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 2013 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 2013, we focused on initiatives to develop our manufacturing operations with Huayi Lighting. 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 2013 or 2012. 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, 2013, 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 2013 of $5.0 million and had an accumulated deficit of $88.4 million as of December 31, 2013. 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 are presently in default on approximately $1.4 million of principal of our unsecured, Convertible Debentures.
As of the date of this annual report, the outstanding principal amount of approximately $1.4 million plus accrued interest and penalties under our original issue discount convertible debentures is due and owing by us. We have been in default to the holders of the debentures since June 22, 2013, when the debentures matured. We continue to not have sufficient financial resources, or the ability to arrange financing, to pay the outstanding amount of the debentures at this time. Our failure to pay the outstanding amount when due last year has resulted in our obligation to pay holders interest at the default rate of 18% per year and to pay a mandatory default amount of an additional 10% of the outstanding principal amount of the debentures. Although we have periodically discussed a work-out with some debenture holders, no such agreement currently exists. There can be no assurance that debenture holders have not already or will not in the future take legal action against us to collect the indebtedness due and owing under the debentures or initiate or join in a bankruptcy or insolvency case or proceeding relating to us. Should debenture holders take any such actions, our company will be seriously impacted and we may not be able to continue in business. See Footnote 6 in the Notes to the Consolidated Financial Statements contained elsewhere in this report.
We are presently in default on approximately $0.1 million of principal on our partially secured Loans payable.
As of the date of this annual report, the outstanding principal amount of $100,000 under our Notes Payable is due and owing by us. We have been in default to the holders of the debentures since June 23, 2013, when the loans matured. The loans are secured by a Deed of Assignment for certain future inventory and all proceeds from the sale of that inventory. We continue to not have sufficient financial resources, or the ability to arrange financing, to pay the outstanding amount of the debentures at this time. Our failure to pay the outstanding amount when due last year has resulted in our obligation to pay holders interest at the default rate of 109.5% per annum from the date of default. There can be no assurance that note holders have not already or will not in the future take legal action against us to collect the indebtedness due and owing under the notes or initiate or join in a bankruptcy or insolvency case or proceeding relating to us. Should note holders take any such actions, our company will be seriously impacted and we may not be able to continue in business. See Footnote 8 in the Notes to the Consolidated Financial Statements contained elsewhere in this report.
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. If we are unable to solve current and future technology issues, we may not be able to offer 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, quality control and sourcing 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.
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, 2013, our executive officers and directors (and their respective affiliates) beneficially owned approximately 20.0% of our outstanding common stock, with SAM Advisors, LLC, an investment advisor controlled by William B. Smith, our Chairman, beneficially owning approximately 11.4% 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, 2013, we have outstanding under our 2007 Stock Incentive Plan stock options to purchase 595,088 shares of common stock, outstanding warrants to purchase 4,772,228 shares of common stock and outstanding convertible debentures to acquire 1,152,223 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, 2013, there were 10,576,097 shares of common stock issued and outstanding. Of these shares, approximately 9,886,097 are freely transferable. Our executive officers and directors beneficially own 2,135,337 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 690,000 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.
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 13, the Company ceased the operations of Sendio and filed a petition of insolvency effective on February 13, 2012.
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 was the Czech Koruna (CZK). The accounts of Sendio contained in the accompanying consolidated balance sheets as of December 31, 2013 and 2012 have been translated into United States dollars at the exchange rate prevailing as of those dates. Translation adjustments were included in “Accumulated Other Comprehensive Income,” a separate component of stockholders’ equity. During the year ended December 31, 2012 we recognized the balance of Accumulated Other Comprehensive Income of $149,146 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, 2013 we have no 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, 2013 and determined there was no impairment.
Fair Value of Financial Instruments
Financial instruments consist of cash, payables and accrued liabilities, loans payable, bridge loans and convertible debentures. 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 due to the short term nature of these items. It is not practical to determine the fair value of our convertible debentures due to the unique terms and embedded financial instruments.
