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EX-32.1 - CERTIFICATION OF WILLIAM B. SMITH, CHIEF EXECUTIVE OFFICER, AND MATTHEW DEVRIES, CHIEF FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Vu1 CORPvu1exh321.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF WILLIAM B. SMITH, CHIEF EXECUTIVE OFFICER - Vu1 CORPvu1exh311.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF MATTHEW DEVRIES, CHIEF FINANCIAL OFFICER - Vu1 CORPvu1exh312.htm
EXCEL - IDEA: XBRL DOCUMENT - Vu1 CORPFinancial_Report.xls


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, 2013
 
[   ] 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. 000-21864
 
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.)

1 Liberty Plaza, 23rd Floor, New York NY
10006
(Address of principal executive offices)
(Zip Code)

(855) 881-2852
(Registrant’s Telephone number, including area code)

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

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

On November 8, 2013, there were 10,426,097 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, 2013 and December 31, 2012
1
Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2013 and 2012
2
Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012
3
Notes to Condensed Consolidated Financial Statements
4
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
   
ITEM 4. Controls and Procedures
18
   
PART II  Other Information
 
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
18
   
ITEM 6. Exhibits
19
   
Signatures
20
 
 
i

 

EXPLANATORY NOTE

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

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 in this Report 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 in this Report, 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, 2012.  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.  Except as required by U.S. federal securities laws, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

 
ii

 
 
Vu1 CORPORATION AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
             
   
SEPTEMBER 30,
   
DECEMBER 31,
 
ASSETS
 
2013
   
2012
 
Current assets
           
Cash
  $ 76,588     $ 328,188  
Prepaid expenses
    88,608       42,722  
                 
Total current assets
    165,196       370,910  
                 
Non-current assets
               
Equipment, net of accumulated depreciation of $1,701 and $0
    32,314       -  
Loan costs
    -       118,500  
Total assets
  $ 197,510     $ 489,410  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities
               
Accounts payable
  $ 1,437,309     $ 1,008,692  
Accrued payroll
    192,725       192,725  
Loan payable
    100,000       100,000  
Convertible debentures, net of discount of $0 and $571,254, respectively
    3,905,975       3,546,496  
Convertible bridge loans
    -       309,000  
Liabilities of Sendio
    555,454       555,454  
Total current liabilities
    6,191,463       5,712,367  
                 
Total liabilities
    6,191,463       5,712,367  
                 
Stockholders' deficit
               
Vu1 Corporation's stockholders' deficit
               
Preferred stock, $1.00 par value; 10,000,000 shares authorized; no shares issued and outstanding
    -       -  
Common stock, no par value; 90,000,000 shares authorized; 9,926,097 and 7,130,226 shares issued and outstanding, respectively
    81,777,805       78,279,737  
Accumulated deficit
    (87,675,703 )     (83,406,639 )
Total Vu1 Corporation's stockholders' deficit
    (5,897,898 )     (5,126,902 )
Non-controlling interest
    (96,055 )     (96,055 )
Total stockholders' deficit
    (5,993,953 )     (5,222,957 )
Total liabilities and stockholders' deficit
  $ 197,510     $ 489,410  
 
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,
 
     
2013
   
2012
   
2013
   
2012
 
                           
Operating expenses
                       
 
Research and development
  $ 185,740     $ 203,556     $ 447,347     $ 510,444  
 
General and administrative
    280,500       347,025       1,387,984       1,170,277  
 
Marketing
    124,518       228,329       278,658       679,172  
 
Total operating expenses
    590,758       778,910       2,113,989       2,359,893  
                                   
Loss from operations
    (590,758 )     (778,910 )     (2,113,989 )     (2,359,893 )
                                   
Other income (expense)
                               
 
Interest income
    -       -       -       19  
 
Interest expense
    (151,612 )     (334,495 )     (1,040,311 )     (960,226 )
 
Loss on conversion of debt
    -       (60,774 )     (1,114,764 )     (353,161 )
 
Derivative valuation gain
    -       -       -       592,783  
                                   
        (151,612 )     (395,269 )     (2,155,075 )     (720,585 )
                                   
Loss before provision for income taxes
    (742,370 )     (1,174,179 )     (4,269,064 )     (3,080,478 )
                                   
Provision for income taxes
    -       -       -       -  
                                   
Net loss
  $ (742,370 )   $ (1,174,179 )   $ (4,269,064 )   $ (3,080,478 )
                                   
Other comprehensive (loss) income:
                               
Foreign currency translation adjustments
    -       -       -       25,374  
                                   
Comprehensive loss
  $ (742,370 )   $ (1,174,179 )   $ (4,269,064 )   $ (3,055,104 )
                                   
Loss per share
                               
Basic
    $ (0.08 )   $ (0.20 )   $ (0.48 )   $ (0.52 )
Diluted
  $ (0.08 )   $ (0.20 )   $ (0.48 )   $ (0.52 )
Weighted average shares outstanding
                               
Basic
    9,591,649       5,987,970       8,858,137       5,869,930  
Diluted
    9,591,649       5,987,970       8,858,137       5,869,930  
 
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,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
             
Net loss
  $ (4,269,064 )   $ (3,080,478 )
Adjustments to reconcile net loss to net cash flows from operating activities:
               
