Attached files
file | filename |
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EX-32.1 - Vu1 CORP | v203594_ex32-1.htm |
EX-10.1 - Vu1 CORP | v203594_ex10-1.htm |
EX-31.2 - Vu1 CORP | v203594_ex31-2.htm |
EX-31.1 - Vu1 CORP | v203594_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended September 30, 2010
¨ Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from ____________ to ____________
Commission
File No. 0-21864
Vu1
CORPORATION
(Exact
name of registrant as specified in its charter)
California
|
84-0672714
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
469 SEVENTH AVENUE, SUITE
356 New York, NY 10018
(Address
of principal executive offices)
557 ROY ST. SUITE 125
SEATTLE, WA 98109
(Former
address of principal executive offices)
(888)
985-8881
(Issuer’s
Telephone number, including area code)
Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 or Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
|
Accelerated filer ¨
|
Non-accelerated filer
¨
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
On
November 22, 2010 there were 104,738,255 shares of the Registrant’s common
stock, no par value, issued and outstanding.
Vu1
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
|
|||
PART
I Financial Information
|
|||
ITEM
1. Condensed Consolidated Financial Statements (unaudited)
|
|||
Balance
Sheets as of September 30, 2010 and December 31, 2009
|
1
|
||
Statements
of Operations and Comprehensive Loss for the Three and Nine Months Ended
September 30, 2010 and 2009
|
2
|
||
Statements
of Cash Flows for the Nine Months Ended September 30, 2010 and
2009
|
3
|
||
Notes
to Condensed Consolidated Financial Statements
|
4
|
||
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
15
|
||
ITEM
4. Controls and Procedures
|
19
|
||
PART
II Other Information
|
|||
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
19
|
||
ITEM 5. Other Information |
20
|
||
ITEM
6. Exhibits
|
20
|
||
|
|||
Signatures
|
21
|
Unless
otherwise indicated or the context otherwise requires, all references in this
Report to “we,” “us,” “our,” and the “Company” are to Vu1 Corporation, Sendio,
s.r.o., our Czech subsidiary, and our inactive subsidiary Telisar
Corporation.
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
Forward
Looking Statements
We are
including the following cautionary statement in this Quarterly Report on Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements. All statements other than statements of historical fact, including
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions, future results of operations or
financial position, made in this Report are forward looking. In particular, the
words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,”
variations of such words, and similar expressions identify forward-looking
statements, but are not the exclusive means of identifying such statements and
their absence does not mean that the statement is not
forward-looking.
The
forward-looking statements contained herein involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Our expectations, beliefs and
projections are expressed in good faith and are believed by management to have a
reasonable basis, including without limitation, management’s examination of
historical operating trends, data contained in our records and other data
available from third parties; however, management’s expectations, beliefs and
projections may not be achieved or accomplished. In addition to other factors
and matters discussed elsewhere herein, the following are important factors
that, in our view, could cause actual results to differ materially from those
discussed in the forward-looking statements:
|
·
|
our
lack of working capital and lack of
revenues;
|
|
·
|
the
availability of capital to us, in the amount and time needed, to fund our
development programs and operations, and the terms and dilutive effect of
any such financings;
|
|
·
|
our
ability to be successful in our product development and testing
efforts;
|
|
·
|
our
ability to obtain commercial development for our planned
products;
|
|
·
|
our
ability to obtain manufacturing for our planned products in a
cost-effective manner and at the times and in the volumes required, while
maintaining quality assurance;
|
|
·
|
market
demand for and acceptance of our planned products, and other factors
affecting market conditions;
|
|
·
|
technological
advances and competitive pressure by our
competitors;
|
|
·
|
governmental
regulations imposed on us in the United States and European Union;
and
|
|
·
|
the
loss of any of our key employees or
consultants.
|
For
additional factors that can affect these forward-looking statements, see the
“Risk Factors” section in our Annual Report on Form 10-K for the year ended
December 31, 2009. The forward-looking statements contained in this Report
speak only as of the date hereof. We caution readers not to place undue
reliance on any such forward-looking statements. We disclaim any
obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
Vu1
CORPORATION AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30,
|
DECEMBER
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 310,645 | $ | 366,303 | ||||
Tax
refund receivable
|
35,481 | 30,938 | ||||||
Prepaid
expenses
|
85,277 | 205,725 | ||||||
Total
current assets
|
431,403 | 602,966 | ||||||
Non-current
assets
|
||||||||
Equipment,
net of accumulated depreciation
|
||||||||
of
$223,163 and $150,015, respectively
|
123,473 | 133,544 | ||||||
Construction
in process
|
471,786 | 472,708 | ||||||
Deposit
on building purchase
|
934,283 | 635,387 | ||||||
Loan
costs
|
- | 28,421 | ||||||
Total
assets
|
$ | 1,960,945 | $ | 1,873,026 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 533,181 | $ | 528,503 | ||||
Accrued
payroll
|
256,227 | 343,723 | ||||||
Accrued
interest
|
- | 136,880 | ||||||
Short
term loan payable
|
112,773 | 116,340 | ||||||
Loan
payable, current portion
|
3,507 | 4,485 | ||||||
Capital
lease obligation, current portion
|
5,322 | 4,927 | ||||||
Total
current liabilities
|
911,010 | 1,134,858 | ||||||
Long-term
liabilities
|
||||||||
Long-term
convertible notes payable, net of discount
|
||||||||
of
$0 and $2,892,343, respectively
|
- | 50,848 | ||||||
Embedded
derivative liability
|
- | 2,853,011 | ||||||
Loan
payable, net of current portion
|
- | 2,214 | ||||||
Capital
lease obligation, net of current portion
|
10,753 | 13,995 | ||||||
Total
liabilities
|
921,763 | 4,054,926 | ||||||
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;
|
||||||||
102,099,487
and 86,152,246 shares issued
|
||||||||
and
outstanding, respectively
|
69,964,058 | 63,681,363 | ||||||
Accumulated
deficit
|
(68,938,832 | ) | (65,873,319 | ) | ||||
Accumulated
other comprehensive income
|
110,011 | 106,111 | ||||||
Total
Vu1 Corporation's stockholders' equity (deficit)
|
1,135,237 | (2,085,845 | ) | |||||
Non-controlling
interest
|
(96,055 | ) | (96,055 | ) | ||||
Total
stockholders' equity (deficit)
|
1,039,182 | (2,181,900 | ) | |||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 1,960,945 | $ | 1,873,026 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
1
Vu1
CORPORATION AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE LOSS
