Vu1 (VUOC) 10-Q 2012 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission file no. 000-21864

Vu1 CORPORATION
(Exact name of registrant as specified in its charter)

California	84-0672714
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

111 Broadway, Suite 808, New York NY	10006
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNoo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero	Accelerated filero
Non-accelerated filero	Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨No x

On August 1, 2012, there were 6,152,981 shares of the Registrant’s common stock, no par value, issued and outstanding.

Vu1 CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

	Page Number
PART I   Financial Information
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Balance Sheets as of June 30, 2012 and December 31, 2011	1
Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2012 and 2011	2
Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	3
Notes to Condensed Consolidated Financial Statements	4
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
ITEM 4. Controls and Procedures	20
PART II  Other Information
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
ITEM 6. Exhibits	21
Signatures	22

EXPLANATORY NOTE

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

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Forward Looking Statements

We are including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements. All statements other than statements of historical fact, including statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions, future results of operations or financial position, made in this Report are forward looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.

The forward-looking statements contained in this Report involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and are believed by management to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties; however, management’s expectations, beliefs and projections may not be achieved or accomplished. In addition to other factors and matters discussed elsewhere in this Report, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements:

· our lack of working capital and lack of revenues;

· the availability of capital to us, in the amount and time needed, to fund our development programs and operations, and the terms and dilutive effect of any such financings;

· our ability to be successful in our product development and testing efforts;

· our ability to obtain commercial development for our planned products;

· our ability to obtain manufacturing for our planned products in a cost-effective manner and at the times and in the volumes required, while maintaining quality assurance;

· market demand for and acceptance of our planned products, and other factors affecting market conditions;

· technological advances and competitive pressure by our competitors;

· governmental regulations imposed on us in the United States and European Union; and

· the loss of any of our key employees or consultants.

For additional factors that can affect these forward-looking statements, see the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2011. The forward-looking statements contained in this Report speak only as of the date hereof. We caution readers not to place undue reliance on any such forward-looking statements. Except as required by U.S. federal securities laws, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. 

Vu1 CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	JUNE 30,			DECEMBER 31,
ASSETS	2012			2011
Current assets
Cash	$	5,165		$	10,992
Accounts receivable		-			3,616
Tax refund receivable		-			57,089
Prepaid expenses		43,274			38,948
Total current assets		48,439			110,645
Non-current assets
Equipment, net of accumulated depreciation
of $22,524 and $318,424, respectively		1,062			1,740
Loan costs		215,422			325,244
Total assets	$	264,923		$	437,629
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	958,052		$	1,012,186
Accrued payroll		192,725			475,176
Capital lease obligation, current portion		-			5,624
Convertible debentures, net of discount of $1,117,539 and $0, respectively		3,000,211			-
Liabilities of Sendio		555,454			-
Total current liabilities		4,706,442			1,492,986
Long-term liabilities
Convertible debentures, net of discount of $0 and $1,603,838, respectively		-			2,513,912
Convertible bridge loans		389,250			489,250
Derivative warrant liability		-			592,783
Capital lease obligation, net of current portion		-			4,114
Total liabilities		5,095,692			5,093,045
Stockholders' deficit
Vu1 Corporation's stockholders' deficit
Preferred stock, $1.00 par value; 10,000,000 shares
authorized; no shares issued and outstanding		-			-
Common stock, no par value; 90,000,000 shares authorized;
5,917,195 and 5,568,253 shares issued and outstanding, respectively		76,603,580			74,898,008
Accumulated deficit		(81,487,490	)		(79,581,191	)
Accumulated other comprehensive income		149,196			123,822
Total Vu1 Corporation's stockholders' deficit		(4,734,714	)		(4,559,361	)
Non-controlling interest		(96,055	)		(96,055	)
Total stockholders' deficit		(4,830,769	)		(4,655,416	)
Total liabilities and stockholders' deficit	$	264,923		$	437,629