Depreciation
    1,701       915  
Share-based compensation
    928,140       411,651  
Amortization of discount on long-term convertible notes
    571,254       752,129  
Amortization of loan costs
    118,500       165,337  
Amortization of prepaid interest
    25,000       -  
Derivative valuation gain
    -       (592,783 )
Loss on conversion of debt
    1,114,764       353,161  
Changes in assets and liabilities:
               
Accounts receivable
    -       3,616  
Prepaid expenses
    (70,886 )     (14,983 )
Accounts payable
    497,778       498,907  
Accrued payroll
    -       90,898  
Net cash flows from operating activities
    (1,082,813 )     (1,411,630 )
                 
Cash flows from investing activities:
               
Purchase of equipment
    (34,015 )     -  
Net cash flows from investing activities
    (34,015 )     -  
                 
Cash flows from financing activities:
               
Net proceeds from sales of common stock and warrants
    853,465       1,400,768  
Payment on convertible debenture
    (88,237 )        
Proceeds from loan payable
    100,000       -  
Net cash flows from financing activities
    865,228       1,400,768  
                 
Effect of exchange rate changes on cash
    -       208  
                 
Net change in cash
    (251,600 )     (10,654 )
                 
Cash, beginning of period
    328,188       10,992  
                 
Cash, end of period
  $ 76,588     $ 338  
                 
Supplemental Cash Flow Information:
               
Cash paid for interest
  $ -     $ -  
                 
Supplemental Noncash Investing and Financing Activities:
               
Conversion of bridge loan and interest to stock and warrants
  $ 368,162     $ 193,431  
Conversion of debenture for stock
  $ 123,538     $ -  
Issuance of common stock and warrants for note payable and interest
  $ 110,000     $ -  
Issuance of common stock and warrants for accounts payable
  $ -     $ 42,000  
 
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 Telisar Corporation, our inactive subsidiary 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 products and the related manufacturing processes.

We have one inactive subsidiary, Telisar Corporation, a California corporation and 66.67% majority-owned subsidiary.
 
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, 2012 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 quarterly period ended September 30, 2013 are not necessarily indicative of results for future quarters or periods in the fiscal year ending December 31, 2013.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
 
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 September 30, 2013 and December 31, 2012 we had $0 and $78,188 of cash in excess of federal insurance limits, respectively.
 
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 more likely than not that we will not be able to realize all or a portion of our deferred tax assets. The fiscal years 2010 to 2012 remain open to examination to U.S. Federal authorities and other jurisdictions in the U.S. where we operate.

 
4

 
 
We recognize the impact of an uncertain tax position in the consolidated financial statements 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 operations.

Loan Costs

Loan costs are amortized to interest expense using the straight line method, which approximates the effective interest method, over the life of the related loan.

Equipment

Equipment is comprised of equipment used in the manufacturing process and related testing and development of our lighting products 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.

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.

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 ASC 718-10 for our share-based payment arrangements.  We used level 3 inputs to measure fair value of these instruments.

Fair Value of Financial Instruments

Financial instruments consist of a loan payable and convertible debentures.  It is not practical to determine the fair value of the Company's financial instruments due to the current terms and embedded financial instruments.
 
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.

 
5

 
 
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.

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 nine months ended September 30, 2013 and 2012, research and development expenses were comprised primarily of technical consulting expenses, travel, materials and operational costs related to the development of the production line.

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.

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 shares of common stock 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,
 
   
2013
   
2012
   
2013
   
2012
 
Warrants
    4,122,228       1,366,108       4,122,228       1,366,108  
Convertible debt
    1,152,223       374,346       1,152,223       374,346  
Stock options
    571,338       591,181       571,338       591,181  
Unvested stock
    275,989       168,500       275,989       168,500  
                                 
Total potentially dilutive securities
    6,121,778       2,500,135       6,121,778       2,500,135  
 
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, 2013 we had no revenues, incurred a net loss of $4.27 million, and had negative cash flows from operations of $1.1 million. In addition, we had an accumulated deficit of $87.7 million at September 30, 2013. 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 2013 and into 2014 to fund our planned operations and research and development activities, through one or more debt or equity financings.  Subsequent to September 30, 2013, we raised gross proceeds of $500,000 in a private placement of our common stock and warrants to accredited investors.  See Note 10.
 
 
6

 
 
NOTE 4 - COMMITMENTS AND CONTINGENCIES
 
Lease Agreement
 
On December 18, 2012 we entered into a 6 month lease for office space in New York, New York.  Monthly rental payments are $2,035.  In June, 2013 this was extended to December 31, 2013 on the same terms.
 
Total rent expense was $18,542 and $8,782 for the nine months ended September 30, 2013 and 2012, respectively.

Liabilities of Sendio

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 research and development and pilot manufacturing facility. On February 13, 2012, Sendio filed a petition of insolvency with the Regional Court in Olomouc, Czech Republic.  In March, 2012 the court determined that Sendio was insolvent, and control of the legal entity passed to a court appointed trustee. The trustee will oversee the orderly sale of the assets and use any proceeds to satisfy the liabilities of Sendio.  These liabilities have been recorded as a current liability on our balance sheet as of September 30, 2013 under the caption “Liabilities of Sendio.”
 
