ITEM 1A. RISK FACTORS
Risks Related to Our Business and Industry
We have historically been a research and product development company. We have a limited operating history with minimal revenue to date, so it may be difficult to evaluate our business and prospects. We also received a going concern qualification in our 2012 audit.
We have been primarily engaged during the last eight years in the research and development of our lighting products, and have incurred significant operating losses. During 2012, we focused on initiatives to transition our manufacturing operations to Huayi Lighting from our former facility in the Czech Republic, which in the past has primarily provided us with product testing, engineering development and pilot production of our initial products. These initiatives also included continued efforts to work with Huayi Lighting to refine the manufacturing processes and developing quality control testing necessary for quantity manufacturing. Our progress has been limited, primarily due to lack of adequate funding necessary to execute our business plan. These initiatives are ongoing and, as a result, we had no revenues in 2012 and minimal revenue in 2011. We currently depend on third-party financing to fund our operations. We have a very limited operating history upon which an investor can evaluate our business and prospects, and we may never generate significant revenue or achieve net income. Peterson Sullivan LLP, our independent registered public accounting firm, in its opinion on our financial statements for the year ended December 31, 2012, raised substantial doubt about our ability to continue as a going concern due to our net losses and negative cash flows from operations and other factors.
We have incurred historical losses and, as a result, may not be able to generate profits, support our operations or establish a return on invested capital, which can have a detrimental effect on the long-term capital appreciation of our common stock.
We incurred a net loss in 2012 of $3.9 million and had an accumulated deficit of $83.4 million as of December 31, 2012. We cannot predict when or whether we will ever realize a profit or otherwise establish a return on invested capital. Our business strategies may not be successful and we may never generate significant revenues or profitability, in any future fiscal period or at all.
We have a number of technology issues to resolve before we will be able to successfully manufacture a full line of
commercially viable lighting products.
Although we have completed initial engineering and obtained UL certification of our initial R30 reflector light, further development work and third-party testing will be necessary before the technology can be deployed and production of a full line of lighting products can be commenced. Specifically, we are continuing to work on our standard Edisonian A19 screw-in light, including obtaining acceptable life and output specifications. If we are unable to solve current and future technology issues, we may not be able to offer a full line of commercially viable products. In addition, if we encounter difficulty in solving technology issues, our research and development costs could increase substantially and our development and production schedules could be significantly delayed.
We have experienced delays in executing our business plan, and further delays will reduce the likelihood that we will be able to manufacture lighting products or generate sufficient revenue to stay in business.
We have previously experienced delays in executing our business plan. These delays are attributable to a number of factors, including:
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unanticipated difficulties and increased expenses in developing our ESL technology,
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unanticipated difficulties in establishing large scale commercial manufacturing processes, and
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our inability to obtain funding in a timely manner.
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In the future, we may experience delays caused by these and other factors. Our business must be viewed in light of the problems, expenses, complications and delays frequently encountered in connection with the development of new technologies, products, markets and operations. If we are unable to anticipate or manage challenges confronting our business in a timely manner, we may be unable to continue our operations.
We must successfully develop, introduce, market and sell lighting products and manage our operating expenses.
To be a viable business, we must successfully develop, introduce, market and sell products and manage our operating expenses. Many of our lighting products are still in development and are subject to the risks inherent in the development of technology products, including unforeseen delays, expenses, patent challenges and complications frequently encountered in the development and commercialization of technology products, the dependence on and attempts to apply new and rapidly changing technology, and the competitive environment of the industry. Many of these events are beyond our control, such as unanticipated development requirements, delays and difficulties with obtaining third-party certification, delays in submitting documentation for and being granted patents and establishing manufacturing and distribution relationships. Our success also depends on our ability to maintain high levels of employee utilization, manage our production costs, sales and marketing costs and general and administrative expenses, and otherwise execute on our business plan. We may not be able to effectively and efficiently manage our development and growth. Any inability to do so could increase our expenses and negatively impact our results of operations.
We rely solely on Huayi Lighting Company to manufacture the ESL lighting products we sell to customers and to source the required raw materials.
Our business prospects depend significantly on our ability to obtain ESL lighting products for sale to our customers. Our manufacturing agreement with Huayi Lighting Company Ltd. provides us with a single source for our ESL lights. Through this agreement, Huayi Lighting is responsible for fabricating the required electronic components of our lights, sourcing the glass components from its suppliers and using its established automated processes to assemble and package finished products. Huayi Lighting is located in the People’s Republic of China, where shipments of product to us could be delayed, rerouted, lost or damaged. Our inability to obtain finished products from Huayi Lighting in accordance with our required technical specifications and on a timely basis due to shipping delays, manufacturing problems or its failure to obtain required raw materials would have a material adverse effect on our revenue from product sales, as well as on our ability to support our customers’ purchase requirements, which could result in loss of customers and damage to our reputation. We may also be subject to the risk of fluctuations in raw material prices, since our arrangement with Huayi Lighting provides that increases and decreases in the prices of such raw materials obtained from local China-based vendors are passed through to us in the form of adjusted final finished good prices charged by Huayi Lighting.
We may face additional barriers and tariffs as a result of importing our lighting products from China, which could increase our prices and make our products less desirable.
We expect to pay a duty on all lighting products that we import from China. This duty is expected to represent a 3.9% mark-up to factory invoice. We will also bear related importing costs such as customs inspection fees and ocean freight charges. In the future, China and the United States may create additional barriers to business between our China-based product manufacturer and us, including new tariffs, costs, restrictions, controls or embargos that could negatively impact our business and operating results. New or increased tariffs would likely result in higher prices (and potentially lower sales volumes) and lower operating margins on our products.
We rely heavily on a few consultants, the loss of whom could have a material adverse effect on our business, operating results and financial condition.
Our future success will depend in significant part upon the continued services of our executive officers and directors and certain key consultants, and our ability to attract, assimilate and retain highly qualified technical, managerial and sales and marketing personnel when needed. Competition for quality personnel is intense, and there can be no assurance that we can retain our existing key personnel or that we will be able to attract, assimilate and retain such employees in the future when needed. The loss of key personnel or the inability to hire, assimilate or retain qualified personnel in the future could have a material adverse effect on our business.
We rely on outside vendors to manage certain key business processes, and any failure by them to perform will negatively affect our business.
We have outsourced certain of our key business processes. If any of our service providers fail to perform at a satisfactory level, our business development will be negatively affected and delayed, and our reputation may be harmed.
Our future operating results are difficult to predict; thus, the future of our business is uncertain.
Due to our limited operating history and the significant development and manufacturing objectives that we must achieve to be successful, our quarterly and annual operating results are difficult to predict and are expected to vary significantly from period to period. In addition, the amount and duration of losses will be extended if we are unable to develop and manufacture our products in a timely manner. Factors that could inhibit our product development, manufacturing and future operating results include:
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failure to solve existing or future technology-related issues in a timely manner,
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failure to obtain sufficient financing when needed,
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failure to secure key manufacturing or other strategic business relationships, and
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competitive factors, including the introduction of new products, product enhancements and the introduction of new or improved technologies by our competitors, the entry of new competitors into the lighting markets and pricing pressures.
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We face currency risks associated with fluctuating foreign currency valuations.
Although we use U.S. dollars to pay Huayi Lighting, increases in the value of the Chinese Yuan Renminbi would have an adverse affect on their manufacturing costs and therefore our bulb cost may be adversely affected. To date, we have not entered into foreign currency contracts or other currency-related derivatives to mitigate the potential impact of foreign currency fluctuations.
Because we are smaller and have fewer financial resources than most of our competitors, we may not be able to successfully compete in the very competitive lighting industry.
The lighting industry is very competitive and we expect this competition to continue to increase. The general illumination market segment within the lighting industry is dominated by a number of well-funded multi-national companies such as General Electric Company, Phillips Electronics NV and Osram Sylvania, that have established products and are developing new products that compete with our current and planned lighting products. We may not be able to compete effectively against these or other competitors, most of whom have substantially greater financial resources and operating experience than we do. Many of our current and future competitors may have advantages over us, including:
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well established products that dominate the market,
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longer operating histories,
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established customer bases,
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substantially greater financial resources,
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well established and significantly greater technical, research and development, manufacturing, sales and marketing resources, capabilities and experience, and
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greater name recognition.
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Our current and potential competitors have established, and may continue to establish in the future, cooperative relationships among themselves or with third parties that would increase their market dominance and negatively impact our ability to compete with them. In addition, competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer needs, or to devote more resources to promoting and selling their products. If we fail to adapt to market demands and to compete successfully with existing and new competitors, our results of operations could be materially adversely affected. The market for lighting technology is changing rapidly and there can be no assurance that we will be able to compete, especially in light of our limited resources. There can be no assurance that any of our current or planned lighting products can compete successfully on a cost, quality or market acceptance basis with competitors’ products and technologies.
We depend on our intellectual property. If we are unable to protect our intellectual property, we may be unable to compete and our business may fail.
Our success and ability to develop our technology and create products and become competitive depend to a significant degree on our ability to protect our proprietary technology, particularly any patentable material. We rely on a combination of patent, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to preserve our rights to our technology. In addition, any intellectual property protection we seek may not preclude competitors from developing products similar to ours. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.
We do not currently have sufficient available resources to defend a lawsuit challenging our intellectual property rights or to prosecute others who may be infringing our rights. Accordingly, even if we have strong intellectual property rights and patent rights, we may not be able to afford to engage in the necessary litigation to enforce our rights.
We compete in industries where competitors pursue patent prosecution worldwide and patent litigation is customary. At any given time, there may be one or more patent applications filed or patents that are the subject of litigation, which, if granted or upheld, could impair our ability to conduct our business without first obtaining licenses or granting cross-licenses, which may not be available on commercially reasonable terms, if at all. We have several patent applications pending in the United States and internationally and we expect to file additional patent applications; however, none of these patents may ever be issued. We do not perform worldwide patent searches as a matter of custom and, at any given time, there could be patent applications pending or patents issued that may have an adverse impact on our business, financial condition and results of operations.
Other parties may assert intellectual property infringement claims against us, and our products may infringe on the intellectual property rights of third parties. Intellectual property litigation is expensive and time consuming and could divert management’s attention from our business and could result in the loss of significant rights. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements which may not be available on acceptable terms, if at all. In addition, we could be required to cease selling any of our products that infringe on the intellectual property rights of others. Successful claims of intellectual property infringement against us may have a material adverse effect on our business, financial condition and results of operations. Even successful defense and prosecution of patent suits is costly and time consuming.
We rely in part on unpatented proprietary technology, and others may independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and strategic partners to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of those trade secrets, know-how or other proprietary information. In particular, we may not be able to protect our proprietary information as we conduct discussions with potential strategic partners. If we are unable to protect the proprietary nature of our technologies, it may have an adverse impact on our business, financial condition and results of operations.
Failure to obtain and maintain industry certification for our lighting products could cause an erosion of our current competitive strengths.
We are designing our lighting products to be UL or ETL (an Intertek listed mark for product compliance to North American safety standards) compliant and intend to seek Energy Star certification, as well as appropriate certifications in the European Union and in other countries. UL or ETL compliance certification is a key standard in the lighting industry, and if we fail to obtain or maintain this standard we may not have any market interest for our products. We may not obtain this certification or we may be required to make changes to our lights, which would delay our commercialization efforts and would negatively harm our business and our results of operations.
Rapid technological changes and evolving industry standards could result in our lighting products becoming obsolete and no longer in demand.
The lighting industry is characterized by rapid technological change and evolving industry standards and is highly competitive with respect to timely product innovation. The introduction of lighting products embodying new technology and the emergence of new industry standards can render existing products and technologies obsolete and unmarketable. Our success will depend in part on our ability to successfully develop commercial applications for our technology, anticipate and respond to technology developments and changes in industry standards, and obtain market acceptance on any products we introduce. We may not be successful in the development of our ESL technology, and we may encounter technical or other serious difficulties in our development or commercialization efforts that would materially and adversely affect our results of operations.
Despite government regulations aimed at eliminating the production of traditional incandescent light bulbs, consumer and political opposition could cause delays in the implementation of those regulations, possibly delaying the pace and impact of our future market penetration.
There has been consumer, political and media resistance from time to time to government regulations mandating the use of energy-efficient lighting, including the elimination of the production of traditional incandescent light bulbs, owing to the low cost of incandescent light bulbs, their easy and broad availability and concerns about other alternatives such as mercury contamination with CFLs. In the event implementation of these government regulations is delayed, we may experience a delay in the pace with which our products may be able to penetrate the general lighting products market.
If we fail to maintain proper and effective internal controls in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors’ views of us and, as a result, the value of our common stock.
Ensuring that we have effective internal control over financial reporting and disclosure controls and procedures in place is a costly and time-consuming effort that needs to be frequently evaluated. As a public company, we conduct an annual management assessment of the effectiveness of our internal controls over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As a smaller reporting company, we are not currently required to receive a report from our independent registered public accounting firm addressing the effectiveness of our internal controls over financial reporting. As we grow, it may be necessary in the future to update our internal controls over financial reporting on the basis of periodic reviews. If we are not able to comply with the requirements of Section 404, or if we (or our independent registered public accounting firm) identify deficiencies in our internal controls over financial reporting that could rise to the level of a material weakness, we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to assert that our internal controls over financial reporting are effective. If we are unable to assert that they are effective (or if our independent registered public accounting firm is unable in the future to express an opinion on the effectiveness of our internal controls over financial reporting), we could be subject to investigations or sanctions by the SEC or other regulatory authorities, and we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause an adverse effect on the market price of our common stock, our business, reputation, financial position and results of operation. In addition, we could be required to expend significant management time and financial resources to correct any material weaknesses that may be identified or to respond to any regulatory investigations or proceedings.
Risks Related to our Securities
Our historic stock price has been volatile and the future market price for our common stock is likely to continue to be volatile. This may make it difficult for you to sell our common stock for a positive return on your investment.
The public market for our common stock has historically been volatile. Any future market price for our shares is likely to continue to be volatile. This price volatility may make it more difficult for you to sell shares when you want at prices you find attractive. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of specific companies. Broad market factors and the investing public’s negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the market for our common stock is limited and we cannot assure you that a larger market will ever be developed or maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, these factors may make it more difficult or impossible for you to sell our common stock for a positive return on your investment.
