Attached files
file | filename |
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EX-31.1 - Vu1 CORP | v167349_ex31-1.htm |
EX-10.1 - Vu1 CORP | v167349_ex10-1.htm |
EX-32.1 - Vu1 CORP | v167349_ex32-1.htm |
EX-10.2 - Vu1 CORP | v167349_ex10-2.htm |
EX-31.2 - Vu1 CORP | v167349_ex31-2.htm |
EX-10.3 - Vu1 CORP | v167349_ex10-3.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended September 30, 2009
¨ Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from ______________ to ______________
Commission
File No. 0-21864
Vu1
CORPORATION
(Exact
name of registrant as specified in its charter)
California
|
84-0672714
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
557 ROY ST. SUITE 125
SEATTLE, WA 98109
(Address
of principal executive offices)
(888)
985-8881
(Issuer’s
Telephone number, including area code)
Indicate by check
mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 or Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
|
Accelerated filer ¨
|
|
Non-accelerated filer
¨
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yeso Nox
On
November 23, 2009 there were 85,811,692 shares of the Registrant’s common stock,
no par value, issued and outstanding.
Vu1
CORPORATION
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
|
|
PART
I Financial Information
|
|
ITEM
1. Condensed Consolidated Financial Statements (unaudited)
|
|
Balance
Sheets as of September 30, 2009 and December 31, 2008
|
1
|
Statements
of Operations and Comprehensive Loss for the Three and Nine Months Ended
September 30, 2009 and 2008
|
2
|
Statements
of Cash Flows for the Nine Months Ended September 30, 2009 and
2008
|
3
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
14
|
ITEM
4T. Controls and Procedures
|
18
|
PART
II Other Information
|
|
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
19
|
ITEM
5. Other Information
|
19
|
ITEM
6. Exhibits
|
20
|
Signatures
|
21
|
EXPLANATORY
NOTE
Unless
otherwise indicated or the context otherwise requires, all references in this
Report to “we,” “us,” “our,” and the “Company” are to Vu1 Corporation, Sendio,
s.r.o., our Czech subsidiary, and our inactive subsidiary Telisar
Corporation.
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
Forward
Looking Statements
We are
including the following cautionary statement in this Quarterly Report on Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements. All statements other than statements of historical fact, including
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions, future results of operations or
financial position, made in this Report are forward looking. In particular, the
words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,”
variations of such words, and similar expressions identify forward-looking
statements, but are not the exclusive means of identifying such statements and
their absence does not mean that the statement is not
forward-looking.
The
forward-looking statements contained herein involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Our expectations, beliefs and
projections are expressed in good faith and are believed by management to have a
reasonable basis, including without limitation, management’s examination of
historical operating trends, data contained in our records and other data
available from third parties; however, management’s expectations, beliefs and
projections may not be achieved or accomplished. In addition to other factors
and matters discussed elsewhere herein, the following are important factors
that, in our view, could cause actual results to differ materially from those
discussed in the forward-looking statements:
·
|
our
lack of working capital and lack of
revenues;
|
|
·
|
the
availability of capital to us, in the amount and time needed, to fund our
development programs and operations, and the terms and dilutive effect of
any such financings;
|
·
|
our
ability be successful in our product development and testing
efforts;
|
·
|
our
ability to obtain commercial development for our planned
products;
|
|
·
|
our
ability to obtain manufacturing for our planned products in a
cost-effective manner and at the times and in the volumes required, while
maintaining quality assurance;
|
|
·
|
market
demand for and acceptance of our planned products, and other factors
affecting market conditions;
|
·
|
technological
advances and competitive pressure by our
competitors;
|
·
|
governmental
regulations imposed on us in the United States and European Union;
and
|
·
|
the
loss of any of our key employees or
consultants.
|
For
additional factors that can affect these forward-looking statements, see the
“Risk Factors” section in our Annual Report on Form 10-K for the year ended
December 31, 2008. The forward-looking statements contained in this
Report speak only as of the date hereof. We caution readers not to
place undue reliance on any such forward-looking statements. We
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof.
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
Vu1
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
SEPTEMBER 30,
|
DECEMBER 31,
|
|||||||
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 18,867 | $ | 2,486,609 | ||||
Tax
refund receivable
|
28,034 | 32,672 | ||||||
Prepaid
expenses
|
128,915 | 17,669 | ||||||
Total
current assets
|
175,816 | 2,536,950 | ||||||
Non-current
assets
|
||||||||
Equipment,
net of accumulated depreciation of $133,297 and $49,744,
respectively
|
167,527 | 240,742 | ||||||
Construction
in process
|
498,816 | 399,859 | ||||||
Deposit
on building purchase
|
439,606 | 212,800 | ||||||
Total
assets
|
$ | 1,281,765 | $ | 3,390,351 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 641,017 | $ | 412,534 | ||||
Accrued
payroll
|
482,277 | 161,130 | ||||||
Loan
payable, current portion
|
4,502 | 3,444 | ||||||
Capital
lease obligation, current portion
|
5,154 | 4,465 | ||||||
Total
current liabilities
|
1,132,950 | 581,573 | ||||||
Long-term
convertible note payable, net of discount of $1,123,054 and $0,
respectively
|
14,734 | - | ||||||
Embeddeed
derivative liability
|
1,406,929 | - | ||||||
Loan
payable, net of current portion
|
3,668 | 6,557 | ||||||
Capital
lease obligation, net of current portion
|
16,147 | 18,173 | ||||||
Total
liabilities
|
2,574,428 | 606,303 | ||||||
Stockholders'
equity (deficit)
|
||||||||
Preferred
stock, $1.00 par value; 10,000,000 shares authorized; no shares issued and
outstanding
|
- | - | ||||||
Common
stock, no par value; 200,000,000 shares authorized; 85,811,692 and
85,691,892 shares issued and outstanding, respectively
|
62,210,821 | 61,165,545 | ||||||
Stock
and warrant subscription receivable
|
- | (131,800 | ) | |||||
Accumulated
deficit
|
(63,673,820 | ) | (58,386,684 | ) | ||||
Accumulated
other comprehensive income
|
170,336 | 136,987 | ||||||
Total
stockholders' equity (deficit)
|
(1,292,663 | ) | 2,784,048 | |||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 1,281,765 | $ | 3,390,351 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
1
Vu1
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Operating
expenses
|
||||||||||||||||
Research
and development
|
$ | 615,203 | $ | 788,094 | $ | 2,074,707 | $ | 3,965,825 | ||||||||
General
and administrative
|
257,778 | 2,036,468 | 1,605,685 | 3,234,575 | ||||||||||||
Marketing
|
80,477 | 122,972 | 274,823 | 251,660 | ||||||||||||
Total
operating expenses
|
953,458 | 2,947,534 | 3,955,215 | 7,452,060 | ||||||||||||
Loss
from operations
|
(953,458 | ) | (2,947,534 | ) | (3,955,215 | ) | (7,452,060 | ) | ||||||||
Other
income
|
||||||||||||||||
Interest
income
|
234 | 3,580 | 2,571 | 9,070 | ||||||||||||
Interest
expense
|
(116,895 | ) | (1,809 | ) | (133,772 | ) | (1,809 | ) | ||||||||
Derivative
valuation loss
|
(1,200,720 | ) | - | (1,200,720 | ) | - | ||||||||||
Total
other income
|
(1,317,381 | ) | 1,771 | (1,331,921 | ) | 7,261 | ||||||||||
Loss
before provision for income taxes
|
(2,270,839 | ) | (2,945,763 | ) | (5,287,136 | ) | (7,444,799 | ) | ||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Net
loss
|
$ | (2,270,839 | ) | $ | (2,945,763 | ) | $ | (5,287,136 | ) | $ | (7,444,799 | ) | ||||
Other
comprehensive (loss) income:
|
||||||||||||||||
Foreign
currency translation adjustments
|
28,382 | (27,696 | ) | 33,349 | 186,552 | |||||||||||
Comprehensive
loss
|
$ | (2,242,457 | ) | $ | (2,973,459 | ) | $ | (5,253,787 | ) | $ | (7,258,247 | ) | ||||
Basic
and diluted:
|
||||||||||||||||
Loss
per share
|
$ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.11 | ) | ||||
Weighted
average shares outstanding
|
85,576,142 | 73,154,045 | 85,541,801 | 68,380,888 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (5,287,136 | ) | $ | (7,444,799 | ) | ||
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
||||||||
Depreciation
|
71,434 | 18,813 | ||||||
Share-based
compensation
|
(79,394 | ) | 1,456,468 | |||||
Issuance
of warrant for services
|
38,839 | 216,780 | ||||||
Amortization
of discount and prepaid interest on long-term convertible
note
|
75,941 | - | ||||||
Issuance
of stock for services
|
93,650 | 85,000 | ||||||
Derivative
valuation loss
|