Three months ended September
30,
|
Nine months ended September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Operating
expenses
|
||||||||||||||||
Research
and development
|
$ | 479,108 | $ | 615,203 | $ | 1,428,537 | $ | 2,074,707 | ||||||||
General
and administrative
|
717,496 | 257,778 | 1,521,314 | 1,605,685 | ||||||||||||
Marketing
|
141,987 | 80,477 | 276,167 | 274,823 | ||||||||||||
Total
operating expenses
|
1,338,591 | 953,458 | 3,226,018 | 3,955,215 | ||||||||||||
Loss
from operations
|
(1,338,591 | ) | (953,458 | ) | (3,226,018 | ) | (3,955,215 | ) | ||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
12 | 234 | 14 | 2,571 | ||||||||||||
Other
income
|
- | - | 36,590 | - | ||||||||||||
Interest
expense
|
(601,867 | ) | (116,895 | ) | (1,239,077 | ) | (133,772 | ) | ||||||||
Loss
on extinguishment of debt
|
(215,873 | ) | - | (215,873 | ) | - | ||||||||||
Derivative
valuation (loss) gain
|
(1,629,942 | ) | (1,200,720 | ) | 1,578,851 | (1,200,720 | ) | |||||||||
Total
other income (expense)
|
(2,447,670 | ) | (1,317,381 | ) | 160,505 | (1,331,921 | ) | |||||||||
Loss
before provision for income taxes
|
(3,786,261 | ) | (2,270,839 | ) | (3,065,513 | ) | (5,287,136 | ) | ||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Net
loss
|
$ | (3,786,261 | ) | $ | (2,270,839 | ) | $ | (3,065,513 | ) | $ | (5,287,136 | ) | ||||
Other
comprehensive loss:
|
||||||||||||||||
Foreign
currency translation adjustments
|
133,527 | 28,382 | 3,900 | 33,349 | ||||||||||||
Comprehensive
loss
|
$ | (3,652,734 | ) | $ | (2,242,457 | ) | $ | (3,061,613 | ) | $ | (5,253,787 | ) | ||||
Loss
per share
|
||||||||||||||||
Basic
|
$ | (0.04 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | ||||
Diluted
|
$ | (0.04 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | ||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
86,626,514 | 85,576,142 | 86,264,585 | 85,541,801 | ||||||||||||
Diluted
|
86,626,514 | 85,576,142 | 86,264,585 | 85,541,801 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Vu1
CORPORATION AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September
30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (3,065,513 | ) | $ | (5,287,136 | ) | ||
Adjustments
to reconcile net loss to
|
||||||||
net
cash flows from operating activities:
|
||||||||
Depreciation
|
66,073 | 71,434 | ||||||
Share-based
compensation
|
550,413 | (79,394 | ) | |||||
Issuance
of warrant for services
|
6,722 | 38,839 | ||||||
Issuance
of warrant for interest
|
19,125 | - | ||||||
Issuance
of stock for services
|
- | 93,650 | ||||||
Amortization
of discount and prepaid interest on long-term convertible
note
|
692,526 | 75,941 | ||||||
Amortization
of loan costs
|
28,421 | - | ||||||
Derivative
valuation (gain) loss
|
(1,578,851 | ) | 1,200,720 | |||||
Loss
on extinguishment of debt
|
215,873 | |||||||
Changes
in assets and liabilities:
|
||||||||
Tax
refund receivable
|
(3,675 | ) | 6,738 | |||||
Prepaid
expenses
|
(7,868 | ) | (54,843 | ) | ||||
Accounts
payable
|
292,847 | 214,023 | ||||||
Accrued
payroll
|
(88,054 | ) | 273,104 | |||||
Accrued
interest
|
348,079 | - | ||||||
Net
cash flows from operating activities
|
(2,523,882 | ) | (3,446,924 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of equipment and construction in process
|
(44,590 | ) | (44,088 | ) | ||||
Deposits
on building purchase
|
(267,530 | ) | (184,972 | ) | ||||
Net
cash flows from investing activities
|
(312,120 | ) | (229,060 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of convertible notes payable and warrants
|
2,819,089 | 1,088,792 | ||||||
Proceeds
from sales of units of common stock and warrants
|
- | 131,800 | ||||||
Payments
on note payable
|
(3,105 | ) | (2,428 | ) | ||||
Payments
on capital lease obligations
|
(2,989 | ) | (2,989 | ) | ||||
Net
cash flows from financing activities
|
2,812,995 | 1,215,175 | ||||||
Effect
of exchange rate changes on cash
|
(32,651 | ) | (6,933 | ) | ||||
Net
change in cash
|
(55,658 | ) | (2,467,742 | ) | ||||
Cash,
beginning of period
|
366,303 | 2,486,609 | ||||||
Cash,
end of period
|
$ | 310,645 | $ | 18,867 | ||||
Cash
paid for interest
|
$ | 203,103 | $ | 2,998 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Vu1
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BUSINESS AND ORGANIZATION
General
All
references in these consolidated financial statements to “we,” “us,” “our,” and
the “Company” are to Vu1 Corporation, Sendio, s.r.o., our Czech subsidiary, and
our inactive subsidiary Telisar Corporation unless otherwise noted or indicated
by its context.
We are
focused on developing, manufacturing and selling a line of mercury free, energy
efficient light bulbs based on our proprietary light-emitting
technology.
For the
past several years, we have primarily focused on research and development
efforts for our technology. In September 2007, we formed Sendio, s.r.o.
(“Sendio”) in the Czech Republic as a wholly-owned subsidiary for the purpose of
operating a pilot manufacturing facility.
We have
one inactive subsidiary, Telisar Corporation, a California corporation of which
we own 66.67%.
NOTE
2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of
Presentation
The
consolidated unaudited financial statements included in this Form 10-Q have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, these
financial statements do not include all of the disclosures required by U.S.
generally accepted accounting principles for complete financial
statements. These consolidated unaudited interim financial statements
should be read in conjunction with the audited financial statements for the
fiscal year ended December 31, 2009 in our Annual Report on Form 10-K. The
financial information furnished herein reflects all adjustments consisting of
normal, recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of our financial position, the results of operations and
cash flows for the periods presented. Operating results for the period
ended September 30, 2010 are not necessarily indicative of results for future
quarters or periods in the fiscal year ending December 31, 2010.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Vu1 and all of our
wholly owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Translating Financial
Statements
The
functional currency of Sendio is the Czech Koruna (“CZK”). The accounts of
Sendio contained in the accompanying condensed consolidated balance sheets have
been translated into United States dollars at the exchange rate prevailing
during the periods presented. Translation adjustments are included in
“Accumulated Other Comprehensive Income,” a separate component of stockholders’
equity (deficit). The accounts of Sendio in the accompanying condensed
consolidated statements of operations have been translated using the average
exchange rates for the periods presented.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
4
Cash is
comprised of deposits with a bank. For purposes of the statements of cash flows,
we consider all investments purchased with original maturities of three months
or less to be cash equivalents. At September 30, 2010 and December 31,
2009, we had cash of $0 and $46,170, respectively, in excess of federally
insured limits.