Our management and SAM Special Opportunities Fund, L.P. own a substantial amount of our stock and are capable of influencing our affairs.
As of December 31, 2012, our executive officers and directors (and their respective affiliates) beneficially owned approximately 28.6% of our outstanding common stock, with SAM Advisors, LLC, an investment advisor controlled by William B. Smith, our Chairman, beneficially owning approximately 17.7% of our outstanding common stock. As a result, these shareholders substantially influence our management and affairs and, if acting together, control most matters requiring the approval by our shareholders including the election of directors, any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transactions. The concentration of ownership may delay or prevent a change of control at a premium price.
Our articles of incorporation contain authorized, unissued preferred stock which, if issued, may inhibit a takeover at a premium price that may be beneficial to you.
Our articles of incorporation allow us to issue up to 10,000,000 shares of preferred stock without further stockholder approval and upon such terms and conditions, and having such rights, preferences, privileges and restrictions as the board of directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire control of, or of discouraging bids for control of our company. This could limit the price that certain investors might be willing to pay in the future for shares of common stock. We have no current plans to issue any shares of preferred stock.
Shares of stock issuable pursuant to our stock options, warrants, convertible debentures and underwriters’ warrants may adversely affect the market price of our common stock.
As of December 31, 2012, we have outstanding under our 2007 Stock Incentive Plan stock options to purchase 309,004 shares of common stock, outstanding warrants to purchase 2,012,034 shares of common stock and outstanding convertible debentures to acquire 374,346 shares of common stock. The exercise or conversion of these securities and sales of common stock issuable pursuant to them, would reduce a stockholder’s percentage voting and ownership interest.
The stock options, warrants and convertible debentures are likely to be exercised when our common stock is trading at a price that is higher than the exercise or conversion price of these securities, and we would be able to obtain a higher price for our common stock than we will receive under such securities. The exercise or conversion, or potential exercise or conversion, of these stock options, warrants and convertible debentures could adversely affect the market price of our common stock and adversely affect the terms on which we could obtain additional financing, if needed.
The large number of shares eligible for future sale may adversely affect the market price of our common stock.
The sale, or availability for sale, of a substantial number of shares of common stock in the public market could materially and adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of our equity securities. At December 31, 2012, there were 7,130,226 shares of common stock issued and outstanding. Of these shares, approximately 5,785,020 are freely transferable. Our executive officers and directors beneficially own 1,345,206 shares, which would be eligible for resale, subject to the volume and manner of sale limitations of Rule 144 under the Securities Act. An additional 1,043,674 shares are “restricted shares,” as that term is defined in Rule 144, and are eligible for sale under the provisions of Rule 144.
Our common stock is currently considered a “penny stock” and may be difficult to sell unless we obtain a Nasdaq listing.
Our common stock is subject to certain rules and regulations relating to “penny stock.” A “penny stock” is generally defined as any equity security that has a price less than $5.00 per share and that is not quoted on a national securities exchange such as Nasdaq. Being a penny stock generally means that any broker who wants to trade in our shares (other than with established clients and certain institutional investors) must comply with certain “sales practice requirements,” including delivery to the prospective purchaser of the penny stock a risk disclosure document describing the penny stock market and the risks associated with it. These penny stock rules make it more difficult for broker-dealers to recommend our common stock and, as a result, our stockholders may have difficulty in selling their shares in the secondary trading market. This lack of liquidity may also make it more difficult for us to raise capital in the future through the sale of our equity securities.
We do not intend to pay cash dividends on our common stock, so any return on investment must come from appreciation.
We have never declared or paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to invest all future earnings, if any, to fund our growth. Therefore, any investment return in our common stock must come from increases in the trading price of our common stock.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following table sets forth the names and ages of our executive officers, directors and key personnel, and their positions with us, as of March 20, 2013:
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William B. Smith
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Chairman of the Board of Directors and Chief Executive Officer
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Matthew J. DeVries
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50
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Chief Financial Officer
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John J. Boyle III
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65
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Director
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Paul D. Fletcher
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53
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Director
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Charles Hunt, Ph.D.
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59
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Director
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John E. Rehfeld
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72
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Director
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W. Duncan Troy
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53
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Director
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Mark W. Weber
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55
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Director
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Juan Carlos Blacker
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Vice President, Business Development - Energy Efficient Markets
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The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers and directors are as follows:
William B. Smith
has served as our Chief Executive Officer since June, 2012. He was elected to our board of directors in November 2010 and elected chairman in January 2011. Mr. Smith is the Founder and has been the Chief Executive Officer of Smith Asset Management, Inc. since 1997. Mr. Smith is also the President and Chief Executive Officer since 2004 of SAM Advisors, LLC, a money management firm spun off from Smith Asset Management, Inc., specializing in distressed public debt and equities trading at discounts to intrinsic value, as well as special situation investments. In addition, Mr. Smith is the founder and has been the Managing Member of SAM Capital Partners, LLC, the General Partner of SAM Special Opportunities Fund, LP (our largest stockholder) since 2009.
As the Chairman and our company’s largest stockholder (through entities controlled by him), Mr. Smith leads the board and guides the company. Mr. Smith brings a deep background in technology companies through his portfolio investments, and extensive experience in mergers and acquisitions and capital markets transactions.
Matthew J. DeVries
has served as our Chief Financial Officer since October 2006. Mr. DeVries has been an independent financial consultant since 2001, providing public and privately-held corporations financial assistance and has coordinated audits and supervised the preparation and filing of public disclosure documents for corporations in his consulting practice.
John J. Boyle III
was elected to our board of directors in September 2011. Mr. Boyle was the President and Chief Executive Officer and a member of the board of directors of Arbor Networks Inc., a network security company, from September 2005 to January 2010. Mr. Boyle was responsible for directing the progression of Arbor Networks into a well-regarded thought-leader on network security issues, and drove the company’s acquisition and integration of Ellacoya Networks, formerly a leading provider of deep packet inspection solutions. Mr. Boyle was a director from July 1999 to 2004 and lead director from 2004 to 2007 of eFunds Corp., a payment services company. Mr. Boyle was also the Chief Executive Officer of Saville Systems, Inc., a provider of customer care and billing solutions to the telecommunications and energy industries, from September 1994 and became Chairman of the Board in 1998 until the company was sold to ADC Telecommunications, Inc. in December 1999. He remained on the board of ADC Telecommunications, Inc. until it was sold in December 2010. Mr. Boyle received a B.S. degree in business administration from Northeastern University.
Mr. Boyle’s more than 20 years of high-tech experience, including scaling venture capital-funded start-ups through exits including initial public offerings and mergers and acquisitions, makes him well qualified as a member of our board.
Paul D. Fletcher
was elected to our board of directors in September 2011. He is currently the Chief Financial Officer at Presidio, Inc., a privately-held high-end IT integration and managed networks services company, since August 2007. Previously, he served as the Senior Vice President and Chief Financial Officer of Trex Company, from July 2003 to August 2007. He was Vice President of Finance of that company from October 2001 through July 2003, and of TREX Company, LLC from October 2001 through December 2002. From 2000 to 2001, Mr. Fletcher served as Vice President and Chief Financial Officer for AMX Corporation, an advanced control system technology company. From 1996 to 2000, he served as Vice President and Treasurer for Excel Communications Inc., a telecommunications company. From 1987 to 1996, he served as Senior Vice President and Treasurer for Lomas Financial Corporation, a financial services company. Mr. Fletcher received his B.A. degree in economics and management from Albion College and an M.B.A. degree in finance and management policy from Northwestern University’s Kellogg School of Management.
Mr. Fletcher demonstrates extensive knowledge of complex accounting, financial reporting and operational issues highly relevant to our business, making him well qualified as a member of our board.
Charles Hunt, Ph.D.
was elected to our board of directors in October 2006. Dr. Hunt holds B.S.E.E. and M.S.E.E. degrees from the University of Utah and a Ph.D. in electrical engineering from Cornell University. He has been at the University of California at Davis since 1986, where he is presently a Professor with multiple appointments and a visiting Professor of Electronics in the Faculty of Physics of the University of Barcelona. Dr. Hunt is a Senior Member of the Institute of Electrical and Electronics Engineers, and is author or co-author of more than 120 refereed publications and eight books, and holds 12 patents. From 1997 to 2004, he served as editor of the journal, Solid-State Electronics.
Dr. Hunt brings 25 years of scientific knowledge in technology product development in the electronic and electrical industries, making his insights invaluable to the board.
John E. Rehfeld
was elected to our board of directors in September 2011. Mr. Rehfeld is currently on the board of directors of Lantronix, Inc., a provider of secure communication technologies (since May 2010), Local.com Corporation, a local search engine provider (since 2005), and Enkeboll Design, a privately-held company (since January 2006). Mr. Rehfeld was previously a director of ADC Telecommunications, Inc., a provider of network infrastructure solutions (from September 2004 to December 2010, when it was sold), Overtone, a privately-held company that monitors company-hosted online forums and feedback platforms (from 2002 to April 2011, when it was sold), and Primal Solutions, Inc., a managed software solutions provider (from December 2008 to June 2009). Mr. Rehfeld most recently served as Chief Executive Officer of Spruce Technologies, Inc., a DVD authoring software company, during 2001. From 1997 to 2001, Mr. Rehfeld served as Chairman and Chief Executive Officer of ProShot Golf, Inc. He also served as President and Chief Executive Officer of Proxima Corporation from 1995 to 1997, and as President and Chief Executive Officer of ETAK, Inc. from 1993 to 1995. Mr. Rehfeld is the Chairman Emeritus of the Forum of Corporate Directors in Orange County, California.
Mr. Rehfeld’s over 30 years of executive experience in high growth industries, including prior experience as a Chief Executive Officer of a number of companies; prior and current experience serving as a director of a number of public and private companies, and a distinguished educational background, including an M.B.A. degree from Harvard University and a B.S. degree in chemical engineering from the University of Minnesota, as well as his current positions as adjunct professor of marketing and strategy for the Executive M.B.A. Programs at Pepperdine University (since 1998) and the University of San Diego (since 2010), provide him with the skills and qualifications to serve on our board of directors.
Duncan Troy
was elected to our board of directors in February 2004, and served as our Chairman of the Board from May 2004 to July 2008, and from July 2010 to January 2011. Mr. Troy was a former Telegen advisory board member and is a current director of the following U.K. based companies: Private Equity III Limited, a U.K. investment vehicle (from September 1996 to date) and SMS Lottome Limited, a U.K. cell phone lottery and gaming company (from March 2004 to date).
Mr. Troy’s nearly 30 years of service as a board member and investor in many early-stage and growth companies make him well qualified as a member of our board.
Mark W. Weber
was elected to our board of directors in June 2005. Mr. Weber has been a marketing consultant, strategic planner and senior business advisor to financial services companies, technology companies and emerging growth companies since 1988. Mr. Weber has been involved in raising private capital and launching start up, emerging growth technology companies and new banks over the past 20 years. Since 1988, he has been the President of Weber Marketing Group, the 12th largest marketing agency in Washington State and a national provider of marketing consulting and branding services to financial services and technology companies across the United States. Mr. Weber was a founder and board member of Pacifica Bank from 1998 to 2005. Pacifica Bank was a SEC-registered business bank sold in 2005 to United Bank California. Mr. Weber also served as chairman of the board’s compensation committee at Pacifica from 2002 to 2005. Mr. Weber served as an advisory board member of several technology and emerging growth companies between 1990 and 2001. He has been on the Board of Trustees of the Noemi Fund, part of Agros International, since 2003.
Mr. Weber’s experience in launching, marketing and branding technology and emerging growth companies make him well qualified to be a member of our board.
All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board. There are no family relationships among our directors and executive officers. As of March 20, 2013, there are no proceedings to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.
Key Personnel
Juan Carlos Blacker
joined our company in September 2011 as Vice President, Business Development - Energy Efficient Markets and serves as a consultant to us. Mr. Blacker was previously the Program and Product Manager at Portland Energy Conservation, Inc. (PECI), an energy resource management company, from July 2007 to August 2011. Mr. Blacker leads the company’s efforts in participating in energy efficiency programs, and in complying with governmental policies and standards, throughout the United States and Canada.
Board of Directors and Corporate Governance
Our board of directors is responsible for establishing broad corporate policies and for overseeing our overall management. In addition to considering various matters which require board approval, the board provides advice and counsel to, and ultimately monitors the performance of, our senior management.
We established a Compensation Committee in 2008, and an Audit Committee and Nominations and Corporate Governance Committee in September 2011. The charters for the Audit Committee, Compensation Committee and Nominations and Corporate Governance Committee are available at our website, www.vu1.com. Five members of our board of directors, John J. Boyle III, Paul Fletcher, John E. Rehfeld, Duncan Troy and Mark W. Weber, are considered “independent” within the meaning of the listing rules of the Nasdaq Stock Market. Additionally, Charles Hunt, Ph.D., who served as a paid consultant in 2008, became an independent director in 2012.
The board, its committees and our management strive to perform and fulfill their respective duties and obligations in a responsible and ethical manner. The board and the Audit, Compensation and Nominations and Corporate Governance Committees each perform annual self evaluations. We have adopted a Code of Ethics that applies to our Chief Executive Officer and Chief Financial Officer. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Matthew DeVries, Chief Financial Officer, Vu1 Corporation, 1 Liberty Plaza, 23
rd
Floor, New York, NY 10006.
Committees of the Board
Audit Committee
.
