in fiscal 2009 compared to $681,000 in fiscal 2008. Also included in
research and development expense is a non-cash charge for compensation expense
of $224,000 for fiscal 2009 and $131,000 for fiscal 2008 resulting from our
issuance of common stock to a vendor and issuances of stock and options to
purchase common stock under our 2007 Stock Incentive Plan.
17
We
anticipate that our development efforts will continue in 2010. If we are unable
to develop a product that is commercially viable with the resources available to
us, we will need to discontinue our current development efforts and either seek
alternative projects or possibly curtail or cease our operations.
General
and Administrative Expenses
General
and administrative expenses for the years ended December 31, 2009 and 2008
consisted of compensation expenses related to stock and options issuances,
consulting expenses, salaries and related costs, professional and legal fees,
insurance, travel, rents, general and corporate related overheads and office
expenses. General and administrative expenses decreased by approximately
$2,021,000 to $2,353,000 for the year ended December 31, 2009 compared to
$4,374,000 for the year ended December 31, 2008. In fiscal 2009, non-cash stock
compensation expenses decreased $1,733,000 to $357,000 in fiscal 2009 compared
to $2,090,000 in fiscal 2008 resulting from the issuance of common stock and
options to purchase common stock. Salary and related costs increased
approximately $151,000 to $729,000 in fiscal 2009 compared to $578,000 in fiscal
2008. The increase is primarily due to payments under the former chief executive
officer’s salary and payment of severance to terminated employees in the Czech
Republic. Rent expense decreased $132,000 in fiscal 2009 to $73,000
compared to $205,000 in fiscal 2008. Included in rent expense for
fiscal 2008 was a non-cash charge of approximately $168,000 resulting from the
6,100,000 shares we issued in 2007 as payment for Sendio’s former facility lease
for which no current year comparable expense exists. This decrease is
partially offset by increases in rent for our US headquarters in Seattle.
Consulting expenses decreased $200,000 to $360,000 in fiscal 2009 compared to
$560,000 in fiscal 2008. The decrease is due to decreased activity
and use of consultants in fiscal 2009. Other operating expenses
comprised of travel, legal and general corporate overheads decreased $66,000 to
$834,000 in fiscal 2008 compared to $900,000 in fiscal 2008. The
decrease is primarily due to lower legal fees and travel in fiscal
2009.
Other
Income
Other
income and expense for the years ended December 31, 2009 and 2008 was comprised
of interest income, interest expense and derivative valuation
loss. Interest income was approximately $3,000 for fiscal 2009
compared to $16,000 in fiscal 2008. The decrease is due to lower average cash
balances and lower interest rates during fiscal 2009. Interest
expense for fiscal 2009 was $256,000 and relates to the interest and
amortization of discount and loan costs on the Convertible Notes, Sendio’s loan
and capital lease obligations as discussed in Notes 7,9,10 and
11. Included in interest expense is discount amortization of $114,000
and amortization of loan costs of $2,000 for fiscal 2009 related to the
Convertible Notes for which no comparable prior year expense exists. Interest
expense for fiscal 2008 of $3,000 was related to Sendio’s loan and capitalized
lease obligations.
Derivative
valuation loss amounted to $1,604,920 during the fiscal 2009 (none for the
fiscal 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 fiscal 2009:
18
Amount
|
||||
Day
one derivative losses
|
$ | 1,315,516 | ||
Fair
value changes
|
289,404 | |||
Total
derivative valuation loss
|
$ | 1,604,920 |
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
of $366,303 as of December 31, 2009 is not sufficient to support our operations
through fiscal 2010 and it will be necessary for us to seek additional
financing.
Historically,
we have funded our operations primarily through private placements of shares of
unregistered common stock with accredited individual and institutional
investors. During 2009 we issued convertible debt to Full Spectrum Capital, LLC
(“Full Spectrum”) and SAM Special Opportunity Fund LP (“SAM”) as more fully
described in Note 7. Through April 15, 2010, Full Spectrum advanced
an additional $758,084 including prepaid interest of $34,114 and SAM advanced an
additional $355,499 including prepaid interest of $15,997.
We
anticipate that with our remaining cash and the loan proceeds described above,
we will be able to fund our curtailed operations into May, 2010. In
February and March, 2010 we retained the services of two investment bankers to
assist us in our fundraising efforts, but we have not yet been successful in
obtaining financing.
We expect
to continue to seek additional financing in 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 2009 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 Notes 7 and
14 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.
19
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.
Critical
Accounting Estimates and Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the use of estimates that affect the
reported amounts of assets, liabilities and expenses. We evaluate our estimates
on an ongoing basis and base our estimates on historical experience and on
various assumptions that we believe to be reasonable under the circumstances at
that time. The discussion below is intended as a brief discussion of
some of the judgments and uncertainties that can impact the application of these
policies and the dollar amounts reported on our financial
statements. Actual results may differ from these estimates under
different assumptions or conditions. We believe that the following critical
accounting policy affects our more significant estimates used in the preparation
of our financial statements and is important to the understanding of our results
of operations. This is not a complete list of all of our accounting
policies, and there may be other accounting policies that are significant your
understanding of our company. For a detailed discussion on the
application of these and our other accounting policies, see Note 2 to our
Consolidated Financial Statements included in this Report.
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.
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.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
Applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
information required by this Item is set forth in our Consolidated Financial
Statements and Notes thereto beginning at page F-1 of this Annual Report on Form
10-K.
20
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM
9A(T). CONTROLS AND PROCEDURES
Disclosure
Control and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and (2) accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal year
covered by this Annual Report on Form 10-K, we have 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 our 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 effective at December 31, 2009.
As
previously reported under “Item 4(T) — Controls and Procedures” in our
quarterly report on Form 10-Q for the quarter ended September 30,
2009, management concluded that our internal control over financial reporting
was not effective based on the material weaknesses identified in the Company’s
internal control over financial reporting due to our independent auditor’s
identification of a material adjustment that was required to recognize the
effects of the down round provision of the Note as discussed in Note 6 to the
condensed consolidated financial statements at September 30, 2009.
During
the quarter ended December 31, 2009, our remediation efforts for the material
weakness identified above were to identify and retain a consulting specialist to
perform the necessary computations and valuations regarding the down round
provisions of the Notes. As a result, management has concluded that
as of December 31, 2009 the severity of this previously reported material
weakness has been sufficiently remediated that the previously reported material
weakness is no longer material.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f)). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of our internal control over financial reporting as
of December 31, 2009, based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control – Integrated Framework, management concluded that our internal
control over financial reporting was effective as of December 31,
2009.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this Annual Report on Form
10-K.
21
/S/ R. Gale
Sellers
|
/S/ Matthew
DeVries
|
|
R.
Gale Sellers
Chief
Executive Officer
|
Matthew
DeVries
Chief
Financial Officer
|
THE
FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL
NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY
REFERENCE INTO SUCH FILING.
ITEM
9B. OTHER INFORMATION
None
22
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Directors
and Executive Officers
The
following table sets forth the names, positions and ages of our executive
officers and directors as of April 15, 2010.
Name
|
Age
|
Title
|
||
R.
Gale Sellers
|
49
|
Chief
Executive Officer and Director
|
||
Duncan
Troy
|
50
|
Director,
Sendio Director
|
||
Richard
N. Herring
|
71
|
Chief
Technology Officer and Director
|
||
Mark
Weber
|
53
|
Director
|
||
Charles
Hunt
|
56
|
Director
|
||
T.
Ron Davis
|
61
|
Chief
Marketing Officer
|
||
Philip
Styles
|
55
|
Vice
President of Manufacturing and Director of Sendio
|
||
Matthew
DeVries
|
|
47
|
|
Chief
Financial Officer
|
We
currently have five directors on our Board of Directors. During 2008, Jeffrey
Gannon also served on our Board of Directors; however, on February 25, 2009,
subsequent to the end of the 2008 fiscal year, Mr. Gannon resigned as a
director. On January 27, 2009, David Grieger, our former Chief
Executive Officer, was appointed as a director until his resignation on June 8,
2009. Our directors serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Our officers
serve at the discretion of the board of directors. There are no arrangements or
understandings among any of our directors or officers. There are no family
relations among any of our directors or officers.
The
principal occupations and brief summary of the background of each of our
directors and executive officers during the past five years is as
follows:
R. GALE
SELLERS was elected to our board effective February 28, 2004, and has served as
our Chief Operating Officer and Secretary since May 2004. Mr. Sellers also
served as our President since July 5, 2007 until December 31, 2008. On June 8,
2009 the board of directors appointed Mr. Sellers as our Chief Executive
Officer. Mr. Sellers is an investor and advisor to start-up and turnaround
companies combining his engineering, marketing and operations experience to
build positive cash flow and shareholder equity. He worked as a consultant
for Telegen to assist with their emergence from bankruptcy from March through
October 2000 (His sole compensation was stock options, which have since expired
unexercised). From 1989 to 2000 he was founder and CEO of ARC Group
International, Inc., a company specializing in international logistics. In
the 1980’s he worked as a test engineer for Martin Marietta (now Lockheed Martin
Corporation) and thereafter was a founding member of Quadtek, Inc., which
pioneered innovative high temperature video systems in industrial environments.
Mr. Sellers currently is the CEO and founder of a private real estate
development company in Seattle, Washington. Mr. Sellers is an investor,
board member or advisory board member for several privately held companies in
various market segments.
DUNCAN
TROY was elected to our board effective February 28, 2004, and has served as our
Chairman of the Board from May 2004 to July, 2008. Mr. Troy was a former Telegen
Advisory Board member and a current director of the following U.K. based
companies, Private Equity III Limited (from September 1996 to date), an
investment vehicle; The Vintage Wine Company Limited (from June 1982 to date), a
wine broker; Lifescan Limited (from January 2003 to date), which offers a range
of screening devices using CT technology for the early detection of disease,
SMSLOTTOME LIMITED (from March 2004). Licensed in the UK by the Betting, Gaming
and Lotteries Act, SMSLOTTOME LIMITED works globally with National Lotteries,
Sports Bodies, Media and Gaming Companies to provide fixed odds and lottery
numbers games by cell phone by providing the technology, hardware, software,
website, technical support, maintenance and multilingual content management
systems. Private Equity VIII Limited (from November 2003) an investment vehicle.
During the past four years he has been actively involved with raising capital
for development companies and is a citizen and resident of the United
Kingdom.
23
RICHARD
N. HERRING was elected to our board effective February 28, 2004, and has served
as our Chief Executive Officer since May 2004 until December 31, 2008, at which
time he became our Chief Technology Officer. Mr. Herring was a former Telegen
Advisory Board member and has served as the Executive Director of Engineers
Without Borders - USA (“EWB-USA”) from 2002 through 2005. EWB-USA is a
non-profit corporation which attempts to help disadvantaged communities improve
their quality of life through implementation of environmentally and economically
sustainable engineering projects. From January 2001 to July 2002 he served
as the CEO of 4C Corporation, a non-profit entity focused on church development.
From April 1998 to August 1999 Mr. Herring served as the CEO of Spectral
Solutions, Inc., a company focused on cellular telephone enhancement products;
Spectral Solutions, Inc. was acquired by ISCO INT’L and Mr. Herring served as
the COO of ISCO INT’L from August 1999 to December 2000. From January 1995
to December 1997 Mr. Herring served as the CEO of Earth Watch, Inc., a company
focused on remote sensing technology. Prior to this, Mr. Herring worked at Ball
Aerospace for 27 years in increasing levels of management including President of
the Space Systems Division and being COO of five divisions of the group before
spinning Digital Globe out as an independent company.