1,200,720 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Tax
refund receivable
|
6,738 | 507,852 | ||||||
Prepaid
expenses
|
(54,843 | ) | 1,490,035 | |||||
Accounts
payable
|
214,023 | 199,309 | ||||||
Accrued
payroll
|
273,104 | (154 | ) | |||||
Net
cash flows from operating activities
|
(3,446,924 | ) | (3,470,696 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchases
of equipment
|
(44,088 | ) | (80,802 | ) | ||||
Purchases
of construction in process and deposit on building
|
(184,972 | ) | (409,767 | ) | ||||
Net
cash flows from investing activities
|
(229,060 | ) | (490,569 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sales of units of common stock and warrants
|
131,800 | 2,787,940 | ||||||
Proceeds
from issuance of convertible note payable and warrants
|
1,088,792 | - | ||||||
Proceeds
from sales of common stock
|
- | 2,130,039 | ||||||
Proceeds
from note payable
|
13,468 | |||||||
Payments
on note payable
|
(2,428 | ) | (1,049 | ) | ||||
Payments
on capital lease obligations
|
(2,989 | ) | (1,342 | ) | ||||
Net
cash flows from financing activities
|
1,215,175 | 4,929,056 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(6,933 | ) | (12,776 | ) | ||||
Net
change in cash and cash equivalents
|
(2,467,742 | ) | 955,015 | |||||
Cash
and cash equivalents, beginning of period
|
2,486,609 | 1,014,512 | ||||||
Cash
and cash equivalents, end of period
|
$ | 18,867 | $ | 1,969,527 | ||||
Cash
paid for interest
|
$ | 2,998 | $ | 1,809 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Vu1
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BUSINESS AND ORGANIZATION
General
All
references in these consolidated financial statements to “we,” “us,” “our,” and
the “Company” are to Vu1 Corporation, Sendio, s.r.o., our Czech subsidiary, and
our inactive subsidiary Telisar Corporation unless otherwise noted or indicated
by its context.
We are
focused on developing, manufacturing and selling a line of mercury free, energy
efficient light bulbs based on our proprietary light-emitting
technology.
For the
past several years, we have primarily focused on research and development
efforts for our technology. In
September 2007, we formed Sendio, s.r.o. (“Sendio”) in the Czech Republic as a
wholly-owned subsidiary for the purpose of operating a pilot manufacturing
facility.
We have
one inactive subsidiary, Telisar Corporation, a California corporation and
majority-owned subsidiary. No noncontrolling interest is presented for the
minority stockholders of Telisar due to its accumulated losses on a stand alone
basis.
NOTE
2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of
Presentation
The
consolidated unaudited financial statements included in this Form 10-Q have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, these
financial statements do not include all of the disclosures required by U.S.
generally accepted accounting principles for complete financial
statements. These consolidated unaudited interim financial statements
should be read in conjunction with the audited financial statements for the
fiscal year ended December 31, 2008 in our Annual Report on Form
10-K. The financial information furnished herein reflects all
adjustments consisting of normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of our financial position, the
results of operations and cash flows for the periods
presented. Operating results for the period ended September 30, 2009
are not necessarily indicative of results for future quarters or periods in the
fiscal year ending December 31, 2009.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Vu1 and all of our
wholly owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Translating Financial
Statements
The
functional currency of Sendio is the Czech Koruna (“CZK”). The
accounts of Sendio contained in the accompanying condensed consolidated balance
sheets have been translated into United States dollars at the exchange rate
prevailing during the periods presented. Translation adjustments are included in
“Accumulated Other Comprehensive Income,” a separate component of stockholders’
equity (deficit). The accounts of Sendio in the accompanying condensed
consolidated statements of operations have been translated using the average
exchange rates for the periods presented.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
4
Cash and Cash
Equivalents
Cash is
comprised of deposits with a bank. For purposes of the statements of cash flows,
we consider all investments purchased with original maturities of three months
or less to be cash equivalents. At September 30, 2009 and December
31, 2008, we had cash of $0 and $1,986,609, respectively, in excess of federally
insured limits.
Equipment
Equipment is comprised primarily of
equipment used in the testing and development of the manufacturing process of
our light bulbs and is stated at cost. We provide for depreciation using the
straight-line method over the estimated useful life of three to fifteen years.
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
equipment are reflected in the statements of operations.
Construction in
process
Construction
in process is comprised of assets to be used in our operations in the Czech
Republic not in service as of September 30, 2009 and December 31,
2008. These assets, when placed in service will be reclassified to
Property and Equipment and depreciated over their estimated useful
lives.
Income
Taxes
We
recognize the amount of income taxes payable or refundable for the current year
and recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement amounts
of certain assets and liabilities and their respective tax bases. Deferred tax
assets and deferred tax liabilities are measured using enacted tax rates
expected to apply to taxable income in the years those temporary differences are
expected to be recovered or settled. A valuation allowance is required when it
is less likely than not that we will be able to realize all or a portion of our
deferred tax assets.
Long-Lived
Assets
We review
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount that the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Fair Value of Financial
Instruments
Financial
instruments, as defined in the Topic 825-10 of the Accounting Standards
Codification (“ASC”), consist of cash, evidence of ownership in an entity, and
contracts that both (i) impose on one entity a contractual obligation to deliver
cash or another financial instrument to a second entity, or to exchange other
financial instruments on potentially unfavorable terms with the second entity,
and (ii) conveys to that second entity a contractual right (a) to receive cash
or another financial instrument from the first entity, or (b) to exchange other
financial instruments on potentially favorable terms with the first entity.
Accordingly, our financial instruments consist of cash and cash equivalents,
receivables, payables and accrued liabilities, derivative financial instruments,
notes payable and convertible debt. We carry cash and cash equivalents,
receivables, payables and accrued liabilities and notes payable at historical
costs; their respective estimated fair values approximate carrying values
due.
Derivative
financial instruments, as defined in ASC 815 “Accounting for Derivative Financial
Instruments and Hedging Activities” consist of financial instruments or
other contracts that contain a notional amount and one or more underlying (e.g.
interest rate, security price or other variable), require no initial net
investment and permit net settlement. Derivative financial instruments may be
free-standing or embedded in other financial instruments. We generally do not
use derivative financial instruments to hedge exposures to cash-flow, market or
foreign-currency risks. However, the conversion feature in our convertible
promissory notes is not afforded equity classification because it embodies risks
not clearly and closely related to host contract. As required by ASC 815-10,
these features are required to be bifurcated and carried as derivative
liabilities, at fair value, in our financial statements.
5
We carry
convertible debt at historical cost. The fair value of our convertible debt in
its hybrid form is determined, for disclosure purposes only, based upon its
forward cash flows, at credit risk adjusted rates, plus the fair value of the
conversion feature. As of September 30, 2009, the fair value of our face value
$1,137,788 convertible debt amounted to approximately $2,555,000.
Fair Value
Measurements
ASC 820
“Fair Value
Measurements” defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Significant fair value measurements resulted
from the application of ASC 815 to our convertible promissory note and warrant
financing arrangements and ASC 718-10 for our share-based payment
arrangements.
Revenue
Recognition
Revenues
are recognized when (a) persuasive evidence of an arrangement exists, (b)
delivery has occurred and no significant obligations remain, (c) the fee is
fixed or determinable and (d) collection is determined to be
probable. We have not recognized any revenues in the
accompanying financial statements.