The board has an Audit Committee comprised of three non-employee directors, Paul D. Fletcher (chairman), Duncan Troy and Mark W. Weber. Each member of the Audit Committee is independent as defined under Nasdaq’s listing rules. The board of directors has determined that Mr. Fletcher qualifies as an “audit committee financial expert.” The Audit Committee functions pursuant to a written charter, under which the committee has such powers as may be assigned to it by the board from time to time. The Audit Committee was established in September 2011. Until the formation of the Audit Committee, the entire board of directors performed the functions of the Audit Committee. The Audit Committee is currently charged with, among other things:
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·
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recommending to the board of directors the engagement or discharge of our independent public accountants, including pre-approving all audit and non-audit related services;
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·
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the appointment, compensation, retention and oversight of the work of the independent auditor engaged by us for the purpose of preparing or issuing an audit report or performing other audit review or attest services for us;
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·
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establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
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·
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approving the scope of the financial audit;
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requiring the rotation of the lead audit partner;
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consulting regarding the completeness of our financial statements;
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·
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reviewing changes in accounting principles;
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reviewing the audit plan and results of the auditing engagement with our independent auditors and with our officers;
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reviewing with our officers, the scope and nature and adequacy of our internal accounting and other internal controls over financial reporting and disclosure controls and procedures;
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reviewing the adequacy of the Audit Committee Charter at least annually;
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meeting with our Internal Auditor on a regular basis;
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·
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performing an internal evaluation of the Audit Committee on an annual basis; and
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·
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reporting to the board of directors on the Audit Committee's activities, conclusions and recommendations.
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Compensation Committee
.
The board has a Compensation Committee comprised of two non-employee directors, John E. Rehfeld (chairman) and Paul Fletcher. Each member of the Compensation Committee is independent as defined under Nasdaq’s listing rules. The Compensation Committee functions pursuant to a written charter, under which the committee has such powers as may be assigned to it by the board from time to time. The Compensation Committee was established in 2008. The Compensation Committee is currently charged with, among other things, assisting the board in:
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approving and evaluating the compensation of directors and executive officers;
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establishing strategies and compensation policies and programs for employees to provide incentives for delivery of value to our stockholders;
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establishing policies to hire and retain senior executives, with the objective of aligning the compensation of senior management with our business and the interests of our stockholders;
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together with management, surveying the amount and types of executive compensation paid by comparable companies, and engaging consultants as necessary to assist them;
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periodically reviewing corporate goals and objectives relevant to executive compensation and making recommendations to the board for changes;
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assisting management in evaluating each executive officer's performance in light of corporate goals and objectives, and recommending to the board (for approval by the independent directors) the executive officers' compensation levels based on this evaluation;
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·
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overseeing our stock option plan or other stock-based plans with respect to our executive officers and employee board members, who are subject to the short-swing profit restrictions of Section 16 of the Securities Exchange Act of 1934, as amended;
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·
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reviewing the overall performance of our employee benefit plans and making recommendations to the board regarding incentive-compensation plans and equity-based plans;
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together with the Nominations and Corporate Governance Committee, reviewing and making recommendations to the independent directors of the board regarding the form and amount of director compensation;
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ensuring that our compensation policies meet or exceed all legal and regulatory requirements and any other requirements imposed on us by the board; and
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producing an annual report on executive compensation for inclusion in our information statement.
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In general, the Compensation Committee formulates and recommends compensation policies for board approval, oversees and implements these board-approved policies, and keeps the board apprised of its activities on a regular basis. In addition, the Compensation Committee together with the Nominations and Corporate Governance Committee, develops criteria to assist the board's assessment of the Chief Executive Officer's leadership of our company.
Nominations and Corporate Governance Committee
.
The board has a Nominations and Corporate Governance Committee comprised of two non-employee directors, Mark W. Weber (chairman) and John J. Boyle III. Each member of the Nominations and Corporate Governance Committee is independent as defined under Nasdaq’s listing rules. The Nominations and Corporate Governance Committee functions pursuant to a written charter, under which the committee has such powers as may be assigned to it by the board from time to time. The Nominations and Corporate Governance Committee was established in September 2011. Until the formation of the Nominations and Corporate Governance Committee, the entire board of directors performed the functions of the Nominations and Corporate Governance Committee. The Nominations and Corporate Governance Committee is currently charged with, among other things, assisting the board in:
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identifying individuals qualified to become board members and recommending that the board select a group of director nominees for each next annual meeting of our stockholders;
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ensuring that the Audit, Compensation and Nominations and Corporate Governance Committees of the board have the benefit of qualified and experienced "independent" directors;
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developing and recommending to the board a set of effective corporate governance policies and procedures applicable to us, and reviewing and reassessing the adequacy of such guidelines annually and recommending to the board any changes deemed appropriate;
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periodically reviewing the charters of all board committees and recommending to the committees and board any changes deemed appropriate;
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developing policies on the size and composition of the board;
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conducting annual evaluations of the performance of the board, committees of the board and individual directors;
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reviewing conflicts of interest and the independence status of directors;
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together with the Compensation Committee, reviewing and making recommendations to the independent directors of the board regarding the form and amount of director compensation;
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reviewing the structure of our senior staffing and management succession plans with the Chief Executive Officer;
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together with the Compensation Committee, developing criteria to assist the board's assessment of the Chief Executive Officer's leadership of our company; and
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·
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generally advising the board (as a whole) on corporate governance matters.
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Committee Interlocks and Insider Participation
No member of our board of directors is an employee or consultant for us or our subsidiaries, except for William B. Smith.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors and persons who own more than 10% of our common stock to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such officers, directors, and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) reports they file.
We believe that our officers, directors, and 10% stockholders complied with their Section 16(a) filing obligations during the year ended December 31, 2012, except for the following: W. Duncan Troy, Charles Hunt, Ph.D., William B. Smith, Paul D. Fletcher, John E. Rehfeld, John J. Boyle III, Matthew DeVries and Mark W. Weber did not file a Form 4 to report an issuance of restricted stock.
Code of Ethics
On March 29, 2011, we adopted a Code of Business Conduct and Ethics applicable to our principal executive officer, principal financial and accounting officer or persons performing similar functions. The Code of Ethics and Business Conduct codifies the business and ethical principles that govern all aspects of our business.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information about the compensation paid to, earned or received during the last two fiscal years ended December 31, 2012 and 2011 by (a) all persons serving as principal executive officer, and (b) our two other most highly compensated executive officers whose total compensation exceeded $100,000 in fiscal 2012, as follows (collectively, the “Named Executive Officers”):
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William B. Smith, our Chief Executive Officer (principal executive officer);
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Scott C. Blackstone, our former Chief Executive Officer (principal executive officer);
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Philip G. Styles, our former Chief Executive Officer (principal executive officer);
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Matthew DeVries, Chief Financial Officer (principal financial officer).
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Summary Compensation Table
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Year
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Salary ($)
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Bonus ($)
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Stock Awards ($)
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Option Awards ($)
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Non-Equity
Incentive Plan Compensation
($)
|
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Nonqualified Deferred Compensation Earnings
($)
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All
Other
Compensation
($)
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Total ($)
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William B. Smith
|
2012
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166,900
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-
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-
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-
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|
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-
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-
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-
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166,900
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Chief Executive Officer, Principal Executive Officer (1)
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2011
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-
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-
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-
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61,625
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-
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-
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-
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61,625
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Scott C. Blackstone
|
2012
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106,481
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-
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-
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88,815
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-
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-
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-
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195,296
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Chief Executive Officer, Principal Executive Officer (2)
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2011
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167,731
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-
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-
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262,656
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-
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-
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-
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430,387
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Philip Styles Former
|
2012
|
|
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-
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|
-
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-
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-
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-
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-
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-
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|
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-
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|
Chief Executive Officer, Principal Executive Officer (3)
|
2011
|
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138,122
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|
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-
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-
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288,910
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|
|
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-
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|
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-
|
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10,639
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|
|
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437,671
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|
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Matthew DeVries
|
2012
|
|
|
146,950
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-
|
|
|
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16,693
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|
|
|
-
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|
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-
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|
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|
-
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-
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|
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163,643
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|
Chief Financial Officer (4)
|
2011
|
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118,750
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-
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-
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79,907
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-
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-
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-
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198,657
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|
________________
|
(1)
|
On June 11, 2012, the board of directors appointed Mr. Smith as our Chief Executive Officer. A total of $62,500 of his salary for 2012 was converted into 56,208 shares of our common stock based on a the closing market prices of our common stock on the last business day of each month beginning in August, 2012. The 2011 option awards amount is comprised of the fair value of a fully vested ten-year option to purchase 12,500 shares of common stock at an exercise price of $10.40 per share awarded on August 22, 2011 with a fair value of $61,625. This amount does not reflect the actual amounts that may be realized. The fair values of the options were computed using the Black-Scholes option valuation method with the assumptions as detailed in Note 11 to the Notes to Consolidated Financial Statements.
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(2)
|
On April 27, 2011, the board of directors appointed Mr. Blackstone as our Chief Executive Officer and entered into a three-year employment agreement as of that date. The 2012 and 2011 option awards amount is comprised of the fair value of the vested portion of a ten-year option to purchase 110,807 shares of common stock at an exercise price of $7.82 per share awarded on April 27, 2011 with a fair value of $616,084, of which $88,815 and $239,406 was recognized in the years ended December 31, 2012 and 2011, respectively. The 2011 amount also includes the fair value of a fully vested ten-year option to purchase 25,000 shares of common stock at an exercise price of $7.80 per share awarded on August 22, 2011 with a fair value of $123,250. These amounts do not reflect the actual amounts that may be realized. The fair values of the options were computed using the Black-Scholes option valuation method with the assumptions as detailed in Note 11 to the Notes to Consolidated Financial Statements. Mr. Blackstone resigned as an our Chief Executive Officer on June 6, 2012.
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|
(3)
|
On October 4, 2010, the board of directors appointed Mr. Styles as our Chief Executive Officer and entered into a one-year employment agreement as of that date. A total of $47,670 and $34,452 of his salary for 2011 and 2010 was converted into 4,674 and 3,378 shares of our common stock, respectively based on a price of $10.20 per share, representing the closing market price for our common stock as of the date of Mr. Styles’ employment agreement. Stock awards of $3,450 for 2010 are comprised of the fair value of 750 shares of our common stock issued from our 2007 Stock Incentive Plan to Mr. Styles on December 17, 2007, which vested during each fiscal year based on the closing market price of $4.60 per share as of the date of issuance. We recognized the fair value of option awards in our Consolidated Financial Statements for fiscal 2011 and 2010 with a fair value totaling $247,785 and $63,270, respectively. These amounts do not reflect the actual amounts that may be realized. The 2010 amount is comprised of the fair value of a fully vested ten-year option to purchase 15,000 shares of common stock at an exercise price of $8.60 per share awarded on July 9, 2010 with a fair value of $127,860, and the vested portion of a ten-year option to purchase our common stock issued on October 4, 2010 at an exercise price of $10.20 per share. The total fair value of this option was $497,416, of which $288,910 and $119,925 was vested at December 31, 2011 and 2010, respectively. The fair values of the options were computed using the Black-Scholes option valuation method with the assumptions as detailed in Note 11 to the Notes to Consolidated Financial Statements. All other compensation for fiscal 2011 and 2010 was comprised of the value of rent of $4,293 and $7,360, respectively, for an apartment in the Czech Republic and $6,346 and $10,879 respectively, paid for an automobile. Mr. Styles resigned as an officer and director in July 2011.
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|
(4)
|
The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 20,000 shares of restricted stock award on August 17, 2012 at a price of $2.24 per share based on the closing market price of that date. The fair value of the award was $44,800, of which $16,693 was recognized in 2012. The 2011 option awards amount is comprised of the fair value of a fully vested ten-year option to purchase 8,750 shares of common stock at an exercise price of $10.40 per share awarded on March 14, 2011 with a fair value of $79,907. This amount does not reflect the actual amounts that may be realized. The fair values of the options were computed using the Black-Scholes option valuation method with the assumptions as detailed in Note 11 to the Notes to Consolidated Financial Statements.
|
The following table summarizes equity awards outstanding at December 31, 2012 for each of the executive officers named in the Summary Compensation Table above:
Outstanding Equity Awards at Fiscal Year End
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
Name
|
|
Number of Securities
Underlying Unexercised
Options (#)
Exciseable
|
|
|
Number of Securities
Underlying Unexercised
Options (#)
Unexerciseable
|
|
|
Equity Incentive
Plan Awards: Number of
Securities Underlying
Unexercised Unearned
Options (#)
|
|
|
Option Exercise
Price ($)
|
|
|
Option
Expiration Date
|
|
|
Number of Shares
or Units of
Stock That Have Not Vested (#)
|
|
|
Market Value
of Shares or
Units of Stock
That Have
Not Vested ($)
|
|
|
Equity Incentive
Plan Awards:
Number of Unearned
Shares, Units or Other
Rights That Have
Not Vested (#)
|
|
|
Equity Incentive Plan Awards: Market
or Payout Value of Unearned Shares,
Units or Other
Rights That Have Not Vested ($)
|
|
|
William B. Smith
|
|
|
12,500
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
7.80
|
|
|
8/21/2016
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Matthew DeVries
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
20,000
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
Matthew DeVries
|
|
|
8,750
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
10.40
|
|
|
3/13/2021
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Matthew DeVries
|
|
|
9,016
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
20.00
|
|
|
9/8/2018
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Employment Agreements
We do not have agreements with any of our Named Executive Officers providing for payments, whether from resignation, retirement or other termination of employment, resulting from a change of control.
Director Compensation
Non-employee Director Compensation.
Non-employee directors currently receive no cash compensation for serving on our board of directors, other than reimbursement of all reasonable expenses for attendance at board and board committee meetings. Under our 2007 Stock Incentive Plan, non-employee directors are entitled to receive stock options to purchase shares of common stock or restricted stock grants.
Employee Director Compensation.
Directors who are employees of our company receive no compensation for services provided in that capacity, but are reimbursed for out-of-pocket expenses in connection with attendance at meetings of our board and its committees.