MARK
WEBER was appointed to our board effective June 15, 2005. Mr. Weber has
been a marketing consultant, strategic planner and senior business advisor to
financial services companies, technology companies and emerging growth companies
since 1988. Mr. Weber has been involved in raising private capital and launching
start up, emerging growth technology companies and new banks the past 20 years.
He has been the President of Weber Marketing Group since its launch in 1988. WMG
is the 12th largest
marketing agency in Washington State and a national provider of marketing
consulting and branding services to financial services and technology companies
across the U.S. Mr. Weber was a founder and board member of Pacifica Bank from
1998 to 2005, helping raise $15 million to launch the bank. Pacifica Bank was a
SEC registered business bank sold in 2005 to United Bank California (UCBH). Mr.
Weber also served as Chairman of the Compensation Committee at Pacifica from
2002 to 2005. Mr. Weber has served as an advisory board member of several
technology and emerging growth companies between 1990 and 2001. He has been on
the Board of Trustees of the Noemi Fund, a part of Agros International since
2003.
DR.
CHARLES HUNT was appointed to our board of directors on October 17, 2006. Dr.
Hunt holds a B.S.E.E. and M.S.E.E. from the University of Utah and a Ph.D. from
Cornell University. He has been at the University of California at Davis since
1986, where he is presently a Professor with multiple appointments and a
visiting Professor of Electronics in the Faculty of Physics of the University of
Barcelona. Professor Hunt is a Senior Member of the Institute of Electrical and
Electronics Engineers, and is Author or Co-Author of over one hundred and twenty
refereed publications, eight books, and holds twelve patents. From 1997-2004 he
served as Editor of the journal, Solid-State
Electronics.
T. RON
DAVIS has served as our Chief Marketing Officer since November 1,
2007. Mr. Davis has been the founder and President of Intellect
Marketing Group from 1993 to 2007 where he provided marketing consulting
services to clients ranging from startup operations to Fortune 500
companies. From 1988 to 1993, Mr. Davis served as the Director of
Fortune 500 Marketing for Microsoft Corporation.
PHILIP
STYLES has served as our Vice President of Manufacturing since September,
2007. Mr. Styles has over 20 years experience in manufacturing
operations. Mr. Styles worked for Sony Corporation for 14 years in various
technical and managerial positions in production engineering and held several
senior management positions in manufacturing, including a recent joint venture
manufacturing operation between LG Electronics and Royal Philips
Electronics.
MATTHEW
DEVRIES is a consultant to us and has served as our Chief Financial Officer
since October 17, 2006. Mr. DeVries has been a financial consultant since 2001,
providing public and privately held corporations financial assistance and has
coordinated audits and supervised the preparation and filing of public
disclosure documents for corporations in his consulting
practice.
24
Audit
Committee Financial Expert
Our
entire Board of Directors currently functions as the Audit Committee. We do not
have an “audit committee financial expert” serving on the Board, but we intend
to locate such expert during 2010.
Policy
on Stockholder Nomination of Directors
There
have been no material changes to the procedures by which stockholders may
recommend nominees to our Board of Directors, from those set forth in our annual
report on Form 10-K for the year ended December 31, 2005.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who own more than 10% of our common stock to file
reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the
Securities and Exchange Commission (the “SEC”). Such officers, directors, and
10% stockholders are also required by SEC rules to furnish us with copies of all
Section 16(a) reports they file.
We
believe that our officers, directors, and 10% stockholders complied with their
Section 16(a) filing obligations during the fiscal year ended December 31, 2009
with the following exceptions:
|
·
|
Mark
Weber, a director did not file Forms 4 to report a grant of options;
and
|
|
·
|
Charles
Hunt, a director did not file Forms 4 to report a grant of options and the
sale of 135,000 shares of common stock;
and
|
|
·
|
Richard
Herring, an officer and director did not file Forms 4 to report
a grant of options; and
|
|
·
|
Duncan
Troy, a director did not file Forms 4 to report a grant of options;
and
|
|
·
|
R.
Gale Sellers, an officer and director did not file Forms 4 to report a
grant of options and for the purchase of Convertible Notes through Full
Spectrum Capital, LLC.
|
Code
of Ethics
We have
not yet adopted a Code of Ethics applicable to our principal executive officer,
principal financial and accounting officer or persons performing similar
functions. The Company intends to do so in fiscal 2010.
ITEM
11. EXECUTIVE COMPENSATION
The
following table provides information about the compensation paid to, earned or
received during the last two fiscal years ended December 31, 2009 and 2008 by
(a) all persons serving as principal executive officer during 2009, and (b)
our two other most highly compensated executive officers whose total
compensation exceeded $100,000 in fiscal 2009, as follows (collectively, the
“Named Executive Officers”):
·
|
R.
Gale Sellers, our Chief Executive Officer (principal executive
officer);
|
·
|
David
Grieger, our former Chief Executive Officer (principal executive
officer);
|
·
|
Richard
Herring, our Chief Technology Officer
and;
|
·
|
T.
Ron Davis, our Chief Marketing
Officer.
|
25
SUMMARY
COMPENSATION TABLE
Name and Principal
Position |
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Richard
Sellers Chief
|
2009
|
157,107 | - | - | - | - | - | - | 157,107 | |||||||||||||||||||||||||
Executive Officer, Principal Executive
Officer (1)
|
2008
|
163,500 | - | - | 258,957 | - | - | - | 422,457 | |||||||||||||||||||||||||
Richard
Herring Chief
|
2009
|
144,768 | - | - | - | - | - | 144,768 | ||||||||||||||||||||||||||
Technology Officer
(2)
|
2008
|
90,000 | - | - | 308,637 | - | - | - | 398,637 | |||||||||||||||||||||||||
T.
Ron Davis Chief
|
2009
|
180,000 | - | - | 63,270 | - | - | - | 243,270 | |||||||||||||||||||||||||
Marketing Officer
(3)
|
2008
|
166,280 | - | - | 234,622 | - | - | - | 400,902 | |||||||||||||||||||||||||
David
Grieger
|
2009
|
120,000 | - | - | - | - | - | - | 120,000 | |||||||||||||||||||||||||
Former
Chief Executive Officer(4)
|
2008
|
- | - | 456,000 | - | - | - | - | 456,000 |
(1)
|
On
December 30, 2009 the Board of directors awarded total compensation in the
amount of $140,000 to Mr. Sellers for his service as our Chief Executive
Officer. Mr. Sellers converted $70,000 of this award into
ten-year options to purchase 107,692 shares of common stock at an exercise
price of $0.65 per share valued at $68,397. The remaining
$70,000 is to be paid to Mr. Sellers upon obtaining satisfactory
funding. A total of $18,970 was paid in cash for Mr. Sellers’
services as Chief Operating Officer and President. Mr. Sellers 2008 salary
of $163,500 is comprised of unpaid fees which were converted into 408,750
shares of common stock and a two-year warrant to purchase 204,375 shares
of common stock at an exercise price of $0.60 per share pursuant to our
Unit Offering. On September 9, 2008 we issued options to purchase 300,000
shares of common stock, of which 260,625 were vested as of December 31,
2008 with 39,375 expiring unvested. The options have an exercise price of
$1.00 per share and a market value of
$258,957.
|
(2)
|
On
December 30, 2009, Mr. Herring elected to convert a total of $27,500 of
unpaid fees into ten-year options to purchase 42,308 shares of common
stock at an exercise price of $0.65 per share valued at
$26,768. Of the remaining fees of $118,000, $27,500 is to be
paid to Mr. Herring upon receipt of adequate funding, with the remaining
amount paid in cash. On September 9, 2008 we issued options to
purchase 350,000 shares of common stock, of which 310,625 vested, with
39,375 expiring unvested. The options have an exercise price of $1.00 per
share and a market value of $308,637. Mr. Herring’s 2008 salary of $90,000
is comprised of $54,000 paid in cash. The remaining $36,000 was converted
into 90,000 shares of common stock and a two-year warrant to purchase
45,000 shares of common stock at an exercise price of $0.60 per share
pursuant to our Unit Offering.
|
(3)
|
On
December 30, 2009 we issued ten-year options to purchase 100,000 shares of
common stock at an exercise price of $0.65 per share valued at
$63,270. On September 9, 2008 we issued we issued options to
purchase 225,000 shares of common stock, of which 205,313 were vested as
of December 31, 2008, with 19,688 expiring unvested. The options have an
exercise price of $1.00 per share and a market value of
$203,999. On December 17, 2007 we issued we issued
options to purchase options to purchase 150,000 shares of common stock
with an exercise price of $0.23 per share and a market value of $31,845,
of which $30,624 vested in 2008 and $1,221 vested in
2007.
|
26
(4)
|
On
December 31, 2008 we issued 400,000 shares of common stock valued at
$456,000 based on the closing market price of $1.14 as of that date to Mr.
Grieger upon his appointment as our Chief Executive
Officer
|
Narrative
Disclosure to Summary Compensation Table
We do not
have any formal employment agreements in place with any of our
employees.
All of
the grants of options above were made from the 2007 Stock Compensation Plan and
pursuant to the Company’s standard form of stock option agreement. The
assumptions used in the valuation of the options are discussed more fully in
Note 12 to the financial statements.
We do not
have agreements with any of our other Named Executive Officers providing for
payments, whether from resignation, retirement or other termination of
employment, resulting from a change of control.
Outstanding
Equity Awards at Fiscal Year-End
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exciseable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexerciseable
|
Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options (#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number of
Shares or
Units of Stock
That Have Not
Vested (#)
|
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
|
Equity Incentive Plan
Awards: Number of
Unearned Shares,
Units or Other Rights
That Have Not Vested
(#)
|
Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares, Units
or Other Rights That
Have Not Vested ($)
|
|||||||||||||||||||||||||||
R.
Gale Sellers
|
250,000 | — | — | $ | 0.38 |
11/15/2017
|
— | — | — | — | ||||||||||||||||||||||||||
R.
Gale Sellers
|
125,000 | — | — | $ | 0.23 |
12/16/2017
|
— | — | — | — | ||||||||||||||||||||||||||
R.
Gale Sellers
|
260,625 | — | — | $ | 1.00 |
9/8/2018
|
— | — | — | — | ||||||||||||||||||||||||||
R.
Gale Sellers
|
107,692 | $ | 0.65 |
12/29/2019
|
— | — | — | — | ||||||||||||||||||||||||||||
Richard
Herring
|
250,000 | — | — | $ | 0.38 |
11/15/2017
|
— | — | — | — | ||||||||||||||||||||||||||
Richard
Herring
|
150,000 | — | — | $ | 0.23 |
12/16/2017
|
— | — | — | — | ||||||||||||||||||||||||||
Richard
Herring
|
310,625 | — | — | $ | 1.00 |
9/8/2018
|
— | — | — | — | ||||||||||||||||||||||||||
Richard
Herring
|
42,308 | $ | 0.65 |
12/29/2019
|
— | |||||||||||||||||||||||||||||||
T.
Ron Davis
|
150,000 | — | — | $ | 0.23 |
12/16/2012
|
— | — | — | — | ||||||||||||||||||||||||||
T.
Ron Davis
|
205,313 | — | — | $ | 1.00 |
9/8/2018
|
— | — | — | — | ||||||||||||||||||||||||||
T.
Ron Davis
|
100,000 | $ | 0.65 |
12/29/2019
|
— | — | — | — | ||||||||||||||||||||||||||||
Philip
Styles
|
— | — | — | — | — | — | — | 15,000 | $ | 9,750 | ||||||||||||||||||||||||||
Philip
Styles
|
100,000 | $ | 0.65 |
12/29/2019
|
— | — | — | — | ||||||||||||||||||||||||||||
Matthew
DeVries
|
50,000 | — | — | $ | 0.23 |
12/16/2012
|
— | — | — | — | ||||||||||||||||||||||||||
Matthew
DeVries
|
180,313 | — | — | $ | 1.00 |
9/8/2018
|
— | — | — | — |
Compensation
of Directors
The
following table summarizes data concerning the compensation of our directors for
the fiscal year ended December 31, 2009.