Research and Development
Costs
For
financial reporting purposes, all costs of research and development activities
performed internally or on a contract basis are expensed as incurred. For the
three and nine months ended September 30, 2009 and 2008, research and
development expenses were comprised primarily of salary, rent, technical
consulting expenses, supplies and travel, and other costs of the research
related operations in the Czech Republic through our wholly-owned subsidiary,
Sendio.
Share-Based
Payments
We
account for share-based compensation expense to reflect the fair value of
share-based awards measured at the grant date. This expense is
recognized over the requisite service period and is adjusted each period for
anticipated forfeitures. We estimate the fair value of each share-based award on
the date of grant using the Black-Scholes option valuation model. The
Black-Scholes option valuation model incorporates assumptions as to stock price
volatility, the expected life of options, a risk-free interest rate and dividend
yield.
Comprehensive
Income
Comprehensive
income includes all changes in equity (net assets) during a period from
non-owner sources. Other comprehensive income presented in the accompanying
consolidated financial statements consists of foreign currency translation
adjustments.
Loss Per
Share
Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted-average number of shares of common stock outstanding, excluding
unvested stock. Diluted loss per share is computed similar to basic loss per
share except that the denominator is increased to include the number of
additional shares of common stock that would have been outstanding if the
potential common shares, including unvested stock, had been issued and if the
additional common shares were dilutive.
The
following potentially dilutive common shares are excluded from the computation
of diluted net loss per share for all periods presented because the effect is
anti-dilutive:
6
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Warrants
|
8,284,359 | 3,762,225 | 8,284,359 | 3,762,225 | ||||||||||||
Convertible
debt
|
2,844,470 | - | 2,844,470 | - | ||||||||||||
Stock
options
|
4,121,875 | 4,650,000 | 4,121,875 | 4,650,000 | ||||||||||||
Unvested
stock
|
190,750 | 381,000 | 190,750 | 381,000 | ||||||||||||
Total
potentially dilutive securities
|
15,441,454 | 8,793,225 | 15,441,454 | 8,793,225 |
Recently Adopted Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) established the FASB
Accounting Standards Codification (“ASC”), as the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and
related accounting literature. The use of the FASB ASC was effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. Its adoption did not have any impact on the Company’s
consolidated financial statements. The FASB ASC is updated through the FASB’s
issuance of Accounting Standards Updates, or ASUs.
NOTE
3 - GOING CONCERN MATTERS
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate our continuation as a
going concern. During the nine months ended September 30, 2009, we had no
revenues, incurred a net loss of $5.3 million and had negative cash flows from
operations of $3.4 million. In addition, we had an accumulated deficit of $63.7
million at September 30, 2009.
These
factors raise substantial doubt about our ability to continue as a going
concern.
Recovery
of our assets is dependent upon future events, the outcome of which is
indeterminable. Our attainment of profitable operations is dependent upon our
obtaining adequate debt or equity financing, developing products for commercial
sale, and achieving a level of sales adequate to support our cost structure. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should we be unable to
continue in existence.
Our
efforts to raise additional funds will continue during fiscal 2009 to fund our
planned operations and research and development activities, through one or more
debt or equity financings. We have engaged an investment banker to
assist us in our fundraising efforts. Unless we obtain sufficient additional
financing, we expect that we will need to continue to continue to curtail or
even cease operations indefinitely, or at least until we can obtain sufficient
financing. Even if we are able to raise sufficient additional capital
to continue our operations, we expect to continue to seek additional financing
through the remainder of fiscal 2009 and into fiscal 2010. See additional
information in Note 11.
NOTE
4 – TAX REFUND RECEIVABLE
Tax
refund receivable represents the 19% value added tax receivable from the
government of the Czech Republic. No allowance for doubtful accounts
has been provided as we believe the amounts are fully collectible.
NOTE
5 - COMMITMENTS AND CONTINGENCIES
On May
28, 2008 Sendio entered into a lease contract for certain facilities located in
the city of Olomouc in the Czech Republic (the “Lease”). We intend to
utilize the facilities to continue our assessment of the feasibility of
manufacturing of our energy efficient, mercury free line of light
bulbs. The Lease term was one year, effective from July 1, 2008 and
terminated on June 30, 2009. The rent for the one year term was CZK
10,000,000, plus mandatory VAT. The rent, after the reduction for
amounts paid by other tenants, was payable monthly in the amount of CZK 455,310
for each month from January through June, 2009. On May 29, 2008
Sendio paid a deposit of CZK 4,000,000 to the landlord.
7
Effective
December 9, 2008 Sendio entered into an agreement (the “Purchase Agreement”) to
purchase the facilities in the Lease from the landlord. The purchase price for
the Premises is CZK 179,000,000 (approximately $9.0 million USD) (the “Purchase
Price”) and the scheduled closing date for ownership transfer anticipated in the
Purchase Agreement was July 1, 2009. The deposit Sendio paid on May 29, 2008
under the Lease for CZK 4,000,000 was considered an advance on the Purchase
Price. We have recorded this amount as a non-current asset as a deposit on
building purchase in the accompanying balance sheets as of September 30, 2009
and December 31, 2008. The remaining balance of the Purchase Price was payable
by means of an escrow account, with payments totaling CZK 175,000,000 originally
scheduled to be made to an escrow account in installments, all of which were due
June 30, 2009.
Sendio
did not make the first payment of CZK 11,000,000 due on February 28 and, on
March 3, 2009 Sendio and the landlord of the building premises in the Czech
Republic amended the payment terms under the Purchase
Agreement. Under the amendment, Sendio paid CZK 1,000,000 into the
escrow account on March 10, 2009 and deferred the payment under the original
payment schedule. Sendio did not make the payments under the revised
payment schedule, and we entered into negotiations with the seller to revise the
terms of the Purchase Agreement.
Pursuant
to these negotiations, Sendio has obtained month to month extensions for each
month of the lease pursuant to these ongoing negotiations and Sendio agreed to
pay CZK 722,556 per month for rent and CZK 645,834 per month for an escrow
payment for July and September, 2009.
Under the
original Purchase Agreement, in the event Sendio does not make the payments
required under Purchase Agreement, the landlord is entitled to claim a
contractual fine in the amount of CZK 17,500,000 and seek indemnification for up
to an additional CZK 8,500,000. See Note 10.
Also
effective December 9, 2008, as additional inducement for the landlord to enter
into the Purchase Agreement, Vu1 entered into a Deed of Guarantee with the
landlord under which it guaranteed up to CZK 13,500,000 of the CZK
175,000,000 aggregate payments by Sendio under the Purchase
Agreement. The guarantee expires upon full payment by Sendio of this
amount.
In
February, 2009 we entered into a five month lease for our current office space
in Seattle, Washington. Monthly rent is $1,530. Upon the
conclusion of the lease term the lease became month to month on the same
terms.
Total
rent expense was $276,886 and $1,967,876 for the nine months ended September 30,
2009 and 2008, respectively.
In March,
2009 we signed an exclusive investment banking agreement with an investment
banker to assist us with our fundraising efforts. During the term of
the agreement, upon the closing of a transaction, we will pay the investment
bank financing fees ranging from 5% to 7% of the value of the transaction as
defined in the agreement. In addition, upon the closing of any sale
of equity securities, we will be required to issue the investment bank warrants
to purchase our common stock ranging from 2% to 4% of the amount raised on terms
equal to the offering price or on terms equal to those sold to
investors. In addition, the investment bank will be entitled to a fee
of 3.5% of any gross proceeds raised by us under certain circumstances as
defined in the agreement. No fees have been paid under this agreement
as of September 30, 2009.
NOTE
6 – CONVERTIBLE NOTE PAYABLE
On June
8, 2009, Vu1 issued a Secured Convertible Grid Promissory Note to Full Spectrum
Capital LLC (“Full Spectrum”), as amended August 31, 2009 (the “Note”). The Note
provides that Full Spectrum may make one or more loans to Vu1, at such times and
in such amounts as determined by Full Spectrum in its sole discretion, but not
to exceed $7 million. Principal amounts under the Note are presently convertible
at any time into shares of our common stock at a price of $0.40 per share and is
secured by all of our assets. The Note also provides that in conjunction with
each advance from Full Spectrum, we will issue three-year warrants to purchase
common stock at an exercise price of $0.75 per share equal to 50% of the shares
into which each advance is convertible. The Note bears interest at
18%.