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.
Fair Value Measurements
ASC 820
“Fair Value Measurements”
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Significant fair value measurements resulted from the application of ASC 815 to our convertible promissory note and warrant financing arrangements and ASC 718-10 for our share-based payment arrangements.
Non-Controlling Interest
Non-controlling interest represents the equity of the 33.3% non-controlling shareholders of Telisar Corporation. The subsidiary had no operations during 2013 and 2012.
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, 2013 and 2012, research and development expenses were comprised primarily of technical consulting expenses, salaries and related benefits and overheads, travel, 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. On August 26, 2013
the board of directors increased the number of shares authorized for issuance under the 2007 Stock Incentive Plan by 1,500,000 shares to a total of 2,500,000 shares.
See Note 10.
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:
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Year ended December 31,
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2013
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2012
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Warrants
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4,772,228
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2,012,034
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Convertible debt
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1,152,223
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374,346
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Stock options
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595,088
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309,004
|
|
Unvested stock
|
|
|
319,231
|
|
|
|
168,500
|
|
Total potentially dilutive securities
|
|
|
6,838,770
|
|
|
|
2,863,884
|
|
Recently Announced Accounting Standards
– In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(“ASU 2013-11”). This update requires companies to present an
unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless certain conditions exist. ASU 2013-11 became effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. The Company will adopt ASU 2013-11 when required in the first quarter of 2014. The Company does not believe the impact of ASU 2013-11 will have a material effect on the Company’s consolidated financial statements or on its financial condition.
ASU 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment
, permits, but does not require, an entity to conduct an initial qualitative assessment to determine whether it is more likely than not that a non-goodwill indefinite-lived asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test currently required (i.e., comparing the asset's fair value with its carrying amount). This new standard was adopted by the Company on September 30, 2012 and had no significant effect on the accompanying consolidated financial statements.
ASU 2011-11,
Disclosures about Offsetting Assets and Liabilities
, requires disclosures about assets and liabilities that are offset or have the potential to be offset. This new guidance was effective for reporting periods beginning January 1, 2013, with retrospective application required. The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
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, 2013, we had a net loss of $5,019,977 and we had negative cash flows from operations of $1,717,606. In addition, we had an accumulated deficit of $88,426,616 at December 31, 2013. These factors raise substantial doubt about our ability to continue as a going concern.
Recovery of our assets is dependent upon future events, the outcome of which is indeterminable. Our attainment of profitable operations is dependent upon 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 $150,000 in a private placement of our common stock and warrants to accredited investors. See Note 14.
NOTE 4 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2013 we issued 48,842 shares of common stock with a fair value of $75,000 to SAM Advisors, LLC. The issuances were based on the closing market prices as of the date of issuance pursuant to our agreement to convert their $12,500 monthly consulting fee to stock at the closing market price on the last business day of each month. SAM Advisors, Inc. is an entity controlled by William B. Smith, our chairman and chief executive officer.
During the year ended December 31, 2013 we issued 6,143 shares of common stock with a fair value of $11,250 to Charles Hunt, a member of our board of directors. The issuances were based in the closing market prices as of the date of issuance pursuant to our agreement to convert $3,750 of his monthly consulting fee to stock at the closing market price on the last business day of each month.
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.
During the year ended December 31, 2012, two of our board members invested $105,000 and $15,000 in our unit private placement as discussed in Note 10.
During the year ended December 31, 2012, 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 7.
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.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
On December 18, 2012 we entered into a 6 month lease for office space in New York, New York. This lease was extended to December 31, 2013 on the same terms. Monthly rental payments are $2,035. The lease was terminated by its terms as of that date.
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.
Total rent expense was $24,647 and $9,859 for the years ended December 31, 2013 and 2012, respectively.
Subsequent to December 31, 2013 the Company entered into a lease for a research and development facility in the United States. See Note 14.