Equipment
Equipment is comprised primarily of
equipment used in the testing and development of the manufacturing process of
our light bulbs and is stated at cost. We provide for depreciation using the
straight-line method over the estimated useful life of three to fifteen years.
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
equipment are reflected in the statements of operations.
Construction in
Process
Construction
in process is comprised of assets to be used in our operations in the Czech
Republic not in service as of September 30, 2010 and December 31, 2009.
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. We have 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
operations.
Long-Lived
Assets
We review
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount that the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Fair Value of Financial
Instruments
Financial
instruments 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.
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.
5
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 for all periods
presented.
Revenue
Recognition
Revenues
are recognized when (a) persuasive evidence of an arrangement exists, (b)
delivery has occurred and no significant obligations remain, (c) the fee is
fixed or determinable and (d) collection is determined to be probable.
We have not recognized any revenues in the accompanying financial
statements.
Research and Development
Costs
For
financial reporting purposes, all costs of research and development activities
performed internally or on a contract basis are expensed as incurred. For the
three and nine months ended September 30, 2010 and 2009, research and
development expenses were comprised primarily of salary, rent, technical
consulting expenses, supplies and travel, and other costs of the research
related operations in the Czech Republic through our wholly-owned subsidiary,
Sendio.
Share-Based
Payments
We
account for share-based compensation expense to reflect the fair value of
share-based awards measured at the grant date. This expense is recognized
over the requisite service period and is adjusted each period for anticipated
forfeitures. We estimate the fair value of each share-based award on the date of
grant using the Black-Scholes option valuation model. The Black-Scholes option
valuation model incorporates assumptions as to stock price volatility, the
expected life of options, a risk-free interest rate and dividend
yield.
Comprehensive
Income
Comprehensive
income includes all changes in equity (net assets) during a period from
non-owner sources. Other comprehensive income presented in the
accompanying consolidated financial statements consists of foreign currency
translation adjustments.
Income (Loss) Per
Share
Basic
loss per share is computed by dividing net loss available to common stockholders
by the weighted-average number of shares of common stock outstanding, excluding
unvested stock. Diluted income per share is calculated to give effect to
potentially issuable dilutive common shares.
6
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:
Three months ended September
30,
|
Nine months ended September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Warrants
|
10,994,232 | 8,284,359 | 10,994,232 | 8,284,359 | ||||||||||||
Convertible
debt
|
- | 2,844,470 | - | 2,844,470 | ||||||||||||
Stock
options
|
6,255,015 | 4,121,875 | 6,255,015 | 4,121,875 | ||||||||||||
Unvested
stock
|
71,625 | 190,750 | 71,625 | 190,750 | ||||||||||||
Total
potentially dilutive securities
|
17,320,872 | 15,441,454 | 17,320,872 | 15,441,454 |
NOTE
3 - GOING CONCERN MATTERS
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate our continuation as a
going concern. During the nine months ended September 30, 2010, we had no
revenues, incurred a net loss of $3.1 million, and had negative cash flows from
operations of $2.5 million. In addition, we had an accumulated deficit of $68.9
million at September 30, 2010.
These
factors raise substantial doubt about our ability to continue as a going
concern.
Recovery
of our assets is dependent upon future events, the outcome of which is
indeterminable. Our attainment of profitable operations is dependent upon our
obtaining adequate debt or equity financing, developing products for commercial
sale, and achieving a level of sales adequate to support our cost structure. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should we be unable to
continue in existence.
Our
efforts to raise additional funds will continue during fiscal 2010 to fund our
planned operations and research and development activities, through one or more
debt or equity financings. We have engaged an investment banker to assist
us in our fundraising efforts. Unless we obtain sufficient additional financing,
we expect that we will need to continue to curtail or even cease operations
indefinitely, or at least until we can obtain sufficient financing. Even
if we are able to raise sufficient additional capital to continue our
operations, we expect to continue to seek additional financing through the
remainder of fiscal 2010 and into 2011. See additional information in Note
12.
NOTE
4 – TAX REFUND RECEIVABLE
Tax
refund receivable represents the 19% value added tax receivable from the
government of the Czech Republic. No allowance for doubtful accounts has
been provided as we believe the amounts are fully collectible.
NOTE
5 - COMMITMENTS AND CONTINGENCIES
On
December 2, 2009 Sendio executed a lease agreement (the “Lease Agreement”) for
its existing office and manufacturing facilities in the Czech Republic. The
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 Lease Agreement expires on June 30, 2011. Sendio is
responsible for utilities, maintenance and certain other costs as defined in the
lease.
Effective
December 9, 2008 and amended March 3, 2009, 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”).
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.
7
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. 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. All required installments have
been made by Sendio as of September 30,
2010.
|
|
·
|
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.
|
Sendio
has deposited an aggregate of $934,283 (CZK 16,855,178) through September 30,
2010 into an escrow account. This amount has been recorded as Deposit on
building purchase in the accompanying balance sheet as of September 30,
2010.
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.
Other
Lease Agreement
We
presently lease our current office space in Seattle, Washington on a month to
month basis for monthly rent of $1,530. Subsequent to quarter end, we
terminated our lease and entered into a new lease. See Note
12.
Total
rent expense was $352,840 and $276,886 for the nine months ended September 30,
2010 and 2009, respectively.
Investment
Banking Agreements
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.
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 terminated on June 30, 2010. 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. No amounts
are presently due under this agreement.
On March
10, 2010 we entered into an Investment Banking Agreement to assist us with our
fundraising efforts, which expired in June, 2010. The Agreement specifies
compensation of 7% 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. 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. No amounts are presently due under this
agreement.