DIRECTOR
COMPENSATION
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
All
Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||
Duncan
Troy (1)
|
62,919 | - | 31,635 | - | - | - | 94,554 | |||||||||||||||||||||
Mark
Weber (2)
|
- | - | 47,453 | - | - | - | 47,453 | |||||||||||||||||||||
Charles
Hunt (3)
|
51,783 | - | 31,635 | - | - | - | 83,418 |
27
(1)
|
On
December 30, 2009 we issued options to purchase 50,000 shares of common
stock to Mr. Troy for service as a director at an exercise price of $0.65
per share and an estimated fair value of $31,635. The exercise
price reflects the closing market prices on the date of
issuance. The options vested on grant and have a ten year life
from the date of issuance.
|
(2)
|
On
December 30, 2009 we issued options to purchase 75,000 shares of common
stock to Mr. Weber for service as a director at an exercise price of $0.65
per share and an estimated fair value of $47,453. The exercise
price reflects the closing market prices on the date of
issuance. The options vested on grant and have a ten year life
from the date of issuance.
|
(3)
|
On
December 30, 2009 we issued options to purchase 50,000 shares of common
stock to Mr. Hunt for service as a director at an exercise price of $0.65
per share and an estimated fair value of $31,635. The exercise
price reflects the closing market prices on the date of
issuance. The options vested on grant and have a ten year life
from the date of issuance.
|
Narrative
Disclosure to Director Compensation Table
The Board
does not receive cash for service on the Board of Directors. There
are no standard arrangements for compensation for the directors.
All of
the grants of options above were made from the 2007 Stock Compensation Plan and
pursuant to the Company’s standard form of stock option agreement. The
assumptions used in the valuation of the options are discussed more fully in
Note 12 to the financial statements.
All
compensation for Directors Herring and Sellers has been previously disclosed in
the “Summary Compensation Table,” above.
28
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The table
below sets forth certain information regarding the beneficial ownership of our
common stock as of April 15, 2010, based on information available to us by the
following persons or groups:
|
·
|
each
person who is known by us to own more than 5% of the outstanding common
stock;
|
|
·
|
each
of our directors;
|
|
·
|
the
Named Executive Officers; and
|
|
·
|
all
of our executive officers and directors, as a
group.
|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial Owner (1)
|
Percent of
Class
|
||||||
R.
Gale Sellers
|
19,377,183 |
(2)
|
22.5 | % | ||||
Polymer
Holdings, Ltd.
|
12,444,231 |
(3)
|
14.4 | % | ||||
Broomhill
Road
|
||||||||
Stonehaven,
UK AB39 2NH
|
||||||||
Smith
Asset Management, LP
|
5,951,906 |
(4)
|
6.9 | % | ||||
111
Broadway, Suite 808
|
||||||||
New
York, NY 10006
|
||||||||
Duncan
Troy
|
2,883,334 |
(5)
|
3.3 | % | ||||
Richard
Herring
|
2,462,933 |
(6)
|
2.9 | % | ||||
Mark
W. Weber
|
1,783,793 |
(7)
|
2.1 | % | ||||
Charles
Hunt
|
1,080,000 |
(8)
|
1.3 | % | ||||
T.
Ron Davis
|
623,513 |
(9)
|
0.7 | % | ||||
All
directors and officers as a group (8 persons)
|
29,120,324 |
(10)
|
33.8 | % |
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to the shares.
A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60
days. Unless otherwise indicated in the footnotes to this table and
subject to community property laws where applicable, we believe that the
each of the stockholders named in this table has sole voting and
investment power with respect to the shares shown as beneficially owned by
him. To our knowledge, there are no voting arrangements among our
stockholders.
|
(2)
|
Includes
a fully-vested option to purchase 250,000 shares of common stock at an
exercise price of $0.38 per share, a fully-vested option to purchase
125,000 shares of common stock at an exercise price of $0.23 per share, a
fully vested option to purchase 260,625 shares of common stock at an
exercise price of $1.00 per share, a fully vested option to purchase
107,692 shares of common stock at an exercise price of $0.65 per share and
a warrant to purchase 204,375 shares of common stock at an exercise price
of $0.60 per share. Also includes the 6,173,997 shares of
common stock underlying the Convertible Note payable to Full Spectrum
Capital, LLC of which Mr. Sellers is the Manager and a 38.2% owner and
3,086,999 warrants at an exercise price of $0.75 per share issued in
conjunction with the Convertible Note. Mr. Sellers disclaims
ownership of these shares and warrants held by Full Spectrum Capital,
except to the extent of his pecuniary interest. Mr. Sellers has
also pledged an aggregate of 4,912,714 shares of common stock as
collateral for loans at two banks, and an additional 2,250,000 shares of
common stock are held by a lender as collateral against a
loan.
|
29
(3)
|
Includes
warrants to purchase 625,000 shares of common stock at an exercise price
of $0.60 per share.
|
(4)
|
Includes
the 3,967,937 shares of common stock underlying the Convertible Note
payable to Smith Asset Management LP and 1,983,969 warrants at an exercise
price of $0.75 per share issued in conjunction with the Convertible
Note.
|
(5)
|
Includes
a fully-vested option to purchase 300,000 shares of common stock at an
exercise price of $0.38 per share, a fully-vested option to purchase
150,000 shares of common stock at an exercise price of $1.00 per share, a
fully-vested option to purchase 50,000 shares of common stock at an
exercise price of $0.65 per share and 933,334 shares of common stock held
by Private Equity III Ltd., an investment entity of which Mr. Troy is the
holder of 12.5% of the issued share capital and a Director. In addition,
Mr. Troy has 2,250,000 shares of common stock held by a lender as
collateral against a loan.
|
(6)
|
Includes
a fully-vested option to purchase 250,000 shares of common stock at an
exercise price of $0.38 per share, a fully-vested option to purchase
150,000 shares of common stock at an exercise price of $0.23 per share,
fully vested options to purchase 310,625 shares of common stock at an
exercise price of $1.00 per share, fully vested options to purchase 42,308
shares of common stock at an exercise price of $0.65 per share and a
warrant to purchase 107,500 shares of common stock at an exercise price of
$0.60 per share.
|
(7)
|
Includes
a fully-vested option to purchase 250,000 shares of common stock at an
exercise price of $0.38 per share, a fully vested option to purchase
150,000 shares of common stock at $1.00 per share, fully vested options to
purchase 75,000 shares of common stock at an exercise price of $0.65 per
share, a warrant to purchase 15,125 shares of common stock at an exercise
price of $0.60 per share and 23,418 shares of common stock held by Weber
Marketing Group, Inc., a corporation wholly owned by Mr.
Weber.
|
(8)
|
Includes
a fully-vested option to purchase 250,000 shares of common stock at an
exercise price of $0.38 per share, a fully-vested option to purchase
125,000 shares of common stock at an exercise price of $0.23 per share, a
fully-vested option to purchase 50,000 shares of common stock at an
exercise price of $0.65 per share and fully vested options to purchase
240,000 shares of common stock at an exercise price of $1.00 per
share.
|
(9)
|
Includes
a fully-vested option to purchase 150,000 shares of common stock at an
exercise price of $0.23 per share, fully vested options to purchase
205,313 shares of common stock at an exercise price of $1.00 per share, a
fully-vested option to purchase 100,000 shares of common stock at an
exercise price of $0.65 per share and warrants to purchase 46,600 shares
of common stock at an exercise price of $0.60 per
share.
|
(10)
|
Consists
of Duncan Troy, Richard Herring, R. Gale Sellers, Mark Weber, Charles
Hunt, Matthew DeVries, T. Ron Davis and Philip
Styles.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
following is a summary description of all transactions during fiscal 2009, and
any currently proposed transactions, between us and any of our related
parties. All ongoing and any future related party transactions have
been and will be made or entered into on terms that are no less favorable to us
than those that may be obtained from an unaffiliated third party. In
addition, any future related party transactions must be approved by a majority
of the disinterested members of our board of directors. If a related
person proposes to enter into such a transaction with us, such proposed
transaction must be reported to us, preferably in advance.
30
Related
Party Transactions
From June
8, 2009 to December 30, 2009, Full Spectrum, an entity managed by R. Gale
Sellers, a director and our Chief Executive Officer advanced an aggregate of
$1,711,515 (including $77,018 of prepaid interest) as described in Note
7.
On
December 30, 2009 R. Gale Sellers and Richard Herring, both directors and
officers converted a total of $97,500 of unpaid compensation into ten-year
options to purchase 150,000 shares of common stock at an exercise price of $0.65
per share as more fully described in Note 12.
Except as
otherwise disclosed herein, none of our directors, executive officers, greater
than five percent stockholders, or any associate or affiliate thereof had any
material interest, direct or indirect, in any transaction with us during the
fiscal year ended December 31, 2009.
Director
Independence
As of
December 31, 2009, two members of our Board of Directors, Mark Weber and Duncan
Troy, were “independent” within the meaning of the listing standards of The
NASDAQ Stock Market.
Our Board
of Directors does not have a separate audit committee, but the entire Board
performs the duties of the audit committee. Directors Richard
Herring, R. Gale Sellers and Charles Hunt do not qualify as independent
directors within the meaning of the listing standards of The NASDAQ Stock
Market.
We do not
have a nominating committee of our Board of Directors.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
Paid to Peterson Sullivan, LLP for Fiscal 2009 and 2008
The
following is a summary of the aggregate fees billed to us by Peterson Sullivan
LLP, our current independent registered public accounting firm, for the fiscal
years ended December 31, 2009 and 2008:
Fiscal 2009
|
Fiscal 2008
|
|||||||
Audit
Fees
|
$ | 50,963 | $ | 37,375 | ||||
Audit
Related Fees
|
— | — | ||||||
Tax
Fees
|
— | — | ||||||
All
Other Fees
|
— | — | ||||||
TOTAL
Fees
|
$ | 50,963 | $ | 37,375 |
Policy
for Approval of Audit and Permitted Non-Audit Services
Our Board
of Directors, which serves as our audit committee, reviews the scope and extent
of all audit and non-audit services to be provided by the independent auditors,
including any engagement letters, and reviews and pre-approves all fees to be
charged for such services. During 2009 and 2008, our independent auditors did
not provide any non-audit services to us. The Board of Directors may
establish additional or other procedures for the approval of audit and non-audit
services that our independent auditors perform. In pre-approving services to be
provided by the independent auditors, the Board of Directors considers whether
such services are consistent with applicable rules regarding auditor
independence.
31
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents
filed as part of this Report are as follows:
1. Financial Statements:
The following consolidated financial statements, related notes and report of
independent registered public accounting firm are incorporated by reference into
Item 8 of Part II of this Annual Report on Form 10-K for the fiscal year
ended December 31, 2009:
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2009 and December 31,
2008
|
F-3
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2009 and December 31, 2008
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years Ended December
31, 2009 and December 31, 2008
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
December 31, 2008
|
F-6
|
|
Notes
to the Consolidated Financial Statements
|
|
F-7
|
2. Financial Statement
Schedules: All schedules have been omitted because they are not
applicable or not required, or the required information is included in the
financial statements or notes thereto.