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vu1 CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
Revenue	$	-		$	7,816		$	-		$	7,816
Cost of revenue		-			47,357			-			47,357
Gross Profit		-			(39,541	)		-			(39,541	)
Operating expenses
Research and development		91,530			644,736			306,888			1,213,393
General and administrative		351,939			1,081,074			823,252			1,909,270
Marketing		161,109			360,992			450,843			544,874
Total operating expenses		604,578			2,086,802			1,580,983			3,667,537
Loss from operations		(604,578	)		(2,126,343	)		(1,580,983	)		(3,707,078	)
Other income (expense)
Interest income		11			26			19			72
Loss on conversion of debt		-			-			(292,387	)		-
Interest expense		(318,416	)		(24,076	)		(625,731	)		(24,697	)
Derivative valuation gain		-			307,130			592,783			648,262
Total other income (expense)		(318,405	)		283,080			(325,316	)		623,637
Loss before provision for income taxes		(922,983	)		(1,843,263	)		(1,906,299	)		(3,083,441	)
Provision for income taxes		-			-			-			-
Net loss	$	(922,983	)	$	(1,843,263	)	$	(1,906,299	)	$	(3,083,441	)
Other comprehensive (loss) income:
Foreign currency translation adjustments		64,523			56,561			25,374			159,227
Comprehensive loss	$	(858,460	)	$	(1,786,702	)	$	(1,880,925	)	$	(2,924,214	)
Loss per share
Basic	$	(0.16	)	$	(0.33	)	$	(0.33	)	$	(0.56	)
Diluted	$	(0.16	)	$	(0.33	)	$	(0.33	)	$	(0.56	)
Weighted average shares outstanding
Basic		5,895,857			5,533,709			5,809,583			5,474,325
Diluted		5,895,857			5,533,709			5,809,583			5,474,325

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vu1 CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended June 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(1,906,299	)	$	(3,083,441	)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation		678			51,405
Share-based compensation		208,468			615,691
Issuance of stock for services		-			247,500
Amortization of discount on long-term convertible notes		486,299			18,678
Amortization of loan costs		109,822			4,827
Derivative valuation gain		(592,783	)		(648,262	)
Loss on conversion of debt		292,387
Changes in assets and liabilities:
Inventory		-			(65,029	)
Accounts receivable		3,616			(7,816	)
Tax refund receivable		-			(25,126	)
Prepaid expenses		(14,983	)		(447,737	)
Accounts payable		257,394			135,063
Accrued payroll		90,898			39,944
Net cash flows from operating activities		(1,064,503	)		(3,164,303	)
Cash flows from investing activities:
Purchases of equipment and construction in process		-			(2,691	)
Deposits on building purchase		-			(223,200	)
Net cash flows from investing activities		-			(225,891	)
Cash flows from financing activities:
Proceeds from sales of common stock and warrants		1,058,468			2,336,901
Proceeds from issuance of convertible notes and warrants					3,500,000
Cash paid for loan costs					(298,500	)
Payments on loan payable		-			(2,346	)
Payments on capital lease obligations		-			(1,993	)
Net cash flows from financing activities		1,058,468			5,534,062
Effect of exchange rate changes on cash		208			(12,957	)
Net change in cash		(5,827	)		2,130,911
Cash, beginning of period		10,992			119,619
Cash, end of period	$	5,165		$	2,250,530
Supplemental Cash Flow Information:
Cash paid for interest	$	-		$	1,192
Supplemental Noncash Investing and Financing Activities:
Conversion of bridge loan and interest to stock and warrants	$	104,249		$	-
Issuance of common stock and warrants for accounts payable	$	42,000		$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Vu1 CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BUSINESS AND ORGANIZATION

General

All references in these consolidated financial statements to “we,” “us,” “our,” and the “Company” are to Vu1 Corporation, Sendio, s.r.o., our Czech subsidiary, and Telisar Corporation, our inactive subsidiary unless otherwise noted or indicated by its context.

We are focused on developing, manufacturing and selling a line of mercury free, energy efficient light bulbs based on our proprietary light-emitting technology. For the past several years, we have primarily focused on research and development efforts for our technology products and the related manufacturing processes.

In September 2007, we formed Sendio, s.r.o. (“Sendio”) in the Czech Republic as a wholly-owned subsidiary for the purpose of operating a research and development and pilot manufacturing facility. On February 13, 2012, Sendio filed a petition of insolvency with the Regional Court in Olomouc, Czech Republic. In March, 2012 the court determined that Sendio was insolvent, and control of the legal entity passed to a court appointed trustee. The trustee will oversee the orderly sale of the assets and use proceeds to satisfy the liabilities of Sendio. These liabilities have been recorded as a current liability on our balance sheet as of June 30, 2012 under the caption “Liabilities of Sendio.”

We have one inactive subsidiary, Telisar Corporation, a California corporation and 66.67% majority-owned subsidiary.