NOTE 5 – CONVERTIBLE DEBENTURES
 
On June 22, 2011, pursuant to a Securities Purchase Agreement, dated as of June 16, 2011, with several institutional investors, we completed a private placement of our original issue discount convertible debentures (referred to as the convertible debentures), receiving gross proceeds of $3,500,000.  Each convertible debenture was issued at a price equal to 85% of its principal amount.  The convertible debentures mature two years after the date of their issuance and do not bear regularly scheduled interest.  Investors may convert their convertible debentures into shares of our common stock at any time and from time to time on or before the maturity date, at a conversion price of $11.00 per share.
 
The convertible debentures will mandatorily convert at our option into shares of our common stock at the conversion price, if the closing bid price for the common stock exceeds $30.00 per share for a period of 10 consecutive trading days, provided that such underlying shares have been fully registered for resale with the U.S. Securities and Exchange Commission (SEC).
 
The convertible debentures are unsecured, general obligations of our company, and rank pari passu with our other unsecured and unsubordinated liabilities.  The convertible debentures are not redeemable or subject to voluntary prepayment by us prior to maturity.  The convertible debentures are identical for all of the investors except for principal amount.
 
The investors agreed not to convert their convertible debentures or exercise their warrants (as discussed below), and we will not be permitted to require a mandatory conversion, to the extent such conversion, exercise or issuance would result in beneficial ownership of more than 4.99% of our outstanding shares at such time.
 
Events of default under the convertible debentures include:
 
failure to pay principal or any liquidated damages on any convertible debenture when due;
   
failure to perform other covenants under the convertible debentures that is not cured five trading days after notice by holders;
   
default under the other financing documents, subject to any grace or cure period provided in the applicable agreement, document or instrument;
   
certain events of bankruptcy or insolvency of our company or any significant subsidiary.  The lender has waived this event of default with respect to the insolvency of Sendio;
   
any default by our company or any subsidiary under any instrument in excess of $150,000 that results in such obligation becoming due and payable prior to maturity;
   
we become party to a change of control transaction, or dispose of greater than 50% of our assets; and
   
failure to deliver common stock certificates to a holder prior to the tenth trading day after a convertible debenture conversion date.
 
 
7

 
 
Upon an event of default, the outstanding principal amount of the convertible debentures, plus a default premium, shall become immediately due and payable to the holders of the convertible debentures.
 
The convertible debentures contain various covenants that limit our ability to:
 
incur additional indebtedness, other than permitted indebtedness as defined in the convertible debenture;
   
incur specified liens, other than permitted liens as defined in the convertible debenture;
   
amend our certificate of incorporation or by-laws in a material adverse manner to the holders; and
   
repay or repurchase more than a de minimus number of shares of our common stock.
 
As part of the financing, we also agreed not to undertake a reverse or forward stock split or reclassification of our common stock until the one-year anniversary of the closing date, except with the consent of a majority in interest of the holders or in connection with an up-listing of our common stock onto a trading market other than the OTC Bulletin Board.

We also issued to the investors five-year warrants to purchase up to 187,175 shares of our common stock at an exercise price of $13.00 per share.  The warrants may be exercised on a cashless basis at any time after the earlier of (i) one year after the date of their issuance or (ii) the completion of the applicable holding period required by Rule 144 in the event the underlying shares have not been fully registered for resale with the SEC.  The warrants are not callable.  Neither the warrants nor the convertible debentures contain a provision for anti-dilution adjustments in the event of a subsequent equity financing at a price less than the respective warrant exercise price or convertible debenture conversion price.

Pursuant to a Registration Rights Agreement, dated as of June 16, 2011, with the investors, we agreed to file a shelf registration statement covering the resale of the shares of common stock issuable upon the conversion of the convertible debentures and exercise of the warrants within 30 days after the closing, use our best efforts to cause the shelf registration statement to be declared effective within 90 days after the closing (or 120 days in the event of a “full review” by the SEC), and keep the shelf registration statement effective until the underlying shares have been sold or may be sold without volume or manner of sale restrictions pursuant to Rule 144 under the Securities Act of 1933 and if we are unable to comply with this covenant, we will be required to pay liquidated damages to the investors in the amount of 1.5% of the investors’ purchase price per month during such non-compliance (capped at a maximum of 10% of the purchase price), with such liquidated damages payable in cash.  We filed the registration statement on July 15, 2011 and it was declared effective on July 26, 2011.  We evaluated any liability under the registration rights agreement at September 30, 2013 and determined no accrual was necessary.

Effective June 22, 2013, the Company entered into a letter agreement with holders of $2,553,000 in principal amount of the Debentures.  The maturity date of these Debentures was extended to June 23, 2014 and the conversion price was reduced from $11.00 to $2.50 per share.  In addition, these Debentures will bear interest at an annual rate of 10% per annum, payable in equal installments on the six month and one year anniversary of the letter agreement.

Also, effective June 22, 2013, the Company entered into a separate letter agreement with the holder of approximately $123,538 in principal amount of the Debentures to reduce the conversion price of these Debentures from $11.00 to $1.22 per share.  This holder then converted the principal amount of their Debentures into 101,260 shares of common stock.

 
8

 
 
We evaluated the amended debentures above to determine if there was an extinguishment of debt or beneficial conversion feature arising as a result of the amendments and determined there was none.