3. Exhibits.
Exhibit
No.
|
Description
|
|||
3.1A
|
(1)
|
Amended
and Restated Articles of Incorporation of Vu1 Corporation dated June 30,
2000
|
||
3.1B
|
(1)
|
Certificate
of Amendment of Articles of Incorporation dated May 19,
2008
|
||
3.1C
|
(1)
|
Certificate
of Amendment of Articles of Incorporation dated August 25,
2008
|
||
3.2A
|
(2)
|
Bylaws
of Vu1 Corporation
|
||
3.2B
|
(3)
|
Certificate
of Amendment of Bylaws effective August 6, 1997
|
||
10.1
|
(4)
|
Vu1
Corporation 2007 Stock Incentive Plan
|
||
10.2
|
(5)
|
Form
of Vu1 Corporation Stock Option Agreement
|
||
10.3
|
(6)
|
Form
of Common Stock Purchase Warrant for Unit offering in
2008
|
||
10.4
|
(7)
|
Lease
Contract between Sendio s.r.o. and Milan Gottwald, dated May 28,
2008
|
||
10.5A
|
(8)
|
Purchase
Agreement between Sendio s.r.o. and Milan Gottwald, dated November 25,
2008
|
||
10.5B
|
(9)
|
Business
Agreement, as an annex to the Purchase Agreement, between Sendio, s.r.o
and Milan Gottwald, dated March 3, 2009
|
||
10.6
|
(8)
|
Deed
of Guarantee between Vu1 Corporation and Milan Gottwald, dated November
24, 2008
|
||
10.7
|
(10)
|
Tenancy
Agreement between Sendio s.r.o. and Milan Gottwald, dated December 2,
2009
|
||
10.8
|
(10)
|
Amendment
No. 2 to the Purchase Agreement dated November 25, 2008 dated December 2,
2009 between Sendio s.r.o. and Milan Gottwald
|
||
10.9
|
(11)
|
Secured
Convertible Grid Promissory Note between Vu1 Corporation and Full Spectrum
Capital LLC, dated June 8, 2009
|
||
10.10
|
(11)
|
Security
Agreement between Vu1 Corporation and Full Spectrum Capital LLC, dated
June 8, 2009
|
||
10.11
|
(11)
|
Form
of Warrant Agreement
|
||
10.12
|
(11)
|
Non-binding
Term Sheet between Vu1 Corporation and Full Spectrum Capital LLC, dated
June 5, 2009
|
||
10.13
|
(12)
|
Amendment
No. 1 to Secured Convertible Grid Promissory Note between Vu1 Corporation
and Full Spectrum Capital LLC, dated August 31, 2009
|
||
10.14
|
|
(13)
|
|
Amended
and Restated Secured Convertible Grid Promissory Note dated November 19,
2009 by and between the Company and Full Spectrum Capital
LLC
|
32
10.15
|
(13)
|
Secured
Convertible Grid Promissory Note dated November 19, 2009 by and between
the Company and SAM Special Opportunity Fund L.P.
|
10.16
|
(13)
|
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.
|
10.17
|
**
|
Credit
Agreement dated October 26, 2009 between Sendio sro and Mr. Peter
Edwards
|
10.18
|
**
|
Amendment
No.1 to the credit Agreement Effective 30th November 2009
between Sendio sro and Mr. Peter Edwards
|
21.1
|
**
|
List
of Subsidiaries
|
31.1
|
**
|
Rule
13a-14(a)/15d-14(a) Certification of R. Gale Sellers
|
31.2
|
**
|
Rule
13a-14(a)/15d-14(a) Certification of Matthew DeVries
|
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
|
**
|
Filed
herewith
|
(1)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on September 15,
2008.
|
(2)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Quarterly Report on Form 10-QSB as filed with the Commission on November
12, 1996.
|
(3)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Annual Report on Form 10-K filed on April 15,
1998.
|
(4)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Quarterly Report on Form 10-QSB as filed with the Commission on November
14, 2007.
|
(5)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on November 21,
2007.
|
(6)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on September 3,
2008.
|
(7)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on June 3,
2008.
|
(8)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on December 15,
2008.
|
(9)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on March 6,
2009.
|
(10)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on December 15, 2009.
|
(11) | Previously filed as an exhibit to, and incorporated herein by reference from, our Current Report on Form 8-K filed on June 9, 2009. |
(12)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Current Report on Form 8-K filed on September 1,
2009.
|
(13)
|
Previously
filed as an exhibit to, and incorporated herein by reference from, our
Quarterly Report on Form 10-Q filed on November 23,
2009.
|
33
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VU1
CORPORATION
|
|||
Date: April
15, 2010
|
By:
|
/s/
|
R. Gale Sellers
|
R.
Gale Sellers
Chief
Executive Officer
|
In
accordance with the Securities Exchange Act of 1934, this Report on Form 10-K
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature
|
Capacities
|
Date
|
/s/
R. Gale Sellers
|
Chief
Executive Officer and Director
|
April
15, 2010
|
R.
Gale Sellers
|
(
Principal Executive
Officer )
|
|
/s/
Duncan Troy
|
Director
|
April
15, 2010
|
Duncan
Troy
|
||
/s/
Richard N. Herring
|
Chief
Technology Officer and Director
|
April
15, 2010
|
Richard
N. Herring
|
||
/s/
Matthew DeVries
|
Chief
Financial Officer
|
April
15, 2010
|
Matthew
DeVries
|
(
Principal Financial
Officer and
Principal Accounting
Officer )
|
|
/s/
Mark Weber
|
Director
|
April
15, 2010
|
Mark
Weber
|
||
/s/
Charles Hunt
|
Director
|
April
15, 2010
|
Charles
Hunt
|
34
VU1
CORPORATION AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and December 31,
2008
|
F-3
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2009 and December 31, 2008
|
F-4
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years Ended December
31, 2009 and December 31, 2008
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009
and December 31, 2008
|
F-6
|
Notes
to the Consolidated Financial Statements
|
F-7
|
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Vu1
Corporation
Seattle,
Washington
We have
audited the accompanying consolidated balance sheets of Vu1 Corporation and
Subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Vu1 Corporation and
Subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3
to the consolidated financial statements, the Company incurred a net loss of
$7,582,690, and it had negative cash flows from operations of $4,635,318 in
2009. In addition, the Company had an accumulated deficit of
$65,873,319 at December 31, 2009. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding those matters are also
described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/S/
PETERSON SULLIVAN LLP
Seattle,
Washington
April 15,
2010
F-2
Vu1
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
DECEMBER 31,
|
||||||||
|
2009
|
2008
|
||||||
ASSETS | ||||||||
Current
assets
|
||||||||
Cash
|
$ | 366,303 | $ | 2,486,609 | ||||
Tax
refund receivable
|
30,938 | 32,672 | ||||||
Prepaid
expenses
|
205,725 | 17,669 | ||||||
Total
current assets
|
602,966 | 2,536,950 | ||||||
Non-current
assets
|
||||||||
Equipment,
net of accumulated depreciation of $150,015 and $49,744,
respectively
|
133,544 | 240,742 | ||||||
Construction
in process
|
472,708 | 399,859 | ||||||
Deposit
on building purchase
|
635,387 | 212,800 | ||||||
Loan
costs
|
28,421 | - | ||||||
Total
assets
|
$ | 1,873,026 | $ | 3,390,351 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 528,503 | $ | 412,534 | ||||
Accrued
payroll
|
343,723 | 161,130 | ||||||
Accrued
interest
|
136,880 | - | ||||||
Short
term loan payable
|
116,340 | - | ||||||
Loan
payable, current portion
|
4,485 | 3,444 | ||||||
Capital
lease obligation, current portion
|
4,927 | 4,465 | ||||||
Total
current liabilities
|
1,134,858 | 581,573 | ||||||
Long-term
liabilities
|
||||||||
Long-term
convertible note payable, net of discount of $2,892,343 and $0,
respectively
|
50,848 | - | ||||||
Embedded
derivative liability
|
2,853,011 | - | ||||||
Loan
payable, net of current portion
|
2,214 | 6,557 | ||||||
Capital
lease obligation, net of current portion
|
13,995 | 18,173 | ||||||
Total
liabilities
|
4,054,926 | 606,303 | ||||||
Stockholders'
equity (deficit)
|
||||||||
Vu1
Corporation's 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; 86,152,246 and
85,691,892 shares issued and outstanding, respectively
|
63,681,363 | 61,165,545 | ||||||
Stock
and warrant subscription receivable
|
- | (131,800 | ) | |||||
Accumulated
deficit
|
(65,873,319 | ) | (58,290,629 | ) | ||||
Accumulated
other comprehensive income
|
106,111 | 136,987 | ||||||
Total
Vu1 Corporation's stockholders' equity (deficit)
|
(2,085,845 | ) | 2,880,103 | |||||
Non-controlling
interest
|
(96,055 | ) | (96,055 | ) | ||||
Total
stockholders' equity (deficit)
|
(2,181,900 | ) | 2,784,048 | |||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 1,873,026 | $ | 3,390,351 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
Vu1
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Operating
expenses
|
||||||||
Research
and development
|
$ | 2,957,848 | $ | 4,900,877 | ||||
General
and administrative
|
2,353,021 | 4,374,390 | ||||||
Marketing
|
413,502 | 593,702 | ||||||
Total
operating expenses
|
5,724,371 | 9,868,969 | ||||||
Loss
from operations
|
(5,724,371 | ) | (9,868,969 | ) | ||||
Other
income (expense)
|
||||||||
Interest
income
|
2,570 | 16,144 | ||||||
Interest
expense
|
(255,969 | ) | (3,246 | ) | ||||
Derivative
valuation loss
|
(1,604,920 | ) | - | |||||
Total
other income (expense)
|
(1,858,319 | ) | 12,898 | |||||
Loss
before provision for income taxes
|
(7,582,690 | ) | (9,856,071 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
loss
|
$ | (7,582,690 | ) | $ | (9,856,071 | ) | ||
Other
comprehensive income (loss):
|
||||||||
Foreign
currency translation adjustments
|
(30,876 | ) | 84,613 | |||||
Comprehensive
loss
|
$ | (7,613,566 | ) | $ | (9,771,458 | ) | ||
Basic
and diluted:
|
||||||||
Loss
per share
|
$ | (0.09 | ) | $ | (0.14 | ) | ||
Weighted
average shares outstanding
|
85,669,639 | 71,798,254 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
Vu1
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Vu1 Corporation Stockholders
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Other
|
||||||||||||||||||||||||||||
Common Stock
|
Subscription
|
Accumulated
|
Comprehensive
|
Non-Controlling
|
||||||||||||||||||||||||
Shares
|
Amount
|
Receivable
|
Deficit
|
Income
|
Interest
|
Total
|
||||||||||||||||||||||
Balance
December 31, 2007
|
64,663,517 | $ | 51,177,740 | $ | - | $ | (48,434,558 | ) | $ | 52,374 | $ | (96,055 | ) | $ | 2,699,501 | |||||||||||||
Issuances
of common stock for:
|
||||||||||||||||||||||||||||
Cash
|
7,100,128 | 2,130,039 | - | - | - | - | 2,130,039 | |||||||||||||||||||||
Services
|
680,000 | 633,038 | - | - | - | - | 633,038 | |||||||||||||||||||||
Issuances
of units of common stock and warrants for:
|
||||||||||||||||||||||||||||
Cash
|
11,776,667 | 4,705,567 | - | - | - | - | 4,705,567 | |||||||||||||||||||||
Services
|
1,168,080 | 467,232 | - | - | - | - | 467,232 | |||||||||||||||||||||
Subscription
receivable
|
329,500 | 131,800 | (131,800 | ) | - | - | - | - | ||||||||||||||||||||
Issuance
of warrant for services
|
- | 41,621 | - | - | - | - | 41,621 | |||||||||||||||||||||
Share-based
compensation
|
- | 1,878,508 | - | - | - | - | 1,878,508 | |||||||||||||||||||||
Forfeited
grants of common stock
|
(26,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||
Net
loss
|
- | - | - | (9,856,071 | ) | - | - | (9,856,071 | ) | |||||||||||||||||||
Foreign
currency translation adjustments
|
- | - | - | - | 84,613 | - | 84,613 | |||||||||||||||||||||
Balance
December 31, 2008
|
85,691,892 | 61,165,545 | (131,800 | ) | (58,290,629 | ) | 136,987 | (96,055 | ) | 2,784,048 | ||||||||||||||||||
Collection
of subscription receivable
|
- | - | 131,800 | - | - | - | 131,800 | |||||||||||||||||||||
Issuance
of stock for services
|
452,604 | 266,459 | - | - | - | - | 266,459 | |||||||||||||||||||||
Issuance
of warrant for services
|
- | 48,735 | - | - | - | - | 48,735 | |||||||||||||||||||||
Share-based
compensation
|
54,000 | 444,920 | - | - | - | - | 444,920 | |||||||||||||||||||||
Issuance
of convertible notes
|
- | 1,755,704 | - | - | - | - | 1,755,704 | |||||||||||||||||||||
Forfeited
grants of common stock
|
(46,250 | ) | - | - | - | - | - | - | ||||||||||||||||||||
Net
loss
|
- | - | - | (7,582,690 | ) | - | - | (7,582,690 | ) | |||||||||||||||||||
Foreign
currency translation adjustments
|
- | - | - | - | (30,876 | ) | - | (30,876 | ) | |||||||||||||||||||
Balance
December 31, 2009
|
