Note 11 - Stockholders' Equity

12 Months Ended

Dec. 31, 2012

Notes

Note 11 - Stockholders' Equity

NOTE 11 - STOCKHOLDERS’ EQUITY

Preferred Stock

Our Amended and Restated Articles of Incorporation allows us to issue up to 10,000,000 shares of preferred stock without further stockholder approval and upon such terms and conditions, and having such rights, preferences, privileges, and restrictions as the Board of Directors may determine.  No preferred shares are currently issued and outstanding.

Common Stock Issuances

2012 Unit Offering

From January 24 to November 21, 2012 we sold 474,632 units at a subscription price of $3.50 per unit for gross proceeds of $1,661,199 in our unit private placement.  Each unit consisted of one share of common stock and a three-year warrant to purchase one share of common stock at an exercise price of $3.75 per share.  A total of 474,632 shares of common stock and warrants to purchase 474,632 shares of common stock at an exercise price of $3.75 were issued.  Included in these amounts are 12,000 shares of our common stock and 12,000 warrants issued upon the conversion of $42,000 in accounts payable to a vendor and 55,267 shares of our common stock and 55,267 warrants issued upon the conversion of loans totaling $193,431 (including accrued interest and loan fees of $18,431).  Also included in these amounts is cash investment of $105,000 and $15,000 received from two of our board members.

The net proceeds of $1,425,768 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance.  The allocated fair value of the warrants was $583,638 and the balance of the proceeds of $842,130 was allocated to the common stock.  

The fair value of the shares issued to the vendor upon conversion of $42,000 of accounts payable was $70,920 based on the closing market price of our common stock on the date of conversion.  The fair value of the warrant issued was $46,979. We recognized a loss on conversion of accounts payable based on the difference between the fair value of the common stock and warrants issued to the vendor in the amount of $75,599.

The fair value of the warrants issued in our unit private placement was calculated using the Black-Scholes option valuation model with the following assumptions:

Closing market price of common stock	$0.70 to $6.00
Estimated volatility	81.0% to 307.9%
Risk free interest rate	0.28% to 0.56%
Expected dividend rate	-
Expected life	3 years

On October 10, 2012 the board of directors reset the exercise price of the $3.75 per share warrants to purchase 474,632 warrants issued from $3.75 per share to $2.00 per share. All other terms and conditions of the warrants remain unchanged. Included in the total are 50,682 warrants owned by two members of our board of directors.  As a result of this reduction in price, the original allocation of the net proceeds of $1,425,768 would have resulted in $629,619 being allocated to the warrants and the balance of the proceeds of $796,149 was allocated to the common stock. 

On September 11, 2012 we issued 12,500 shares of common stock with a fair value of $30,625 based on the closing market price as of that date to a vendor for services.  We recognized this as marketing expense in the accompanying statement of operations for the year ended December 31, 2012.

Effective July 24, 2012 we issued 59,000 shares of our restricted common stock valued at $142,780 based on the closing market price for our common stock of $2.42 per share pursuant to an agreement with a vendor for investor relations services.  Effective August 31, 2012, we terminated the contract pursuant to its terms and cancelled the issuance of 52,858 shares.  Accordingly, we recognized the fair value of the 6,142 shares of $14,864 as marketing expense in the accompanying statements of operations for the year ended December 31, 2012.

From August 31, 2012 to December 31, 2012 we issued 56,208 shares of common stock with a fair value of $62,500 to SAM Advisors, LLC. The issuances were based in the closing market prices as of the date of issuance pursuant to our agreement to convert their $12,500 monthly consulting fee to stock at the closing market price on the last business day of each month. SAM Advisors, Inc. is an entity controlled by William B. Smith, our chairman and chief executive officer.

On December 20, 2012, we completed a private placement to accredited investors of 525,000 restricted shares of our common stock, at a purchase price of $0.80 per share, for gross proceeds of $420,000.  As part of the private placement, the investors were issued three-year warrants to purchase 525,000 shares of our common stock, at an exercise price of $1.50 per share. 