If Full
Spectrum loans a total of $3 million to Vu1, Vu1 has agreed to file a
registration statement with the Securities and Exchange Commission for all of
the shares of common stock issuable under the Note upon conversion and upon
exercise of the warrants. Full Spectrum is a recently formed LLC that
is managed by R. Gale Sellers, an executive officer and director of
Vu1.
8
Full
Spectrum retains out of each advance an amount equal to one interest payment
(three months’ accrued interest) (the “Interest Prepayment”), to be applied by
Full Spectrum either to the final quarterly payment of interest due under the
Note, or as payment of accrued and unpaid interest upon an event of default or
prepayment of the Note. The amount retained as interest was treated as a
component of the face value of the Notes and as prepaid interest, subject to
amortization.Vu1 may prepay the Note at any time, but any such prepayment must
include payment of an amount equal to the interest that would have accrued on
such prepaid principal amount from the prepayment date through the maturity date
of the Note but that has not yet been paid to or retained by the
LLC.
Through
September 30, 2009, the total outstanding principal balance under the Note was
$1,137,788 (which includes $48,996 as the Interest Prepayment) which is
currently convertible at $0.40 per share into 2,844,470 shares of common
stock. We issued three year warrants to purchase 1,422,235
shares of our common stock at an exercise price of $0.75 per share.
The
amendment to the Note dated August 31, 2009 extended the due date of the first
interest payment to December 1, 2009, extended the date that Full Spectrum could
make advances, if any under the Note until October 31, 2009, and extended the
due date of the Note to April 30, 2011. The amendment also contains a
down round provision that enables the Note holders to convert to our common
stock at the lesser of $0.40 per share or the per share price of any future
convertible debt or equity offering approved by the Board of
Directors. The modifications did not substantially change the cash
flows associated with the Note or the fair value of the embedded conversion
options. However, the modifications require bifurcation of the embedded
conversion options and classification in derivative liabilities at fair value
because they are no longer considered indexed to the Company’s common
stock.
The
following is a summary of our accounting for the Note, including the
modification:
Pre-Modification
|
Post-Modification
|
|||||||||||||||||||||||
Date during 2009
|
June 8
|
July 1
|
September
15
|
September
16
|
September
21
|
Total
|
||||||||||||||||||
Face
value
|
$ | 522,500 | $ | 418,000 | $ | 87,563 | $ | 57,475 | $ | 52,250 | $ | 1,137,788 | ||||||||||||
Proceeds
|
500,000 | 400,000 | 83,792 | 55,000 | 50,000 | 1,088,792 | ||||||||||||||||||
Initial
allocation:
|
||||||||||||||||||||||||
Prepaid
interest
|
$ | (22,500 | ) | $ | (18,000 | ) | $ | (3,771 | ) | $ | (2,475 | ) | $ | (2,250 | ) | $ | ( 48,996 | ) | ||||||
Notes
payable
|
694 | — | — | 694 | ||||||||||||||||||||
Warrants
|
235,918 | 153,113 | 20,540 | 16,183 | 14,958 | 440,712 | ||||||||||||||||||
Beneficial
conversion
|
286,582 | 264,887 | — | — | — | 551,469 | ||||||||||||||||||
Derivative
liabilities
|
— | — | 66,329 | 74,286 | 74,064 | 214,679 | ||||||||||||||||||
Day
one loss
|
— | — | — | (32,994 | ) | (36,772 | ) | (69,766 | ) | |||||||||||||||
$ | 500,000 | $ | 400,000 | $ | 83,792 | $ | 55,000 | $ | 50,000 | $ | 1,088,792 | |||||||||||||
Modification
adjustment:
|
||||||||||||||||||||||||
Derivative
liabilities
|
$ | 293,906 | $ | 235,125 | — | — | — | $ | 529,031 | |||||||||||||||
Day
one loss
|
$ | (255,483 | ) | $ | (212,251 | ) | — | — | — | $ | (467,734 | ) | ||||||||||||
Aggregate
inception and modification date:
|
||||||||||||||||||||||||
Derivative
liabilities
|
$ | 293,906 | $ | 235,125 | $ | 66,329 | $ | 74,286 | $ | 74,064 | $ | 743,710 | ||||||||||||
Day
one losses
|
$ | (255,483 | ) | $ | (212,251 | ) | — | $ | (32,994 | ) | $ | (36,772 | ) | $ | (537,500 | ) |
Our
accounting for the Note modifications provided for bifurcation of the derivative
liability at fair value. Since insufficient basis was available in the
modification date carrying value, a day one derivative loss was recognized in
the statement of operations. We will continue to carry the derivative
liabilities at fair value, with charges or credits to the statement of
operations for changes in fair value, until the Notes are settled through
payment or conversion.
The
Warrants issued in the Financing have strike prices of $0.75 and terms of three
years from the issuance date. Warrants achieved equity classification because
they met all of the requisite criteria and conditions therefore. However, the
initial accounting for the Financing requires allocation of proceeds among the
Notes and the warrants based upon relative fair values. The estimated fair value
of the Warrants was calculated using the Black-Scholes option pricing model with
the following assumptions:
9
Date during 2009
|
June 8
|
July 1
|
September
15
|
September
16
|
September
21
|
Total
|
||||||||||||||||||
Linked
common shares
|
653,125 | 522,500 | 109,453 | 71,844 | 65,313 | 1,422,235 | ||||||||||||||||||
Trading
market price
|
$ | 0.88 | $ | 0.70 | $ | 0.60 | $ | 0.80 | $ | 0.91 | ||||||||||||||
Expected
dividend
|
— | — | — | — | — | |||||||||||||||||||
Expected
life
|
3.0 | 3.0 | 3.0 | 3.0 | 3.0 | |||||||||||||||||||
Volatility
|
145 | % | 123 | % | 130 | % | 178 | % | 178 | % | ||||||||||||||
Risk
free rate
|
2.0 | % | 1.57 | % | 1.57 | % | 1.57 | % | 1.57 | % |
See also
Note 11, Subsequent Events.
NOTE
7 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative
financial instruments represent the embedded conversion features in our Notes
that required bifurcation from the host debt agreements. Derivative financial
instruments are classified as liabilities and carried at fair value, with
changes reflected in the statement of operations. The following table summarizes
the components of changes in our derivative financial instruments during the
three months ended September 30, 2009:
Amount
|
||||
Balance
at July 1, 2009
|
$ | — | ||
Modifications
and issuances:
|
||||
Derivatives
recognized upon modification of Notes, discussed in Note 6
|
529,031 | |||
Derivatives
recognized upon issuance of post-modification Notes
|
214,679 | |||
Unrealized
fair value changes, included in income
|
663,219 | |||
Balance
at September 30, 2009
|
$ | 1,406,929 |
The
following table summarizes the affect on our statement of operations related to
derivative financial instruments for the three and nine months ended September
30, 2009:
Income (expense):
|
Amount
|
|||
Day
one derivative losses
|
$ | 537,501 | ||
Fair
value changes
|
663,219 | |||
$ | 1,200,720 |
We value
our derivative financial instruments using a Monte Carlo Simulation Technique
(“MCST”). The MCST was selected because this technique embodies all of the types
of inputs that we expect market participants would consider in determining the
fair value of equity linked derivatives embedded in hybrid debt agreements.