On June 22, 2013, the Company did not make the required payment on the remaining $1,441,213 in principal amount of the Debentures described above, which constitutes an event of default under the terms of the remaining original Debentures.  As a result, the Company recorded a penalty of 10% of the principal amount of $144,121 as interest expense on the accompanying statement of operations for the nine months ended September 30, 2013. The Company is also liable for all other amounts, costs, expenses and liquidated damages due in respect of those Debentures.  Additionally, the remaining original Debentures will bear default interest at a rate of 18% per annum. As a result of the Debentures being past due, the investors may at any time exercise their remedies under the terms of the Debentures.

The carrying value at September 30, 2013 and December 31, 2012 of the convertible debentures is as follows:

   
September 30,
2013
   
December 31,
2012
 
Debentures Due June 22, 2013, in default at June 30, 2013, interest at 18%
  $ 1,352,975     $ 4,117,750  
Debentures Due June 23, 2014, interest at 10%
    2,553,000       -  
Original issue discount
    -       (155,443 )
      3,905,975       3,962,307  
Beneficial conversion feature and warrant allocation
    -       (415,811 )
Carrying value
  $ 3,905,975     $ 3,546,496  
                 


The original issue discount of the convertible debentures is being amortized over their two-year life using the effective interest method.

Interest expense related to the convertible debentures is as follows:

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Amortization of original issue discount
  $ -     $ 78,588     $ 155,443     $ 229,416  
Amortization of beneficial conversion feature and warrant allocation
    -       187,242       415,811       522,713  
Amortization of loan costs
    -       55,515       104,392       165,337  
Penalty interest
    -       -       144,121       -  
Stated interest payable in cash
    124,012       -       135,294       -  
    $ 124,012     $ 321,345     $ 955,061     $ 917,466  
 
NOTE 6 – CONVERTIBLE BRIDGE LOANS

In October and November 2011, we received $475,000 in gross proceeds from six existing stockholders in an interim convertible bridge loan financing involving the issuance of 12% convertible promissory notes and warrants to purchase common stock.  Included in the proceeds was $50,000 received from Mark W. Weber, a member of our board of directors.  Under the notes, the loans are due upon the earlier of (a) the closing of financing pursuant to which shares of common stock or other equity securities are issued by us for aggregate consideration of not less than $5,000,000, through the (i) conversion of the note, including accrued interest, or (ii) at the lender’s option, repayment of the note, or (b) in any event, two years after the issuance of the note.  The number of shares of common stock issuable upon conversion of the note will be based on a conversion price equal to a 15% discount to the price obtained in any round of equity financing.  In the event we fail to repay the promissory notes on or before November 30, 2011, the note’s interest rate will be increased to 15% per annum.  We did not repay the promissory notes prior to that date, and the interest rate was increased to 15% per annum.  Total interest expense related to the loans for the nine months ended September 30, 2013 and 2012 was $7,027 and $42,760, respectively.

In addition to interest on the promissory note, each note holder is entitled to receive a warrant to purchase the number of shares of common stock determined by dividing 115% of the principal amount of the note by the price at which our common stock is sold in any round of equity financing not less than $5,000,000, times 100%.  The warrants will be exercisable at any time, commencing 90 days after the closing of the round of financing, and from time to time for a period of three years after the issuance date, at an exercise price of $11.00 per share (subject to appropriate adjustment in the event of any subsequent stock split or similar transaction). 

 
9

 
 
During February, 2013 three of the convertible bridge loans totaling $368,162 (including accrued interest and loan fees of $68,162) were converted into 368,162 shares of our restricted common stock, three year warrants to purchase 368,162 shares of our common stock at an exercise price of $1.50 per share and three year warrants to purchase 98,571 shares of our common stock at an exercise price of $11.00 per share.  The fair value of the common stock was $662,690 based on the market prices of our common stock on the date of conversion of $1.80 per share.  The fair value of the three year warrants to purchase 368,162 shares of our common stock at an exercise price of $1.50 per share was $633,121 and fair value of the three year warrants to purchase 98,571 shares of our common stock at an exercise price of $11.00 per share was $158,094.  We recognized a loss on debt conversion for the nine months ended September 30, 2013 in the amount of $1,085,744.

The fair value of the warrants issued upon the conversion was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.82%, volatility – 227.1%, and an expected dividend rate of 0%.
 
NOTE 7 – LOANS PAYABLE

On December 20, 2012, we received gross proceeds of $100,000 pursuant to the terms of a Loan Agreement dated December 20, 2012.  The loan is secured by a Deed of Assignment for certain inventory and all proceeds from the sale of the inventory.  The loan is payable on June 23, 2013, six months from the date of the agreement.  We prepaid interest of $25,000 for the term of the loan and $15,000 for loan costs, which are being amortized over the life of the note.  We recognized $27,600 and $0 of interest expense and $54,114 and $0 for the three and nine months ended September 30, 2013 and 2012, respectively.  On June 23, 2013 we did not repay the loan and it is in default.  As a result of the default, the interest rate on the loan is 109.5% per annum from the date of default.