The net proceeds of $400,000 were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance.  The allocated fair value of the warrants was $127,787 and the balance of the proceeds of $272,213 was allocated to the common stock.  The fair value of the warrants issued in our unit private placement was calculated using the Black-Scholes option valuation model with the following assumptions:

Closing market price of common stock	$0.70
Estimated volatility	101.20%
Risk free interest rate	0.39%
Expected dividend rate	-
Expected life	3 years

In addition, on December 20, 2012, we entered into a settlement and release agreement with a vendor and issued 250,000 shares of our restricted common stock and three-year warrants to purchase 250,000 shares of our common stock at an exercise price of $1.50 per share, in settlement of $250,000 of trade accounts payable.  The fair value of the shares issued was $175,000 based on the closing market price of our common stock on the date of conversion.  The fair value of the warrant issued was $82,151. We recognized a loss on conversion of accounts payable based on the difference between the fair value of the common stock and warrants issued to the vendor in the amount of $7,151.

The fair value of the warrants issued in our unit private placement was calculated using the Black-Scholes option valuation model with the following assumptions:

Closing market price of common stock	$0.70
Estimated volatility	101.20%
Risk free interest rate	0.39%
Expected dividend rate	-
Expected life	3 years

Also on December 20, 2012, we entered into a settlement and release agreement with another vendor and issued 64,256 shares of our restricted common stock in settlement of $64,256 of trade accounts payable. The fair value of the shares issued was $44,979 based on the closing market price of our common stock on the date of conversion.  We recognized a gain on conversion of accounts payable based on the difference between the fair value of the common stock issued to the vendor in the amount of $19,277.

2011 Unit Offering

From January 12 to February 4, 2011, we sold 20,075 units at a subscription price of $20.00 per unit for net proceeds of $401,500 in our unit private placement.  Each unit consisted of two shares of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $20.00 per share.  A total of 40,150 shares of common stock and warrants to purchase 20,075 shares of common stock at an exercise price of $20.00 were issued.  Included in these amounts are 6,650 shares of our common stock and 3,325 warrants issued upon the conversion of $66,500 in accounts payable to R. Gale Sellers, our former Chief Executive Officer and board member.

The net proceeds were allocated based on the relative fair values of the common stock and the warrants on the dates of issuance.  The allocated fair value of the warrants was $67,776 and the balance of the proceeds of $333,724 was allocated to the common stock.  

The fair value of the warrants issued in our unit private placement was calculated using the Black-Scholes option valuation model with the following assumptions:

Closing market price of common stock	$10.00 to $11.20
Estimated volatility	105.5% to 108.7%
Risk free interest rate	0.54% to 0.77%
Expected dividend rate	-
Expected life	2 years

2011 Private Placement

On February 8, 2011, we completed a private placement to eight institutional accredited investors of 245,560 shares of our common stock, at a purchase price of $9.00 per share, for gross proceeds of $2,210,000.  As part of the private placement, the investors were issued five-year warrants to purchase 245,560 shares of our common stock, at an initial exercise price of $12.00 per share. 

These warrants contain a full ratchet provision which reduces the exercise price of the warrant in the event we issue common stock or common stock equivalents at a price lower than the exercise price of the warrants.  The exercise price cannot be reduced below $9.00 per share. As such, the warrants were treated as a derivative warrant liability as discussed in Note 10. The exercise price was reduced on June 22, 2011 to $11.00 per share as a result of the issuance of the convertible debentures as described in Note 7.  On January 24, 2012, the exercise price of the warrants was further reduced to $9.00 per share in conjunction with the 2012 Unit Offering as described above.  As a result of the price reductions, the warrants no longer qualify for derivative liability treatment.

For each of the warrants, the holder will be able to exercise the warrant on a so-called cashless basis at any time following the one-year anniversary of the closing of the private placement in which a registration statement covering the shares of our common stock underlying such warrants is not effective. 