8
NOTE
6 – CONVERTIBLE NOTES 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 and amended and
restated November 19, 2009. Full Spectrum is an entity that is managed and 27.5%
owned by R. Gale Sellers, our former Chief Executive Officer and a member of our
board of directors. On November 19, 2009 we entered into a new Secured
Convertible Grid Promissory Note with SAM Special Opportunity Fund, LP (“SAM”)
(collectively, the “Notes”). The Notes provide that Full Spectrum and SAM may
make one or more loans to Vu1, at such times and in such amounts as determined
by Full Spectrum or SAM in its sole discretion, but not to exceed $7 million.
Principal amounts under the Notes are presently convertible at any time into
shares of our common stock at a price of $0.40 per share and are secured by all
of our assets. The Note also provides that in conjunction with each advance
under the Notes, 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 Notes bear interest at 18% payable in quarterly
installments beginning February 1, 2010. We have granted to both lenders a
first priority security interest in our assets as collateral security for
repayment of their Notes. The Notes are due on June 30, 2011.
The Notes
also provide that if Full Spectrum and SAM advance loans exceeding of $3
million, we are required 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.
The
holders of the Notes retain out of each advance made to us an amount equal to
one interest payment (three months’ accrued interest) (the “Interest
Prepayment”), to be applied either to the final quarterly payment of interest
due under the Notes, or as payment of accrued and unpaid interest upon an event
of default or prepayment of the Notes. 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 Notes 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.
The Notes
contain 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 down round provision requires bifurcation of the embedded
conversion options and classification in derivative liabilities at fair value
because they are no longer considered indexed to our common stock. 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.
From June
8, 2009 to September 27, 2010 we have received advances from Full Spectrum and
SAM under their Notes summarized as follows:
9
Issuances
|
||||||||||||||||
Year Ended
|
Nine Months
Ended
|
Pre-Conversion
Balances at
|
Balance
|
|||||||||||||
December
31,
|
September
30,
|
September 27,
|
December
31,
|
|||||||||||||
2009
|
2010
|
2010
|
2009
|
|||||||||||||
Notes
|
||||||||||||||||
Face
value, 18% per annum, secured
|
||||||||||||||||
convertible
grid promissory notes, due
|
||||||||||||||||
June
30, 2011
|
$ | 2,943,191 | $ | 3,312,275 | $ | 6,255,466 | $ | 2,943,191 | ||||||||
Original
issue discount, resulting from the
|
||||||||||||||||
allocation
of basis to warrants and
|
||||||||||||||||
compound
embedded derivatives
|
(2,943,191 | ) | (2,154,076 | ) | (5,097,267 | ) | (2,943,191 | ) | ||||||||
Amortization
of original issue discount
|
||||||||||||||||
using
the effective interest method
|
381,172 | 325,099 | 706,271 | 50,848 | ||||||||||||
Carrying
values at September 27, 2010
|
$ | 381,172 | $ | 1,483,298 | $ | 1,864,470 | $ | 50,848 |
Linked
Common Shares
|
|||||||||||||
Notes
|
7,357,976 | 8,280,687 | 15,638,663 | ||||||||||
Warrants
|
3,678,989 | 4,140,344 | 7,819,333 | ||||||||||
Total
|
11,036,965 | 12,421,031 | 23,457,996 |
The
following is a summary of our accounting for issuances under the Full Spectrum
and SAM Notes during the nine months ended September 30, 2010:
Face
value
|
$ | 3,312,275 | ||
Proceeds
in cash
|
2,819,089 | |||
Accrued
interest extinguished
|
344,134 | |||
Initial
allocation:
|
||||
Prepaid
interest
|
(149,052 | ) | ||
Notes
payable
|
1,158,199 | |||
Warrants
|
664,775 | |||
Derivative
liabilities
|
1,705,174 | |||
Extinguishment
of obligations
|
(215,873 | ) | ||
$ | 3,163,223 |
On
September 13, 2010, we issued a Note with a face value of $360,350
(including $16,216 of prepaid interest) and warrants to purchase 450,438 shares
of common stock in exchange for $344,134 of unpaid, accrued interest through
August 1, 2010 payable to Full Spectrum. This transaction was accounted for as
an extinguishment of obligations wherein the fair value of the notes and
warrants, amounting to $437,253 and $138,970, respectively, were exchanged for
the carrying value of the obligation, and the difference of $215,873 was
recorded as loss on extinguishment of debt in the accompanying unaudited
condensed consolidated statements of operations for the three and nine months
ended September 30, 2010.
Information
and significant assumptions embodied in our valuations (including equivalent
amounts across ranges of simulations resulting from the calculations) of the
derivative instrument for the issuances for the nine months ended September 30,
2010 are shown in the following table:
Trading
market price
|
$0.19-$0.59
|
||
Expected
life (years)
|
0.85
- 1.25
|
||
Equivalent
volatility
|
88.7%
- 145.3%
|
||
Risk
adjusted yield
|
8.37%
- 9.67%
|
||
Risk
adjusted interest rate
|
|
15.1%-18.0%
|
The
Warrants issued in conjunction with the 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 for the Notes requires allocation of
proceeds among the Notes and the warrants based upon relative fair values. The
estimated fair value of the Warrants was calculated using the Black-Scholes
option pricing model with the following assumptions:
10
Trading
market price
|
$0.29-$0.59
|
||
Expected
dividend
|
—
|
||
Expected
life in years
|
3.0
|
||
Volatility
|
97.2%-162.0%
|
||
Risk
free rate
|
0.6%-1.7%
|
On
September 27, 2010, the investors converted their convertible grid promissory
notes, along with all related accrued interest through that date into 15,450,296
shares of our unregistered common stock and the notes were cancelled. The
conversion was made in accordance with the original terms and conditions of the
underlying contracts, without modification or adjustment. We accounted for the
conversion by initially adjusting the embedded derivatives to fair value and
adjusting amortization of the original issue discount and prepaid interest to
the conversion date. The carrying values associated with the notes (as reflected
in the table below) were then aggregated and reclassified to stockholders’
equity.