Total principal payments for future years for the Convertible Debentures described in Note 5 and the Loan Payable are as follows as of September 30, 2013:
 
   
September 30,
 2013
 
2013
    4,005,975  
    $ 4,005,975  
 
On May 16, 2013 we received gross proceeds of $100,000 pursuant to a Loan Agreement as of that date.  The term of the loan was for 30 days.  Total interest for the 30 day term was $10,000, which was recognized as interest expense for the nine months ended September 30, 2013.  On June 18, 2013 the holder of the loan converted $110,000 of principal and interest in our unit private placement as further described in Note 8 at a conversion price of $1.50 per share into 73,333 shares of common stock and three-year warrants to purchase common stock at an exercise price of $2.00 per share.  The fair value of the common stock was $95,333 based on the market prices of our common stock on the date of conversion of $1.30 per share.  The fair value of the three year warrants to purchase 73,333 shares of our common stock at an exercise price of $2.00 per share was $43,687. We recognized a loss on debt conversion for the nine months ended September 30, 2013 in the amount of $29,020.

The fair value of the warrants issued upon the conversion was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.42%, volatility – 91.4%, and an expected dividend rate of 0%.
 
NOTE 8 – STOCKHOLDERS’ EQUITY
 
Preferred Stock
 
Our Amended and Restated 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.  No preferred shares are currently issued and outstanding.

 
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Common Stock

2012 Unit Offering Amendment

During 2012, we issued a total of 474,632 shares of our restricted common stock and three-year warrants to purchase 474,632 shares of our common stock at an exercise price of $2.00 per share pursuant to a private placement to accredited investors at a price of $3.50 per unit. Each unit was comprised of one share of common stock and one warrant.  On January 25, 2013 we amended the terms of the private placement, reducing the purchase price of the unit to $1.00 and reducing the exercise price of the warrant to $1.50 per share.  As a result of the amendment, the Company issued an additional 1,186,567 shares of common stock to those investors and increased the number of shares reserved for issuance upon the exercise of the warrants by 1,186,567. The issuance of the shares under the amendment was considered non-compensatory; therefore, there was no effect on the results of operations. The effect of the issuance was a reallocation of the original gross proceeds among additional paid-in capital accounts attributable to the shares and warrants, based on the relative fair values of the instruments delivered in total, including those issued under the amended terms. As a result of this reduction in price and change in the number of issued shares, the allocation of the net proceeds of $1,425,768 would have resulted in $587,989 being allocated to the warrants and the balance of the proceeds of $837,779 would have been allocated to the common stock.

2013 Unit Offerings

On January 25, 2013 we completed a private placement to accredited investors of 105,000 restricted shares of our common stock, at a purchase price of $1.00 per share, for gross proceeds of $105,000.  As part of the private placement, the investors were issued three-year warrants to purchase 105,000 shares of our common stock, at an exercise price of $1.50 per share.

The net proceeds were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance.  The amount allocated to the fair value of the warrants was $52,363 and the balance of the proceeds of $52,637 was allocated to the common stock.  

The fair value of the warrants issued in our unit private placement was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 3 years, risk free interest rate – 0.42%, volatility – 346.4%, and an expected dividend rate of 0%.

From April 9 to September 30, 2013 we raised gross proceeds of $871,000 in a unit private placement to accredited investors at a price of $1.50 per unit.  Each unit is comprised of one share of common stock and one three-year warrant to purchase common stock at an exercise price of $2.00 per share.  Included in the proceeds is $110,000 of principal and interest which was converted into the unit offering as described in Note 7.  Also included is $10,000 received from a member of our board of directors.  We issued an aggregate of 580,667 shares of common stock and warrants to purchase 580,667 shares of common stock at an exercise price of $2.00 per share.

The net proceeds of $761,000 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance.  The amount allocated to the fair value of the warrants was $256,836 and the balance of the proceeds of $504,164 was allocated to the common stock.  The fair value of the warrants issued was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.34% to 0.65%, volatility – 91.4% to 150.3%, and an expected dividend rate of 0%.

Issuances of common stock

During the nine months ended September 30, 2013 we issued 685,667 shares of common stock in our unit offerings described above and 368,162 shares of common stock upon the conversion of three of the convertible bridge loans as described in Note 6.

From January 1 to September 30, 2013 we issued 48,842 shares of common stock with a fair value of $75,000 to SAM Advisors, LLC. The issuances were based on the closing market prices as of the date of issuance pursuant to our agreement to convert their $12,500 monthly consulting fee to stock at the closing market price on the last business day of each month. SAM Advisors, LLC is an entity controlled by William B. Smith, our chairman and chief executive officer.  Effective July 1, 2013 Mr. Smith receives this amount in cash.

 
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From January 1 to September  30, 2013 we issued 6,143 shares of common stock with a fair value of $11,250 to Charles Hunt, a member of our board of directors. The issuances were based in the closing market prices as of the date of issuance pursuant to our agreement to convert $3,750 of his monthly consulting fee to stock at the closing market price on the last business day of each month.

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

On August 26, 2013 the board of directors increased the number of shares authorized for issuance under the 2007 Stock Incentive Plan by 1,500,000 shares to a total of 2,500,000 shares.

Stock issuances

On February 20, 2013 we issued 80,000 shares of restricted stock from the 2007 Stock Incentive Plan to two board members and an officer for services vesting on the date of grant.  The shares had a fair value of $128,800 based on the closing market price of our common stock on that date of $1.61 per share.

On June 15, 2013 we issued 19,231 shares of restricted common stock to a consultant for services vesting in equal monthly installments through the one year anniversary date of service.  The shares had a fair value of $25,000 based on the closing market price of our common stock of $1.30 as of that date.