The net proceeds from the private placement totaling $2,001,901, following the payment of offering-related expenses of $208,099, were used by us for our capital expenditure requirements and for working capital and other general corporate purposes.  At the closing of the private placement, we paid Rodman & Renshaw LLC, the placement agent for the private placement, cash compensation of 7% of the gross proceeds of the private placement and a five-year warrant to purchase up to 17,190 shares of our common stock, at an initial exercise price of $12.00 per share.

We agreed, pursuant to the terms of a registration rights agreement with the investors, to file a shelf registration statement with respect to the resale of the shares of our common stock sold to the investors and shares of our common stock issuable upon exercise of the warrants with the SEC on or before April 10, 2011; and to use our best efforts to have the shelf registration statement declared effective by the SEC as soon as possible after the initial filing, and in any event no later than 90 days after the closing date (or 150 days in the event of a review of the shelf registration statement by the SEC). We also agreed to keep the shelf registration statement effective until all registrable securities may be sold under Rule 144 under the Securities Act of 1933 and if we are unable to comply with this covenant, we will be required to pay liquidated damages to the investors in the amount of 1.5% of the investors’ purchase price per month during such non-compliance (capped at a maximum of 10% of the purchase price), with such liquidated damages payable in cash.  We filed the registration statement on April 10, 2011 and it was declared effective on April 18, 2011.  We evaluated any liability under the registration rights agreement at December 31, 2012 and determined no accrual was necessary.

The investors agreed, pursuant to the securities purchase agreement, not to engage in any short sales (as defined in the agreement) until the earlier of the effective date of the shelf registration statement referred to above or the date when the shares of our common stock sold to the investors and shares of our common stock issuable upon exercise of the warrants are eligible for sale under Rule 144 under the Securities Act of 1933.  We also granted the investors the right to participate in future equity financing transactions within the 12 months following the closing of the private placement and agreed to certain restrictions on our ability to sell our equity securities until 60 days after the effective date of the shelf registration statement.

Issuances of Common Stock

During the year ended December 31, 2011 we completed the following:

From January 12 to February 4, 2011, we sold 20,075 Units at a subscription price of $20.00 per Unit for net proceeds of $401,500 in our Unit Private Placement.  Each Unit consists of two shares of common stock and a two-year warrant to purchase one share of common stock at an exercise price of $20.00 per share.  A total of 40,150 shares of common stock and two-year warrants to purchase 20,075 shares of common stock at an exercise price of $20.00 were issued.  Included in these amounts are 6,650 shares of our common stock and 3,325 warrants issued upon the conversion of accounts payable by R. Gale Sellers, our former Chief Executive Officer and a former member of our board of directors.

On June 22, 2011, we issued 15,000 shares of common stock with a fair value of $135,000 based on the closing market price as of that date of $9.00 per share to Milan Gottwald pursuant to the Sendio facilities purchase agreement as described in Note 6.

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

On October 26, 2007, our Board of Directors approved our 2007 Stock Incentive Plan.  A total of 500,000 shares of our common stock were authorized for issuance under the plan. The Stock Incentive Plan allows us to grant stock or stock option awards to our employees, directors, officers, consultants, agents, advisors and independent contractors of Vu1 and subsidiaries. We issue new shares when options are exercised. The Stock Incentive Plan is administered by our Board of Directors and Compensation Committee, which can determine the size and type of award granted, purchase price, vesting schedule and expiration date of any stock or options grant.  All grants of shares and the shares underlying options are for restricted common stock and are issued at the closing market price of our common stock on the date of grant.  On March 14, 2011, our board of directors increased the number of shares of our common stock that we are authorized to issue under the 2007 Stock Incentive Plan from 500,000 shares to 1,000,000 shares.  A majority of our stockholders approved the amendment to the Stock Incentive Plan on October 10, 2011.

Stock issuances

A summary of activity related to grants of common stock under the 2007 Stock Incentive Plan as of December 31, 2012 is presented below.