The
carrying value on the date of conversion consisted of the following
components:
Convertible
notes payable
|
$ | (1,864,470 | ) | |
Embedded
derivative liability
|
(2,979,335 | ) | ||
Prepaid
interest
|
242,150 | |||
Accrued
interest
|
(146,116 | ) | ||
$ | (4,747,771 | ) |
NOTE
7 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative
financial instruments represent the embedded conversion features in our Notes
that required bifurcation from the host debt agreements. Derivative financial
instruments are classified as liabilities and carried at fair value, with
changes reflected in the statements of operations. The following table
summarizes the components of changes in our derivative financial instruments
during the three and nine months ended September 30, 2010:
Three Months ended
September 30, 2010
|
Nine Months ended
September 30, 2010
|
|||||||
Beginning
balances
|
$ | 491,035 | $ | 2,853,011 | ||||
Issuances and modification | ||||||||
Derivatives
recognized upon issuance
|
858,358 | 1,705,174 | ||||||
Unrealized
fair value changes, included in income
|
1,629,942 | (1,578,851 | ) | |||||
Conversion
|
(2,979,335 | ) | (2,979,334 | ) | ||||
Ending
balances
|
$ | - | $ | - |
We value
our derivative financial instruments using a Monte Carlo Simulation Technique
(“MCST”). The MCST was selected because this technique embodies all of the types
of inputs that we expect market participants would consider in determining the
fair value of equity linked derivatives embedded in hybrid debt agreements.
Those inputs include equity-related inputs, as well as credit risks, interest
risks and redemption behaviors. The following tables summarize the significant
inputs and equivalent amounts across ranges of simulations resulting from the
calculations:
September 27, 2010
|
||||
Trading
market price
|
$ | 0.40 | ||
Expected
life (years)
|
0.60 - 0.86 | |||
Equivalent
volatility
|
158.62 | % | ||
Risk
adjusted yield
|
7.79 | % | ||
Risk
adjusted interest rate
|
18.00 | % |
11
NOTE
8 – 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 $113,000) secured by certain assets of
Sendio. On May 1, 2010, we issued three year warrants to purchase
75,000 shares of our common stock at an exercise price of $0.38 per share to the
investor as compensation for extending the due date of the loan. The
fair value of the warrant of $19,125 was recognized as interest expense in the
accompanying condensed consolidated statements of operations for the nine months
ended September 30, 2010. The fair value of the warrant was
determined using the following assumptions: market price - $0.38, volatility –
111.0%, risk free interest rate – 1.51%. On June 3, 2010 the due date
of the note and accrued interest was extended to August 31, 2010. On
September 1, 2010, the due date of the note was further extended to November 30,
2010. See Note 12.
NOTE
9 – 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
10 – CAPITAL LEASE OBLIGATION
On May
30, 2008 Sendio entered into a five-year lease agreement for the purchase of
certain equipment. The capital lease obligation bears interest at a
rate of 7.7% and requires payments of principal and interest of approximately
$630 plus mandatory VAT and insurance over the 60-month term of the leases. The
assets acquired under the capital lease obligation are being depreciated over
the five-year term of the lease.
NOTE
11 – 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 9, 2010 we issued 12,222 shares of common stock to a former employee
at a price of $0.45 per share based on the market price as of that date in
settlement of $5,500 of unpaid consulting fees.
On
September 21, 2010 we issued 150,000 shares of common stock to a former employee
at a price of $0.40 per share based on the market price as of that date in
settlement of $60,000 of unpaid salary.
On
September 21, 2010 we issued 47,990 shares of common stock to Charles Hunt, a
director at a price of $0.40 per share based on the market price as of that date
in settlement of $19,196 of unpaid consulting fees.
On
September 21, 2010 we issued 99,758 shares of common stock to Richard Herring, a
director at a price of $0.40 per share based on the market price as of that date
in settlement of $39,903 of unpaid consulting fees.
On
September 25, 2010 we issued 36,975 shares of common stock to a former employee
at a price of $0.40 per share in settlement of $14,790 of unpaid salary and
expenses.
On
September 27, 2010 we issued 15,450,296 shares of common stock upon the
conversion of the Notes and related accrued interest as described in Note
6.
12
Stock and Stock Options
issued and exercised pursuant to the 2007 Stock Incentive
Plan
On July
9, 2010 we issued options to purchase 1,000,000 shares of common stock to R.
Gale Sellers, our then Chief Executive Officer and director pursuant to Mr.
Sellers’ employment agreement entered into as of that date and effective January
1, 2009. The options vest 50% upon issuance, with the remaining 50%
vesting monthly through December 31, 2010.
In
addition on July 9, 2010 Mr. Sellers elected to convert his entire 2010 annual
salary per the employment agreement of $240,000 into 10 year options to purchase
558,140 shares of common stock. A total of $120,000 of accrued but unpaid salary
was converted into 279,070 options, which vested immediately. The remaining
279,070 options will vest on a pro rata basis through December 31,
2010.
Also on
July 9, 2010 we issued options to purchase 600,000 shares of common stock to
Philip Styles, our current President and Chief Executive Officer and
director. The options vest 50% upon issuance, with the remaining 50%
vesting upon the achievement of certain performance milestones through December
31, 2010.
The
options issued above have a ten-year life and an exercise price of $0.43 per
share based on the closing market price as of the date of
issuance. The fair value of the options issued to Mr. Sellers and Mr.
Styles of $919,724 was determined using the Black-Scholes Option Pricing Model,
using the following assumptions: risk free interest rate of 3.07%, expected
dividend yield of 0%, expected volatility of 162.1% and an expected life of 10
years.
For
the nine months ended September 30, 2010 and 2009 we recognized $550,413 and
$224,184, respectively, as share-based compensation related to the vesting of
stock options and previously outstanding grants of stock.
As of
September 30, 2010 there are 71,625 shares of unvested restricted stock issued
in 2007 of which we anticipate $2,995 of unrecognized compensation expense will
be recognized ratably through the vesting date of November 30,
2010. In addition as of September 30, 2010 there are options to
purchase 439,535 shares of common stock of which we anticipate $166,020 of
unrecognized compensation expense will be recognized ratably through the vesting
date of December 31, 2010 and $127,860 will be recognized based upon the
achievement of certain performance criteria by December 31, 2010.
On
September 25, 2010 we issued 150,000 shares of common stock to a former employee
pursuant to the exercise of an option to purchase common stock at an exercise
price of $0.23 per share in settlement of $34,500 of unpaid salary.
During
the nine months ended September 30, 2010, options to purchase 550,000 shares of
common stock expired unexercised.
Warrants
As
discussed in Note 6, during the nine months ended September 30, 2010 we issued
three-year warrants to purchase 2,137,870 shares of common stock at an exercise
price of $0.75 per share to Full Spectrum, which is managed by R. Gale Sellers,
a director and our former Chief Executive Officer. In addition we
issued three-year warrants to purchase 2,002,474 shares of common stock at an
exercise price of $0.75 per share to SAM. These warrants were issued
pursuant to advances and extinguishment of interest made under their respective
Notes.