Those inputs include equity-related inputs, as well as credit risks, interest
risks and redemption behaviors. The following table summarizes the significant
inputs and equivalent amounts across ranges of simulations resulting from the
calculations:
Inception or Modification Date Calculations
|
||||||||||||||||||||||||
Date during 2009
|
June 8
|
July 1
|
September
15
|
September
16
|
September
21
|
September
30
|
||||||||||||||||||
Linked
common shares
|
1,306,250 | 1,045,000 | 218,908 | 143,688 | 130,625 | 2,844,470 | ||||||||||||||||||
Trading
market price
|
$ | 0.88 | $ | 0.70 | $ | 0.60 | $ | 0.80 | $ | 0.91 | $ | 0.80 | ||||||||||||
Expected
life (years)
|
1.73 | 1.66 | 1.62 | 1.62 | 1.61 | 1.58 | ||||||||||||||||||
Equivalent
volatility
|
97.05 | % | 97.05 | % | 98.44 | % | 109.64 | % | 111.38 | % | 111.62 | % | ||||||||||||
Risk
adjusted yield
|
12.00 | % | 12.00 | % | 11.09 | % | 11.09 | % | 11.09 | % | 11.09 | % | ||||||||||||
Risk
adjusted interest rate
|
14.44 | % | 14.44 | % | 14.54 | % | 18.00 | % | 18.00 | % | 18.00 | % |
10
NOTE
8 – LOAN PAYABLE
On May
15, 2008 Sendio entered into a three-year note payable for the purchase of a
vehicle. The note bears interest at a rate of 24.5% and is payable in
36 equal monthly installments of principal and interest of approximately $575
plus mandatory VAT and insurance. The note is secured by the
vehicle.
NOTE
9 – CAPITAL LEASE OBLIGATION
On May
30, 2008 Sendio entered into a five-year lease agreement for the purchase of
certain equipment. The capital lease obligation bears interest at a
rate of 7.7% and requires payments of principal and interest of approximately
$630 plus mandatory VAT and insurance over the 60-month term of the leases. The
assets acquired under the capital lease obligation are being depreciated over
the five-year term of the lease.
NOTE
10 – STOCKHOLDERS’ EQUITY
Preferred
Stock
Our
Amended and Restated Articles of Incorporation allows us to issue up to
10,000,000 shares of preferred stock without further stockholder approval and
upon such terms and conditions, and having such rights, preferences, privileges,
and restrictions as the Board of Directors may determine. No
preferred shares are currently issued and outstanding.
Common
stock
On May 5,
2009 we entered into an engagement letter with a vendor pursuant to which we
issued 75,000 shares of common stock valued at $71,250 based on the closing
market price as of that date of $0.95 per share. The fair value was recognized
as general and administrative expense on the date of issuance. In addition, the
engagement letter specifies the issuance of an additional 75,000 shares of
common stock upon the achievement of certain performance goals by November 5,
2009. These performance goals had not been achieved as of September
30, 2009.
Subscription
Receivable
During
January and February, 2009 we collected net proceeds of $131,800 pursuant to
subscription agreements for 164,750 Units under our Unit
Offering. Each Unit consists of two shares of common stock and a
two-year warrant to purchase one share of common stock at an exercise price of
$0.60 per share. A total of 329,500 shares of common stock and two-year warrants
to purchase 164,750 shares of common stock at an exercise price of $0.60 per
share were issued.
Stock and Stock Options
issued pursuant to the 2007 Stock Incentive Plan
On
January 2, 2009 we made the following grants to an employee under the 2007 Stock
Compensation Plan based on the closing market price as of that date of $1.10 per
share:
|
·
|
We
issued 100,000 shares of common stock valued at $110,000. The
shares will vest based upon the achievement of certain performance
milestones. These shares were forfeited on September 30,
2009.
|
|
·
|
We
granted five-year options to purchase 150,000 shares of common stock
valued at $132,707 which was calculated using the Black Scholes method and
the following assumptions: volatility of 113.6%, risk free interest rate
of 1.72% and an estimated life of five years. These options
were forfeited on September 30,
2009.
|
11
For the
nine months ended September 30, 2009 and 2008 we recognized ($79,394) and
$1,456,468, respectively, as share-based compensation related to the vesting of
outstanding grants of stock and stock options. A total of 2,250,000
unvested stock options were forfeited during the nine months ended September 30,
2009, resulting in the reversal of previously recorded share based compensation
expenses on options which were forfeited. No awards were exercised during the
nine months ended September 30, 2009.
There are
no unvested stock options as of September 30, 2009. We have 95,375
shares of unvested restricted stock issued in 2007 which we anticipate will vest
in November, 2009 and 95,375 shares of unvested restricted stock issued in 2007
which will vest in November, 2010. Total unrecognized compensation
expense related to these unvested shares is $11,882 of which $4,570 will be
recognized upon vesting in the fourth quarter of 2009 and $7,312 will be
recognized ratably over the four quarters in 2010.
Warrants
On
January 27, 2009 we issued a two-year warrant to a vendor to purchase 25,000
shares of common stock at an exercise price of $1.00 per share based on the
closing market price as of that date. The warrant vested monthly over
the period of service from January to May, 2009. The value of the
warrant of $15,876 was recognized as marketing expense over the period of
service and was calculated using the Black Scholes method and the following
assumptions: volatility of 127.3%, risk free interest rate of 0.87% and an
estimated life of two years. A total of $15,876 was recognized as
sales and marketing expense for the nine months ended September 30,
2009.
On March
17, 2009 we issued a three-year warrant to a vendor to purchase 150,000 shares
of common stock at an exercise price of $0.75 per share based on the closing
market price as of that date. A total of 75,000 shares vest over the
one year life of the agreement, with the remaining shares vesting upon the
achievement of certain performance milestones. The performance
milestones were not achieved during the nine months ended September 30, 2009.
The value of the warrant of $79,163 was calculated using the Black Scholes
method and the following assumptions: volatility of 119.0%, risk free interest
rate of 1.45% and an estimated life of three years. A total of $22,963 was
recognized as an expense for the nine months ended September 30,
2009.
As
discussed in Note 6, from June 6 to September 30, 2009 we issued three year
warrants to purchase 1,422,235 shares of common stock at an exercise price of
$0.75 per share to Full Spectrum Capital, LLC, which is controlled by R. Gale
Sellers, a director and our Chief Executive Officer.
NOTE
11 – SUBSEQUENT EVENTS
We have
evaluated all subsequent events through November 23, 2009, the date the
nine-month period ending September 30, 2009 financial statements were
issued.
See Note 5 – Commitments and
Contingencies. As discussed in Note 5, Sendio did not make the payments
required under the Purchase Agreement by June 30, 2009 and Sendio is in ongoing
negotiations with the landlord regarding the lease agreement and the purchase
agreement. For October and November, 2009, Sendio obtained extensions
of the lease pursuant to these ongoing negotiations and Sendio agreed to pay CZK
722,556 per month for rent and CZK 645,834 per month for an escrow payment. In
addition, Sendio has obtained a waiver of claims against the Vu1 Guarantee, the
contractual penalty and indemnification claims described in Note 5 through
November 30, 2009. Although these negotiations are continuing, there can be no
assurances that these negotiations will be successful. If these
negotiations are not successful, our financial condition and operations will be
adversely effected.
On
November 3, 2009 we issued an unsecured 10% note payable to an investor for cash
in the amount of GBP 70,000 (approximately $115,000). The note is due
on November 30, 2009.
See Note 6 – Convertible Note
Payable. From October 6 through November 19, 2009, Full Spectrum made
additional advances under its Note for additional principal of $291,555
(including $12,555 as the Interest Prepayment and reimbursed expenses of
$15,000) under the Note which is currently convertible at $0.40 per share into
728,889 shares of our common stock. In conjunction with the advances,
we issued a three-year warrant to purchase 364,444 shares of our common stock at
an exercise price of $0.75 per share.
12
On
November 19, 2009, (a) we entered into an Amended and Restated Secured
Convertible Grid Promissory Note with Full Spectrum and (b) we entered into
a new Secured Convertible Grid Promissory Note with SAM Special Opportunity
Fund, LP (“SAM”) on the same terms as the Full Spectrum note. Each
note contemplates that Full Spectrum and SAM may make one or more cash advances
to Vu1 prior to December 31, 2009, for a total potential loan not to exceed $7
million, with the exact amount to be determined by each of Full Spectrum and SAM
in its sole discretion. Also on November 19, 2009, we amended and
restated our Security Agreement with Full Spectrum to add SAM as an additional
secured creditor, extending to both lenders a first priority security interest
in our assets as collateral security for repayment of their notes.