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation 

The consolidated unaudited financial statements included in this Form 10-Q have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, these financial statements do not include all of the disclosures required by U.S. generally accepted accounting principles for complete financial statements. These consolidated unaudited interim financial statements should be read in conjunction with the audited financial statements for the fiscal year ended December 31, 2011 in our Annual Report on Form 10-K. The financial information furnished herein reflects all adjustments consisting of normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our financial position, the results of operations and cash flows for the periods presented. Operating results for the quarterly period ended June 30, 2012 are not necessarily indicative of results for future quarters or periods in the fiscal year ending December 31, 2012.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Translating Financial Statements

The functional currency of Sendio is the Czech Koruna (CZK). The accounts of Sendio contained in the accompanying consolidated balance sheets as of June 30, 2012 and December 31, 2011 have been translated into United States dollars at the exchange rate prevailing as of those dates.Translation adjustments are included in “Accumulated Other Comprehensive Income,” a separate component of stockholders’ equity.The accounts of Sendio in the accompanying consolidated statements of operations for the six months ended June 30, 2012 and 2011 have been translated using the average exchange rates prevailing for the respective periods. Sendio recorded an aggregate of $0, ($8,051), $0 and ($11,583) of foreign currency transaction gain (loss) to general and administrative expense in the accompanying statements of operations for the three and six months ended June 30, 2012 and 2011, respectively.

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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 June 30, 2012 and December 31, 2011, we had no cash in excess of federally insured limits in effect as of those dates, respectively.

Equipment

Equipment is comprised of equipment used in the manufacturing process and related testing and development of our lighting products and is stated at cost. We provide for depreciation using the straight-line method over the estimated useful lives of three to 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 more likely than not that we will not be able to realize all or a portion of our deferred tax assets. The fiscal years 2008 to 2011 remain open to examination to U.S. Federal authorities and other jurisdictions in the U.S. where we operate. Sendio has paid no income taxes since its inception and its fiscal years for 2008 to 2011 remain open to examination by Czech tax authorities.

We recognize the impact of an uncertain tax position in the consolidated financial statements of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position.  Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of operations.

Loan Costs

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

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.

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Fair Value of Financial Instruments

Financial instruments consist of cash, payables and accrued liabilities, convertible debentures, and convertible loans payable. 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. The fair value of our convertible debentures is $3,803,507 at June 30, 2012 based on the present value of the future cash flows of the instrument.

Fair Value Measurements

ASC 820“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.Significant fair value measurements resulted from our derivative warrant liability, our discount and beneficial conversion feature on convertible notes and 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 for all periods presented.

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 six months ended June 30, 2012 and 2011, research and development expenses were comprised primarily of technical consulting expenses, salaries and related benefits and overheads, rent, materials and operational costs related to the development of the production line.

Share-Based Payments

We account for share-based compensation expense to reflect the fair value of share-based awards measured at the grant date. This expense is recognized over the requisite service period and is adjusted each period for anticipated forfeitures. We estimate the fair value of each share-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Comprehensive Income

Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. Other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments.

Loss Per Share

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.

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The following potentially dilutive shares of common stock are excluded from the computation of diluted net loss per share for all periods presented because the effect is anti-dilutive:

	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
Warrants		1,232,626		921,963		1,232,626		921,963
Convertible debt		374,346		374,346		374,346		374,346
Stock options		591,181		474,811		591,181		474,811
Unvested stock		148,500		-		148,500		-
Total potentially dilutive securities		2,346,653		1,771,120		2,346,653		1,771,120

.

NOTE 3 - GOING CONCERN MATTERS

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate our continuation as a going concern. During the six months ended June 30, 2012 we had no revenues, incurred a net loss of $1.9 million, and had negative cash flows from operations of $1.1 million. In addition, we had an accumulated deficit of $81.5 million at June 30, 2012. These factors raise substantial doubt about our ability to continue as a going concern.

Recovery of our assets is dependent upon future events, the outcome of which is indeterminable. Our attainment of profitable operations is dependent upon our obtaining adequate debt or equity financing, developing products for commercial sale, and achieving a level of sales adequate to support our cost structure. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

During July, 2012 we raised gross proceeds of $99,000 in a private placement of stock and warrants to certain accredited investors. See Note 10, “Subsequent Events”.