On August 26, 2013 we issued 300,000 shares of restricted common stock to our non-executive board members and an officer for services vesting ratably through June 1, 2014.  The shares had a fair value of $360,000 based in the closing market price of $1.20 as of that date.

We recognized a total of $57,302, $132,665, $419,617 and $172,780 of compensation expense related to restricted stock issuances as general and administrative and research and development expenses for the three and nine months ended September 30, 2013 and 2012, respectively.

At September 30, 2013 there are 275,989 shares of unvested restricted stock representing $332,547 of unrecognized compensation expense of which we anticipate $124,960 to be recognized through December 31, 2013 and $207,587 will be recognized in the first half of 2014.  

Stock Option issuances

On February 20, 2013 we issued ten-year, fully vested options to purchase 42,600 shares of common stock from the 2007 Stock Incentive Plan at an exercise price of $1.61 per share to two board members and an officer for services.  The fair value of the options granted of $68,741 was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 10 years, risk free interest rate – 2.02%, volatility – 246.2%, and an expected dividend rate of 0%.

On March 11, 2013 we issued five-year options to purchase 250,000 shares of common stock at an exercise price of $1.70 per share to William B. Smith, our Chairman and Chief Executive Officer.  A total of 83,334 options vested immediately, with an additional 83,333 shares vesting on the six month and twelve month anniversary of the options.  In addition, certain performance based criteria provide for the potential acceleration of the vesting schedule.  The fair value of the options granted of $410,540 was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 5 years, risk free interest rate – 0.9%, volatility – 188.8%, and an expected dividend rate of 0%.

We recognized compensation expense of $87,429, $1,933, $422,062 and $132,416 related to the vested portion of stock options based on their estimated grant date fair value as marketing expense, research and development expense or general and administrative expense based on the specific recipient of the award for the three and nine months ended September 30, 2013 and 2012, respectively.

At September 30, 2013, we have unrecognized compensation expense related to stock options of $60,935, of which we anticipate $34,212 will be recognized through December 31, 2013 and $26,724 will be recognized in 2014.

During the nine months ended September 30, 2013 options to purchase 30,266 shares of common stock at a weighted average exercise price of $14.32 expired unexercised.

 
12

 
 
Warrants

As a result of the amendment of our 2012 Unit Offering as described above, the Company issued warrants to purchase an additional 1,186,567 shares of common stock at an exercise price of $1.50 per share to the investors in the offering.

During the nine months ended September 30, 2013 we issued three year warrants to purchase 105,000 shares of common stock at an exercise price of $1.50 per share in our unit offering described above.

During the nine months ended September 30, 2013 we issued three year warrants to purchase 580,667 shares of common stock at an exercise price of $2.00 per share in our unit offering described above.

Also during the nine months ended September 30, 2013 we issued  three year warrants to purchase 368,162 shares of our common stock at an exercise price of $1.50 per share and three year warrants to purchase 98,571 shares of our common stock at an exercise price of $11.00 per share to three investors upon the conversion of convertible bridge notes as described in Note 6.

During the nine months ended September 30, 2013 warrants to purchase a total of 230,858 shares of common stock with a weighted average exercise price of $15.31 expired unexercised.

A summary of our outstanding warrants at September 30, 2013 is as follows:

           
Weighted-Average
       
Exercise
   
Warrants
   
Remaining Contractual
   
Number
 
Price
   
Outstanding
   
Life (Years)
   
Exercisable
 
$ 1.50       2,909,360       1.9       2,909,360  
$ 2.00       580,667       2.7       580,667  
$ 9.00       262,750       2.4       262,750  
$ 11.00       156,071       2.1       156,071  
$ 13.00       213,380       2.7       213,380  
          4,122,228       2.3       4,122,228  
 
NOTE 9 – RELATED PARTY TRANSACTIONS

From January 1 to September 30, 2013 we issued 48,842 shares of common stock with a fair value of $75,000 to SAM Advisors, LLC. The issuances were based on the closing market prices as of the date of issuance pursuant to our agreement to convert their $12,500 monthly consulting fee to stock at the closing market price on the last business day of each month. SAM Advisors, Inc. is an entity controlled by William B. Smith, our chairman and chief executive officer.

From January 1 to September 30, 2013 we issued 6,143 shares of common stock with a fair value of $11,250 to Charles Hunt, a member of our board of directors. The issuances were based in the closing market prices as of the date of issuance pursuant to our agreement to convert $3,750 of his monthly consulting fee to stock at the closing market price on the last business day of each month.

NOTE 10 – SUBSEQUENT EVENTS

Subsequent to September 30, 2013 we received gross proceeds of $500,000 from accredited investors at a price of $1.00 per unit and issued 500,000 shares of common stock and two-year warrants to purchase 500,000 shares of common stock at an exercise price of $1.25 per share.

 
13

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report.
 
Overview
  
We are focused on designing, developing and selling a line of mercury-free, energy efficient lighting products based on our proprietary light-emitting technology.  For the past several years, we have primarily focused our efforts on research and product development of our Electron Stimulated Luminescence™ (ESL) technology.  In 2007, we formed Sendio s.r.o. in the Czech Republic as a wholly-owned subsidiary for continued development of our lighting products, and to design the manufacturing processes required for commercialization and manufacturing.  During 2010, we continued our development work on the technology to refine the prototype with the miniaturization of the electronics and improvements to the efficiency of the products and the design and implementation of the processes required to manufacture our lights.  During the second quarter of 2010, we submitted our initial light for safety certification to Underwriters Laboratories (UL®) and, in October 2010, we received that certification. 