	Number of   Shares	Grant Date Fair Value
Outstanding, December 31, 2010	130,951	$4.60 to $22.80
Granted	13,125	$8.00
Forfeited	(12,683)	$10.20
Outstanding, December 31, 2011	131,393	$4.60 to $22.80
Granted	168,500	$3.26
Forfeited	(2,795)	$8.00
Outstanding, December 31, 2012	297,098	$2.24 to $22.80
Vested, December 31, 2012	128,598	$2.24 to $22.80

A summary of the status of our nonvested stock grants as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below.

Nonvested Stock Grants	Number of   Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011	7,529	$	8.00
Granted	168,500		3.26
Forfeited	(2,795)		8.00
Vested	(4,734)		9.20
Nonvested at December 31, 2012	168,500	$	3.26

We made the following common stock awards for the year ended December 31, 2012 from the 2007 Stock Incentive Plan:

On June 1, 2012 we granted a total of 148,500 shares of restricted common stock to the six non-executive board members for service on the board of directors.  The shares had a fair value of $504,900 based on the closing market price of $3.40 on the date of grant.  The shares vest on June 1, 2013.   

On August 17, 2012 we granted 20,000 shares of restricted common stock to an officer for service.  The shares had a fair value of $44,800 based on the closing market price of $2.24 on the date of grant.  The shares vest on August 17, 2013.

On July 28, 2011, Bill K. Hamlin, then a member of our board of directors, was appointed to the positions of President and Chief Operating Officer of Vu1.  As part of his employment agreement, Mr. Hamlin agreed to convert $105,000 of his annual salary into 13,125 shares of our common stock at a conversion price of $8.00 per share, based on the closing market price of our common stock on the first day of his employment.  These shares vested in twelve equal monthly installments over the term of his employment agreement.  Mr. Hamlin resigned his position as President and Chief Operating Officer and director effective May 11, 2012.  We recognized a total of $37,869 of compensation expense relative to the 4,734 shares of common stock that vested during the year ended December 31, 2012. We recognized a total of $44,754 of compensation expense relative to the 5,592 shares that vested for the year ended December 31, 2011. A total of 2,795 shares of unvested common stock were forfeited in 2012.

We made the following common stock awards for the year ended December 31, 2011 from the 2007 Stock Incentive Plan:

On March 17, 2011, we issued 5,000 shares of common stock from the 2007 Stock Incentive Plan with a fair value of $51,000 based on the closing market price as of that date of $10.20 per share pursuant to the settlement of a dispute with a former consultant and employee to the Company.

On June 15, 2011, we issued 12,500 shares of common stock with a fair value of $112,500 based on the closing market price as of that date of $9.00 per share for services to Integrated Sales Solutions, a company controlled by our President and Chief Operating Officer, Billy K. Hamlin.

Option issuances

A summary of activity related to stock options under the 2007 Stock Incentive Plan as of December 31, 2012 is presented below.

	Number of   Shares	Exercise price range	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2010	332,754	$4.60to$20.00	$11.55	8.2	$792,384
Granted	267,057	$7.80to$10.40	$8.16
Exercised	-	-	$-
Forfeited	(8,630)	$10.20	$10.20
Outstanding, December 31, 2011	591,181	$4.60to$20.00	$10.04	5.9	$3,150
Granted	-	-	$-
Exercised	-	-	$-
Forfeited	(282,177)	$4.60to$13.00	$8.32
Outstanding, December 31, 2012	309,004	$4.60to$20.00	$11.62	6.0	$-
Exercisable, December 31, 2012	306,176	$4.60to$20.00	$11.66	6.0	$-

The aggregate intrinsic value of the stock options fluctuates in relation to the market price of our common stock as reflected on the OTC Bulletin Board.