As
discussed in Note 8, On May 1, 2010 we issued three year warrants to purchase
75,000 shares of our common stock at an exercise price of $0.38 per share to the
investor as an inducement to extend the due date of the loan.
On March
17, 2009 we issued a three-year warrant to a vendor to purchase 150,000 shares
of common stock at an exercise price of $0.75 per share based on the closing
market price as of that date. A total of 75,000 shares vest over the
one year life of the agreement, with the remaining shares vesting upon the
achievement of certain performance milestones. The performance
milestones were not achieved during the nine months ended September 30, 2010. A
total of $6,722 was recognized as an expense relating to the vested portion of
the warrants for the nine months ended September 30, 2010.
During
the nine months ended September 30, 2010 warrants to purchase 3,762,225 shares
of common stock with an exercise price of $0.60 per share expired
unexercised.
13
A summary
of our outstanding warrants follows:
Weighted-Average
|
||||||||||||||
Exercise
|
Warrants
|
Remaining
Contractual
|
Number
|
|||||||||||
Price
|
Outstanding
|
Life (Years)
|
Exercisable
|
|||||||||||
$ | 0.38 | 75,000 | 2.6 | 75,000 | ||||||||||
$ | 0.60 | 2,874,899 | 0.1 | 2,874,899 | ||||||||||
$ | 0.75 | 7,969,333 | 2.4 | 7,894,333 | ||||||||||
$ | 1.00 | 25,000 | 0.3 | 25,000 | ||||||||||
$ | 1.15 | 50,000 | 0.1 | 50,000 | ||||||||||
10,994,232 | 1.3 | 10,919,232 |
NOTE
12 – SUBSEQUENT EVENTS
On
October 4, 2010 we executed an Executive Employment Agreement with Philip
Styles, our Chief Executive Officer and Director. The agreement
provides for a salary of $240,000 per year effective as of October 4, 2010. Mr.
Styles has agreed to convert his annual salary into 470,588 shares of our common
stock at the fixed conversion price of $0.51 per share until such time as the
Board of Directors approves the payment of his salary in cash. These
shares will vest on a monthly basis as the salary is earned.
In
addition on October 4, 2010 we granted to Mr. Styles a ten-year option to
purchase 1,000,000 shares of our common stock at an exercise price of $0.51 per
share vesting monthly through October 3, 2011. The grant was made from our 2007
Stock Compensation Plan and pursuant to our standard form of stock option
agreement.
The
exercise price for the stock option grants and the common stock conversion rate
were set at the closing market price of our common stock on the OTC Bulletin
Board on October 4, 2010, the date that the Board of Directors approved the
Executive Employment Agreement.
On
November 1, 2010 we entered into a month to month lease agreement for office
space for our corporate headquarters located in New York City, New
York. Monthly rental payments are $1,320 under the
lease.
On
November 4, 2010 we issued 50,000 shares of common stock to two employees of
Sendio at a price of $0.51 per share based on the closing market price as of
that date and a fair value of $25,500 in settlement of $17,300 of unpaid wages
and $8,200 of unpaid bonus compensation.
Also on
November 4, 2010 we issued 137,255 shares of common stock to R. Gale Sellers,
our former Chief Executive Officer and a director at a price of $0.51 per share
based on the closing market price as of that date and a fair value of $70,000 in
settlement of unpaid 2009 salary in the same amount.
Subsequent
to September 30, 2010 we issued 790,125 shares of common stock in exchange for
proceeds of $474,075 related to the exercise of warrants at an exercise price of
$0.60 per share.
Also
subsequent to September 30, 2010 we sold 320,400 Units at a subscription price
of $1.00 per Unit for net proceeds of $320,400 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
$1.00 per share. A total of 640,800 shares of common stock and
two-year warrants to purchase 320,400 shares of common stock at an exercise
price of $1.00 were issued.
On
November 5, 2010 we issued 250,000 shares of common stock with a fair value of
$150,000 based on the closing market price of $0.60 as of that date to Billy K.
Hamlin, for service as a member of our Board of Directors.
On
November 18, 2010 we issued 300,000 shares of common stock to a Duncan Troy, the
Chairman of our Board of Directors pursuant to the exercise of an option to
purchase common stock at an exercise price of $0.38 per share in exchange for
cash in the amount of $114,000.
On
November 18, 2010 the Company paid the 10% note payable to an investor for cash
in the amount of GBP 70,000 (approximately $113,000) and all related accrued
interest as described in Note 8.
14
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-Q.
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 Electron Stimulated
Luminescence (“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 2010, we have continued our development
work on the technology to refine the prototype with the miniaturization of the
electronics and improvements to the efficiency of the bulb and the design and
implementation of the processes required to manufacture the bulb. During the
second quarter of 2010, we submitted the bulb for safety certification to
Underwriters Laboratories and in October, 2010 we received such
certification. 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 and into fiscal 2011 to support
initial production for evaluation that is planned to begin in the first quarter
of 2011. 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 2010, 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 September 30, 2010 is not sufficient to support our operations through
fiscal 2010 and it will be necessary for us to seek additional
financing. See “Liquidity and Capital Resources” below.
Plan
of Operations
Our
efforts are presently focused on our initial planned product, the R30 sized
light bulb. We submitted our R30 sized light bulb to Underwriters Laboratories
during the second quarter of 2010 to obtain safety certification, and received
such certification in October, 2010. We anticipate that the development efforts
will continue in 2010 to support initial production for evaluation that is
planned to begin in the first quarter of 2011. 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. 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 first quarter of 2011 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 September 30, 2010
and the US operations had no employees.
15
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 and into 2011 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. There can be no
assurances that this development process will be successful or, if successful,
that the technology will find a market and achieve sales that can sustain our
operations without additional funding.
Our
office space in Seattle, WA is presently leased on a month to month basis
through November 30, 2010. On November 1, 2010 we secured a new lease
in New York City, New York.
Results
of Operations
Comparison
of Results for the three months ended September 30, 2010 and 2009
Revenues
We had no
revenues for the three months ended September 30, 2010 and 2009.
Research
and Development Expenses
For the
three months ended September 30, 2010 and 2009, we were involved in a single
project to develop and commercialize our proprietary technology in our R30 sized
light bulb. For the comparable quarters, research and development
expenses were comprised primarily of salary, rent, technical consulting
expenses, supplies and travel, and other costs of the research related
operations in the Czech Republic through our wholly-owned subsidiary, Sendio.