We are also developing an R40 flood light for the United States commercial market and a smaller R63 light for the European market to be used in currently-installed recessed lighting fixtures. In addition, we are currently developing our version of the standard Edisonian A19 screw-in light (and its European equivalent, the A60), the most common general purpose electric light in the world.  We submitted this light in June 2011 for safety certification to UL and, in August 2011, we received certification.  

Our efforts are presently focused on this initial product, the R30 size light for recessed fixtures.  We are currently supporting initial production of this light and are continuing to enhance our manufacturing capabilities through an outsourcing arrangement in China.  The commercial viability of our ESL technology will largely depend on these results, the ability to manufacture our products on a large scale commercial basis, market acceptance of the products and other factors.  During the nine months ended September 30, 2013 and 2012, we had no revenues.
    
Our independent registered public accounting firm has issued a “going concern” modification to its report on our financial statements for the year ended December 31, 2012, stating that we had a net loss and negative cash flows from operations in fiscal 2012, 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.

We need to raise additional capital through one or more debt or equity financings to continue our operations. If we are unable to obtain additional financing, we will be unable to continue our operations.
 
Factors Affecting Financial Results

Our anticipated expenditures related to our current operations will primarily depend on personnel costs and additional equipment needs for continued development and manufacturing of our line of lighting products.  In addition, we anticipate we will incur substantial costs related to establishing the strategic business relationship with our product manufacturer, as well as for sales, marketing 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 the commercial manufacturing results for our lighting products, and as such cannot be presently estimated. 
 
Our anticipated costs in 2013 for the continued development of our line of ESL lighting products cannot be reasonably estimated due to the inherent uncertainty of the research and feasibility of the manufacturing processes.  There can be no assurance 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 emphasis on the development of our planned products, the additional manufacturing processes required by our product manufacturer, the distribution, marketing and branding of products and the development of sales channels relating to our lighting products will command management’s primary attention during the next 12 months.  It will also comprise the primary use of our financial resources.  In 2013, our success will depend on our ability to secure additional funding, reach commercial manufacturing levels for our R30, R40 and A19 lights, generate market awareness and acceptance of our current and planned lighting products, protect our technology through patents and trade secrets, and develop our planned products to meet industry standards.  If we are unable for technological, financial, competitive or other reasons to successfully take these steps, our business and operations will be adversely affected.

Our cash as of September 30, 2013 is not sufficient to support our operations through fiscal 2013 and it will be necessary for us to seek additional financing.  See “Liquidity and Capital Resources” below.

 
14

 
 
Results of Operations
 
Comparison of Results for the Three Months Ended September  30, 2013 and 2012
 
Revenues

We recognized no revenues for the three months ended September 30, 2013 and 2012.

Research and Development Expenses
 
For the three months ended September 30, 2013 and 2012, we were involved in a single project to develop and commercialize our proprietary technology in our R30 sized light bulbs.  Research and development expenditures for the three months ended September 30, 2013 and 2012 were comprised of technical consulting expenses, product line development fees, materials and travel.  Research and development expenses decreased approximately $18,000 to $186,000 for the three months ended September 30, 2013 compared to $204,000 for the three months ended September 30, 2012.   The decrease was primarily related to decreased consulting and materials expenses in the three months ended September 30, 2013.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2013 and 2012 were comprised of share-based compensation expenses, professional and legal fees, consulting expenses, insurance, travel and general corporate related overheads and office expenses. General and administrative expenses decreased by approximately $67,000 to $281,000 for the three months ended September 30, 2013 compared to $347,000 for the three months ended September 30, 2012.  The decrease was primarily due to decreases in consulting and legal expenses, partially offset by non-cash charges related to share-based compensation expenses, which increased $3,000 to $138,000 relating primarily to restricted stock and stock options issued to our officers and certain directors for the three months ended September 30, 2013 compared to $135,000 for the three months ended September 30, 2012.

Marketing Expenses

Marketing expenses for the three months ended September 30, 2013 and 2012 were comprised of consulting fees, share-based compensation expenses and office related expenses. Marketing expenses decreased by approximately $103,000 to $125,000 for the three months ended September 30, 2013 compared to $228,000 for the three months ended September 30, 2012. The decrease was primarily related to decreases in consulting expenses and non-cash charges related to share-based compensation expenses, which decreased $44,000 relating to stock and stock options issued during 2012.  There was no comparable expense for the three months ended September 30, 2013.
 
Other Income and Expense
 
Other income and expense for the three months ended September 30, 2013 was primarily comprised of interest expense and loss on conversion of debt.
 
 
15

 
 
Interest expense for the three months ended September 30, 2013 decreased $182,000 to $152,000 compared to $334,000 for the three months ended September 30, 2012.  Interest expense for the three months ended September 30, 2013 also included the interest for convertible promissory notes as discussed in Note 5 and the interest on the loans payable discussed in Note 7.
 
Comparison of Results for the Nine Months Ended September 30, 2013 and 2012
 
Revenues

We recognized no revenues for the nine months ended September 30, 2013 and 2012.