The range of exercise prices for options outstanding and options exercisable under the 2007 Stock Incentive Plan at December 31, 2012 are as follows:

Range of Exercise Prices	Weighted Average Remaining Contractual Life of Options Outstanding (in years)	Options Outstanding		Options Exercisable
		Number of   Shares	Weighted Average Exercise Price	Number of   Shares	Weighted Average Exercise Price
$4.60	5.0	20,000	$4.60	20,000	$4.60
$7.60to$8.60	6.2	145,407	$8.16	142,579	$8.17
$10.20to$13.00	7.1	67,501	$11.71	67,501	$11.71
$20.00	5.1	76,096	$20.00	76,096	$20.00

A summary of the status of our nonvested options as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below.

Nonvested Options	Number of   Shares Underlying Options		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011	147,445	$	10.20
Granted	-		-
Forfeited or expired	(144,617)		10.20
Vested	-		-
Nonvested at December 31, 2012	2,828	$	7.80

There were no grants of stock options from the 2007 Stock Incentive Plan for the year ended December 31, 2012.

We made the following stock option awards for the year ended December 31, 2011 from the 2007 Stock Incentive Plan:

On March 14, 2011, our board of directors issued ten-year options to purchase a total of 31,250 shares of our common stock at an exercise price of $10.40 per share based on the closing market price as of that date to certain  of our directors and an officer. The fair value of the options granted of $285,032 was calculated using the Black-Scholes option valuation model.

On April 27, 2011, we issued five-year options to purchase 110,807 shares of our common stock at an exercise price of $7.82 per share based on the closing market price as of that date to Scott C. Blackstone, Ph.D., our Chief Executive Officer, in conjunction with his employment agreement as of that date.  The options vest monthly over three years from the date of issuance.  The fair value of the options granted of $616,084 was calculated using the Black-Scholes option valuation model.  These options expired during 2012.

On July 28, 2011, we issued stock options to purchase up to 70,000 shares of our common stock at an exercise price of $8.00 per share, the closing market price on Bill K. Hamlin’s first day of employment, from the Stock Incentive Plan.  A total of 30,000 options will vest over the term of his employment agreement, and the remaining 40,000 options will vest upon meeting certain performance criteria set by the Company.  The fair value of the options granted of $244,580 was calculated using the Black-Scholes option valuation model. These options expired during 2012.

On August 22, 2011, we issued stock options to purchase 50,000 shares of our common stock at an exercise price of $7.80 per share, the closing market price on the date of issuance, to certain directors and an officer from the Stock Incentive Plan.  The options vest upon issuance.  The fair value of the options granted of $246,500 was calculated using the Black-Scholes option valuation model. These options expired during 2012.

On September 12, 2011, we issued stock options to purchase 5,000 shares of our common stock at an exercise price of $7.80 per share, the closing market price on the date of issuance, to an employee from the Stock Incentive Plan.  The options vest ratably over five years.  The fair value of the options granted of $23,190 was calculated using the Black-Scholes option valuation model.

We used the following assumptions in the calculations of the Black Scholes option valuation model to calculate the fair value of options issued during the years ended December 31, 2012 and 2011:

	Years ended December 31,
	2012	2011
Closing market price of common stock	-	$7.80 to $10.40
Estimated volatility	-	72.8% to 92.3%
Risk free interest rate	-	0.42% to 3.36%
Expected dividend rate	-	-
Expected life	-	2 - 10 years

We recognized compensation expense of $445,685 and $1,006,807 related to the vested portion of stock and stock options based on their estimated grant date fair value as research and development expense or general and administrative expense based on the specific recipient of the award for the years ended December 31, 2012 and 2011, respectively.

At December 31, 2012, there are 168,500 shares of unvested restricted stock issued in 2012 of which we anticipate $238,364 of unrecognized compensation expense will be recognized ratably through the vesting date of August 17, 2013.   At December 31, 2012, we have unrecognized compensation expense related to stock options of $13,528, of which we anticipate $7,730 and $5,798 will be recognized in fiscal year 2013 and 2014, respectively.

As of December 31, 2012, the 2007 Stock Incentive Plan has 383,614 shares available for future grants of stock or options.