The table below summarizes the compensation we paid to non-employee directors for the year ended December 31, 2012:
Director Compensation
|
Name
|
|
Fees Earned or
Paid in Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Option Awards ($)
|
|
|
Non-Equity
Incentive Plan
Compensation ($)
|
|
|
Nonqualified Deferred Compensation
Earnings ($)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
|
John J. Boyle III (1)
|
|
|
-
|
|
|
|
50,594
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,594
|
|
|
John J. Boyle III (1)
|
|
|
-
|
|
|
|
50,594
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,594
|
|
|
Paul D. Fletcher (2)
|
|
|
-
|
|
|
|
57,540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,540
|
|
|
Charles E. Hunt (3)
|
|
|
-
|
|
|
|
39,683
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,683
|
|
|
John E. Rehfeld (4)
|
|
|
-
|
|
|
|
57,540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,540
|
|
|
W. Duncan Troy (5)
|
|
|
22,382
|
|
|
|
39,683
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,065
|
|
|
Mark W. Weber (6)
|
|
|
-
|
|
|
|
49,603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,603
|
|
_____________
|
(1)
|
The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 25,500 shares of restricted stock award on Jun 1, 2012 at a price of $3.40 per share based on the closing market price of that date. The fair value of the award was $86,700, of which $50,594 was recognized in 2012.
|
|
(2)
|
The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 29,000 shares of restricted stock award on Jun 1, 2012 at a price of $3.40 per share based on the closing market price of that date. The fair value of the award was $98,600, of which $57,540 was recognized in 2012.
|
|
(3)
|
The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 20,000 shares of restricted stock award on Jun 1, 2012 at a price of $3.40 per share based on the closing market price of that date. The fair value of the award was $68,000, of which $39,683 was recognized in 2012.
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(4)
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The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 29,000 shares of restricted stock award on Jun 1, 2012 at a price of $3.40 per share based on the closing market price of that date. The fair value of the award was $98,600, of which $57,540 was recognized in 2012.
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(5)
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Fees paid in cash represent amounts paid for service as Sendio’s Executive Director. The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 20,000 shares of restricted stock award on Jun 1, 2012 at a price of $3.40 per share based on the closing market price of that date. The fair value of the award was $68,000, of which $39,683 was recognized in 2012.
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(6)
|
The 2012 stock awards amount is comprised of the fair value of the vested portion of a grant of 25,000 shares of restricted stock award on Jun 1, 2012 at a price of $3.40 per share based on the closing market price of that date. The fair value of the award was $85,000, of which $49,603 was recognized in 2012.
|
The option amounts do not reflect the actual amounts that may be realized. The fair values of the options were computed using the Black-Scholes option valuation method with the assumptions as detailed in Note 11 to the Notes to Consolidated Financial Statements.
2007 Stock Incentive Plan
In October 2007, our board of directors adopted the Vu1 Corporation 2007 Stock Incentive Plan (the “Stock Plan”). As of December 31, 2012, 309,004 shares of common stock were reserved for issuance upon the exercise of outstanding stock options under the Stock Plan. Set forth below is a summary of the Stock Plan, but this summary is qualified in its entirety by reference to the full text of the Stock Plan, which has been filed with the SEC, and any stockholder who wishes to obtain a copy of the Stock Plan may do so by written request to Vu1 Corporation, 1 Liberty Plaza, 23
rd
Floor, New York, NY 10006, Attention: Mr. Matthew DeVries, Chief Financial Officer.
Administration.
The Stock Plan is administered by our board of directors, or a committee appointed by, and consisting of two or more members of the board of directors. Each member of the committee must exhibit the independence necessary to comply with any applicable securities law, the rules of the exchange on which our common stock is traded or any other applicable law, as necessary. Committee members serve for such term as the board may determine, subject to removal by the board at any time.
Except for the terms and conditions explicitly set forth in the Stock Plan, the administrator has exclusive authority, in its discretion, to determine all matters relating to awards under the Stock Plan, including the selection of individuals to be granted awards, the type of awards, the number of shares of common stock subject to an award, all terms, conditions, restrictions and limitations, if any, of an award and the terms of any document, agreement or instrument that evidences the award. The administrator also has exclusive authority to interpret the Stock Plan and may from time to time adopt, and change, rules and regulations of general application for the Stock Plan’s administration. The administrator’s interpretation of the Stock Plan and its rules and regulations, and all actions taken and determinations made by the administrator pursuant to the Stock Plan, are conclusive and binding on all parties involved or affected. The administrator may delegate administrative duties to such of our officers as it so determines.
Shares subject to the Stock Plan.
The Stock Plan authorizes the granting of awards for up to an aggregate of 1,000,000 shares of our authorized but unissued common stock (subject to adjustment as described below). Shares that were previously the subject of an award under the Stock Plan that are no longer subject to the award become available for future grant.
Eligible Participants
.
All of our employees, directors, officers, consultants, agents, advisors and independent contractors and of our subsidiaries are eligible to participate in the Stock Plan, as selected by the administrator.
Awards
.
The administrator has the authority, in its sole discretion, to determine the type or types of awards to be made under the Stock Plan. Such awards include incentive stock options, nonqualified stock options and stock awards. Awards may be granted singly or in combination. An eligible person may receive one or more grants of awards as the administrator may from time to time determine, and such determinations may be different as to different holders and may vary as to different grants, even when made simultaneously.
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·
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Stock Options
. Each option will vest and become exercisable from time to time over such period and upon such terms as the administrator may determine; provided that unless the administrator specifies a different schedule, the default vesting rate is 36 months after the grant date. The exercise price of each stock option granted will be as determined by the administrator, but will not be less than 100% of the fair market value of the common stock on the date the option is granted. The administrator has the authority to determine the treatment of stock option grants upon a participant’s retirement, disability, death or termination. Stock options granted under the Stock Plan may not be assigned or transferred by the holder of the option other than by will or by the applicable laws of descent and distribution and, during the holder’s lifetime, such awards may be exercised only by the holder.
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With respect to incentive stock options, (i) the aggregate fair market value of the common stock with respect to which options are exercisable for the first time by a participant in any calendar year may not exceed $100,000 (with any amount in excess of $100,000 being treated as a nonqualified stock option) and (ii) the expiration date of such options may not be more than ten years after the date of the grant.
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Incentive stock options may be granted to a person who, at the time the option is granted, owns more than 10% of our outstanding voting capital stock only if the exercise price per share is not less than 110% of the fair market value of the common stock on the grant date and the option term does not exceed five years from the grant date.
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·
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Restricted Stock Awards
. The administrator, in its discretion, may grant restricted stock awards to participants on terms and conditions established by the administrator, including vesting terms conditioned on performance-based criteria or time of continuous service to us, rights of repurchase, and other terms, conditions and restrictions. Such terms may include, but are not limited to, acceleration of vesting or termination of rights to repurchase shares upon events such as death or disability of a participant or termination of a participant’s employment or term of board service. A participant to whom an award of restricted stock is made will generally have all the rights of a stockholder with respect to such shares, including the right to vote and to receive dividends, except as set forth in the applicable award agreement.
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Adjustments
. If our outstanding common stock is at any time changed or exchanged by declaration of a stock dividend, stock split, reverse stock split, combination of shares, recapitalization, merger, consolidation or other corporate reorganization, in which we are the surviving corporation, an appropriate adjustment will be made in the number and kind of shares that have been awarded pursuant to the Stock Plan and that may be thereafter awarded.
In the event of any "corporate transaction" (a term defined in the Stock Plan generally as a change in control), all outstanding awards will become fully vested and exercisable immediately prior to the effective date of the corporate transaction. The outstanding awards will not become fully vested if replaced by a comparable award as determined by the administrator by the successor company.
Withholding
. If any withholding amount for the exercise of a stock option or restricted stock award under the Stock Plan is required by law, we may (a) require a participant to remit a cash amount sufficient to satisfy, in whole or in part, any federal, state and local withholding requirements prior to delivery of certificates for common stock, (b) grant a participant the right to satisfy any withholding requirements, in whole or in part, by electing to require that we withhold from the shares of common stock issuable to the participant, that number of full shares of common stock having a fair market value equal to the amount required to be withheld, (c) grant a participant the right to deliver shares of unrestricted stock to us, or (d) satisfy withholding requirements through any other lawful method, such as through additional withholdings against the participant’s other wages with us.
Termination of Stock Plan
. The board of directors may suspend, terminate or amend the Stock Plan at any time without stockholder approval, except as stockholder approval may be required under (a) Rule 16b-3 of the Securities Exchange Act of 1934, (b) the Internal Revenue Code or certain regulations promulgated pursuant to the Code, (c) the rules for listed companies on the national securities exchange on which the common stock is traded, if applicable, or (d) any other applicable law or rule. No incentive stock options may be granted under the Stock Plan after October 26, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the number of shares of our common stock beneficially owned on March 20, 2013 by:
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·
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each person who is known by us to beneficially own 5% or more of our common stock,
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|
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·
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each of our directors and executive officers, and
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·
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all of our directors and executive officers as a group.
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Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of our common stock which may be acquired upon exercise or conversion of stock options, warrants or other convertible securities which are currently exercisable or convertible, or which become exercisable within 60 days after the date indicated in the table, are deemed beneficially owned by those holders. Subject to any applicable community property laws, the persons or entities named in the table below have sole voting and investment power with respect to all shares indicated as beneficially owned by them.
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Name and Address of Beneficial Owner (1)
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Amount and Nature of Beneficial Owner (2)
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Percent of Class (3)
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SAM Special Opportunity Fund
|
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1,264,894
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(4
|
)
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|
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14.9
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%
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|
SAM Advisors LLC
|
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1,264,894
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(4
|
)
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|
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14.9
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%
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William B. Smith
|
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1,264,894
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(4
|
)
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14.9
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%
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111 Broadway, Suite 808
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New York, New York 10006
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Polymer Holdings, Ltd.
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715,058
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(5
|
)
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8.4
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%
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Broomhill Road
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Stonehaven, UK AB39 2NH
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Matthew DeVries
|
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85,366
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(6
|
)
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1.0
|
%
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John J. Boyle III
|
|
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-
|
|
|
|
|
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*
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Paul D. Fletcher
|
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210,000
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(7
|
)
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2.5
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%
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Charles Hunt, Ph. D.
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84,138
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(8
|
)
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1.0
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%
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John E. Rehfeld
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-
|
|
|
|
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*
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Duncan Troy
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134,517
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(9
|
)
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1.6
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%
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Mark W. Weber
|
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257,033
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(10
|
)
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3.0
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%
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All directors and officers as a group (10 persons)
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2,035,948
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(11
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)
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23.9
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%
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*
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Less than 1% of outstanding shares.
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(1)
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Unless otherwise indicated, the address of each person is c/o Vu1 Corporation, 1 Liberty Plaza, 23
rd
Floor, New York, New York 10006.
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(2)
|
Unless otherwise indicated, includes shares owned by a spouse, minor children and relatives sharing the same home, as well as entities owned or controlled by the named person. Also includes shares if the named person has the right to acquire those shares within 60 days after March 20, 2013, by the exercise or conversion of any warrant, stock option or other convertible securities. Unless otherwise noted, shares are owned of record and beneficially by the named person.
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(3)
|
The calculation in this column is based upon 8,501,793 shares of common stock outstanding on March 20, 2013. The shares of common stock underlying warrants, stock options or other convertible securities are deemed outstanding for purposes of computing the percentage of the person holding them but are not deemed outstanding for the purpose of computing the percentage of any other person.
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(4)
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Consists of 354,207 shares of common stock and warrants to purchase 77,912 shares of common stock at an exercise price of $15.00 per share held by SAM Special Opportunity Fund, LP, an investment partnership advised by SAM Advisors, LLC, and 570,275 shares of common stock held by SAM Advisors, LLC, a money management firm. Also includes options to purchase 12,500 shares of common stock at an exercise price of $7.80 per share and options to purchase 83,334 shares of common stock at an exercise price of $1.70 per share. Does not include options to purchase 166,666 shares of common stock as these options are not vested within 60 days of March 20, 2013. Mr. Smith, our Chairman and Chief Executive Officer, is the President and Chief Executive Officer of SAM Advisors, LLC.
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(5)
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Includes warrants to purchase 23,302 shares of common stock at an exercise price of $15.00 per share.
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(6)
|
Includes stock options to purchase 9,016 shares of common stock at an exercise price of $20.00 per share, stock options to purchase 8,750 shares of common stock at an exercise price of $10.60 per share and options to purchase 10,100 shares of common stock at an exercise price of $1.61 per share. Does not include a restricted stock award of 20,000 shares of common stock as these shares are not vested within 60 days of March 20, 2013.
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(7)
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Includes warrants to purchase 105,000 shares of common stock at an exercise price of $1.50 per share.
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(8)
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Includes stock options to purchase 12,500 shares of common stock at an exercise price of $7.60 per share, a stock option to purchase 6,250 shares of common stock at an exercise price of $4.60 per share, a stock option to purchase 2,500 shares of common stock at an exercise price of $13.00 per share, a stock option to purchase 12,000 shares of common stock at an exercise price of $20.00 per share, and a stock option to purchase 3,750 shares of common stock at an exercise price of $10.60 per share.
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(9)
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Includes a stock option to purchase 7,500 shares of common stock at an exercise price of $20.00 per share, a stock option to purchase 2,500 shares of common stock at an exercise price of $13.00 per share, a stock option to purchase 10,000 shares of common stock at an exercise price of $10.60 per share, a stock option to purchase 16,250 shares of common stock at an exercise price of $1.61 per share and 46,667 shares of common stock held by Private Equity III Ltd., an investment entity of which Mr. Troy is a director.
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(10)
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Includes a stock option to purchase 12,500 shares of common stock at an exercise price of $7.60 per share, a stock option to purchase 7,500 shares of common stock at $20.00 per share, a stock option to purchase 3,750 shares of common stock at an exercise price of $13.00 per share, a stock option to purchase 8,750 shares of common stock at an exercise price of $10.60 per share, and 1,171 shares of common stock held by Weber Marketing Group, Inc., a corporation wholly owned by Mr. Weber.
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(11)
|
Comprised of William B. Smith, Matthew DeVries, John J. Boyle III, Paul D. Fletcher, Charles Hunt, John E. Rehfeld, Duncan Troy and Mark Weber.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following is a summary description of all transactions during the year ended December 31, 2012 and to date, and any currently proposed transactions, between us and any of our related parties. All ongoing and any future related party transactions have been and will be made or entered into on terms that are no less favorable to us than those that may be obtained from an unaffiliated third party. In addition, any future related party transactions must be approved by a majority of the disinterested members of our board of directors. If a related person proposes to enter into such a transaction with us, such proposed transaction must be reported to us, in advance.