86,152,246 | $ | 63,681,363 | $ | - | $ | (65,873,319 | ) | $ | 106,111 | $ | (96,055 | ) | $ | (2,181,900 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
Vu1
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (7,582,690 | ) | $ | (9,856,071 | ) | ||
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
||||||||
Depreciation
|
96,972 | 52,404 | ||||||
Share-based
compensation
|
444,920 | 1,878,508 | ||||||
Issuance
of warrant for services
|
48,735 | 41,621 | ||||||
Issuance
of units of common stock and warrants for services
|
- | 467,232 | ||||||
Amortization
of discount and prepaid interest on long-term convertible
note
|
113,514 | - | ||||||
Amortization
of loan costs
|
1,579 | - | ||||||
Issuances
of common stock for services
|
266,459 | 633,038 | ||||||
Derivative
valuation loss
|
1,604,920 | - | ||||||
Amortization
of prepaid expenses arising from common stock issued for
rent
|
- | 1,678,739 | ||||||
Changes
in assets and liabilities:
|
||||||||
Tax
refund receivable
|
2,384 | 503,532 | ||||||
Prepaid
expenses
|
(55,846 | ) | 3,083 | |||||
Accounts
payable
|
249,169 | (50,317 | ) | |||||
Accrued
payroll
|
174,566 | 11,762 | ||||||
Net
cash flows from operating activities
|
(4,635,318 | ) | (4,636,469 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of equipment and construction in process
|
(50,088 | ) | (511,345 | ) | ||||
Deposits
on building purchase
|
(407,414 | ) | (236,640 | ) | ||||
Net
cash flows from investing activities
|
(457,502 | ) | (747,985 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sales of units of common stock and warrants
|
131,800 | 4,705,567 | ||||||
Proceeds
from issuance of convertible note payable and warrants
|
2,780,747 | - | ||||||
Proceeds
from short term loan
|
113,408 | - | ||||||
Proceeds
from sales of common stock
|
- | 2,130,039 | ||||||
Proceeds
from note payable
|
- | 12,953 | ||||||
Payments
on note payable
|
(3,431 | ) | (1,832 | ) | ||||
Payments
on capital lease obligations
|
(3,986 | ) | (2,325 | ) | ||||
Net
cash flows from financing activities
|
3,018,538 | 6,844,402 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(46,024 | ) | 12,149 | |||||
Net
change in cash and cash equivalents
|
(2,120,306 | ) | 1,472,097 | |||||
Cash
and cash equivalents, beginning of period
|
2,486,609 | 1,014,512 | ||||||
Cash
and cash equivalents, end of period
|
$ | 366,303 | $ | 2,486,609 | ||||
Cash
paid for interest
|
$ | 3,995 | $ | 3,246 | ||||
Supplemental
disclosure of non-cash financing and investing activities
|
||||||||
Capital
lease obligation
|
$ | - | $ | 27,770 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
Vu1
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BUSINESS AND ORGANIZATION
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
66.67% majority-owned subsidiary. During 2008, Telegen Display
Corporation and Telegen Communications Corporation were dissolved on April 22,
2008 in the state of California. Telegen Display Laboratories, Inc. was
dissolved on July 29, 2008. The three dissolved subsidiaries have no
operations for all periods presented.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The
consolidated financial statements include the accounts of Vu1 and all of its
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 consolidated balance sheets as of
December 31, 2009 and 2008 have been translated into United States dollars at
the exchange rate prevailing as of those dates. Translation adjustments are
included in “Accumulated Other Comprehensive Loss,” a separate component of
stockholders’ equity. The accounts of Sendio in the accompanying consolidated
statements of operations for the years ended December 31, 2009 and 2008 have
been translated using the average exchange rates prevailing for the respective
periods. Sendio recorded an aggregate of $4,710 and $13,580 of
foreign currency transaction gain as an offset to general and administrative
expense in the accompanying statements of operations for the years ended
December 31, 2009 and 2008, respectively.
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.
Cash and Cash
Equivalents
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
December 31, 2009 and 2008, we had cash of $46,170 and $1,986,609 respectively,
in excess of federally insured limits in effect as of those
dates.
F-7
Equipment
Equipment
is comprised 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 lives 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. Net book value of assets in the U.S. and Czech Republic
were as follows:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
United
States
|
$ | 11,155 | $ | 16,642 | ||||
Czech
Republic
|
122,389 | 224,100 | ||||||
$ | 133,544 | $ | 240,742 |
Construction in
Process
Construction
in process is comprised of assets to be used in the operations in the Czech
Republic not in service as of December 31, 2009 and 2008. These
assets, when placed in service will be reclassified to 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.
FASB ASC
740-10-25 clarifies the accounting for uncertain tax positions and requires that
an entity recognizes in the consolidated financial statements the impact of a
tax position, if that position is more likely than not of being sustained upon
examination, based on the technical merits of the
position. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition
or measurement are reflected in the period in which the change in judgment
occurs. The Company has elected to classify interest and penalties related to
unrecognized tax benefits, if and when required, as part of income tax expense
in the consolidated statements of income.
Long-Lived
Assets
Long-lived
assets are reviewed 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. Management reviewed
the assets during the fourth quarter of 2009 and determined no impairment was
deemed necessary.
Fair Value of Financial
Instruments
Financial
instruments consist of cash, receivables, payables and accrued liabilities,
derivative financial instruments, loans payable and convertible debt. The fair
value of our cash, receivables, payables and accrued liabilities and loans
payable are carried at historical cost; their respective estimated fair values
approximate their carrying values.
F-8
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 the 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.
We carry
our long term 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 December 31, 2009, the fair value of our
face value $2,943,191 convertible debt amounted to approximately
$5,472,000.
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 hierarchy prioritizes the inputs into three
broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets
for identical assets or liabilities. Level 2 inputs are quoted prices for
similar assets and liabilities in active markets or inputs that are observable
for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on our own assumptions used to
measure assets and liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the lowest level
input that is significant to the fair value measurement. 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.
Non-Controlling
Interest
Non-controlling
interest represents the equity of the 33.3% non-controlling shareholders of
Telisar Corporation. The subsidiary had no operations during 2009 and
2008.
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
years ended December 31, 2009 and 2008, research and development expenses were
comprised primarily of technical consulting expenses, legal expenses for the
development and protection of intellectual property and travel. Also
included in research and development for the year ended December 31, 2009 and
2008 were non-cash stock compensation charges of $223,591 and $131,490,
respectively for the issuance of shares of common stock and options to
consultants and employees.
F-9
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. On October 26, 2007 our Board of Directors approved the Vu1 Corporation
2007 Stock Incentive Plan (“Stock Incentive Plan”). A total of
10,000,000 shares of our common stock were authorized for issuance under the
plan. The Plan was approved by our stockholders on May 22,
2008.
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
We
calculate basic loss per share 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:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Warrants
|
10,541,113 | 6,522,374 | ||||||
Convertible
debt
|
7,357,976 | - | ||||||
Stock
options
|
4,796,875 | 6,071,875 | ||||||
Unvested
stock
|
71,625 | 190,750 | ||||||
Total
potentially dilutive securities
|
22,767,589 | 12,784,999 |
Recently Issued Accounting
Pronouncements
In
January 2010, the FASB issued guidance which clarifies and provides additional
disclosure requirements related to recurring and non-recurring fair value
measurements. The Company must implement these new requirements in its first
quarter of fiscal 2010. Certain additional disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measures are not effective until fiscal years beginning after December 15, 2010.
Other than requiring additional disclosures, implementation of this new guidance
will not have a material impact on the Company's financial
statements.
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.
F-10
NOTE 3 - GOING CONCERN
MATTERS
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States which contemplate
our continuation as a going concern. During the year ended December 31, 2009, we
incurred a net loss of $7,582,690 and we had negative cash flows from operations
of $4,635,318. In addition, we had an accumulated deficit of $65,873,319 at
December 31, 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
obtaining adequate debt and equity financing and achieving a level of sales
adequate to support our cost structure. In addition, realization of a
significant portion of the assets in the accompanying balance sheet is dependent
upon our ability to meet our financing requirements and the success of our plans
to sell our product. 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.
We plan
to raise additional equity or debt financing and continue to develop and market
our product. If we are unsuccessful in raising additional capital, we may be
forced to curtail or even cease our operations.
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 - RELATED PARTY TRANSACTIONS
From June
8, 2009 to December 30, 2009, R. Gale Sellers, a director and our Chief
Executive Officer advanced an aggregate of $1,711,515 (including $77,018 of
prepaid interest) through Full Spectrum Capital, LLC (“Full Spectrum”) as
described in Note 7. Mr. Sellers is the managing director of Full
Spectrum.
On
December 30, 2009 R. Gale Sellers and Richard Herring, both directors and
officers converted a total of $97,500 of unpaid compensation into ten-year
options to purchase 150,000 shares of common stock at an exercise price of $0.65
per share as more fully described in Note 12.
During
the first six months of 2008, R. Gale Sellers and Mark Weber purchased shares of
our common stock on the same terms as third parties in a private placement as
described in Note 12.
On
September 9, 2008 R. Gale Sellers and Richard Herring converted a total of
$199,500 of unpaid compensation into Units under our Unit Private Placement as
described more fully in Note 12.
On
November 15, 2008 Mark Weber, a member of our Board of Directors, converted a
total of $12,100 of unpaid expenses into Units under our Unit Private Placement
as described more fully in Note 12.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Sendio
Facility Operating Lease and Purchase Agreement
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”). 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.
F-11
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 December 31, 2009 and
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.
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.
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 (“Amendment No.
1”). Under Amendment No. 1, 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 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 through November, 2009.