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. 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 contingent obligation for fees and warrants terminated on January 21, 2013.
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. 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 contingent obligation for fees and warrants terminated in 2012.
NOTE 6 – 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 matured on June 22, 2013, two years after the date of their issuance and did 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 were 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, 2013 and determined no accrual was necessary.
Effective June 22, 2013, the Company entered into a letter agreement with holders of $2,553,000 in principal amount of the Debentures. The maturity date of these Debentures was extended to June 23, 2014 and the conversion price was reduced from $11.00 to $2.50 per share. In addition, these Debentures will bear interest at an annual rate of 10% per annum, payable in equal installments on the six month and one year anniversary of the letter agreement.
Also, effective June 22, 2013, the Company entered into a separate letter agreement with the holder of approximately $123,538 in principal amount of the Debentures to reduce the conversion price of these Debentures from $11.00 to $1.22 per share. This holder then converted the principal amount of their Debentures into 101,260 shares of common stock.
We evaluated the amended debentures above to determine if there was an extinguishment of debt or beneficial conversion feature arising as a result of the amendments and determined there was none.
On June 22, 2013, the Company did not make the required payment on the remaining $1,441,213 in principal amount of the Debentures described above, which constitutes an event of default under the terms of the remaining original Debentures. As a result, the Company recorded a penalty of 10% of the principal amount of $144,121 as interest expense on the accompanying statement of operations for the year ended December 31, 2013. The Company is also liable for all other amounts, costs, expenses and liquidated damages due in respect of those Debentures. Additionally, the remaining original Debentures will bear default interest at a rate of 18% per annum. As a result of the Debentures being past due, the investors may at any time exercise their remedies under the terms of the Debentures.
The carrying value at December 31, 2013 and 2012 of the convertible debentures is as follows:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Debentures Due June 22, 2013, in default at December 31, 2013, interest at 18%
|
|
$
|
1,352,975
|
|
|
$
|
4,117,750
|
|
Debentures Due June 23, 2014, interest at 10%
|
|
|
2,553,000
|
|
|
|
-
|
|
Original issue discount
|
|
|
-
|
|
|
|
(155,443
|
)
|
|
|
|
3,905,975
|
|
|
|
3,962,307
|
|
Beneficial conversion feature and warrant allocation
|
|
|
-
|
|
|
|
(415,811
|
)
|
Carrying value
|
|
$
|
3,905,975
|
|
|
$
|
3,546,496
|
|
The original issue discount of the convertible debentures was 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 were 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,
|
|
|
|
2013
|
|
|
2012
|
|
Amortization of original issue discount
|
|
$
|
155,443
|
|
|
$
|
309,628
|
|
Amortization of beneficial conversion feature and warrant allocation
|
|
|
415,811
|
|
|
|
722,956
|
|
Amortization of loan costs
|
|
|
104,392
|
|
|
|
220,852
|
|
Penalty interest payable in cash
|
|
|
144,121
|
|
|
|
-
|
|
Stated interest payable in cash
|
|
|
259,168
|
|
|
|
-
|
|
|
|
$
|
1,078,935
|
|
|
$
|
1,253,436
|
|
NOTE 7 – 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 year ending December 31, 2013 and 2012 was $7,027 and $54,103 (including $14,250 of loan costs in 2012), 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 February, 2013 three of the convertible bridge loans totaling $368,162 (including accrued interest and loan fees of $68,162) were converted into 368,162 shares of our restricted common stock, three year warrants to purchase 368,162 shares of our common stock at an exercise price of $1.50 per share and three year warrants to purchase 98,571 shares of our common stock at an exercise price of $11.00 per share. The fair value of the common stock was $662,690 based on the market prices of our common stock on the date of conversion of $1.80 per share. The fair value of the three year warrants to purchase 368,162 shares of our common stock at an exercise price of $1.50 per share was $633,121 and fair value of the three year warrants to purchase 98,571 shares of our common stock at an exercise price of $11.00 per share was $158,094. We recognized a loss on debt conversion for the year ended December 31, 2013 in the amount of $1,085,744.