Related Party Transactions
During the year ended December 31, 2012, we paid consulting fees of $125,000 to SAM Advisors, LLC for services rendered to us. In addition,
From August 31, 2012 to December 31, 2012, we issued 56,208 shares of common stock with a fair value of $62,500 to SAM Advisors, LLC pursuant to our agreement with SAM to convert its monthly fee to common stock at the price of our common stock on the last day of each month.
SAM Advisors LLC is owned by William B. Smith, our Chairman and Chief Executive Officer.
Two of our board members invested $105,000 and $15,000 in our unit private placement, as discussed in Note 11 to the Notes to Consolidated Financial Statements.
One of our board members
converted a loan totaling $57,385 (including $7,385 of accrued interest and loan fees) into 16,396 shares of our common stock, three year warrants to purchase 16,396 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 16,429 shares of our common stock at an exercise price of $11.00 per share, as discussed in Note 8
to the Notes to Consolidated Financial Statements
.
During the year ended December 31, 2012, we paid fees of $22,382 to Duncan Troy for services rendered as the managing director of Sendio. Mr. Troy is a member of our board of directors.
In September 2010, we entered into an agreement with Integrated Sales Solutions II, LLC (“ISS”) to enhance our capabilities in designing and establishing sales strategy and distribution channels with retail, electrical utilities, electrical distributors and government agencies.
ISS became a related party to us upon the appointment of Bill K. Hamlin to our board of directors in October 2010. Mr. Hamlin is the Chief Executive Officer of ISS.
In April 2011, we entered into an agreement with Hamlin Consulting, LLC to advise and assist us in defining logistics, warehousing, finished goods requirements, distribution, packaging, merchandising and support for our ESL bulbs. ISS and Hamlin Consulting are owned by Bill K. Hamlin, a former director of our company and our former President and Chief Operating Officer. We paid $13,268 to ISS and $45,000 to Hamlin Consulting for the year ended December 31, 2012.
Except as otherwise disclosed above, none of our directors, executive officers, greater than five percent stockholders, or any associate or affiliate thereof had any material interest, direct or indirect, in any transaction with us during the year ended December 31, 2012.
Director Independence
Six members of our board of directors, John J. Boyle III, Paul D. Fletcher, Charles E. Hunt, John E. Rehfeld, Duncan Troy and Mark W. Weber, are considered “independent” within the meaning of the listing rules of the Nasdaq Stock Market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Peterson Sullivan, LLP for Fiscal 2012 and 2011
The following is a summary of the aggregate fees billed to us by Peterson Sullivan LLP, our current independent registered public accounting firm, for the fiscal years ended December 31, 2012 and 2011:
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|
|
Fiscal 2012
|
|
|
Fiscal 2011
|
|
|
Audit Fees
|
|
$
|
40,800
|
|
|
$
|
40,000
|
|
|
Audit Related Fees
|
|
|
16,800
|
|
|
|
29,325
|
|
|
Tax Fees
|
|
|
—
|
|
|
|
—
|
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
|
Total Fees
|
|
$
|
57,600
|
|
|
$
|
69,325
|
|
Policy for Approval of Audit and Permitted Non-Audit Services
Our Board of Directors, which serves as our audit committee, reviews the scope and extent of all audit and non-audit services to be provided by the independent auditors, including any engagement letters, and reviews and pre-approves all fees to be charged for such services. During 2012 and 2011, our independent auditors did not provide any non-audit services to us. The Board of Directors may establish additional or other procedures for the approval of audit and non-audit services that our independent auditors perform. In pre-approving services to be provided by the independent auditors, the Board of Directors considers whether such services are consistent with applicable rules regarding auditor independence.
NOTES TO 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 former Czech Republic based subsidiary, and our inactive subsidiary Telisar Corporation, unless otherwise noted or indicated by its context.
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 on research and development efforts for our technology and the related manufacturing processes.
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 manufacturing facility. As discussed in Note 2, 6 and 13, the Company has ceased the operations of Sendio effective on February 13, 2012 and, as a result has recognized an impairment of all of its long term assets and inventory during the year ended December 31, 2011.
We have one inactive subsidiary, Telisar Corporation, a California corporation and 66.67% majority-owned subsidiary.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Vu1 and all of its wholly-owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Translating Financial Statements
The functional currency of Sendio is the Czech Koruna (CZK). The accounts of Sendio contained in the accompanying consolidated balance sheets as of December 31, 2012 and 2011 have been translated into United States dollars at the exchange rate prevailing as of those dates. Translation adjustments are included in “Accumulated Other Comprehensive Income,” a separate component of stockholders’ equity. The accounts of Sendio in the accompanying consolidated statements of operations for the years ended December 31, 2012 and 2011 have been translated using the average exchange rates prevailing for the respective periods. Sendio recorded an aggregate of $0 and ($19,894) of foreign currency transaction loss as general and administrative expense in the accompanying statements of operations for the years ended December 31, 2012 and 2011, respectively. During the year ended December 31, 2012 we recognized the balance of Accumulated Other Comprehensive Income of $149,196 as a gain on liquidation of foreign subsidiary in the accompanying statement of operations for the year ended December 31, 2012 as we no longer have an ongoing investment in a foreign subsidiary.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, we consider all investments purchased with original maturities of three months or less to be cash equivalents. At December 31, 2012 we have $78,188 of cash in excess of federal insurance limits.
Equipment
Equipment is comprised of equipment used in the testing and development of the manufacturing process for 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 five 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.
Income Taxes
We recognize the amount of income taxes payable or refundable for the current year and recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement amounts of certain assets and liabilities and their respective tax bases. Deferred tax assets and deferred tax liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. A valuation allowance is required when it is less likely than not that we will be able to realize all or a portion of our deferred tax assets.
FASB ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of 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 loans.
Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Management reviewed the assets at December 31, 2012 and determined there was no impairment. Management reviewed the assets at December 31, 2011 and determined that the long-lived assets of Sendio were fully impaired as further discussed in Note 13. As a result of this determination, we recognized an impairment loss for the year ended December 31, 2011 related to Sendio’s long term assets as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
Equipment
|
|
$
|
215,283
|
|
|
Construction in process
|
|
|
288,570
|
|
|
Deposit on building purchase
|
|
|
1,308,875
|
|
|
Total impairment loss
|
|
$
|
1,812,728
|
|
Fair Value of Financial Instruments
Financial instruments consist of cash, receivables, payables and accrued liabilities, derivative financial instruments, loans payable, bridge loans and convertible debt. The fair value of our cash, receivables, payables and accrued liabilities and loans payable are carried at historical cost; their respective estimated fair values approximate their carrying values.
Derivative financial instruments, as defined in ASC 815 “
Accounting for Derivative Financial Instruments and Hedging Activities”
consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the conversion feature in our convertible promissory notes is not afforded equity classification because it embodies risks not clearly and closely related to the host contract. As required by ASC 815-10, these features are required to be bifurcated and carried as derivative liabilities, at fair value, in our financial statements.
We carry our long term convertible debt at historical cost. The fair value of our convertible debt in its hybrid form is determined, for disclosure purposes only, based upon its forward cash flows, at credit risk adjusted rates, plus the fair value of the conversion feature. The fair value of our convertible debentures is $3,962,307 at December 31, 2012 based on the present value of the future cash flows of the instrument.
Fair Value Measurements
ASC 820
“Fair Value Measurements”
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Significant fair value measurements resulted from the application of ASC 815 to our convertible promissory note and warrant financing arrangements and ASC 718-10 for our share-based payment arrangements. We used level 3 inputs to measure fair value of these 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 during 2012 and 2011.
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 years ended December 31, 2012 and 2011, research and development expenses were comprised primarily of technical consulting expenses, salaries and related benefits and overheads, rent 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. On October 26, 2007 our Board of Directors approved the Vu1 Corporation 2007 Stock Incentive Plan (the “Stock Incentive Plan”). A total of 500,000 shares of our common stock were authorized for issuance under the Stock Incentive Plan. The Stock Incentive Plan was approved by our stockholders on May 22, 2008. On March 14, 2011, our Board of Directors increased the number of shares of our common stock that we are authorized to issue under our Stock Incentive Plan from 500,000 shares to 1,000,000 shares. A majority of our stockholders approved the amendment to the Stock Incentive Plan on October 10, 2011. See Note 11.
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 and a reclassification on disposal of foreign subsidiary.
Loss Per Share
We calculate basic loss per share by dividing loss available to common stockholders by the weighted-average number of shares of common stock outstanding, excluding unvested stock. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common shares, including unvested stock, had been issued and if the additional common shares were dilutive.
The following potentially dilutive common shares are excluded from the computation of diluted net loss per share for all periods presented because the effect is anti-dilutive due to our net losses:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Warrants
|
|
|
2,012,034
|
|
|
|
921,963
|
|
|
Convertible debt
|
|
|
374,346
|
|
|
|
374,346
|
|
|
Stock options
|
|
|
309,004
|
|
|
|
591,181
|
|
|
Unvested stock
|
|
|
168,500
|
|
|
|
7,529
|
|
|
Total potentially dilutive securities
|
|
|
2,863,884
|
|
|
|
1,895,019
|
|
NOTE 3 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States which contemplate our continuation as a going concern. For the year ended December 31, 2012, we had a net loss of $3,825,448 and we had negative cash flows from operations of $1,568,781. In addition, we had an accumulated deficit of $83,406,639 at December 31, 2012. These factors raise substantial doubt about our ability to continue as a going concern.
Recovery of our assets is dependent upon future events, the outcome of which is indeterminable. Our attainment of profitable operations is dependent upon obtaining adequate financing and achieving a level of sales adequate to support our cost structure. In addition, realization of a significant portion of the assets in the accompanying balance sheet is dependent upon our ability to meet our financing requirements and the success of our plans to sell our product. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.
Subsequent to year end, we raised gross proceeds of $105,000 in a private placement of our common stock and warrants to accredited investors. See Note 14.
NOTE 4 – TAX REFUND RECEIVABLE
Tax refund receivable represents the 19% value added tax receivable from the government of the Czech Republic at December 31, 2011. No allowance for doubtful accounts has been provided as we believe the amounts are fully collectible. There is no amount at December 31, 2012 due to the insolvency of Sendio during 2012.
NOTE 5 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2012 we paid consulting fees of $125,000 to SAM Advisors, LLC for services rendered to the Company. In addition,
From August 31, 2012 to December 31, 2012 we issued 56,208 shares of common stock with a fair value of $62,500 to SAM Advisors, LLC pursuant to our agreement with SAM to convert their monthly fee to common stock at the price of our common stock on the last day of each month.
SAM Advisors LLC is owned by William B. Smith, our Chairman and chief executive officer.
Two of our board members invested $105,000 and $15,000 in our unit private placement as discussed in Note 11.
One of our board members
converted a loan totaling $57,385 (including $7,385 of accrued interest and loan fees) into 16,396 shares of our common stock, three year warrants to purchase 16,396 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 16,429 shares of our common stock at an exercise price of $11.00 per share as discussed in Note 8.
During the year ended December 31, 2012 we paid fees of $22,382 to Duncan Troy for services rendered as the managing director of Sendio. Mr. Troy is a member of our board of directors.
In June 2011, we paid a consulting fee of $50,000 to SAM Advisors, LLC for services rendered to the Company. SAM Advisors LLC is owned by William B. Smith, our Chairman.
In August 2011, we paid $25,000 to William B. Smith, our Chairman and $25,000 to Greg Owens, then a director, for consulting services rendered to the Company.
In November, 2011 we received $50,000 from Mark W. Weber, a member of our board of directors in exchange for the issuance of a bridge note as discussed in Note 8.
In September 2010, we entered into an agreement with Integrated Sales Solutions II, LLC (“ISS”) to enhance our capabilities in designing and establishing sales strategy and distribution channels with retail, electrical utilities, electrical distributors and government agencies.
ISS became a related party to us upon the appointment of Bill K. Hamlin to our board of directors in October, 2010. Mr. Hamlin is the Chief Executive Officer of ISS.
In April 2011, we entered into an agreement with Hamlin Consulting, LLC to advise and assist us in defining logistics, warehousing, finished goods requirements, distribution, packaging, merchandising and support for our ESL bulbs. ISS and Hamlin Consulting are owned by Bill K. Hamlin, a former director of our company and our former President and Chief Operating Officer. We paid $13,268 and $144,000 to ISS and $45,000 and $180,000 to Hamlin Consulting for the years ended December 31, 2012 and 2011, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Sendio Facility Operating Lease and Purchase Agreement
On May 28, 2008, Sendio entered into a lease contract for certain facilities located in the city of Olomouc in the Czech Republic. On December 2, 2009, Sendio executed a new lease agreement (the “Lease Agreement”) for its existing office and manufacturing facilities in the Czech Republic. The New Lease Agreement commenced on December 1, 2009 and specifies annual rent of CZK 13,365,000 plus applicable VAT taxes (CZK 1,113,750 per month), less amounts paid by existing tenants in the building. The rent was CZK 719,556 per month after offset of the amounts paid by existing tenants and would increase should the existing tenants vacate the premises by the amount paid by the vacating tenant. The Lease Agreement expired on June 30, 2011. On June 22, 2011, Sendio s.r.o. amended the lease agreement (the “New Lease Agreement”), dated December 2, 2009, for its former office and manufacturing facilities located in the city of Olomouc in the Czech Republic. The amendment extended the termination date of the lease from June 30, 2011 to June 30, 2013. There were no changes in the rent to be paid for the facilities. The annual rent remains CZK 13,365,000, plus applicable VAT taxes (CZK 1,113,750 per month), less amounts paid by existing tenants in the building. The rent was CZK 719,556, plus applicable VAT taxes per month after offset of the amounts paid by existing tenants, and would increase if the existing tenants vacate the premises by the amount paid by the vacating tenant. Our rent increased on September 1, 2011 by CZK 357,633 to CZK 1,074,189 due to an existing tenant vacating the premises. Sendio was responsible for utilities, maintenance and certain other costs as defined in the New Lease Agreement.
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 was CZK 179,000,000 (approximately $9.0 million USD) (the “Purchase Price”). A deposit Sendio paid on May 29, 2008 for CZK 4,000,000 was considered an advance on the Purchase Price. We recorded this amount as a non-current asset as a deposit on building purchase in the accompanying balance sheet as of December 31, 2010. 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 originally due June 30, 2009.