On
December 2, 2009 Sendio executed a new lease agreement (the “New Lease
Agreement”) for its existing office and manufacturing facilities in the Czech
Republic. The New Lease Agreement commenced on December 1, 2009 and specifies
annual rent of CZK 13,365,000 plus applicable VAT taxes (CZK 1,113,750 per
month), less amounts paid by existing tenants in the building. The
present rent is CZK 719,556 per month after offset of the amounts paid by
existing tenants and will increase should the existing tenants vacate the
premises by the amount paid by the vacating tenant. The New Lease
Agreement expires on June 30, 2011. Sendio is responsible for utilities,
maintenance and certain other costs as defined in the lease.
In
addition on December 2, 2009 Sendio executed an amendment to the purchase
agreement (“Amendment No. 2”) for the facilities. Under Amendment No.
2, Sendio agreed to payments of the remaining purchase price of CZK 170,770,830
as follows:
|
·
|
Payment
of CZK 2,167,668 to the escrow account related to the purchase of the
building. This payment was made by
Sendio.
|
|
·
|
Payments
totaling CZK 12,270,846 payable in 19 monthly installments beginning
December 1, 2009 of CZK 645,834 through June 30, 2011 into the escrow
account. The first installment of 645,834 was made by Sendio in
December 2009. If any required installment is not made timely
as defined in the agreement, the seller is entitled to claim a contractual
fine of 60% per year on the past-due
amount.
|
|
·
|
Payment
of the remaining purchase price of CZK 156,332,316 into the escrow account
on or prior to June 30, 2011. If any required installment is
not made timely as defined in the agreement, the seller is entitled to
claim a contractual fine of 36% per year on the past-due
amount.
|
Under the
Amendment No. 2, the seller specifically waived any claims for contractual
penalties, damages or other costs arising out of any defaults by Sendio under
the purchase agreement occurring prior to November 30, 2009. However,
in the event of future breaches or claims under the purchase agreement by
Sendio, Amendment No. 2 provides that the seller may be able to claim
contractual penalties of CZK 17,500,000 for defaults prior to June 30,
2009.
F-12
Amendment
No. 2 also specifies that the seller has the right to withdraw from the purchase
agreement and impose contractual fines in the aggregate amount of up to CZK
26,000,000 (which amount includes the CZK17,500,000 for defaults prior to June
30, 2009 described above) in the event that Sendio does not make any installment
payment timely. The seller has the right to collect these from
amounts deposited in escrow.
Other
Operating Leases
On
October 31, 2007, Sendio entered into a non-residential premises lease agreement
with Multidisplay, s.r.o. (“Multidisplay”) for certain facilities located in the
Czech Republic (the “Prior Lease”). At its option, Sendio had the right to
extend the Prior Lease beyond its original expiration date by providing written
notice to Multidisplay no later than April 30, 2008. Sendio did not exercise its
right to extend the lease and the lease terminated as of June 30, 2008 according
to its terms.
We issued
6,100,000 shares of common stock in 2007 as payment in full of all amounts owing
for rent under the Prior Lease through June 30, 2008. The shares were
valued at $2,275,354, representing the amount of the rent liability as of the
date of the lease and initially recorded in 2007 as a prepaid expense. The value
of the shares was recorded as rent expense over the term of the
lease.
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 becomes month to month on the same
terms.
Total
rent expense was $431,649 and $1,980,227 for the years ended December 31, 2009
and 2008, respectively.
The
future payments under our Sendio and Seattle operating leases, net of amounts
presently paid by other tenants at the Sendio facility as of December 31, 2009
are as follows:
2010
|
$ | 475,911 | ||
2011
|
228,776 | |||
Total
|
$ | 704,687 |
Investment
Banking Agreements
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 and for one year after its termination, upon the closing of a
transaction from investors introduced by the investment bank, we will pay the
investment bank financing fees ranging from 5% to 7% of the value of the
transaction as defined in the agreement. This agreement was terminated on
December 31, 2009. No fees have been paid to the investment banker
under this agreement.
Effective
April 29, 2008, we entered into a six-month non-exclusive Financial Advisory and
Investment Banking Agreement with an investment banker. Under the
terms of the agreement, we issued 250,000 shares of common stock valued at
$85,000 or $0.34 per share based on the closing market price of our common stock
on the date of issuance. This amount was recorded as general and administrative
expenses on the date of issuance. For investors introduced to us by
the investment banker and who participate in a private placement with us, we
were required to pay to the investment banker a cash fee equal to 10% of the
gross proceeds we receive from such investors and a two year warrant to purchase
our common stock equal to 20% of the shares issued to such
investors. No proceeds were received under this agreement and it
terminated with no further liability to us.
F-13
NOTE
7 – 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.
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.
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.
Since insufficient basis was available in the modification date carrying value,
a day one derivative loss was recognized in income. We will continue to carry
the derivative liabilities at fair value, with charges or credits to income for
changes in fair value, until the Notes are settled through payment or
conversion. The terms of the Notes provided for capitalization of three month’s
interest which was treated as component of the face value of the Notes and a
prepaid interest, subject to amortization.
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 $1,231,675 (including $55,425 as the Interest
Prepayment and $15,000 of expenses reimbursed) which is currently convertible at
$0.40 per share into 3,079,188 shares of common stock. In connection
with the loan advance from SAM, we issued to SAM three-year warrants to purchase
1,539,595 shares of Vu1 common stock at an exercise price of $0.75 per
share.
F-14
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 the
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.
|
Our
accounting for the August 31, 2009 Note modifications provided for bifurcation
of the derivative liability at fair value.
The
November 19, 2009 modifications did not substantially change cash flows or the
fair value of the embedded conversion options.
The
following is a summary of our accounting for the Full Spectrum and SAM Notes,
including the modification:
August Modification
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Date
|
6/8/2009
|
7/1/2009
|
9/15/2009
|
9/16/2009
|
9/21/2009
|
10/6/2009
|
10/16/2009
|
11/9/2009
|
11/19/2009
|
11/19/2009
|
11/20/2009
|
12/29/2009
|
Total
|
|||||||||||||||||||||||||||||||||||||||
Face
value
|
$ | 523,560 | $ | 418,848 | $ | 87,740 | $ | 57,592 | $ | 52,356 | $ | 116,230 | $ | 167,539 | $ | 3,141 | $ | 5,236 | $ | 277,487 | $ | 954,188 | $ | 279,272 | $ | 2,943,190 | ||||||||||||||||||||||||||
Proceeds
|
500,000 | 400,000 | 83,792 | 55,000 | 50,000 | 111,000 | 160,000 | 3,000 | 5,000 | 265,000 | 911,250 | 266,705 | 2,810,747 | |||||||||||||||||||||||||||||||||||||||
Initial
allocation:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Prepaid
interest
|
(23,560 | ) | (18,848 | ) | (3,948 | ) | (2,592 | ) | (2,356 | ) | (5,230 | ) | (7,539 | ) | (141 | ) | (236 | ) | (12,487 | ) | (42,939 | ) | (12,567 | ) | (132,443 | ) | ||||||||||||||||||||||||||
Notes
payable
|
— | — | 694 | — | — | — | — | — | — | — | — | 694 | ||||||||||||||||||||||||||||||||||||||||
Warrants
|
236,978 | 153,961 | 20,717 | 16,300 | 15,064 | 52,246 | 68,322 | 1,007 | 2,253 | 119,406 | 410,603 | 107,376 | 1,204,235 | |||||||||||||||||||||||||||||||||||||||
Beneficial
conversion
|
286,582 | 264,887 | — | — | — | — | — | — | — | — | — | — | 551,469 | |||||||||||||||||||||||||||||||||||||||
Derivative
liabilities
|
— | — | 66,329 | 74,286 | 74,064 | 121,751 | 175,497 | 3,173 | 5,288 | 280,262 | 963,730 | 270,196 | 2,034,576 | |||||||||||||||||||||||||||||||||||||||
Day
one loss
|
— | — | — | (32,994 | ) | (36,772 | ) | (57,767 | ) | (76,280 | ) | (1,039 | ) | (2,305 | ) | (122,181 | ) | (420,144 | ) | (98,300 | ) | (847,782 | ) | |||||||||||||||||||||||||||||
$ | 500,000 | $ | 400,000 | $ | 83,792 | $ | 55,000 | $ | 50,000 | $ | 111,000 | $ | 160,000 | $ | 3,000 | $ | 5,000 | $ | 265,000 | $ | 911,250 | $ | 266,705 | $ | 2,810,747 | |||||||||||||||||||||||||||
Modification
adjustment:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative
liabilities
|
$ | 293,906 | $ | 235,125 | — | — | — | — | — | — | — | — | — | — | $ | 529,031 | ||||||||||||||||||||||||||||||||||||
Day
one loss
|
$ | (255,483 | ) | $ | (212,251 | ) | — | — | — | — | — | — | — | — | — | — | $ | (467,734 | ) | |||||||||||||||||||||||||||||||||
Aggregate inception
and
modification date:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair
value changes
|
$ | (223,110 | ) | $ | (168,016 | ) | $ | (17,682 | ) | $ | 17,558 | $ | 22,493 | $ | 10,770 | $ | 15,916 | $ | 398 | $ | 209 | $ | 11,099 | $ | 38,168 | $ | 2,793 | $ | (289,404 | ) | ||||||||||||||||||||||
Day
one losses
|
$ | (255,483 | ) | $ | (212,251 | ) | — | $ | (32,994 | ) | $ | (36,772 | ) | $ | (57,767 | ) | $ | (76,280 | ) | $ | (1,039 | ) | $ | (2,305 | ) | $ | (122,181 | ) | $ | (420,144 | ) | $ | (98,300 | ) | $ | (1,315,516 | ) |
The
warrants issued in conjunction with the Full Spectrum and SAM Notes 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 requires allocation of
proceeds among the Notes and their warrants based upon relative fair values. The
estimated fair value of the warrants reflected in the table above represent the
relative fair values of the warrants, derived by allocating the proceeds to the
warrants and Notes based upon their respective fair values. Fair values of
warrants were calculated using the Black-Scholes option pricing model with the
following assumptions:
F-15
Issuance
Date
|
6/8/2009
|
7/1/2009
|
9/15/2009
|
9/16/2009
|
9/21/2009
|
10/6/2009
|
10/16/2009
|
11/9/2009
|
11/19/2009
|
11/19/2009
|
11/20/2009
|
12/29/2009
|
||||||||||||||||||||||||||||||||||||
Linked
common shares
|
654,450 | 523,560 | 109,675 | 71,990 | 65,445 | 145,288 | 209,424 | 3,927 | 6,545 | 346,859 | 1,192,736 | 349,090 | ||||||||||||||||||||||||||||||||||||
Trading
market price
|
$ | 0.88 | $ | 0.70 | $ | 0.60 | $ | 0.80 | $ | 0.91 | $ | 0.78 | $ | 0.70 | $ | 0.51 | $ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.65 | ||||||||||||||||||||||||
Expected
dividend
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Expected
life in years
|
3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | ||||||||||||||||||||||||||||||||||||
Volatility
|
144.8 | % | 122.7 | % | 130.2 | % | 178.1 | % | 178.1 | % | 158.6 | % | 144.6 | % | 141.6 | % | 172.8 | % | 172.8 | % | 172.8 | % | 141.5 | % | ||||||||||||||||||||||||
Risk
free rate
|
2.0 | % | 1.6 | % | 1.6 | % | 1.6 | % | 1.6 | % | 1.6 | % | 1.6 | % | 1.4 | % | 1.2 | % | 1.2 | % | 1.3 | % | 1.6 | % |
The
following table shows, as of December 31, 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
|
$ | 1,634,497 | $ | 1,711,515 | 4,278,788 | 2,139,394 | ||||||||||
SAM
|
1,176,250 | 1,231,675 | 3,079,188 | 1,539,595 | ||||||||||||
$ | 2,810,747 | $ | 2,943,190 | 7,357,976 | 3,678,989 |
NOTE
8 – 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
2009:
Amount
|
||||
Balance
at June 8, 2009 (first date of issuance)
|
$ | — | ||
Modifications
and issuances:
|
||||
Derivatives
recognized upon modification of Notes, discussed in Note 7
|
529,031 | |||
Derivatives
recognized upon issuance of post-modification Notes
|
2,034,576 | |||
Unrealized
fair value changes, included in income
|
289,404 | |||
Balance
at December 31, 2009
|
$ | 2,853,011 |
The
following table summarizes the effect on our statement of operations related to
derivative financial instruments for 2009:
Amount
|
||||
Day
one derivative losses
|
$ | 1,315,516 | ||
Fair
value changes
|
289,404 | |||
Total
derivative valuation loss
|
$ | 1,604,920 |
We value
our derivative financial instruments using a Monte Carlo Simulation Technique
(“MCST”) using Level 3 inputs. 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:
F-16
Inception or Modification Date Calculations
|
||||||||||||||||||||||||||||||||||||||||||||||||
Date
|
6/8/2009
|
7/1/2009
|
9/15/2009
|
9/16/2009
|
9/21/2009
|
10/6/2009
|
10/16/2009
|
11/9/2009
|
11/19/2009
|
11/19/2009
|
11/20/2009
|
12/29/2009
|
||||||||||||||||||||||||||||||||||||
Linked
common shares
|
1,308,901 | 1,047,120 | 219,351 | 143,979 | 130,890 | 290,576 | 418,848 | 7,853 | 13,089 | 693,717 | 2,385,471 | 698,181 | ||||||||||||||||||||||||||||||||||||
Trading
market price
|
$ | 0.88 | $ | 0.70 | $ | 0.60 | $ | 0.80 | $ | 0.91 | $ | 0.78 | $ | 0.70 | $ | 0.51 | $ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.65 | ||||||||||||||||||||||||
Expected
life (years)
|
1.73 | 1.66 | 1.62 | 1.62 | 1.61 | 1.35 | 1.35 | 1.31 | 1.31 | 1.31 | 1.31 | 1.24 | ||||||||||||||||||||||||||||||||||||
Equivalent
volatility
|
97.05 | % | 97.05 | % | 98.44 | % | 109.64 | % | 111.38 | % | 109.28 | % | 109.28 | % | 111.61 | % | 111.61 | % | 111.61 | % | 111.61 | % | 122.20 | % | ||||||||||||||||||||||||
Risk
adjusted yield
|
12.00 | % | 12.00 | % | 11.09 | % | 11.09 | % | 11.09 | % | 11.26 | % | 11.26 | % | 10.06 | % | 10.06 | % | 10.06 | % | 10.06 | % | 9.67 | % | ||||||||||||||||||||||||
Risk
adjusted interest rate
|
14.44 | % | 14.44 | % | 14.54 | % | 18.00 | % | 18.00 | % | 14.51 | % | 14.51 | % | 16.70 | % | 16.70 | % | 16.70 | % | 16.70 | % | 16.67 | % |
NOTE
9 – SHORT TERM LOAN PAYABLE
On
November 3, 2009 we issued a 10% note payable to an investor for cash in the
amount of GBP 70,000 (approximately $115,000) secured by certain assets of
Sendio. The note was due on November 30, 2009. On
April 8, 2010 the investor granted an extension of the note until May 31,
2010.