The fair value of the warrants issued upon the conversions in 2013 was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.82%, volatility – 227.1%, and an expected dividend rate of 0%.
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 10. 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 conversions in 2012 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 in 2012 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.
NOTE 8 – LOANS PAYABLE
On December 20, 2012, we received gross proceeds of $100,000 pursuant to the terms of a Loan Agreement dated December 20, 2012. The loan is secured by a deed of assignment for certain future inventory and proceeds from the sale of that inventory as described in the deed of assignment. The loan was 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 were amortized over the life of the note. We recognized $81,714 and $1,486 of interest expense and $23,514 and $892 for loan cost amortization within interest expense for the years ended December 31, 2013 and 2012, respectively.
On June 23, 2013 we did not repay the loan and it is in default. As a result of the default, the interest rate on the loan is 109.5% per annum from the date of default.
Total principal payments for future years for the Convertible Bridge Loans, the Convertible Debentures described in Note 7, the Convertible Bridge Loans described in Note 7 and the Loan Payable are as follows as of December 31, 2013:
|
|
December 31,
2013
|
|
2014
|
|
|
4,005,975
|
|
|
|
$
|
4,005,975
|
|
On May 16, 2013 we received gross proceeds of $100,000 pursuant to a Loan Agreement as of that date. The term of the loan was for 30 days. Total interest for the 30 day term was $10,000, which was recognized as interest expense for the year ended December 31, 2013. On June 18, 2013 the holder of the loan converted $110,000 of principal and interest in our unit private placement as further described in Note 10 at a conversion price of $1.50 per share into 73,333 shares of common stock and three-year warrants to purchase common stock at an exercise price of $2.00 per share. The fair value of the common stock was $95,333 based on the market prices of our common stock on the date of conversion of $1.30 per share. The fair value of the three year warrants to purchase 73,333 shares of our common stock at an exercise price of $2.00 per share was $43,687. We recognized a loss on conversion of debt for the year ended December 31, 2013 in the amount of $29,020.
The fair value of the warrants issued upon the conversion was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.42%, volatility – 91.4%, and an expected dividend rate of 0%.
NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments were 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 a private placement. If we issued 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 was decreased to equal the price at which the common stock or common stock equivalents were issued. The exercise price could not be reduced below $9.00 per share. 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 6.
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 in Note 10. 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 for the year ended December 31, 2012.
The Company used the Black-Scholes option valuation model to measure the fair value of the warrants, and based on the following assumptions: market value of common stock of $4.15, expected life of 4.04 years, volatility of 81.0% and risk free interest rate of 0.66%.
NOTE 10 - STOCKHOLDERS’ EQUITY
Preferred Stock
Our Amended and Restated Articles of Incorporation allow us to issue up to 10,000,000 shares of preferred stock without further stockholder approval and upon such terms and conditions, and having such rights, preferences, privileges, and restrictions as the Board of Directors may determine. No preferred shares are currently issued and outstanding.
Common Stock Issuances
2013 Unit Offerings
On January 25, 2013 we completed a private placement to accredited investors of 105,000 restricted shares of our common stock, at a purchase price of $1.00 per share, for gross proceeds of $105,000. As part of the private placement, the investors were issued three-year warrants to purchase 105,000 shares of our common stock, at an exercise price of $1.50 per share.
The net proceeds were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance. The amount allocated to the fair value of the warrants was $52,363 and the balance of the proceeds of $52,637 was allocated to the common stock.
The fair value of the warrants issued in our unit private placement was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 3 years, risk free interest rate – 0.42%, volatility – 346.4%, and an expected dividend rate of 0%.