Also effective December 9, 2008, as additional inducement for the landlord to enter into the Purchase Agreement, Vu1 entered into a Deed of Guarantee with the landlord under which it guaranteed up to CZK 13,500,000 of the CZK 175,000,000 aggregate payments by Sendio under the Purchase Agreement. The guarantee expired upon full payment by Sendio of this amount.
On June 22, 2011, Sendio amended and restated the Purchase Agreement, effective December 9, 2008 and amended March 3, 2009 and December 2, 2009 (the “Purchase Agreement”), for the same facilities with Milan Gottwald (“Mr. Gottwald”), the owner. Under the Purchase Agreement, Sendio has made installment payments totaling CZK 23,084,224 into an escrow account through December 31, 2011 to be applied against the total purchase price of CZK 179,000,000. This amount was originally recorded as a Deposit on building purchase on the accompanying balance sheet. As discussed in Notes 2 and 13, we reviewed our long-term assets for impairment effective December 31, 2011 and determined that the value of these deposits was impaired.
Also in conjunction with the Purchase Agreement, we issued 15,000 shares of our common stock valued at $135,000 based on the closing market price on the effective date of the agreement of $9.00 per share, to Mr. Gottwald. This amount has been recorded as general and administrative expenses in the accompanying statement of operations for the year ended December 31, 2011.
Our lease for the premises was terminated effective March 15, 2012 and our obligation to acquire the building was terminated on February 8, 2012 in conjunction with the insolvency of Sendio, sro as discussed in Note 13.
Other Operating Leases
On July 11, 2011 we entered into a month to month lease agreement for office space in New Hampshire. Monthly rental payments were $1,445 under the lease. This lease was terminated in April, 2012.
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.
Total rent expense was $9,859 and $593,918 for the years ended December 31, 2012 and 2011, respectively.
The future payments under the New York lease as of December 31, 2012 are $12,210 for the year ended December 31, 2013.
Investment Banking Agreements
On June 7, 2011, we entered into an agreement with Rodman & Renshaw, LLC to act as our exclusive placement agent for the sale of securities on June 22, 2011 as described in Note 11. The agreement specified cash compensation of 7% of the purchase price paid in an offering plus warrants equal to 7% of common shares issued or issuable under the offering on the same terms as offered to investors in the private placement. In addition, cash compensation of 7% of any proceeds from the exercise of warrants issued in conjunction with a private placement will be paid. The agreement terminated on July 21, 2011. The obligation for fees and warrants survives for 18 months for proceeds raised from investors in the private placement.
On January 24, 2011, we entered into an agreement with Rodman & Renshaw, LLC to act as our exclusive placement agent for the sale of securities on February 8, 2011 as described in Note 11. The agreement specified cash compensation of 7% of the purchase price paid in an offering plus warrants equal to 7% of common shares issued or issuable under the offering on the same terms as offered to investors in the private placement. In addition, cash compensation of 7% of any proceeds from the exercise of warrants issued in conjunction with a private placement will be paid. The agreement terminated 30 days after a successful private placement. The obligation for fees and warrants survives for 18 months for proceeds raised from investors in the private placement.
NOTE 7 – 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, 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.
|
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 December 31, 2012 and determined no accrual was necessary.
The carrying value at December 31, 2012 and 2011 and June 22, 2011 (inception) of the convertible debentures is as follows:
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
June 22, 2011
(Issue Date)
|
|
|
Face amount
|
|
$
|
4,117,750
|
|
|
$
|
4,117,750
|
|
|
$
|
4,117,750
|
|
|
Original issue discount
|
|
|
(155,443
|
)
|
|
|
(465,072
|
)
|
|
|
(617,750
|
)
|
|
|
|
|
3,962,307
|
|
|
|
3,652,678
|
|
|
|
3,500,000
|
|
|
Beneficial conversion feature and warrant allocation
|
|
|
(415,811
|
)
|
|
|
(1,138,766
|
)
|
|
|
(1,447,812
|
)
|
|
Carrying value
|
|
$
|
3,546,496
|
|
|
$
|
2,513,912
|
|
|
$
|
2,052,188
|
|
The original issue discount of the convertible debentures is being amortized over their two-year life using the effective interest method.
The proceeds were first allocated between the convertible debentures and the warrants based upon their relative fair values. The estimated fair value of the warrants issued with the convertible debentures of $1,018,582 was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock – $9.00 per share; estimated volatility – 84.6%; risk-free interest rate – 1.58%, expected dividend rate – 0% and expected life – 5.0 years. This resulted in allocating $788,972 to the warrants and $2,711,028 to the convertible debentures.
Next, the intrinsic value of the beneficial conversion feature was computed as the difference between the fair value of the common stock issuable upon conversion of the convertible debentures and the total price to convert based on the effective conversion price. This resulted in allocating $658,840 to the beneficial conversion feature. The resulting $1,447,812 discount to the convertible debentures is being amortized over the two-year term of the convertible debentures using the effective interest method.
In conjunction with the placement of the convertible debentures, we paid our investment banker $245,000 as a placement fee and issued five-year warrants to purchase 26,205 shares of our common stock at an exercise price of $13.00 per share. All terms are identical to the warrants issued to the holders of the convertible debentures. The estimated fair value of the warrants issued with the convertible debentures of $142,601 was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock – $9.00 per share; estimated volatility – 84.6%; risk-free interest rate – 1.58%, expected dividend rate – 0% and expected life – 5.0 years. In addition, we incurred legal and other costs of $53,500 paid in cash. These costs, totaling $441,101 were recorded as loan costs on the accompanying balance sheet on the date of issuance and are being amortized to interest expense using the straight line method, which approximates the effective interest method, over the two-year term of the convertible debentures.
Interest expense related to the convertible debentures is as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Amortization of original issue discount
|
|
$
|
309,628
|
|
|
$
|
152,679
|
|
|
Amortization of beneficial conversion feature and warrant allocation
|
|
|
722,956
|
|
|
|
309,045
|
|
|
Amortization of loan costs
|
|
|
220,852
|
|
|
|
115,857
|
|
|
|
|
$
|
1,253,436
|
|
|
$
|
577,581
|
|
NOTE 8 – CONVERTIBLE BRIDGE LOANS
In October and November 2011, we received $475,000 in gross proceeds from six existing stockholders in an interim 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 pay the promissory notes prior to that date, and the interest rate was increased to 15% per annum. Total interest expense for the years ending December 31, 2012 and 2011 was $54,103 and $25,463 (including $14,250 of loan costs), respectively.
In addition to interest on the promissory note, each note holder received 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).
During the year ended December 31, 2012, three of the convertible bridge loans totaling $193,431 (including accrued interest and loan fees of $18,431) were converted into 55,267 units in our private placement offering as discussed in Note 11. Accordingly, we issued 55,267 shares of our common stock, three year warrants to purchase 55,267 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 57,500 shares of our common stock at an exercise price of $11.00 per share. The fair value of the common stock was $230,540 based on the market prices of our common stock on the respective dates of conversion ranging from $2.11 to $5.75 per share. The fair value of the three year warrants to purchase 55,267 shares of our common stock at an exercise price of $3.75 per share was $171,023 and fair value of the three year warrants to purchase 57,500 shares of our common stock at an exercise price of $11.00 per share was $145,029. We recognized a loss on debt conversion in the amount of $353,161 on the dates of conversion for the notes. 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 – 0.31% to 0.82%, volatility – 103.6% to 198.4%, and an expected dividend rate of 0%.
One of the convertible bridge loans converted was held by Mark Weber, a member of our board of directors, who converted a loan totaling $57,385 (including $7,385 of accrued interest and loan fees) into 16,396 shares of our common stock, three year warrants to purchase 16,396 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 16,429 shares of our common stock at an exercise price of $11.00 per share.
The remaining bridge loans were converted to common stock and warrants subsequent to year end. See Note 14.
NOTE 9 – LOAN 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 $1,486 and $0 of interest expense and $892 and $0 for loan cost amortization within interest expense for the years ended December 31, 2012 and 2011, respectively.
Total principal payments for future years for the Convertible Bridge Loans, the Convertible Debentures described in Note 7, the Convertible Bridge Loans described in Note 8 and the Loan Payable are as follows as of December 31, 2012:
|
|
|
December 31,
2012
|
|
|
2013
|
|
|
4,526,750
|
|
|
|
|
$
|
4,526,750
|
|
NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are classified as liabilities and carried at fair value, with changes reflected in the statement of operations.
On February 9, 2011, we issued five-year warrants to purchase 262,750 shares of our common stock at an exercise price of $12.00 per share in conjunction with the private placement described in Note 11. If we issue common stock or common stock equivalents at a price per share less than the exercise price of the warrants, the exercise price of the warrants is decreased to equal the price at which the common stock or common stock equivalents were issued. The exercise price cannot be reduced below $9.00 per share. We determined that the potential adjustment to the exercise price of the warrants exceeded the economic dilution suffered and therefore the warrants are not to be considered indexed to our common stock and causes the warrants to be a derivative liability. Derivative financial instruments are classified as liabilities and carried at fair value at each reporting date, with changes reflected in the statements of operations.
On June 22, 2011, the exercise price of the warrants was reduced from $12.00 per share to $11.00 per share as a result of the issuance of the convertible debentures at a conversion price of $11.00 per share as described in Note 7. As a result, we recognized the difference in the fair value of the warrants of $39,503 as of that date as an additional unrealized fair value change in the derivative gain for the year ended December 31, 2011.
On January 24, 2012, the exercise price of the warrants was further reduced to $9.00 per share in conjunction with the private placement as described in Note 11. As a result, we recognized the difference in the fair value of the warrants of $46,444 as of that date as an additional unrealized fair value change in the derivative gain for the year ended December 31, 2012. As a result of this reduction, the exercise price no longer has the potential for further adjustment, and we determined that the warrants no longer represented a derivative liability, and the remaining balance of the derivative liability was recognized as a derivative gain in the amount of $639,227.
The following table summarizes the components of changes in our derivative warrant liability during the years ended December 31, 2012 and 2011:
|
|
|
Years ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Beginning balance
|
|
$
|
592,783
|
|
|
$
|
-
|
|
|
Derivatives recognized upon issuance
|
|
|
-
|
|
|
|
2,090,648
|
|
|
Fair value change due to repricing, included in income
|
|
|
46,444
|
|
|
|
39,503
|
|
|
Unrealized fair value changes, included in income
|
|
|
(639,227
|
)
|
|
|
(1,537,368
|
)
|
|
Total unrealized gain, included in income
|
|
|
(592,783
|
)
|
|
|
(1,497,865
|
)
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
592,783
|
|
The Company uses the Black-Scholes option valuation model to measure the fair value of the warrants, and based on the following assumptions, a summary of the fair values are as follows:
|
|
|
February 9,
2011
|
|
|
June 22,
2011
|
|
|
June 22,
2011
|
|
|
December 31,
2011
|
|
|
January 24,
2012
|
|
|
Exercise price
|
|
$
|
12.00
|
|
|
$
|
12.00
|
|
|
$
|
11.00
|
|
|
$
|
11.00
|
|
|
$
|
9.00
|
|
|
Trading market price
|
|
$
|
10.62
|
|
|
$
|
9.00
|
|
|
$
|
9.00
|
|
|
$
|
4.74
|
|
|
$
|
4.15
|
|
|
Expected life (years)
|
|
|
5.00
|
|
|
|
4.64
|
|
|
|
4.64
|
|
|
|
4.11
|
|
|
|
4.04
|
|
|
Equivalent volatility
|
|
|
102.90
|
%
|
|
|
82.80
|
%
|
|
|
82.80
|
%
|
|
|
89.20
|
%
|
|
|
81.0
|
%
|
|
Expected dividend rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Risk-free interest rate
|
|
|
2.33
|
%
|
|
|
1.58
|
%
|
|
|
1.58
|
%
|
|
|
0.60
|
%
|
|
|
0.66
|
%
|
|
Fair value
|
|
$
|
2,090,648
|
|
|
$
|
1,386,411
|
|
|
$
|
1,425,914
|
|
|
$
|
592,783
|
|
|
$
|
46,444
|
|
NOTE 11 - STOCKHOLDERS’ EQUITY
Preferred Stock
Our Amended and Restated Articles of Incorporation allows us to issue up to 10,000,000 shares of preferred stock without further stockholder approval and upon such terms and conditions, and having such rights, preferences, privileges, and restrictions as the Board of Directors may determine. No preferred shares are currently issued and outstanding.
Common Stock Issuances
2012 Unit Offering
From January 24 to November 21, 2012 we sold 474,632 units at a subscription price of $3.50 per unit for gross proceeds of $1,661,199 in our unit private placement. Each unit consisted of one share of common stock and a three-year warrant to purchase one share of common stock at an exercise price of $3.75 per share. A total of 474,632 shares of common stock and warrants to purchase 474,632 shares of common stock at an exercise price of $3.75 were issued. Included in these amounts are 12,000 shares of our common stock and 12,000 warrants issued upon the conversion of $42,000 in accounts payable to a vendor and 55,267 shares of our common stock and 55,267 warrants issued upon the conversion of loans totaling $193,431 (including accrued interest and loan fees of $18,431). Also included in these amounts is cash investment of $105,000 and $15,000 received from two of our board members.
The net proceeds of $1,425,768 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance. The allocated fair value of the warrants was $583,638 and the balance of the proceeds of $842,130 was allocated to the common stock.
The fair value of the shares issued to the vendor upon conversion of $42,000 of accounts payable was $70,920 based on the closing market price of our common stock on the date of conversion. The fair value of the warrant issued was $46,979. We recognized a loss on conversion of accounts payable based on the difference between the fair value of the common stock and warrants issued to the vendor in the amount of $75,599.