On
November 19 and 20, 2009, we received cash advances from SAM under its note for
an aggregate principal amount of $1,229,181 (including $52,931 as the Interest
Prepayment and $15,000 of expenses reimbursed) which is currently convertible at
$0.40 per share into 3,072,954 shares of common stock. In connection
with the loan advance from SAM, we issued to SAM three-year warrants to purchase
1,536,476 shares of Vu1 common stock at an exercise price of $0.75 per
share.
The terms
of the SAM note are substantially the same as the Full Spectrum note, as amended
and restated. In amending and restating the Full Spectrum note, we
made the following amendments to the Full Spectrum note:
|
●
|
we
extended until December 31, 2009 the date by which the holder is permitted
to make additional advances to us under
note;
|
|
●
|
we
extended the date of the first required interest payment to February 1,
2010;
|
|
●
|
we
fixed the maturity date at June 30, 2011 or such later date as mutually
agreed;
|
|
●
|
we
agreed to provide 30 days’ notice prior to any “change of control” (as
defined in the note);
|
|
●
|
regarding
events of default, we extended to 30 days (from 10 days) the grace period
for delinquent interest payments, and we included a cross-default for a
payment default on either the Full Spectrum note or the SAM
note;
|
|
●
|
we
clarified our obligation to prepare and file a registration statement (for
the shares underlying the notes and warrants) upon an aggregate of $3
million being advanced under the Full Spectrum note and the SAM
note;
|
|
●
|
we
deleted the provision granting the holder a transferable and assignable
right to make a “second loan” to
us;
|
|
●
|
we
deleted the provision granting the holder a right of first refusal
regarding future financings;
|
|
●
|
we
restricted any future transfer or assignment of the note without our prior
written consent; and
|
|
●
|
we
extended the $30,000 expense reimbursement to be not limited to attorneys
fees.
|
The
following table shows, as of November 23, 2009, (i) the net amount of cash
received on advances made by Full Spectrum and SAM under their respective notes,
(ii) the outstanding principal amount of each note, (iii) the total
number of shares of common stock into which the notes are convertible (assuming
a conversion rate of $0.40 per share) and (iv) the total number of warrants
issued to Full Spectrum and SAM. For each cash advance made under
either note, the lender retains the Interest Prepayment, to be applied by the
lender to the final quarterly payment of interest due under the note, or as
payment of accrued and unpaid interest upon an event of default or prepayment of
the note; accordingly, the outstanding principal amount for each note is
calculated as the sum of the total amount of cash advances, plus the Interest
Prepayments and retained expenses.
Advances
|
Total Principal
|
Conversion Shares
|
Warrants
|
|||||||||||||
Full
Spectrum
|
1,367,792 | 1,429,343 | 3,573,359 | 1,786,679 | ||||||||||||
SAM
|
1,161,250 | 1,229,181 | 3,072,954 | 1,536,476 | ||||||||||||
2,529,042 | 2,658,524 | 6,646,313 | 3,323,155 |
Neither
Full Spectrum nor SAM is obligated to make any additional advances to us and
there are no assurances when or whether we will receive any additional amounts
from either lender.
13
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Form 10-Q.
Overview
We are
focused on developing, manufacturing and selling a line of mercury free, energy
efficient light bulbs based on our proprietary light-emitting
technology. For the past several years, we have primarily focused our
efforts on research and development efforts for our ESL technology. In 2007 we
formed Sendio s.r.o. (“Sendio”) in the Czech Republic as a wholly owned
subsidiary for continued development of the bulb, and to design the
manufacturing processes required for commercialization and
manufacturing. We have continued our development work on the
technology and have initiated the design and implementation of the processes
required to manufacture the bulb. Our efforts are presently focused on our
initial planned product, the R30 sized light bulb. We also have filed a patent
in October, 2009 for a linear fluorescent tube replacement, but no significant
development work has begun. The continuation of our development efforts during
2009 and into 2010 depends upon our ability to raise additional
capital. The commercial viability of our ESL™ technology will largely
depend on these development results, our ability to manufacture our product at
commercially feasible levels, market acceptance of the product and other
factors. We have no commercial products and no revenues.
We have
curtailed operations in an effort to conserve cash and our development
activities were significantly reduced. Although we received net loan proceeds of
approximately $1.5 million in October and November, our current cash and cash
equivalents are not sufficient to support our planned operations through January
2010, even at reduced levels. See “Liquidity and Capital Resources”
below.
Our
independent registered public accounting firm has issued a “going concern”
statement in its report on our financial statements for the fiscal year ended
December 31, 2008, stating that we had a net loss and negative cash flows from
operations in fiscal 2008, and that we have an accumulated deficit. Accordingly,
those conditions raise substantial doubt about our ability to continue as a
going concern. Our consolidated financial statements do not include any
adjustments that might result from this going-concern uncertainty.
Plan
of Operations
Our
efforts are primarily focused on our initial planned product, the R30 sized
light bulb. We hope to continue our development efforts through 2009 and into
2010; however, the continuation of these efforts depends upon our ability to
secure additional financing. Curtailing our operations has indefinitely delayed
some of our planned development expenditures. Although we received net proceeds
of $1.5 million subsequent to the end of the quarter from loans through November
23, 2009 (see Note 11 to Financial Statements), our operations have been and
continue to be curtailed. We are unable to predict whether and when we will be
able to resume our development or commercialization efforts as planned. The
commercial viability of our ESL™ technology will largely depend on these
development results, our ability to manufacture our product at commercially
feasible levels, market acceptance of the product and other factors. We have no
commercial products and no revenues. If we are able to secure financing, we
expect to continue to make significant expenditures developing our planned
product and the related manufacturing processes in fiscal 2009 and into 2010.
Our future success and operating results will depend in large part on the
results of these efforts.
We
previously entered into an agreement to purchase the facility presently leased
by Sendio in the Czech Republic. We are using this facility to develop our ESL
technology and manufacturing processes. The lease expired by its terms on June
30, 2009 and Sendio has not made any of the payments required under the Purchase
Agreement from June 30, 2009 (as discussed in Notes 5 and 11 of our condensed
consolidated financial statements). We will need additional funding to complete
the purchase of this building. We are presently in negotiations with the seller
and landlord of the building, but there can be no assurances that these
negotiations will be successful. If we are not successful with these
negotiations, the extension that we have obtained on our lease will expire on
November 30, 2009. This will have a material adverse effect on our
operations.
Sendio
had 36 engineering, technical and administrative employees at September 30, 2009
and the US Operations had one employee.
14
Our
anticipated expenditures related to our operations for the remainder of fiscal
2009 and into 2010 will primarily depend on our ability to get financing, as
well as on personnel costs and equipment needs for continued development of our
light bulb and the manufacturing processes. In addition, if we obtain
financing, we anticipate we may incur additional costs related to purchases of
raw materials and supplies, marketing, sales and distribution related costs, and
increased administrative costs. An overall estimate of our capital expenditures
is primarily dependant upon the success of our development and manufacturing
results for our prototype, and as such cannot presently be
estimated. Our capital expenditures depend upon our ability to obtain
additional financing.
Our
anticipated costs in fiscal 2009 and into 2010 for work on our light bulb cannot
be reasonably estimated due to the inherent uncertainty of the research and
feasibility of the manufacturing processes. An additional project for a
linear fluorescent tube replacement is planned, but its development is
contingent upon the receipt of additional financing. There can be no
assurances that this development process will be successful or, if successful,
that the technology will find a market and achieve sales that can sustain our
operations without additional funding.
Our
office space in Seattle, WA is presently leased on a month to month
basis.
Results
of Operations
Comparison
of Results for the three months ended September 30, 2009 and 2008
Revenues
We had no
revenues for the three months ended September 30, 2009 and 2008.
Research
and Development Expenses
For the
three months ended September 30, 2009 and 2008, we were involved in a single
project to develop and commercialize our proprietary technology. For
the comparable quarters, research and development expenses were comprised
primarily of salary, rent, technical consulting expenses, supplies and travel,
and other costs of the research related operations in the Czech Republic through
our wholly-owned subsidiary, Sendio. Research and development expenses decreased
approximately $173,000 to $615,000 for the three months ended September 30, 2009
compared to $788,000 for the three months ended September 30,
2008. The decrease is related to a decrease in salaries and
attendant costs and consulting fees related to the curtailing of our
operations.