NOTE
10 – 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
11 – 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 lease. The
assets acquired under the capital lease obligation are being depreciated over
the five-year term of the lease.
NOTE
12 - 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
September 10, 2008, we filed an amendment to our Amended and Restated Articles
of Incorporation with the State of California Secretary of State to increase the
number of authorized shares of our no par value common stock from 100,000,000 to
200,000,000. At December 31, 2009 and 2008, we had 86,152,246 and 85,691,892
shares of common stock outstanding, respectively.
Common Stock
Issuances
During
the year ended December 31, 2009 we completed the following:
|
·
|
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
were not met and we have no further liability under this engagement
letter.
|
F-17
|
·
|
On
September 30, 2009 we issued 44,800 shares of common stock to an employee
upon their termination for services valued at
$22,400.
|
|
·
|
On
December 3, 2009 we issued 158,750 shares of common stock valued at
$103,188 or $0.65 per share based on the closing market price for our
common stock as of that date to three vendors as compensation for
services.
|
|
·
|
On
December 3, 2009 we issued 174,054 shares of common stock at a price of
$0.40 per share to six vendors in settlement of past due accounts payable
totaling $69,622.
|
We made
the following common stock awards for the year ended December 31, 2009 from the
2007 Stock Compensation Plan:
|
·
|
On
January 2, 2009 we issued 100,000 shares of common stock to an employee
valued at $110,000 or $1.10 per share based on the closing market price as
of that date. The shares did not vest and the stock was
returned to the Plan.
|
|
·
|
On
December 18, 2009 we granted 54,000 shares of common stock to employees
for services valued at $34,020 or $0.63 per share based on the closing
market price for our common stock as of that date. The shares
vested upon issuance.
|
During
the year ended December 31, 2008, we completed the following:
·
|
In
the first six months of 2008, we sold an aggregate of 7,100,128 shares of
common stock at a price of $0.30 per share for net proceeds of $2,130,039
in our Stock Private Placement, including $75,000 from Mark Weber, a
member of our Board of Directors and $150,000 from R. Gale Sellers, an
officer and a member of our Board of
Directors.
|
·
|
On
April 29, 2008 we issued 250,000 shares of common stock valued at $85,000
or $0.34 per share based on the closing market price of our common stock
on the date of issuance pursuant to the Financial Advisory and Investment
Banking Agreement discussed in Note
6.
|
·
|
From
August 27, 2008 to November 15, 2008 we sold 5,888,334 Units at a
subscription price of $0.80 per Unit for net proceeds of $4,705,567 in our
Unit Private Placement. 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 11,776,667
shares of common stock and two-year warrants to purchase 5,888,334 shares
of common stock were issued. The net proceeds were allocated
based on the relative fair values of the common stock and the warrants on
the dates of issuance. The allocated fair value of the warrants
was $1,357,941 and the balance of the proceeds of $3,347,626 was allocated
to the common stock.
|
·
|
On
September 9, 2008 the Board of Directors approved the conversion of
$211,600 of unpaid compensation and expenses due to our officers and
directors into Units in our private placement on the same terms as third
party investors, at a rate of $0.80 per Unit. Mr. Sellers, then
our President and Chief Operating Officer, converted $163,500 into 204,375
Units and we issued 408,750 shares of common stock and a two-year warrant
to purchase 204,375 shares of common stock. Mr. Herring, our
Chief Executive Officer, converted $36,000 into 45,000 Units and we issued
90,000 shares of common stock and a two-year warrant to purchase 45,000
shares of common stock. Mark Weber, a director converted
$12,100 of unpaid expenses into 15,125 Units and we issued 30,250 shares
of common stock and a two-year warrant to purchase 15,125 shares of common
stock. The conversion was effective November 15, 2009. In
addition, unpaid amounts due to two vendors totalling $255,632 were
converted into 319,540 units and we issued 639,080 shares of common stock
and a two-year warrant to purchase 319,540 shares of common stock. The
total amount converted of $467,232 was allocated based on the relative
fair values of the common stock and the warrants on the date of
issuance. The allocated fair value of the warrants was $134,888
and the balance of $332,344 was allocated to the common
stock.
|
F-18
The fair
value of the warrants issued in our Unit Private Placement was calculated using
the Black-Scholes Option Pricing Model with the following
assumptions:
Closing
market price of common stock
|
$1.00
to $1.40
|
|||
Estimated
volatility
|
144.5%
to 168.7%
|
|||
Risk
free interest rate
|
1.45%
to 2.31%
|
|||
Expected
dividend rate
|
-
|
|||
Expected
life
|
2
years
|
Warrant
Issuances
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 warrants vested monthly
over the period of service from January to May, 2009. The value of
the warrants of $15,876 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.
During
January and February, 2009 we issued two-year warrants to purchase 164,750
shares of common stock at an exercise price of $0.60 per share pursuant to
subscription agreements receivable at December 31, 2008 for 164,750 Units under
our Unit Private Placement as discussed below.
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 warrants vest over
the one year life of the agreement, with the remaining warrants vesting upon the
achievement of certain performance milestones. The value of the warrants 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. The performance milestones had not
been achieved at December 31, 2009. We recognized a total of $32,859
of expense during the year ended December 31, 2009 pertaining to the vested
portion of these warrants. We will recognize $6,721 of additional
expense during the first quarter of 2010 and the remaining $39,583 upon the
achievement of the performance milestones.
We issued
three-year warrants to purchase 3,678,989 at an exercise price of $0.75 per
share in conjunction with the Convertible Notes Payable discussed in Note
7.
On
November 1, 2008 we issued a two year warrant to purchase 50,000 shares of
common stock at an exercise price of $1.15 per share to a vendor for
services. The estimated fair value of $41,621 was recorded as general
and administrative expense on the date of issuance and was calculated using the
Black Scholes option pricing model with the assumptions for volatility of
152.8%, risk free interest rate of 1.45% and a two year life.
From
August 27, 2008 to November 15, 2008 we issued two-year warrants to purchase
5,888,334 shares of common stock at an exercise price of $0.60 per share in
conjunction with our Unit Private Placement described above.
On
September 9, 2008 we issued two-year warrants to purchase 204,375 shares of
common stock at an exercise price of $0.60 per share in conjunction with the
conversion of unpaid compensation and expenses to certain officers and directors
as described above.
The
following table summarizes our outstanding warrants as of December 31,
2009:
F-19
Weighted-Average
|
||||||||||||
Exercise
|
Warrants
|
Remaining Contractual
|
Number
|
|||||||||
Price
|
Outstanding
|
Life (Years)
|
Exercisable
|
|||||||||
$0.60
|
6,637,124 | 0.8 | 6,637,124 | |||||||||
$0.75
|
3,828,989 | 2.7 | 3,753,989 | |||||||||
$1.00
|
25,000 | 1.1 | 25,000 | |||||||||
$1.15
|
50,000 | 0.8 | 50,000 | |||||||||
10,541,113 | 1.5 | 10,466,113 |
Stock and Stock Options
Issued Pursuant to the 2007 Stock Incentive Plan
On
October 26, 2007 our Board of Directors approved our 2007 Stock Incentive
Plan. A total of 10,000,000 shares of our common stock were
authorized for issuance under the plan. The Stock Incentive Plan allows us to
grant stock or stock option awards to our employees, directors, officers,
consultants, agents, advisors and independent contractors and subsidiaries, for
up to an aggregate of 10,000,000 shares of common
stock. The Stock Incentive Plan is administered by our Board of
Directors and Compensation Committee, who can determine the size and type of
award granted, purchase price, vesting schedule and expiration date of any stock
or options grant. All grants of shares and the shares underlying
options are for restricted common stock and are issued at the closing market
price of our common stock on the date of grant.
A summary
of activity related to grants of common stock under the 2007 Stock Incentive
Plan as of December 31, 2009 is presented below.
Number of
Shares
|
Grant Date Fair
Value
|
||||||
Outstanding,
December 31, 2007
|
1,799,500 |
$0.23
|
|||||
Granted
|
430,000 |
$1.00
to $1.14
|
|||||
Forfeited
|
(26,000 | ) |
$0.23
|
||||
Outstanding,
December 31, 2008
|
2,203,500 |
$0.23
to 1.14
|
|||||
Granted
|
154,000 |
$0.63
to $1.10
|
|||||
Forfeited
|
(146,250 | ) |
$0.23 to $1.10
|
||||
Outstanding,
December 31, 2009
|
2,211,250 |
$0.23 to $1.14
|
|||||
Vested,
December 31, 2009
|
2,139,625 |
$0.23 to $1.14
|
A summary
of the status of our nonvested stock grants as of December 31, 2009 and changes
during the year ended December 31, 2009 is presented below.