From April 9 to July 11, 2013 we raised gross proceeds of $871,000 in a unit private placement to accredited investors at a price of $1.50 per unit. Each unit is comprised of one share of common stock and one three-year warrant to purchase common stock at an exercise price of $2.00 per share. Included in the proceeds is $110,000 of principal and interest which was converted into the unit offering as described in Note 8. Also included is $10,000 received from a member of our board of directors. We issued an aggregate of 580,667 shares of common stock and warrants to purchase 580,667 shares of common stock at an exercise price of $2.00 per share.
The net proceeds of $761,000 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance. The amount allocated to the fair value of the warrants was $256,836 and the balance of the proceeds of $504,164 was allocated to the common stock. The fair value of the warrants issued was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.34% to 0.65%, volatility – 91.4% to 150.3%, and an expected dividend rate of 0%.
From October 10 to December 31, 2013 we received gross proceeds of $650,000 from accredited investors at a price of $1.00 per unit and issued 650,000 shares of common stock and two-year warrants to purchase 650,000 shares of common stock at an exercise price of $1.25 per share.
The net proceeds of $650,000 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance. The amount allocated to the fair value of the warrants was $217,155 and the balance of the proceeds of $432,845 was allocated to the common stock. The fair value of the warrants issued was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 2 years, risk free interest rate – 0.28% to 0.38%, volatility – 81.5% to 113.0%, and an expected dividend rate of 0%.
2013 Issuances of common stock
During the year ended December 31, 2013 we issued 685,667 shares of common stock in our unit offerings described above and 368,162 shares of common stock upon the conversion of three of the convertible bridge loans as described in Note 6.
During the year ended December 31, 2013 we issued 48,842 shares of common stock with a fair value of $75,000 to SAM Advisors, LLC. The issuances were based on the closing market prices as of the date of issuance pursuant to our agreement to convert their $12,500 monthly consulting fee to stock at the closing market price on the last business day of each month. SAM Advisors, LLC is an entity controlled by William B. Smith, our chairman and chief executive officer. Effective July 1, 2013 Mr. Smith receives this amount in cash.
During the year ended December 31, 2013 we issued 6,143 shares of common stock with a fair value of $11,250 to Charles Hunt, a member of our board of directors. The issuances were based in the closing market prices as of the date of issuance pursuant to our agreement to convert $3,750 of his monthly consulting fee to stock at the closing market price on the last business day of each month.
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
|
|
$
|
0.52
|
|
|
$
|
0.52
|
|
Estimated volatility
|
|
|
92
|
%
|
|
|
92
|
%
|
Risk free interest rate
|
|
|
3.36
|
%
|
|
|
3.36
|
%
|
Expected dividend rate
|
|
|
-
|
|
|
|
-
|
|
Expected life
|
|
10 years
|
|
|
10 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 January 25, 2013 we amended the terms of the 2012 Unit Offering, 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.
2012 Issuances of 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.
Stock issuances
A summary of activity related to grants of common stock under the 2007 Stock Incentive Plan as of December 31, 2013 is presented below.
|
|
Number of
Shares
|
|
|
Grant Date
Fair Value
|
|
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
|
|
Granted
|
|
|
399,231
|
|
|
$
|
1.20 to $1.61
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2013
|
|
|
696,329
|
|
|
$
|
1.20 to $22.80
|
|
|
|
|
|
|
|
|
|
|
Vested, December 31, 2013
|
|
|
524,070
|
|
|
$
|
1.20 to $22.80
|
|
A summary of the status of our nonvested stock grants as of December 31, 2013 and changes during the year ended December 31, 2013 is presented below.
Nonvested Stock Grants
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2012
|
|
|
168,500
|
|
|
$
|
8.00
|
|
Granted
|
|
|
399,231
|
|
|
|
1.29
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(395,472
|
)
|
|
|
9.20
|
|
Nonvested at December 31, 2013
|
|
|
172,259
|
|
|
$
|
3.26
|
|
We made the following common stock awards for the year ended December 31, 2013 from the 2007 Stock Incentive Plan:
On February 20, 2013 we issued 80,000 shares of restricted stock from the 2007 Stock Incentive Plan to two board members and an officer for services vesting on the date of grant. The shares had a fair value of $128,800 based on the closing market price of our common stock on that date of $1.61 per share.