General
and Administrative Expenses
General
and administrative expenses for the three months ended September 30, 2009 and
2008 consisted of salaries and attendant costs, share based compensation
expenses, professional and legal fees, consulting expenses, insurance, travel
and general corporate related overhead and office expenses. General and
administrative expenses decreased by approximately $1,779,000 to $258,000 for
the three months ended September 30, 2009 compared to $2,036,000 for the three
months ended September 30, 2008. This decrease was due primarily to
decreases in share based compensation costs which were ($268,000) for the three
months ended September 30, 2009 compared to $1,185,000 for the three months
ended September 30, 2008. The remaining decrease is due to reductions
in salaries and consulting fees related to the curtailing of our
operations.
Marketing
Expenses
Marketing
expenses for the three months ended September 30, 2009 and 2008 were comprised
of salaries, consulting fees, market and branding research and office related
expenses. Marketing expenses decreased by approximately $43,000 to $80,000 for
the three months ended September 30, 2009 compared to $123,000 for the three
months ended September 30, 2008. This decrease was due primarily to
decreases in consulting fees for the quarter ended September 30,
2009.
15
Other
Income and Expense
Other
income and expense for the three months ended September 30, 2009 was comprised
of interest income, interest expense and derivative valuation
loss. Interest income was approximately $234 compared to $3,600 for
the three months ended September 30, 2008. The decrease is due to lower average
cash balances and lower interest rates for the current
period. Interest expense for the three months ended September 30,
2009 increased $115,000 to $117,000 and relates to the accrued interest and
amortization of discount on the Note, Sendio’s loan and capital lease
obligations as discussed in Notes 6, 7 and 8. Included in interest expense is
discount amortization of $66,000 for the three months ended September 30, 2009
related to the Note. Interest expense for the three months ended
September 30, 2008 of $2,000 was related to Sendio’s loan and capitalized lease
obligations.
Derivative
valuation loss amounted to $1,201,720 during the three months ended September
30, 2009 (none for the three months ended September 30, 2008). Derivative
valuation loss results from embedded derivative financial instruments that are
required to be measured at fair value.
The
following table summarizes the effect on our statement of operations related to
derivative financial instruments for the three months ended September 30,
2009:
Income
(expense):
|
Amount
|
|||
Day
one derivative losses
|
$ | 537,501 | ||
Fair
value changes
|
663,219 | |||
$ | 1,200,720 |
The
changes in the fair value of our derivatives are significantly influenced by
changes in our trading stock price and changes in interest rates in the public
markets. Further, certain elements of the fair value techniques require us to
make estimates about the outcome of certain events, such as defaults. We value
our derivative financial instruments using a Monte Carlo Simulation Technique
(“MCST”). The MCST was selected because this technique embodies all of the types
of inputs that we expect market participants would consider in determining the
fair value of equity link derivatives embedded in hybrid debt agreements. Those
inputs include equity-related inputs, as well as credit risks, interest risks
and redemption behaviors. Changes in these inputs will affect the carrying value
of our derivative liabilities and therefore the amount of derivative valuation
gain (loss) that we are required to record.
Comparison
of Results for the nine months ended September 30, 2009 and 2008
Revenues
We had no
revenues for the nine months ended September 30, 2009 and 2008.
Research
and Development Expenses
For the
nine months ended September 30, 2009 and 2008, we were involved in a single
project to develop and commercialize our proprietary technology. For
the comparable quarters, research and development expenses were comprised
primarily of salary, rent, technical consulting expenses, supplies and travel,
and other costs of the research related operations in the Czech Republic through
our wholly-owned subsidiary, Sendio. Research and development expenses decreased
approximately $1,891,000 to $2,075,000 for the nine months ended September 30,
2009 compared to $3,966,000 for the nine months ended September 30,
2008. The decrease is related primarily to a decrease in rent
expense at Sendio as well as the decrease in salaries and attendant costs and
consulting fees related to the curtailing of our operations. In the
nine months ended September 30, 2008 we incurred a non-cash charge of
approximately $1,571,000 resulting from the 6,100,000 shares we issued as
payment for the initial term under the former lease of Sendio’s premises, for
which no comparable current year charge exists.
16
General
and Administrative Expenses
General
and administrative expenses for the nine months ended September 30, 2009 and
2008 consisted of salaries and attendant costs, share based compensation
expenses, professional and legal fees, consulting expenses, insurance, travel
and general corporate related overhead and office expenses. General and
administrative expenses decreased by approximately $1,629,000 to $1,606,000 for
the nine months ended September 30, 2009 compared to $3,235,000 for the nine
months ended September 30, 2008. This decrease was due primarily to
decreases in share based compensation costs related to the issuance and vesting
of stock options to employees. Share based compensation expense was
($93,000) compared to $1,492,000 for the nine months ended September 30, 2009
and 2008, respectively. The remaining decrease was due to decreases
in consulting fees for the nine months ended September 30, 2009.
Marketing
Expenses
Marketing
expenses for the nine months ended September 30, 2009 and 2008 were comprised of
salaries, consulting fees, market and branding research and office related
expenses. Marketing expenses increased by approximately $23,000 to $275,000 for
the nine months ended September 30, 2009 compared to $252,000 for the nine
months ended September 30, 2008. This increase was due primarily to
increases in non-cash costs of $23,000 related to a warrant issued to a
consultant, partially offset by decreases in consulting fees for the nine months
ended September 30, 2009.
Other
Income and Expense
Other
income and expense for the nine months ended September 30, 2009 was comprised of
interest income, interest expense and derivative valuation
loss. Interest income was approximately $3,000 compared to $9,000 for
the nine months ended September 30, 2008. The decrease is due to lower average
cash balances and lower interest rates for the current
period. Interest expense for the nine months ended September 30, 2009
was $134,000 and relates to the interest and amortization of discount on the
Note, Sendio’s loan and capital lease obligations as discussed in Notes 6, 7 and
8. Included in interest expense is discount amortization of $75,000
for the nine months ended September 30, 2009 related to the Note. Interest
expense for the nine months ended September 30, 2008 of $2,000 was related to
Sendio’s loan and capitalized lease obligations.
Derivative
valuation loss amounted to $1,200,720 during the nine months ended September 30,
2009 (none for the nine months ended September 30, 2008). Derivative valuation
loss results from embedded derivative financial instruments that are required to
be measured at fair value.
The
following table summarizes the effect on our statement of operations related to
derivative financial instruments for the nine months ended September 30,
2009:
Income
(expense):
|
Amount
|
|||
Day
one derivative losses
|
$ | 537,501 | ||
Fair
value changes
|
663,219 | |||
$ | 1,200,720 |
The
changes in the fair value of our derivatives are significantly influenced by
changes in our trading stock price and changes in interest rates in the public
markets. Further, certain elements of the fair value techniques require us to
make estimates about the outcome of certain events, such as defaults. We value
our derivative financial instruments using a Monte Carlo Simulation Technique
(“MCST”). The MCST was selected because this technique embodies all of the types
of inputs that we expect market participants would consider in determining the
fair value of equity link derivatives embedded in hybrid debt agreements. Those
inputs include equity-related inputs, as well as credit risks, interest risks
and redemption behaviors. Changes in these inputs will affect the carrying value
of our derivative liabilities and therefore the amount of derivative valuation
gain (loss) that we are required to record.
Liquidity
and Capital Resources
Our cash
and cash equivalents were approximately $19,000 as of September 30, 2009 and are
not sufficient to support our reduced levels of operations. In
October and November, 2009 Full Spectrum advanced an additional $279,000 under
their Note. In addition, we received net proceeds of $115,000 from the issuance
of an unsecured note payable and net proceeds of $1,161,250 from SAM. These are
described more fully in Note 11 to the condensed consolidated financial
statements.
17
We
anticipate that with our remaining cash and cash equivalents and the loan
proceeds described above, we will be able to fund our curtailed operations into
January, 2010. In March 2009, we engaged an investment banker to assist us with
our fundraising efforts, but we have not yet been successful in obtaining
financing.