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:
|
Closing market price of common stock
|
$0.70 to $6.00
|
|
Estimated volatility
|
81.0% to 307.9%
|
|
Risk free interest rate
|
0.28% to 0.56%
|
|
Expected dividend rate
|
-
|
|
Expected life
|
3 years
|
On October 10, 2012 the board of directors reset the exercise price of the $3.75 per share warrants to purchase 474,632 warrants issued from $3.75 per share to $2.00 per share. All other terms and conditions of the warrants remain unchanged. Included in the total are 50,682 warrants owned by two members of our board of directors. As a result of this reduction in price, the original allocation of the net proceeds of $1,425,768 would have resulted in $629,619 being allocated to the warrants and the balance of the proceeds of $796,149 was allocated to the common stock.
On September 11, 2012 we issued 12,500 shares of common stock with a fair value of $30,625 based on the closing market price as of that date to a vendor for services. We recognized this as marketing expense in the accompanying statement of operations for the year ended December 31, 2012.
Effective July 24, 2012 we issued 59,000 shares of our restricted common stock valued at $142,780 based on the closing market price for our common stock of $2.42 per share pursuant to an agreement with a vendor for investor relations services. Effective August 31, 2012, we terminated the contract pursuant to its terms and cancelled the issuance of 52,858 shares. Accordingly, we recognized the fair value of the 6,142 shares of $14,864 as marketing expense in the accompanying statements of operations for the year ended December 31, 2012.
From August 31, 2012 to December 31, 2012 we issued 56,208 shares of common stock with a fair value of $62,500 to SAM Advisors, LLC. The issuances were based in 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.
On December 20, 2012, we completed a private placement to accredited investors of 525,000 restricted shares of our common stock, at a purchase price of $0.80 per share, for gross proceeds of $420,000. As part of the private placement, the investors were issued three-year warrants to purchase 525,000 shares of our common stock, at an exercise price of $1.50 per share.
The net proceeds of $400,000 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance. The allocated fair value of the warrants was $127,787 and the balance of the proceeds of $272,213 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:
|
Closing market price of common stock
|
$0.70
|
|
Estimated volatility
|
101.20%
|
|
Risk free interest rate
|
0.39%
|
|
Expected dividend rate
|
-
|
|
Expected life
|
3 years
|
In addition, on December 20, 2012, we entered into a settlement and release agreement with a vendor and issued 250,000 shares of our restricted common stock and three-year warrants to purchase 250,000 shares of our common stock at an exercise price of $1.50 per share, in settlement of $250,000 of trade accounts payable. The fair value of the shares issued was $175,000 based on the closing market price of our common stock on the date of conversion. The fair value of the warrant issued was $82,151. We recognized a loss on conversion of accounts payable based on the difference between the fair value of the common stock and warrants issued to the vendor in the amount of $7,151.
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:
|
Closing market price of common stock
|
$0.70
|
|
Estimated volatility
|
101.20%
|
|
Risk free interest rate
|
0.39%
|
|
Expected dividend rate
|
-
|
|
Expected life
|
3 years
|
Also on December 20, 2012, we entered into a settlement and release agreement with another vendor and issued 64,256 shares of our restricted common stock in settlement of $64,256 of trade accounts payable. The fair value of the shares issued was $44,979 based on the closing market price of our common stock on the date of conversion. We recognized a gain on conversion of accounts payable based on the difference between the fair value of the common stock issued to the vendor in the amount of $19,277.
2011 Unit Offering
From January 12 to February 4, 2011, we sold 20,075 units at a subscription price of $20.00 per unit for net proceeds of $401,500 in our unit private placement. Each unit consisted of two shares of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $20.00 per share. A total of 40,150 shares of common stock and warrants to purchase 20,075 shares of common stock at an exercise price of $20.00 were issued. Included in these amounts are 6,650 shares of our common stock and 3,325 warrants issued upon the conversion of $66,500 in accounts payable to R. Gale Sellers, our former Chief Executive Officer and board member.
The net proceeds were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance. The allocated fair value of the warrants was $67,776 and the balance of the proceeds of $333,724 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:
|
Closing market price of common stock
|
$10.00 to $11.20
|
|
Estimated volatility
|
105.5% to 108.7%
|
|
Risk free interest rate
|
0.54% to 0.77%
|
|
Expected dividend rate
|
-
|
|
Expected life
|
2 years
|
2011 Private Placement
On February 8, 2011, we completed a private placement to eight institutional accredited investors of 245,560 shares of our common stock, at a purchase price of $9.00 per share, for gross proceeds of $2,210,000. As part of the private placement, the investors were issued five-year warrants to purchase 245,560 shares of our common stock, at an initial exercise price of $12.00 per share.
These warrants contain a full ratchet provision which reduces the exercise price of the warrant in the event we issue common stock or common stock equivalents at a price lower than the exercise price of the warrants. The exercise price cannot be reduced below $9.00 per share. As such, the warrants were treated as a derivative warrant liability as discussed in Note 10. The exercise price was reduced on June 22, 2011 to $11.00 per share as a result of the issuance of the convertible debentures as described in Note 7. On January 24, 2012, the exercise price of the warrants was further reduced to $9.00 per share in conjunction with the 2012 Unit Offering as described above. As a result of the price reductions, the warrants no longer qualify for derivative liability treatment.
For each of the warrants, the holder will be able to exercise the warrant on a so-called cashless basis at any time following the one-year anniversary of the closing of the private placement in which a registration statement covering the shares of our common stock underlying such warrants is not effective.
The net proceeds from the private placement totaling $2,001,901, following the payment of offering-related expenses of $208,099, were used by us for our capital expenditure requirements and for working capital and other general corporate purposes. At the closing of the private placement, we paid Rodman & Renshaw LLC, the placement agent for the private placement, cash compensation of 7% of the gross proceeds of the private placement and a five-year warrant to purchase up to 17,190 shares of our common stock, at an initial exercise price of $12.00 per share.
We agreed, pursuant to the terms of a registration rights agreement with the investors, to file a shelf registration statement with respect to the resale of the shares of our common stock sold to the investors and shares of our common stock issuable upon exercise of the warrants with the SEC on or before April 10, 2011; and to use our best efforts to have the shelf registration statement declared effective by the SEC as soon as possible after the initial filing, and in any event no later than 90 days after the closing date (or 150 days in the event of a review of the shelf registration statement by the SEC). We also agreed to keep the shelf registration statement effective until all registrable securities may be sold under 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 April 10, 2011 and it was declared effective on April 18, 2011. We evaluated any liability under the registration rights agreement at December 31, 2012 and determined no accrual was necessary.
The investors agreed, pursuant to the securities purchase agreement, not to engage in any short sales (as defined in the agreement) until the earlier of the effective date of the shelf registration statement referred to above or the date when the shares of our common stock sold to the investors and shares of our common stock issuable upon exercise of the warrants are eligible for sale under Rule 144 under the Securities Act of 1933. We also granted the investors the right to participate in future equity financing transactions within the 12 months following the closing of the private placement and agreed to certain restrictions on our ability to sell our equity securities until 60 days after the effective date of the shelf registration statement.
Issuances of Common Stock
During the year ended December 31, 2011 we completed the following:
From January 12 to February 4, 2011, we sold 20,075 Units at a subscription price of $20.00 per Unit for net proceeds of $401,500 in our Unit Private Placement. Each Unit consists of two shares of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $20.00 per share. A total of 40,150 shares of common stock and two-year warrants to purchase 20,075 shares of common stock at an exercise price of $20.00 were issued. Included in these amounts are 6,650 shares of our common stock and 3,325 warrants issued upon the conversion of accounts payable by R. Gale Sellers, our former Chief Executive Officer and a former member of our board of directors.
On June 22, 2011, we issued 15,000 shares of common stock with a fair value of $135,000 based on the closing market price as of that date of $9.00 per share to Milan Gottwald pursuant to the Sendio facilities purchase agreement as described in Note 6.
Stock and Stock Options issued and exercised pursuant to the 2007 Stock Incentive Plan
On October 26, 2007, our Board of Directors approved our 2007 Stock Incentive Plan. A total of 500,000 shares of our common stock were authorized for issuance under the plan. The Stock Incentive Plan allows us to grant stock or stock option awards to our employees, directors, officers, consultants, agents, advisors and independent contractors of Vu1 and subsidiaries. We issue new shares when options are exercised. The Stock Incentive Plan is administered by our Board of Directors and Compensation Committee, which can determine the size and type of award granted, purchase price, vesting schedule and expiration date of any stock or options grant. All grants of shares and the shares underlying options are for restricted common stock and are issued at the closing market price of our common stock on the date of grant. On March 14, 2011, our board of directors increased the number of shares of our common stock that we are authorized to issue under the 2007 Stock Incentive Plan from 500,000 shares to 1,000,000 shares. A majority of our stockholders approved the amendment to the Stock Incentive Plan on October 10, 2011.
Stock issuances
A summary of activity related to grants of common stock under the 2007 Stock Incentive Plan as of December 31, 2012 is presented below.
|
|
|
Number of Shares
|
|
|
Grant Date
Fair Value
|
|
|
Outstanding, December 31, 2010
|
|
|
130,951
|
|
|
$
|
4.60 to $22.80
|
|
|
Granted
|
|
|
13,125
|
|
|
$
|
8.00
|
|
|
Forfeited
|
|
|
(12,683
|
)
|
|
$
|
10.20
|
|
|
Outstanding, December 31, 2011
|
|
|
131,393
|
|
|
$
|
4.60 to $22.80
|
|
|
Granted
|
|
|
168,500
|
|
|
$
|
3.26
|
|
|
Forfeited
|
|
|
(2,795
|
)
|
|
$
|
8.00
|
|
|
Outstanding, December 31, 2012
|
|
|
297,098
|
|
|
$
|
2.24 to $22.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, December 31, 2012
|
|
|
128,598
|
|
|
$
|
2.24 to $22.80
|
|
A summary of the status of our nonvested stock grants as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below.
|
Nonvested Stock Grants
|
|
Number of Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
Nonvested at December 31, 2011
|
|
|
7,529
|
|
|
$
|
8.00
|
|
|
Granted
|
|
|
168,500
|
|
|
|
3.26
|
|
|
Forfeited
|
|
|
(2,795
|
)
|
|
|
8.00
|
|
|
Vested
|
|
|
(4,734
|
)
|
|
|
9.20
|
|
|
Nonvested at December 31, 2012
|
|
|
168,500
|
|
|
$
|
3.26
|
|
We made the following common stock awards for the year ended December 31, 2012 from the 2007 Stock Incentive Plan:
On June 1, 2012 we granted a total of 148,500 shares of restricted common stock to the six non-executive board members for service on the board of directors. The shares had a fair value of $504,900 based on the closing market price of $3.40 on the date of grant. The shares vest on June 1, 2013.
On August 17, 2012 we granted 20,000 shares of restricted common stock to an officer for service. The shares had a fair value of $44,800 based on the closing market price of $2.24 on the date of grant. The shares vest on August 17, 2013.
On July 28, 2011, Bill K. Hamlin, then a member of our board of directors, was appointed to the positions of President and Chief Operating Officer of Vu1. As part of his employment agreement, Mr. Hamlin agreed to convert $105,000 of his annual salary into 13,125 shares of our common stock at a conversion price of $8.00 per share, based on the closing market price of our common stock on the first day of his employment. These shares vested in twelve equal monthly installments over the term of his employment agreement. Mr. Hamlin resigned his position as President and Chief Operating Officer and director effective May 11, 2012. We recognized a total of $37,869 of compensation expense relative to the 4,734 shares of common stock that vested during the year ended December 31, 2012. We recognized a total of $44,754 of compensation expense relative to the 5,592 shares that vested for the year ended December 31, 2011. A total of 2,795 shares of unvested common stock were forfeited in 2012.
We made the following common stock awards for the year ended December 31, 2011 from the 2007 Stock Incentive Plan:
On March 17, 2011, we issued 5,000 shares of common stock from the 2007 Stock Incentive Plan with a fair value of $51,000 based on the closing market price as of that date of $10.20 per share pursuant to the settlement of a dispute with a former consultant and employee to the Company.
On June 15, 2011, we issued 12,500 shares of common stock with a fair value of $112,500 based on the closing market price as of that date of $9.00 per share for services to Integrated Sales Solutions, a company controlled by our President and Chief Operating Officer, Billy K. Hamlin.
Option issuances
A summary of activity related to stock options under the 2007 Stock Incentive Plan as of December 31, 2012 is presented below.
|
|
|
Number of Shares
|
|
|
Exercise price range
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term (Years)
|
|
|
Aggregate Intrinsic
Value
|
|
|
Outstanding, December 31, 2010
|
|
|
332,754
|
|
|
$
|
4.60 to $20.00
|
|
|
$
|
11.55
|
|
|
|
8.2
|
|
|
$
|
792,384
|
|
|
Granted
|
|
|
267,057
|
|
|
$
|
7.80 to $10.40
|
|
|
$
|
8.16
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,630
|
)
|
|
$
|
10.20
|
|
|
$
|
10.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
591,181
|
|
|
$
|
4.60 to $20.00
|
|
|
$
|
10.04
|
|
|
|
5.9
|
|
|
$
|
3,150
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(282,177
|
)
|
|
$
|
4.60 to $13.00
|
|
|
$
|
8.32
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
309,004
|
|
|
$
|
4.60 to $20.00
|
|
|
$
|
11.62
|
|
|
|
6.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2012
|
|
|
306,176
|
|
|
$
|
4.60 to $20.00
|
|
|
$
|
11.66
|
|
|
|
6.0
|
|
|
$
|
-
|
|
The aggregate intrinsic value of the stock options fluctuates in relation to the market price of our common stock as reflected on the OTC Bulletin Board.