On June 15, 2013 we issued 19,231 shares of restricted common stock to a consultant for services vesting in equal monthly installments through the one year anniversary date of service. The shares had a fair value of $25,000 based on the closing market price of our common stock of $1.30 as of that date.
On August 26, 2013 w
e issued 300,000 shares of restricted common stock to our non-executive board members and an officer for services vesting ratably through June 1, 2014. The shares had a fair value of $360,000 based in the closing market price of $1.20 as of that date.
We recognized a total of $544,889 and $311,336 of compensation expense related to restricted stock issuances as general and administrative and research and development expenses for the years ended December 31, 2013 and 2012, respectively.
At December 31, 2013 there are 172,259 shares of unvested restricted stock representing $207,587 of unrecognized compensation expense which we anticipate
will be recognized in the first half of 2014.
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 vested 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 vested 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. A total of 2,795 shares of unvested common stock were forfeited in 2012.
Option issuances
A summary of activity related to stock options under the 2007 Stock Incentive Plan as of December 31, 2013 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, 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
|
|
|
$
|
-
|
|
Granted
|
|
|
317,600
|
|
|
$
|
1.28 to $1.70
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31,516
|
)
|
|
$
|
7.80 to $20.00
|
|
|
$
|
12.54
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
595,088
|
|
|
$
|
1.28 to $20.00
|
|
|
$
|
6.15
|
|
|
|
3.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2013
|
|
|
511,755
|
|
|
$
|
1.28 to $20.00
|
|
|
$
|
6.87
|
|
|
|
3.7
|
|
|
$
|
-
|
|
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, 2013 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
|
|
$
|
1.28 to $1.70
|
|
|
|
4.9
|
|
|
|
317,600
|
|
|
$
|
1.65
|
|
|
|
234,267
|
|
|
$
|
1.64
|
|
$
|
4.60
|
|
|
|
4.0
|
|
|
|
20,000
|
|
|
$
|
4.60
|
|
|
|
20,000
|
|
|
$
|
4.60
|
|
$
|
7.60 to $8.60
|
|
|
|
5.2
|
|
|
|
140,407
|
|
|
$
|
8.17
|
|
|
|
140,407
|
|
|
$
|
8.17
|
|
$
|
10.20 to $13.00
|
|
|
|
6.1
|
|
|
|
52,501
|
|
|
$
|
11.45
|
|
|
|
52,501
|
|
|
$
|
11.45
|
|
$
|
20.00
|
|
|
|
4.7
|
|
|
|
64,580
|
|
|
$
|
20.00
|
|
|
|
64,580
|
|
|
$
|
20.00
|
|
A summary of the status of our nonvested options as of December 31, 2013 and changes during the year ended December 31, 2013 is presented below.
Nonvested Options
|
|
Number of
Shares
Underlying
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2012
|
|
|
2,828
|
|
|
$
|
7.80
|
|
Granted
|
|
|
317,600
|
|
|
|
1.65
|
|
Forfeited or expired
|
|
|
(2,828
|
)
|
|
|
7.80
|
|
Vested
|
|
|
(234,267
|
)
|
|
|
1.65
|
|
Nonvested at December 31, 2013
|
|
|
83,333
|
|
|
$
|
1.70
|
|
We made the following stock option awards for the year ended December 31, 2013 from the 2007 Stock Incentive Plan:
On February 20, 2013 we issued ten-year, fully vested options to purchase 42,600 shares of common stock from the 2007 Stock Incentive Plan at an exercise price of $1.61 per share to two board members and an officer for services. The fair value of the options granted of $68,741 was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 10 years, risk free interest rate – 2.02%, volatility – 246.2%, and an expected dividend rate of 0%.