Research and development expenses decreased approximately $136,000 to $479,000
for the three months ended September 30, 2010 compared to $615,000 for the three
months ended September 30, 2009. The decrease is related to a
decrease in salaries and attendant costs and consulting fees related to the
curtailing of our operations. This is partially offset by the increase in rent
for our Sendio facility.
General
and Administrative Expenses
General
and administrative expenses for the three months ended September 30, 2010 and
2009 were comprised of share based compensation expenses, professional and legal
fees, consulting expenses, insurance, travel and general corporate related
overhead and office expenses. General and administrative expenses increased by
approximately $460,000 to $717,000 for the three months ended September 30, 2010
compared to $258,000 for the three months ended September 30,
2009. Non-cash charges related to share based compensation expenses
increased $776,000 to $508,000 relating primarily to stock options issued to our
current and former Chief Executive Officers for the three months ended September
30, 2010 compared to ($268,000) for the three months ended September 30,
2009. The increase in stock compensation expense is offset by
decreases in legal fees, consulting fees and general overheads related to the
curtailing of our operations.
Marketing
Expenses
Marketing
expenses for the three months ended September 30, 2010 and 2009 were comprised
of consulting fees, market research, conference fees and office related
expenses. Marketing expenses increased by approximately $62,000 to $142,000 for
the three months ended September 30, 2010 compared to $80,000 for the three
months ended September 30, 2009. This increase was due primarily to
increases in consulting fees related to public relations and channel development
for the quarter ended September 30, 2010.
16
Other
Income and Expense
Other
income and expense for the three months ended September 30, 2010 was comprised
of interest income, interest expense, loss on extinguishment of debt and
derivative valuation loss. Interest income was $12 for the three
months ended September 30, 2010 compared to $234 for the three months ended
September 30, 2009. The decrease is due to lower average cash balances. Interest
expense for the three months ended September 30, 2010 increased $485,000 to
$602,000 compared to $117,000 for the three months ended September 30,
2009. Interest expense relates to the accrued interest and
amortization of discount and prepaid interest on the Notes and Sendio’s loan and
capital lease obligations as discussed in Notes 6, 9 and 10. Included in
interest expense are discount and prepaid amortization of $423,000 and
amortization of loan costs of $19,000 for the three months ended September 30,
2010 related to the Notes. Interest expense for the three months
ended September 30, 2009 of $117,000 was related to the loan from Full Spectrum
and Sendio’s loan and capitalized lease obligations. Included in
interest expense are discount and prepaid amortization of $66,000 related to
their Note.
Loss on
extinguishment of debt for the three months ended September 30, 2010 of $216,000
pertains to the exchange of a Note with a face value of $360,350 and
warrants to purchase 450,438 shares of common stock in exchange for $344,134 of
unpaid, accrued interest through August 1, 2010 payable to Full Spectrum as
discussed in Note 6. There is no amount for the three months ended
September 30, 2009.
Derivative
valuation loss amounted to approximately $1,630,000 during the three months
ended September 30, 2010 compared to a loss of $1,201,000 for the three months
ended September 30, 2009. Derivative valuation loss results from embedded
derivative financial instruments that are required to be measured at fair
value.
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 linked derivatives embedded in hybrid debt agreements.
Those inputs include equity-related inputs, as well as credit risks, interest
risks and redemption behaviors. Changes in these inputs will affect the carrying
value of our derivative liabilities and therefore the amount of derivative
valuation gain (loss) that we are required to record.
Comparison
of Results for the nine months ended September 30, 2010 and 2009
Revenues
We had no
revenues for the nine months ended September 30, 2010 and 2009.
Research
and Development Expenses
For the
nine months ended September 30, 2010 and 2009, we were involved in a single
project to develop and commercialize our proprietary technology in our R30 sized
light bulb. For the comparable quarters, research and development
expenses were comprised primarily of salaries, rent, technical consulting
expenses, supplies and travel, and other costs of the research related
operations in the Czech Republic through our wholly-owned subsidiary, Sendio.
Research and development expenses decreased approximately $646,000 to $1,429,000
for the nine months ended September 30, 2010 compared to $2,075,000 for the nine
months ended September 30, 2009. The decrease is related to a
decrease in salaries and attendant costs and consulting fees related to the
curtailing of our operations. This is partially offset by the increase in rent
for our Sendio facility.
General
and Administrative Expenses
General
and administrative expenses for the nine months ended September 30, 2010 and
2009 were comprised of salaries and attendant costs, share based compensation
expenses, professional and legal fees, consulting expenses, insurance, travel
and general corporate related overhead and office expenses. General and
administrative expenses decreased by approximately $84,000 to $1,521,000 for the
nine months ended September 30, 2010 compared to $1,606,000 for the nine months
ended September 30, 2009. Non-cash charges related to share based compensation
expenses for the nine months ended September 30, 2010 increased $544,000 to
$542,000 relating primarily to stock options issued to our current and former
Chief Executive Officers for the nine months ended September 30, 2010 compared
to ($2,000) for the nine months ended September 30, 2009. The
increase in stock compensation expense is offset by decreases in legal fees,
consulting fees and general overheads related to the curtailing of our
operations.
Marketing
Expenses
Marketing
expenses for the nine months ended September 30, 2010 and 2009 were comprised of
salaries, consulting fees, market research, conference fees and office related
expenses. Marketing expenses increased by approximately $1,000 to $276,000 for
the nine months ended September 30, 2010 compared to $275,000 for the nine
months ended September 30, 2009. Decreases in salary expense were
offset by increases in consulting fees.
17
Other
Income and Expense
Other
income and expense for the nine months ended September 30, 2010 was comprised of
interest income, other income, interest expense, and derivative valuation gain
or loss. Interest income was $14 for the nine months ended September
30, 2010 compared to $2,571 for the nine months ended September 30, 2009. The
decrease is due to lower average cash balances. Other income for the nine months
ended September 30, 2010 of approximately $37,000 is a recovery of unclaimed
property for which no prior year comparable amount exists. Interest
expense for the nine months ended September 30, 2010 increased approximately
$1,105,000 to $1,239,000 compared to $134,000 for the nine months ended
September 30, 2009 and relates to the accrued interest and amortization of
discount and prepaid interest on the Notes, Sendio’s loan and capital lease
obligations and the fair value of the warrant with a fair value of $19,125
issued pursuant to the short term note payable as discussed in Notes 6, 8, 9 and
10. Included in interest expense are discount and prepaid amortization of
$693,000 and amortization of loan costs of $28,000 for the nine months ended
September 30, 2010 related to the Notes. Interest expense for
the nine months ended September 30, 2009 of $134,000 was related to the
loan from Full Spectrum and Sendio’s loan and capitalized lease
obligations. Included in interest expense are discount and prepaid
amortization of $75,000 related to the Full Spectrum Note.