Warrant Issuances and Exercises

We issue new shares when warrants are exercised.  There were no warrants exercised during the years ended December 31, 2012 and 2011.

2012 Warrants

During year ended December 31, 2012 we issued three year warrants at an exercise price of $3.75 per share to purchase 474,632 shares of common stock in our unit offering described above.  On October 10, 2012 the board of directors reset the exercise price of the $3.75 per share warrants to purchase 474,632 warrants issued from $3.75 per share to $2.00 per share. All other terms and conditions of the warrants remain unchanged. Included in the total are 50,682 warrants owned by two members of our board of directors.

Also during the year ended December 31, 2012 we issued three year warrants at an exercise price of $11.00 per share to purchase 57,500 shares of common stock to three investors upon the conversion of a convertible bridge notes as described in Note 8.

On December 20, 2012, we issued three-year warrants to purchase 525,000 shares of our common stock at an exercise price of $1.50 per share in conjunction with a private placement as of that date as described above.

In addition, on December 20, 2012, we issued three-year warrants to purchase 250,000 shares of our common stock at an exercise price of $1.50 per share, in settlement of $250,000 of trade accounts payable as described above.

On January 24, 2012, the exercise price of the warrants to purchase 262,750 shares of common stock issued in conjunction with our February 9, 2011 private placement was reduced from $11.00 per share to $9.00 per share as a result of the issuance of the common stock and warrants in our unit private placement describe above.

During the year ended December 31, 2012 warrants to purchase a total of 214,975 shares of common stock with a weighted average exercise price of $15.55 expired unexercised.

2011 Warrants

On February 8, 2011, we issued five-year warrants to purchase 245,560 shares of our common stock, at an initial exercise price of $12.00 per share to investors in a private placement and a five-year warrant to purchase up to 17,190 shares of our common stock at an initial exercise price of $12.00 per share to the placement agent. 

On June 22, 2011, the exercise price of the warrants was reduced from $12.00 per share to $11.00 per share as a result of the issuance of the convertible debentures at a conversion price of $11.00 per share as described in Note 7. We also issued two-year warrants to purchase 20,075 shares of common stock at an exercise price of $20.00 in our unit offering, described above.  In addition, we issued five-year warrants to purchase 213,380 shares of our common stock, at an exercise price of $13.00 per share as described above. 

During the year ended December 31, 2011, warrants to purchase 6,988 shares of common stock with a weighted average exercise price of $13.43 per share expired unexercised.

A summary of activity related to our warrants as of December 31, 2012 is presented below.

	Number of   Shares	Exercise price range		Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (Years)
Outstanding, December 31, 2010	432,746	$7.60 to $20.00	$	15.18	2.1
Granted	496,205	$11.00 to $20.00	$	12.22
Exercised	-	-	$	-
Forfeited	(6,988)	$12.00 to $20.00	$	13.43
Outstanding, December 31, 2011	921,963	$7.60 to $20.00	$	13.60	2.7
Granted	1,305,046	$1.50 to $11.00	$	2.10
Exercised	-	-	$	-
Forfeited	(214,975)	$15.00 to $20.00	$	15.55
Outstanding, December 31, 2012	2,012,034	$1.50 to $20.00	$	5.67	2.6
Exercisable, December 31, 2012	2,012,034	$1.50 to $20.00	$	5.67	2.6

The following table summarizes our outstanding warrants as of December 31, 2012:

		Weighted-Average
Exercise	Warrants	Remaining Contractual	Number
Price	Outstanding	Life (Years)	Exercisable
$1.50	775,000	3.0	775,000
$2.00	472,546	2.3	472,546
$7.60	3,750	0.3	3,750
$9.00	262,750	3.1	262,750
$11.00	57,500	2.3	57,500
$13.00	213,380	3.5	213,380
$15.00	207,033	0.5	207,033
$20.00	20,075	0.1	20,075
	2,012,034	2.6	2,012,034