Nonvested Stock Grants
|
Number of
Shares
|
Weighted Average
Grant Date Fair Value |
||||||
Nonvested
at December 31, 2008
|
190,750 | $ | 0.23 | |||||
Granted
|
154,000 | 0.94 | ||||||
Forfeited
|
(146,250 | ) | 0.82 | |||||
Vested
|
(126,875 | ) | 0.40 | |||||
Nonvested
at December 31, 2009
|
71,625 | $ | 0.23 |
F-20
We
recognized compensation expense related to the vested portion of these share
grants with a fair value of $50,781 and $548,038 for the years ended December
31, 2009 and 2008, respectively. These amounts were recognized as research and
development expense, general and administrative expense or marketing expense
based on the specific recipient of the award for the years ended December 31,
2009 and 2008, respectively. As of December 31, 2009 a total of
71,625 shares of common stock with a fair value of $16,474 are
unvested. The cost is expected to be recognized ratably through
November, 2010. All grants were valued at the closing market price of our common
stock as of the date of grant.
A summary
of activity related to stock options under the 2007 Stock Incentive Plan as of
December 31, 2009 is presented below.
Number of
Shares
|
Exercise price range
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
Aggregate
Intrinsic Value
|
||||||||||||||||
Outstanding,
December 31, 2007
|
1,950,000 | $ | 0.23 to $0.38 | $ | 0.33 | - | ||||||||||||||
Granted
|
4,300,000 | $ | 0.49 to $1.14 | 0.93 | - | |||||||||||||||
Forfeited
|
(178,125 | ) | $ | 1.00 | 1.00 | - | ||||||||||||||
Outstanding,
December 31, 2008
|
6,071,875 | $ | 0.23 to $1.14 | 0.74 | - | |||||||||||||||
Granted
|
975,000 | $ | 0.63 to $1.10 | 0.71 | ||||||||||||||||
Forfeited
|
(2,250,000 | ) | $ | 0.49 to $1.14 | 0.99 | |||||||||||||||
Outstanding,
December 31, 2009
|
4,796,875 | $ | 0.23 to $1.00 | $ | 0.61 | 8.3 | $ | 710,000 | ||||||||||||
Exercisable,
December 31, 2009
|
4,746,875 | $ | 0.23 to $1.00 | $ | 0.63 | 8.3 | $ | 709,000 |
The
aggregate intrinsic value of the stock options fluctuates in relation to the
market price of our common stock as reflected on the OTC Bulletin
Board.
On
December 30, 2009 we issued options to R. Gale Sellers and Richard Herring, both
directors and officers in lieu of a total of $97,500 of unpaid
compensation. Mr. Sellers converted $70,000 of unpaid compensation
into options to purchase 107,692 shares of common stock at an exercise price of
$0.65 per share. and Mr. Herring converted $22,500 of unpaid compensation
into options to purchase 42,308 shares of common
stock. The options have a ten year life and an exercise price of
$0.65 per share.
The range
of exercise prices for options outstanding and options exercisable under the
2007 Stock Incentive Plan at December 31, 2009 are as follows:
Range of Exercise Prices
|
Weighted Average
Remaining Contractual
Life of Options
Outstanding
(in years)
|
Options Outstanding
|
Options Exerciseable
|
|||||||||||||||||
Number of
Shares
|
Weighted
Average
Exercise Price
|
Number of
Shares
|
Weighted
Average
Exercise Price
|
|||||||||||||||||
$0.23- $0.38
|
7.3 | 1,950,000 | $ | 0.33 | 1,950,000 | $ | 0.33 | |||||||||||||
$0.49 - $0.65
|
9.5 | 1,325,000 | $ | 0.59 | 1,275,000 | $ | 0.58 | |||||||||||||
$1.00
|
8.6 | 1,521,875 | $ | 1.00 | 1,521,875 | $ | 1.00 |
A summary
of the status of our nonvested options as of December 31, 2009 and changes
during the year ended December 31, 2009 is presented below.
F-21
Nonvested options
|
Number of
Shares
Underlying
Options
|
Weighted Average
Grant Date Fair Value |
||||||
Nonvested
at December 31, 2008
|
2,100,000 | $ | 0.99 | |||||
Granted
|
975,000 | 0.71 | ||||||
Forfeited
or expired
|
(2,250,000 | ) | 0.99 | |||||
Vested
|
(775,000 | ) | 0.64 | |||||
Nonvested
at December 31, 2009
|
50,000 | $ | 0.63 |
We
recognized compensation expense of $394,139 and $1,878,508 related to the vested
portion of these options based on their estimated grant date fair value as
research and development expense, general and administrative expense or
marketing expense based on the specific recipient of the award for the years
ended December 31, 2009 and 2008, respectively. The estimated fair
value of the options on the date of grant was calculated using the Black Scholes
option pricing model and the following assumptions.
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Closing
market price of common stock
|
$0.63
to $1.10
|
$0.49
to $1.14
|
||||||
Estimated
volatility
|
113.6%
to 149.1%
|
101.7%
to 168.7%
|
||||||
Risk
free interest rate
|
0.87%
to 3.80%
|
2.25%
to 4.03%
|
||||||
Expected
dividend rate
|
-
|
-
|
||||||
Expected
life
|
5-10
years
|
5-10
years
|
As of
December 31, 2009 there was a total of $31,015 of unrecognized compensation
expense related to the nonvested options which is expected to be recognized
ratably through May, 2010.
As of
December 31, 2009 the 2007 Stock Incentive Plan has 2,991,875 shares available
for future grants of stock or options.
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 Private
Placement. 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.
NOTE
13 - INCOME TAXES
The net
deferred tax asset is comprised of the following:
F-22
December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
operating loss carryforwards
|
$ | 18,947,823 | $ | 17,663,738 | ||||
Share-based
compensation
|
1,000,327 | 849,750 | ||||||
Other
|
16,736 | (19,864 | ) | |||||
Valuation
allowance
|
(19,964,886 | ) | (18,493,624 | ) | ||||
Deferred
Income Tax Asset
|
$ | - | $ | - |
Loss
before income taxes is comprised of:
For the Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
US
Operations
|
$ | 4,463,303 | $ | 4,416,458 | ||||
Czech
Republic Operations
|
3,119,387 | 5,439,613 | ||||||
$ | 7,582,690 | $ | 9,856,071 |
The
provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the years ended December 31, 2009 and
2008 as follows:
For the Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
loss
|
$ | 7,582,690 | $ | 9,856,071 | ||||
Tax
at federal statutory rate (34%)
|
$ | (2,578,115 | ) | $ | (3,351,064 | ) | ||
Effect
of lower foreign tax rate
|
467,904 | 815,942 | ||||||
Permanent
differences
|
679,114 | 79,237 | ||||||
Change
in valuation allowance
|
1,431,097 | 2,455,885 | ||||||
Provision
for Income Taxes
|
$ | - | $ | - |
As of
December 31, 2009, we had net operating loss carryforwards for U.S. and Czech
Republic federal income tax reporting purposes which if unused, will expire in
the following years:
F-23
US
|
Czech Republic
|
|||||||
Year
|
Amount
|
Amount
|
||||||
2012
|
$ | - | $ | 1,417,677 | ||||
2013
|
- | 5,412,080 | ||||||
2014
|
- | 2,500,684 | ||||||
2018
|
27,080,269 | - | ||||||
2019
|
1,745,867 | - | ||||||
2020
|
6,137,725 | - | ||||||
2021
|
5,251,175 | - | ||||||
2022
|
1,751,322 | - | ||||||
2023
|
1,729,930 | - | ||||||
2024
|
328,048 | - | ||||||
2025
|
191,893 | - | ||||||
2026
|
465,173 | - | ||||||
2027
|
760,272 | - | ||||||
2028
|
2,775,311 | - | ||||||
2029
|
2,297,836 | - | ||||||
$ | 50,514,821 | $ | 9,330,441 |
The
utilization of U.S. net operating loss carryforwards may be limited due to the
ownership change under the provisions of Internal Revenue Code Section 382. The
fiscal years 2006 to 2009 remain open to examination to U.S. Federal authorities
and other jurisdictions in the U.S. where we operate. Sendio has paid no income
taxes since its inception and its fiscal years for 2007 to 2009 remain open to
examination by Czech tax authorities.
NOTE
14 - SUBSEQUENT EVENTS
The Board
of Directors extended the date that advances could be made under the loan
agreements with Full Spectrum and SAM until April 30,
2010. Subsequent to December 31, 2009, SAM and Full Spectrum advanced
additional amounts under their notes as discussed in Note 7 through April 15,
2010 as follows:
Advances
|
Total Principal
|
Conversion Shares
|
Warrants
|
|||||||||||||
Full
Spectrum
|
$ | 723,970 | $ | 758,084 | 1,895,209 | 947,605 | ||||||||||
SAM
|
339,502 | 355,499 | 888,749 | 444,374 | ||||||||||||
$ | 1,063,472 | $ | 1,113,583 | 2,783,958 | 1,391,979 |
Total
amounts outstanding as of April 15, 2010 are as follows:
Advances
|
Total Principal
|
Conversion Shares
|
Warrants
|
|||||||||||||
Full
Spectrum
|
$ | 2,358,467 | $ | 2,469,599 | 6,173,997 | 3,086,999 | ||||||||||
SAM
|
1,515,752 | 1,587,174 | 3,967,937 | 1,983,969 | ||||||||||||
$ | 3,874,219 | $ | 4,056,773 | 10,141,934 | 5,070,968 |
On
February 18, 2010 we entered into a Financial Advisory and Investment Banking
Services Agreement to assist us with our fundraising efforts. We paid
$20,000 as an advisory fee at the inception of the agreement. In
addition, the agreement specifies compensation for the placement of equity
securities of 8% of any gross proceeds plus warrants equal to 8% of common
shares issued or issuable in any financing from investors identified by the
investment banker. In addition, if the investment banker moves to
conduct a syndicated offering with other brokers, an additional 2% of gross
proceeds for a management fee and 3% of gross proceeds will be due for a non
accountable expense allowance plus warrants equal to 5% of common shares issued
or issuable in such financing.
F-24
The
agreement also specifies compensation of 6% of gross proceeds with 6% warrant
coverage for any mezzanine debt financing and 1.5% of gross proceeds for senior
debt with no warrant coverage. The agreement terminates on June 30, 2010 unless
terminated earlier as specified under the agreement. Under certain circumstances
as specified in the agreement, a breakup fee of $30,000 may be due upon
cancellation of the agreement. The obligation for payment of fees and
warrants as specified above survives for one year subsequent to the termination
of the agreement for any amounts raised from investors identified and contacted
by the investment banker.
On March
10, 2010 we entered into an Investment Banking Agreement to assist us with our
fundraising efforts. The term of the agreement is for three months
and specifies compensation of 7.0% of any gross proceeds plus warrants equal to
7% of the number of common shares issued or issuable upon conversion in any
financing transaction from investors identified by the investment
banker. The agreement is exclusive with respect to institutional
investors. In addition, the investment banker has a right of first
refusal under certain circumstances for a period of 18 months following the
termination of the agreement under certain circumstances as defined in the
agreement. The obligation for payment of these fees and warrants
survives for one year subsequent to the termination of the agreement for any
amounts raised from investors identified and contacted by the investment
banker.
F-25