We expect
to continue to seek additional financing in 2009 and into 2010 to fund our
planned operations and research and development and manufacturing activities,
through one or more debt or equity financings. Our efforts to raise
sufficient capital may not be successful, and even if we are able to obtain
additional financing, the terms of any such financing may be unfavorable to us
and may be highly dilutive to existing stockholders. There can be no assurances
that further cash advances, when and if made, will be sufficient to sustain our
required levels of operations.
If
necessary, we may explore strategic alternatives, which may include a merger,
asset sale, joint venture or another comparable transaction. If we are
unable to obtain sufficient cash to continue to fund operations or if we are
unable to locate a strategic partner, we may be forced to seek protection from
creditors under the bankruptcy laws or cease operations. Any
inability to obtain additional cash as needed would have a material adverse
effect on our financial position, results of operations and our ability to
continue in existence. Our auditors added an explanatory paragraph to
their opinion on our fiscal 2008 financial statements stating that there was
substantial doubt about our ability to continue as a going concern.
All of
our assets are currently held as collateral to secure repayment of the
promissory notes payable to Full Spectrum and SAM. (See Note 6 and 11
to our consolidated financial statements). In the event that we cease
operations or are otherwise unable to repay the note as it becomes due, Full
Spectrum and SAM will have full rights as secured creditors with respect to our
assets, including the right to take control of our assets, sell the assets at a
public or private sale, or take any other action permitted by applicable
law.
If we
cease operations or file for protection under the bankruptcy laws, any cash and
assets we have would be used first to satisfy claims of creditors and to
discharge liabilities. We cannot predict whether our stockholders
would receive any return on their shares.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
ITEM
4T. CONTROLS AND PROCEDURES
As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
period covered by this report, we carried out an evaluation of the effectiveness
of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and
with the participation of management, including our chief executive officer and
chief financial officer. Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are not effective at September 30, 2009.
In
connection with its review of our quarterly results for the period ended
September 30, 2009, our independent auditor identified a material adjustment
that was required to recognize the effect of the down round provision of the
Note as discussed in Note 6 to the condensed consolidated financial
statements. As a result, we have concluded that there is a material
weakness regarding the process surrounding the identification and analysis of
potential derivative elements contained in our agreements and contracts.
We are currently evaluating how to effectively remediate this material
weakness. In this regard, we continue to review our disclosure
controls and procedures, including our internal control over financial
reporting, and intend to make changes aimed at enhancing their effectiveness and
to ensure that our systems evolve with our business.
There
have been no changes in our internal controls over financial reporting in
connection with this evaluation that occurred during the third quarter of fiscal
2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act (a) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (b) is accumulated and communicated to
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.
18
PART
II - OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
September 30, 2009 we issued 44,800 shares of common stock to an employee upon
their termination for services valued at $22,400.
ITEM
5. OTHER INFORMATION
On
November 19, 2009, (a) we entered into an Amended and Restated Secured
Convertible Grid Promissory Note with Full Spectrum Capital LLC (“Full
Spectrum”), and (b) we entered into a new Secured Convertible Grid
Promissory Note with SAM Special Opportunity Fund, LP (“SAM”) on the same terms
as the Full Spectrum note. Each note contemplates that Full Spectrum
and SAM may make one or more cash advances to Vu1 prior to December 31, 2009,
for a total potential loan not to exceed $7 million, with the exact amount to be
determined by each of Full Spectrum and SAM in its sole
discretion. Also on November 19, 2009, we amended and restated our
Security Agreement with Full Spectrum to add SAM as an additional secured
creditor, extending to both lenders a first priority security interest in our
assets as collateral security for repayment of their notes.
On
November 19 and 20, 2009, we received cash advances from SAM under its note for
an aggregate $1,229,181 including $52,931 of prepaid interest and $15,000 of
expenses reimbursed which is currently convertible at $0.40 per share into
3,072,954 shares of common stock.. In connection with the loan
advance from SAM, we issued to SAM a three-year warrant to purchase 1,536,476
shares of Vu1 common stock at an exercise price of $0.75 per share.
The terms
of the SAM note are substantially the same as the Full Spectrum note, as amended
and restated. In amending and restating the Full Spectrum note, we
made the following amendments to the Full Spectrum note:
|
●
|
we
extended until December 31, 2009 the date by which the holder is permitted
to make additional advances to us under
note;
|
|
●
|
we
extended the date of the first required interest payment to February 1,
2010;
|
|
●
|
we
fixed the maturity date at June 30, 2011 or such later date as mutually
agreed;
|
|
●
|
we
agreed to provide 30 days’ notice prior to any “change of control” (as
defined in the note);
|
|
●
|
regarding
events of default, we extended to 30 days (from 10 days) the grace period
for delinquent interest payments, and we included a cross-default for a
payment default on either the Full Spectrum note or the SAM
note;
|
|
●
|
we
clarified our obligation to prepare and file a registration statement (for
the shares underlying the notes and warrants) upon an aggregate of $3
million being advanced under the Full Spectrum note and the SAM
note;
|
|
●
|
we
deleted the provision granting the holder a transferable and assignable
right to make a “second loan” to
us;
|
|
●
|
we
deleted the provision granting the holder a right of first refusal
regarding future financings;
|
|
●
|
we
restricted any future transfer or assignment of the note without our prior
written consent; and
|
|
●
|
we
extended the $30,000 expense reimbursement to be not limited to attorneys
fees.
|
Copies of
the amended and restated Full Spectrum note, the SAM note and the Amended and
Restated Security Agreement are included as Exhibits 10.1, 10.2 and 10.3,
respectively, to this Form 10-Q. The foregoing summary of the
amendments to the notes is qualified in its entirety to the complete text of the
notes. Readers are also encouraged to review our prior filings with
the Securities and Exchange Commission that describe the other material terms of
the note, security agreement and warrants, including, without limitation, our
Form 8-K dated June 8, 2009 and Form 8-K dated September 1, 2009.
The
following table shows, as of November 23, 2009, (i) the total amount of
cash advances made by Full Spectrum and SAM under their respective notes,
(ii) the outstanding principal amount of each note, (iii) the total
number of shares of common stock into which the notes are convertible (assuming
a conversion rate of $0.40 per share) and (iv) the total number of warrants
issued to Full Spectrum and SAM. For each cash advance made under
either note, the lender retains an amount equal to one interest payment (three
months’ interest), to be applied by the lender to the final quarterly payment of
interest due under the note, or as payment of accrued and unpaid interest upon
an event of default or prepayment of the note; accordingly, the outstanding
principal amount for each note is calculated as the sum of the total amount of
cash advances, plus the retained interest payments.
19
Advances
|
Total Principal
|
Conversion Shares
|
Warrants
|
|||||||||||||
Full
Spectrum
|
1,367,792 | 1,429,343 | 3,573,359 | 1,786,679 | ||||||||||||
SAM
|
1,161,250 | 1,229,181 | 3,072,954 | 1,536,476 | ||||||||||||
2,529,042 | 2,658,524 | 6,646,313 | 3,323,155 |
Neither
Full Spectrum nor SAM is obligated to make any additional advances to us and
there are no assurances when or whether we will receive any additional amounts
from either lender.
ITEM 6.
|
EXHIBITS
|
10.1
|
Amended
and Restated Secured Convertible Grid Promissory Note dated November 19,
2009 by and between the Company and Full Spectrum Capital
LLC
|
10.2
|
Secured
Convertible Grid Promissory Note dated November 19, 2009 by and between
the Company and SAM Special Opportunity Fund L.P.
|
10.3
|
Amended
and Restated Security Agreement dated November 19, 2009 by and among the
Company, Full Spectrum Capital LLC and SAM Special Opportunity Fund
L.P.
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of R. Gale Sellers, Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Matthew DeVries, Chief Financial
Officer
|
32.1
|
Certification
of R. Gale Sellers, CEO, and Matthew DeVries, CFO, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
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 23, 2009
|
|||
By:
|
/s/ R. Gale Sellers
|
||
R.
Gale Sellers
|
|||
Chief
Executive Officer
|
|||
(Principal
Executive Officer)
|
|||
By:
|
/s/ Matthew DeVries
|
||
Matthew
DeVries
|
|||
Chief
Financial Officer
|
|||
(Principal
Financial and Accounting Officer)
|
21