On March 11, 2013 we issued five-year options to purchase 250,000 shares of common stock at an exercise price of $1.70 per share to William B. Smith, our Chairman and Chief Executive Officer. A total of 83,334 options vested immediately, with an additional 83,333 shares vesting on the six month and twelve month anniversary of the options. In addition, certain performance based criteria provide for the potential acceleration of the vesting schedule. The fair value of the options granted of $410,540 was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 5 years, risk free interest rate – 0.9%, volatility – 188.8%, and an expected dividend rate of 0%.
On November 11, 2013 we issued five-year, fully vested options to purchase 25,000 shares of common stock at an exercise price of $1.28 per share to a consultant. The fair value of the options granted of $22,055 was calculated using the Black-Scholes option valuation model with the following assumptions – expected life – 5 years, risk free interest rate – 1.47%, volatility – 88.5%, and an expected dividend rate of 0%.
We recognized compensation expense of $478,228 and $132,416 related to the vested portion of stock options based on their estimated grant date fair value as marketing expense, research and development expense or general and administrative expense based on the specific recipient of the award for the years ended December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013 options to purchase 30,266 shares of common stock at a weighted average exercise price of $14.32 expired unexercised.
There were no grants of stock options from the 2007 Stock Incentive Plan for the year ended December 31, 2012.
We recognized compensation expense of $544,577 and $445,685 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, 2013 and 2012, respectively.
At December 31, 2013, there are 319,231 shares of unvested restricted stock issued in 2013 of which we anticipate $207,587 of unrecognized compensation expense will be recognized in 2014.
At December 31, 2013, we have unrecognized compensation expense related to stock options of $26,824 which will be recognized in 2014.
As of December 31, 2013, the 2007 Stock Incentive Plan has 1,223,299 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, 2013 and 2012.
2013 Warrants
As a result of the amendment of our 2012 Unit Offering as described above, the Company issued warrants to purchase an additional 1,186,567 shares of common stock at an exercise price of $1.50 per share to the investors in the offering.
On January 25, 2013 we issued three year warrants to purchase 105,000 shares of common stock at an exercise price of $1.50 per share in our unit offering described above.
From April 9 to July 11, 2013 we issued three year warrants to purchase 580,667 shares of common stock at an exercise price of $2.00 per share in our unit offering described above.
From October 10 to December 31, 2013 we issued two-year warrants to purchase 650,000 shares of common stock at an exercise price of $1.25 per share in our unit offering described above.
In February, 2013 we issued three year warrants to purchase 368,162 shares of our common stock at an exercise price of $1.50 per share and three year warrants to purchase 98,571 shares of our common stock at an exercise price of $11.00 per share to three investors upon the conversion of convertible bridge notes as described in Note 7.
During the year ended December 31, 2013 warrants to purchase a total of 230,858 shares of common stock with a weighted average exercise price of $15.31 expired unexercised.
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 7.
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.
A summary of activity related to our warrants as of December 31, 2013 is presented below.