Research and Development Expenses
 
For the nine months ended September 30, 2013 and 2012, we were involved in a single project to develop and commercialize our proprietary technology in our R30 sized light bulbs.  Research and development expenditures for the nine months ended September 30, 2013 and 2012 were comprised of technical consulting expenses, product line development fees, materials and travel.  Research and development expenses decreased approximately $63,000 to $447,000 for the nine months ended September 30, 2013 compared to $510,000 for the nine months ended September 30, 2012.   The decrease was primarily related to a $150,000 payment to our outsourced manufacturer for product line development fees during the nine months ended September 30, 2012 for which no current year expense exists.  This is partially offset by increased materials expenses and increased travel during the nine months ended September 30, 2013.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2013 and 2012 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 $218,000 to $1,388,000 for the nine months ended September 30, 2013 compared to $1,170,000 for the nine months ended September 30, 2012.  The increase was primarily due to non-cash charges related to share-based compensation expenses, which increased $557,000 to $834,000 relating primarily to restricted stock and stock options issued to our officers and certain directors for the nine months ended September 30, 2013 compared to $277,000 for the nine months ended September 30, 2012. This was partially offset by decreases in legal and professional fees, consulting and lower levels of operations during the nine months ended September 30, 2013.

Marketing Expenses

Marketing expenses for the nine months ended September 30, 2013 and 2012 were comprised of consulting fees, share-based compensation expenses and office related expenses. Marketing expenses decreased by approximately $400,000 to $279,000 for the nine months ended September 30, 2013 compared to $679,000 for the nine months ended September 30, 2012. The decrease was primarily related to decreases in consulting expenses and non-cash charges related to share-based compensation expenses, which decreased $109,000 relating to stock and stock options issued during the nine months ended September 30, 2012.  There was no comparable expense for the nine months ended September 30, 2013.

Other Income and Expense
 
Other income and expense for the nine months ended September 30, 2013 was comprised of interest expense and loss on conversion of debt.  Other income and expense for the nine months ended September 30, 2012 also included derivative valuation gain.
 
Interest expense for the nine months ended September 30, 2013 increased $80,000 to $1,040,000 compared to $960,000 for the nine months ended September 30, 2012.  Interest expense for the nine months ended September 30, 2013 and 2012 included the amortization related to the original issue discount, beneficial conversion feature, and loan costs for the convertible debentures as discussed in Note 5.  Interest expense for the nine months ended September 30, 2013 also included the interest for convertible bridge loans as discussed in Note 6 and the interest on the loans payable discussed in Note 7.

 
16

 
 
Derivative valuation gain results from embedded derivative financial instruments that are required to be measured at fair value. Derivative valuation gain amounted to approximately $0 and $593,000 during the nine months ended September 30, 2013 and 2012, respectively and are related to a derivative warrant liability which arose in 2011.

We valued our derivative warrant liability using the Black Scholes valuation method. The changes in the fair value of our derivatives are significantly influenced by changes in our stock price and changes in interest rates in the public markets. 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

We had cash of $76,588 and $4,005,975 of short-term debt as of September 30, 2013.  A total of $1,541,213 plus accrued interest of this amount is presently in default with the lenders.

Subsequent to September 30, 2013, we raised a total of $500,000 in a unit private placement as discussed in Note 10.

We do not anticipate that our existing cash and the additional proceeds from our unit offering will be sufficient to fund our operations and anticipated capital expenditures for the next twelve months. We need additional financing in 2013 to fund our operations, research and product 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 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 further curtail or even cease our 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 independent registered public accounting firm added an explanatory paragraph to its opinion on our 2012 financial statements stating that there was substantial doubt about our ability to continue as a going concern.

Contractual Obligations
 
We have contractual payment obligations for operating leases as of September 30, 2013 of $6,105 related to our New York corporate headquarters lease.
 
Impact of Inflation
 
We expect to be able to pass inflationary increases for raw materials and other costs on to our customers through price increases, as required, and do not expect inflation to be a significant factor in our business.
 
Seasonality
 
Although our operating history is limited, we do not believe our products are seasonal.
 
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 policies affect our more significant estimates used in the preparation of our financial statements and are 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 to 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 Condensed Financial Statements included in this Report.

 
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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 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 our discount and beneficial conversion feature and warrant allocation on our convertible notes and our share-based payment arrangements.

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, 2013.

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 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
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 purchasers had adequate access to information about us.

 
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During the three months ended September 30, 2013 we issued 40,000 shares of common stock in our unit offering described in Note 8, above.
 
ITEM 6.  EXHIBITS
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of William B. Smith, Chief Executive Officer
   
31.2
Rule 13a-14(a)/15d-14(a) Certification of Matthew DeVries, Chief Financial Officer
   
32.1
Certification of William B. Smith, Chief Executive Officer, and Matthew DeVries, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS*
XBRL Instance Document
   
101.SCH*
XBRL Taxonomy Extension Schema Document
   
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VU1 CORPORATION
 
 (Registrant)
   
   
 
Dated: November 12, 2013
   
   
 
By: /s/ William B. Smith
 
William B. Smith
 
Chief Executive Officer
 
(Principal Executive Officer)
   
   
 
By: /s/ Matthew DeVries
 
Matthew DeVries
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
 
 
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