The range of exercise prices for options outstanding and options exercisable under the 2007 Stock Incentive Plan at December 31, 2012 are as follows:
|
Range of Exercise Prices
|
|
|
Weighted Average
Remaining Contractual
Life of Options
Outstanding
(in years)
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
$
|
4.60
|
|
|
|
5.0
|
|
|
|
20,000
|
|
|
$
|
4.60
|
|
|
|
20,000
|
|
|
$
|
4.60
|
|
|
$
|
7.60 to $8.60
|
|
|
|
6.2
|
|
|
|
145,407
|
|
|
$
|
8.16
|
|
|
|
142,579
|
|
|
$
|
8.17
|
|
|
$
|
10.20 to $13.00
|
|
|
|
7.1
|
|
|
|
67,501
|
|
|
$
|
11.71
|
|
|
|
67,501
|
|
|
$
|
11.71
|
|
|
$
|
20.00
|
|
|
|
5.1
|
|
|
|
76,096
|
|
|
$
|
20.00
|
|
|
|
76,096
|
|
|
$
|
20.00
|
|
A summary of the status of our nonvested options as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below.
|
Nonvested Options
|
|
Number of Shares
Underlying Options
|
|
|
Weighted Average
Grant Date Fair Value
|
|
|
Nonvested at December 31, 2011
|
|
|
147,445
|
|
|
$
|
10.20
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited or expired
|
|
|
(144,617
|
)
|
|
|
10.20
|
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
Nonvested at December 31, 2012
|
|
|
2,828
|
|
|
$
|
7.80
|
|
There were no grants of stock options from the 2007 Stock Incentive Plan for the year ended December 31, 2012.
We made the following stock option awards for the year ended December 31, 2011 from the 2007 Stock Incentive Plan:
On March 14, 2011, our board of directors issued ten-year options to purchase a total of 31,250 shares of our common stock at an exercise price of $10.40 per share based on the closing market price as of that date to certain of our directors and an officer. The fair value of the options granted of $285,032 was calculated using the Black-Scholes option valuation model.
On April 27, 2011, we issued five-year options to purchase 110,807 shares of our common stock at an exercise price of $7.82 per share based on the closing market price as of that date to Scott C. Blackstone, Ph.D., our Chief Executive Officer, in conjunction with his employment agreement as of that date. The options vest monthly over three years from the date of issuance. The fair value of the options granted of $616,084 was calculated using the Black-Scholes option valuation model. These options expired during 2012.
On July 28, 2011, we issued stock options to purchase up to 70,000 shares of our common stock at an exercise price of $8.00 per share, the closing market price on Bill K. Hamlin’s first day of employment, from the Stock Incentive Plan. A total of 30,000 options will vest over the term of his employment agreement, and the remaining 40,000 options will vest upon meeting certain performance criteria set by the Company. The fair value of the options granted of $244,580 was calculated using the Black-Scholes option valuation model. These options expired during 2012.
On August 22, 2011, we issued stock options to purchase 50,000 shares of our common stock at an exercise price of $7.80 per share, the closing market price on the date of issuance, to certain directors and an officer from the Stock Incentive Plan. The options vest upon issuance. The fair value of the options granted of $246,500 was calculated using the Black-Scholes option valuation model. These options expired during 2012.
On September 12, 2011, we issued stock options to purchase 5,000 shares of our common stock at an exercise price of $7.80 per share, the closing market price on the date of issuance, to an employee from the Stock Incentive Plan. The options vest ratably over five years. The fair value of the options granted of $23,190 was calculated using the Black-Scholes option valuation model.
We used the following assumptions in the calculations of the Black Scholes option valuation model to calculate the fair value of options issued during the years ended December 31, 2012 and 2011:
|
|
|
Years ended December 31,
|
|
|
|
2012
|
|
2011
|
|
Closing market price of common stock
|
|
-
|
|
$7.80 to $10.40
|
|
Estimated volatility
|
|
-
|
|
72.8% to 92.3%
|
|
Risk free interest rate
|
|
-
|
|
0.42% to 3.36%
|
|
Expected dividend rate
|
|
-
|
|
-
|
|
Expected life
|
|
-
|
|
2 - 10 years
|
We recognized compensation expense of $445,685 and $1,006,807 related to the vested portion of stock and stock options based on their estimated grant date fair value as research and development expense or general and administrative expense based on the specific recipient of the award for the years ended December 31, 2012 and 2011, respectively.
At December 31, 2012, there are 168,500 shares of unvested restricted stock issued in 2012 of which we anticipate $238,364 of unrecognized compensation expense will be recognized ratably through the vesting date of August 17, 2013.
At December 31, 2012, we have unrecognized compensation expense related to stock options of $13,528, of which we anticipate $7,730 and $5,798 will be recognized in fiscal year 2013 and 2014, respectively.
As of December 31, 2012, the 2007 Stock Incentive Plan has 383,614 shares available for future grants of stock or options.
Warrant Issuances and Exercises
We issue new shares when warrants are exercised. There were no warrants exercised during the years ended December 31, 2012 and 2011.
2012 Warrants
During year ended December 31, 2012 we issued three year warrants at an exercise price of $3.75 per share to purchase 474,632 shares of common stock in our unit offering described above. On October 10, 2012 the board of directors reset the exercise price of the $3.75 per share warrants to purchase 474,632 warrants issued from $3.75 per share to $2.00 per share. All other terms and conditions of the warrants remain unchanged. Included in the total are 50,682 warrants owned by two members of our board of directors.
Also during the year ended December 31, 2012 we issued three year warrants at an exercise price of $11.00 per share to purchase 57,500 shares of common stock to three investors upon the conversion of a convertible bridge notes as described in Note 8.
On December 20, 2012, we issued three-year warrants to purchase 525,000 shares of our common stock at an exercise price of $1.50 per share in conjunction with a private placement as of that date as described above.
In addition, on December 20, 2012, we issued three-year warrants to purchase 250,000 shares of our common stock at an exercise price of $1.50 per share, in settlement of $250,000 of trade accounts payable as described above.
On January 24, 2012, the exercise price of the warrants to purchase 262,750 shares of common stock issued in conjunction with our February 9, 2011 private placement was reduced from $11.00 per share to $9.00 per share as a result of the issuance of the common stock and warrants in our unit private placement describe above.
During the year ended December 31, 2012 warrants to purchase a total of 214,975 shares of common stock with a weighted average exercise price of $15.55 expired unexercised.
2011 Warrants
On February 8, 2011, we issued five-year warrants to purchase 245,560 shares of our common stock, at an initial exercise price of $12.00 per share to investors in a private placement and a five-year warrant to purchase up to 17,190 shares of our common stock at an initial exercise price of $12.00 per share to the placement agent.
On June 22, 2011, the exercise price of the warrants was reduced from $12.00 per share to $11.00 per share as a result of the issuance of the convertible debentures at a conversion price of $11.00 per share as described in Note 7. We also issued two-year warrants to purchase 20,075 shares of common stock at an exercise price of $20.00 in our unit offering, described above. In addition, we issued five-year warrants to purchase 213,380 shares of our common stock, at an exercise price of $13.00 per share as described above.
During the year ended December 31, 2011, warrants to purchase 6,988 shares of common stock with a weighted average exercise price of $13.43 per share expired unexercised.
A summary of activity related to our warrants as of December 31, 2012 is presented below.
|
|
|
Number of Shares
|
|
|
Exercise
price range
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Term (Years)
|
|
|
Outstanding, December 31, 2010
|
|
|
432,746
|
|
|
$
|
7.60 to $20.00
|
|
|
$
|
15.18
|
|
|
|
2.1
|
|
|
Granted
|
|
|
496,205
|
|
|
$
|
11.00 to $20.00
|
|
|
$
|
12.22
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
(6,988
|
)
|
|
$
|
12.00 to $20.00
|
|
|
$
|
13.43
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
921,963
|
|
|
$
|
7.60 to $20.00
|
|
|
$
|
13.60
|
|
|
|
2.7
|
|
|
Granted
|
|
|
1,305,046
|
|
|
$
|
1.50 to $11.00
|
|
|
$
|
2.10
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
(214,975
|
)
|
|
$
|
15.00 to $20.00
|
|
|
$
|
15.55
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
2,012,034
|
|
|
$
|
1.50 to $20.00
|
|
|
$
|
5.67
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2012
|
|
|
2,012,034
|
|
|
$
|
1.50 to $20.00
|
|
|
$
|
5.67
|
|
|
|
2.6
|
|
The following table summarizes our outstanding warrants as of December 31, 2012:
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
|
Remaining Contractual
|
|
|
Number
|
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
|
$
|
1.50
|
|
|
|
775,000
|
|
|
|
3.0
|
|
|
|
775,000
|
|
|
$
|
2.00
|
|
|
|
472,546
|
|
|
|
2.3
|
|
|
|
472,546
|
|
|
$
|
7.60
|
|
|
|
3,750
|
|
|
|
0.3
|
|
|
|
3,750
|
|
|
$
|
9.00
|
|
|
|
262,750
|
|
|
|
3.1
|
|
|
|
262,750
|
|
|
$
|
11.00
|
|
|
|
57,500
|
|
|
|
2.3
|
|
|
|
57,500
|
|
|
$
|
13.00
|
|
|
|
213,380
|
|
|
|
3.5
|
|
|
|
213,380
|
|
|
$
|
15.00
|
|
|
|
207,033
|
|
|
|
0.5
|
|
|
|
207,033
|
|
|
$
|
20.00
|
|
|
|
20,075
|
|
|
|
0.1
|
|
|
|
20,075
|
|
|
|
|
|
|
|
2,012,034
|
|
|
|
2.6
|
|
|
|
2,012,034
|
|
NOTE 12 - INCOME TAXES
The net deferred tax asset is comprised of the following:
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Net operating loss carryforwards
|
|
$
|
18,986,174
|
|
|
$
|
21,039,036
|
|
|
Share-based compensation
|
|
|
1,792,487
|
|
|
|
1,746,808
|
|
|
Fixed assets
|
|
|
-
|
|
|
|
63,382
|
|
|
Deposit on building
|
|
|
-
|
|
|
|
221,055
|
|
|
Other
|
|
|
-
|
|
|
|
17,716
|
|
|
Valuation allowance
|
|
|
(20,778,661
|
)
|
|
|
(23,087,997
|
)
|
|
Deferred income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Loss before income taxes is comprised of:
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
US Operations
|
|
$
|
3,825,448
|
|
|
$
|
2,784,347
|
|
|
Czech Republic Operations
|
|
|
-
|
|
|
|
6,297,275
|
|
|
|
|
$
|
3,825,448
|
|
|
$
|
9,081,622
|
|
The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the years ended December 31, 2012 and 2011 as follows:
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
3,825,448
|
|
|
$
|
9,081,622
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at federal statutory rate (34%)
|
|
$
|
(1,300,652
|
)
|
|
$
|
(3,087,751
|
)
|
|
Effect of lower foreign tax rate
|
|
|
-
|
|
|
|
944,587
|
|
|
Permanent differences
|
|
|
265,129
|
|
|
|
(543,292
|
)
|
|
Loss of Sendio net operating losses
|
|
|
3,344,859
|
|
|
|
-
|
|
|
Change in valuation allowance
|
|
|
(2,309,336
|
)
|
|
|
2,686,456
|
|
|
Provision for Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2012, we had net operating loss carryforwards for U.S. federal income tax reporting purposes which if unused, will expire in the following years:
|
|
|
US
|
|
|
Year
|
|
Amount
|
|
|
2018
|
|
$
|
27,080,269
|
|
|
2019
|
|
|
1,745,867
|
|
|
2020
|
|
|
6,137,725
|
|
|
2021
|
|
|
5,251,175
|
|
|
2022
|
|
|
1,751,322
|
|
|
2023
|
|
|
78,281
|
|
|
2024
|
|
|
413,886
|
|
|
2025
|
|
|
508,429
|
|
|
2026
|
|
|
465,173
|
|
|
2027
|
|
|
760,272
|
|
|
2028
|
|
|
2,494,690
|
|
|
2029
|
|
|
2,121,595
|
|
|
2030
|
|
|
1,688,397
|
|
|
2031
|
|
|
2,433,302
|
|
|
2032
|
|
|
2,911,306
|
|
|
|
|
$
|
55,841,689
|
|
The utilization of U.S. net operating loss carryforwards may be limited due to the ownership change under the provisions of Internal Revenue Code Section 382. The fiscal years 2009 to 2012 remain open to examination to U.S. Federal authorities and other jurisdictions in the U.S. where we operate.
NOTE 13 – SENDIO, SRO INSOLVENCY
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 is overseeing the orderly sale of the assets and using any proceeds to satisfy the liabilities of Sendio. As a result of the insolvency petition, we recognized an impairment of all of our long term assets as of December 31, 2011 comprised of equipment, construction in process and the deposit on building purchase as discussed in Note 2. Included in the balance sheets are the following assets and liabilities of Sendio that are subject to the insolvency proceedings:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
8,774
|
|
|
Tax refund receivable
|
|
|
-
|
|
|
|
57,089
|
|
|
Prepaid expenses and other receivables
|
|
|
-
|
|
|
|
10,657
|
|
|
|
|
|
-
|
|
|
|
76,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
189,089
|
|
|
$
|
273,337
|
|
|
Accrued payroll
|
|
|
357,052
|
|
|
|
373,349
|
|
|
Capital lease obligation, current portion
|
|
|
9,313
|
|
|
|
5,624
|
|
|
Total current liabilities of Sendio
|
|
|
555,454
|
|
|
|
652,310
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities of Sendio:
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
-
|
|
|
|
4,114
|
|
|
Total liabilities of Sendio
|
|
$
|
555,454
|
|
|
$
|
656,424
|
|
Our lease obligation and the obligation to purchase the Sendio facility as discussed in Note 6 were terminated. Our lease for the premises was terminated effective March 15, 2012 and our obligation to acquire the building was terminated on February 8, 2012.
NOTE 14 – SUBSEQUENT EVENTS
As discussed in Note 11, 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.
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.
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. In addition, we issued 80,000 shares of restricted stock from the 2007 Stock Incentive Plan with 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 February 26, 2013 the three remaining holders of the convertible bridge loans as discussed in Note 8 converted the balance of an aggregate of $368,162 of their loans (including $68,162 of loan fees and accrued interest as of that date) into 368,162 shares of common stock at a conversion price of $1.00 per share. In addition, we issued three-year warrants to purchase 368,162 shares of common stock at an exercise price of $1.50 per share and three-year warrants to purchase 98,571 shares of common stock at an exercise price of $11.00 per share.
From January 1 to February 28, 2013 we issued 13,925 shares of common stock with a fair value of $25,000 to SAM Advisors, LLC. The issuances were based in 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 February 28, 2013 we issued 3,988 shares of common stock with a fair value of $7,500 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.
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.
F-28