|
|
Number of
Shares
|
|
|
Exercise
price range
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Outstanding, December 31, 2011
|
|
|
921,963
|
|
|
$
|
7.60 to $20.00
|
|
|
$
|
13.60
|
|
|
|
2.7
|
|
Granted
|
|
|
1,307,132
|
|
|
$
|
1.50 to $11.00
|
|
|
$
|
2.10
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(214,975
|
)
|
|
$
|
15.00 to $20.00
|
|
|
$
|
15.55
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
2,014,120
|
|
|
$
|
1.50 to $20.00
|
|
|
$
|
5.67
|
|
|
|
2.6
|
|
Granted
|
|
|
2,988,966
|
|
|
$
|
1.25 to $11.00
|
|
|
$
|
1.86
|
|
|
|
1.8
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(230,858
|
)
|
|
$
|
7.60 to $20.00
|
|
|
$
|
15.31
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
4,772,228
|
|
|
$
|
1.25 to $13.00
|
|
|
$
|
2.76
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2013
|
|
|
4,772,228
|
|
|
$
|
1.25 to $13.00
|
|
|
$
|
2.76
|
|
|
|
1.8
|
|
The following table summarizes our outstanding warrants as of December 31, 2013:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Exercise
|
|
|
Warrants
|
|
|
Remaining Contractual
|
|
|
Number
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
$
|
1.25
|
|
|
|
650,000
|
|
|
|
1.9
|
|
|
|
650,000
|
|
$
|
1.50
|
|
|
|
2,909,360
|
|
|
|
1.6
|
|
|
|
2,909,360
|
|
$
|
2.00
|
|
|
|
580,667
|
|
|
|
2.5
|
|
|
|
580,667
|
|
$
|
9.00
|
|
|
|
262,750
|
|
|
|
2.1
|
|
|
|
262,750
|
|
$
|
11.00
|
|
|
|
156,071
|
|
|
|
1.9
|
|
|
|
156,071
|
|
$
|
13.00
|
|
|
|
213,380
|
|
|
|
2.5
|
|
|
|
213,380
|
|
|
|
|
|
|
4,772,228
|
|
|
|
1.8
|
|
|
|
4,772,228
|
|
NOTE 11 - INCOME TAXES
The net deferred tax asset is comprised of the following:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Net operating loss carryforwards
|
|
$
|
19,683,962
|
|
|
$
|
18,986,174
|
|
Share-based compensation
|
|
|
1,404,983
|
|
|
|
1,792,487
|
|
Valuation allowance
|
|
|
(21,088,945
|
)
|
|
|
(20,778,661
|
)
|
Deferred income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the years ended December 31, 2013 and 2012 as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
5,019,977
|
|
|
$
|
3,825,448
|
|
|
|
|
|
|
|
|
|
|
Tax at federal statutory rate (34%)
|
|
$
|
(1,706,792
|
)
|
|
$
|
(1,300,652
|
)
|
Permanent differences
|
|
|
631,820
|
|
|
|
265,129
|
|
Expiration of options and warrants
|
|
|
764,688
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
310,284
|
|
|
|
1,035,523
|
|
Provision for Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2013, 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
|
|
2033
|
|
|
2,052,317
|
|
|
|
$
|
57,894,006
|
|
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 2010 to 2013 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. Included in the balance sheets are the following liabilities of Sendio that are subject to the insolvency proceedings:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
189,089
|
|
|
$
|
189,089
|
|
Accrued payroll
|
|
|
357,052
|
|
|
|
357,052
|
|
Capital lease obligation, current portion
|
|
|
9,313
|
|
|
|
9,313
|
|
Total liabilities of Sendio
|
|
|
555,454
|
|
|
|
555,454
|
|
Our lease for the Sendio premises was terminated effective March 15, 2012 and our obligation to acquire the Sendio building was terminated on February 8, 2012.
NOTE 14 – SUBSEQUENT EVENTS
On January 28, 2014 we entered into a lease agreement for approximately 4,600 square feet of office and light industrial space located in Berkeley, California in the United States. We utilize the facility for our research and development activities and as our corporate headquarters.
The lease term is for two years effective from February 1, 2014 and terminates on January 31, 2016. Our lease obligations are $55,000, $60,000 and $5,000 for the years ended December 31, 2014, 2015 and 2016, respectively. The Company is also responsible for certain insurance, utilities, maintenance and other costs as described in the lease.
Through March 27, 2014 we received gross proceeds of $150,000 from accredited investors at a price of $1.00 per unit and issued 150,000 shares of common stock and two-year warrants to purchase 150,000 shares of common stock at an exercise price of $1.25 per share.
On February 11, 2014 we issued stock options to purchase 13,158 shares of common stock to a consultant at an exercise price of $1.14 per share based on the closing market price of our common stock as of that date.
F-26