Loss on
extinguishment of debt for the nine months ended September 30, 2010 of $216,000
pertains to the exchange of a Note with a face value of $360,350 and
warrants to purchase 450,438 shares of common stock in exchange for $344,134 of
unpaid, accrued interest through August 1, 2010 payable to Full Spectrum as
discussed in Note 6. There is no amount for the nine months ended
September 30, 2009.
Derivative
valuation gain amounted to approximately $1,579,000 for the nine months ended
September 30, 2010 compared to a loss of $1,201,000 for the nine months ended
September 30, 2009. Derivative valuation gain or loss results from embedded
derivative financial instruments that are required to be measured at fair
value.
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 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
was approximately $311,000 as of September 30, 2010 and is not sufficient to
support our reduced levels of operations.
In
October and November, 2010 we issued 790,125 shares of common stock
in exchange for proceeds of $474,075 related to the exercise of warrants at an
exercise price of $0.60 per share.
Also in
October and November, 2010 we sold 320,400 Units at a subscription price of
$1.00 per Unit for net proceeds of $320,400 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
$1.00 per share.
In
November, 2011 we received proceeds of $114,000 pursuant to the exercise of
stock options by Duncan Troy as more fully described in Note 12.
As of
September 30, 2010 we have $121,000 of short term debt, of which approximately
$113,000 matures on November 30, 2010. On November 18, 2010, the
Company paid the 10% note payable to an investor in the amount of GBP 70,000
(approximately $113,000) plus related accrued interest as described in Note
12.
We
anticipate that with our remaining cash and the proceeds from the sale of Units
and exercise of warrants described above, we will be able to fund our operations
into January, 2011.
18
We expect
to continue to seek additional financing in 2010 and into 2011 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.
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.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
ITEM
4. CONTROLS AND PROCEDURES
As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
period covered by this report, we carried out an evaluation of the effectiveness
of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and
with the participation of management, including our chief executive officer and
chief financial officer. Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective at September 30, 2010.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required
to be disclosed in our reports filed or submitted under the Exchange Act
(a) is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and
(b) is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
There
have been no changes in our internal controls over financial reporting in
connection with this evaluation that occurred during the third quarter of fiscal
2010 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the period covered by this report, we have issued unregistered securities to the
persons as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, except as specified below,
or any public offering, and we believe that each transaction was exempt from the
registration requirements of the Securities Act of 1933 by virtue of Section
4(2) thereof and/or Regulation D promulgated thereunder. All recipients had
adequate access to information about us.
During
the nine months ended September 30, 2010 we issued three-year warrants to
purchase a total of 4,140,344 shares of common stock at an exercise price of
$0.75 per share pursuant to advances made on the Notes as described in Note
6.
On May 1,
2010 we issued a three-year warrant to purchase 75,000 shares of common stock at
an exercise price of $0.38 per share as described in Note 8.
On July
9, 2010 we issued ten-year options to purchase 2,158,140 shares of common stock
at an exercise price of $0.43 per share as described in Note 11.
On
September 9, 2010 we issued 12,222 shares of common stock to a former employee
at a price of $0.45 per share based on the market price as of that date in
settlement of $5,500 of unpaid consulting fees.
19
On
September 21, 2010 we issued 150,000 shares of common stock to a former employee
at a price of $0.40 per share based on the market price as of that date in
settlement of $60,000 of unpaid salary.
On
September 21, 2010 we issued 47,990 shares of common stock to Charles Hunt, a
director at a price of $0.40 per share based on the market price as of that date
in settlement of $19,196 of unpaid consulting fees.
On
September 21, 2010 we issued 99,758 shares of common stock to Richard Herring, a
director at a price of $0.40 per share based on the market price as of that date
in settlement of $39,903 of unpaid consulting fees.
On
September 25, 2010 we issued 36,975 shares of common stock to a former employee
at a price of $0.40 per share in settlement of $14,790 of unpaid salary and
expenses.
On
September 27, 2010 we issued 15,450,296 shares of common stock upon the
conversion of the Notes and related accrued interest as described in Note
6.
ITEM
5. Other Information
Compensatory
Arrangement of Chief Executive Officer
On
October 4, 2010 we executed an Executive Employment Agreement with Philip
Styles, our Chief Executive Officer and Director. The agreement
provides for a salary of $240,000 per year effective as of October 4, 2010. Mr.
Styles has agreed to convert his annual salary into 470,588 shares of our common
stock at the fixed conversion price of $0.51 per share until such time as the
Board of Directors approves the payment of his salary in cash. These
shares will vest on a monthly basis as the salary is earned.
In
addition on October 4, 2010 we granted to Mr. Styles a ten-year option to
purchase 1,000,000 shares of our common stock at an exercise price of $0.51 per
share vesting monthly through October 3, 2011. The grant was made from our 2007
Stock Compensation Plan and pursuant to our standard form of stock option
agreement.
The
exercise price for the stock option grants and the common stock conversion rate
were set at the closing market price of our common stock on the OTC Bulletin
Board on October 4, 2010, the date that the Board of Directors approved the
Executive Employment Agreement.
The
Executive Employment Agreement also calls for the payment of six months’ annual
salary in the event Mr. Styles is terminated by us other than for cause, as
defined in the Executive Employment Agreement.
The
Executive Employment Agreement expires on October 3, 2011 unless terminated
earlier in accordance with the agreement.
The
summary description of the Executive Employment Agreement above is qualified in
its entirety to the full text of the form of the Executive Employment Agreement
attached as Exhibit 10.1 to this Form 10-Q.
ITEM
6. EXHIBITS
10.1 | Executive Employment Agreement dated October 4, 2010 between the Company and Philip Styles |
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Philip G. Styles, Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Matthew DeVries, Chief Financial
Officer
|
32.1
|
Certification
of Philip G. Styles, 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
|
20
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
VU1
CORPORATION
|
||||
(Registrant)
|
||||
Dated:
November 22, 2010
|
||||
By:
|
/s/ Philip G. Styles
|
|||
Philip
G. Styles
|
||||
Chief
Executive Officer
|
||||
(Principal
Executive Officer)
|
||||
By:
|
/s/ Matthew DeVries
|
|||
Matthew
DeVries
|
||||
Chief
Financial Officer
|
||||
(Principal
Financial and Accounting Officer)
|
21