Our efforts to raise additional funds will continue during fiscal 2012 to fund our planned operations and research and development activities, through one or more debt or equity financings.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

Sendio Facility Operating Lease and Purchase Agreement

On May 28, 2008, and amended on December 2, 2009 and June 22, 2011, Sendio s.r.o. entered into a lease agreement for its former office and manufacturing facilities located in the city of Olomouc in the Czech Republic. Effective December 9, 2008 and amended June 22, 2011, Sendio entered into a Purchase Agreement, effective December 9, 2008 and amended March 3, 2009 and December 2, 2009 (the “Purchase Agreement”), for the same facilities with Milan Gottwald (“Mr. Gottwald”), the owner. On February 13, 2012, Sendio filed a petition of insolvency with the Regional Court in Olomouc, Czech Republic. In March, 2012 the court determined that Sendio was insolvent, and control of the legal entity passed to a court appointed trustee. The trustee will oversee the orderly sale of the assets and use proceeds to satisfy the liabilities of Sendio. Our lease obligation and the obligation to purchase the Sendio facility were terminated. Our lease for the premises was terminated effective March 15, 2012 and our obligation to acquire the building was terminated on February 8, 2012.

Other Lease Agreements

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. The lease was terminated on March 31, 2012. On November 1, 2010, we entered into a six month lease agreement for office space located in New York City, New York. The lease continued on a month to month basis. Monthly rental payments were $1,320 under the lease. The lease was terminated on March 31, 2012.

Total rent expense was $8,782, $137,357, $8,782 and $258,182 for the three and six months ended June 30, 2012 and 2011, respectively.

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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 30 days after a successful private placement. The obligation for fees and warrants survives for 18 months for proceeds raised from investors in the private placement.

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 obligation for fees and warrants survives for 18 months for proceeds raised from investors in the private placement.

NOTE 5 – CONVERTIBLE DEBENTURES

On June 22, 2011, pursuant to a Securities Purchase Agreement, dated as of June 16, 2011, with several institutional investors, we completed a private placement of our original issue discount convertible debentures (referred to as the convertible debentures), receiving gross proceeds of $3,500,000. Each convertible debenture was issued at a price equal to 85% of its principal amount. The convertible debentures mature two years after the date of their issuance and do not bear regularly scheduled interest. Investors may convert their convertible debentures into shares of our common stock at any time and from time to time on or before the maturity date, at a conversion price of $11.00 per share.

The convertible debentures will mandatorily convert at our option into shares of our common stock at the conversion price, if the closing bid price for the common stock exceeds $30.00 per share for a period of 10 consecutive trading days, provided that such underlying shares have been fully registered for resale with the U.S. Securities and Exchange Commission (SEC).

The convertible debentures are unsecured, general obligations of our company, and rank pari passu with our other unsecured and unsubordinated liabilities. The convertible debentures are not redeemable or subject to voluntary prepayment by us prior to maturity. The convertible debentures are identical for all of the investors except for principal amount.

The investors agreed not to convert their convertible debentures or exercise their warrants, 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

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• 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.

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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 March 31, 2012 and determined no accrual was necessary.

The carrying value at June 30, 2012 and December 31, 2011 of the convertible debentures is as follows:

	June 30, 2012			December 31, 2011
Face amount	$	4,117,750		$	4,117,750
Original issue discount		(314,243	)		(465,072	)
		3,803,507			3,652,678
Beneficial conversion feature and warrant allocation		(803,296	)		(1,138,766	)
Carrying value	$	3,000,211		$	2,513,912

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

Interest expense related to the convertible debentures is as follows:

	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
Amortization of original issue discount	$	76,176	$	6,288	$	150,828	$	6,288
Amortization of beneficial conversion feature and warrant allocation		173,305		12,390		335,471		12,390
Amortization of loan costs		54,911		4,827		109,822		4,827
	$	304,392	$	23,505	$	596,121	$	23,505

NOTE 6 – 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 repay the promissory notes prior to that date, and the interest rate was increased to 15% per annum. Total interest expense related to the loans for the three an six months ended June 30, 2012 and 2011 was $14,024, $0, $29,610 and $0, respectively.

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

On February 7, 2012 a loan totaling $104,249 (including accrued interest of $4,249) was converted into 29,786 units in our private placement offering as discussed in Note 8. Accordingly, we issued 29,786 shares of our common stock, three year warrants to purchase 29,786 shares of our common stock at an exercise price of $3.75 per share and three year warrants to purchase 32,857 shares of our common stock at an exercise price of $11.00 per share. The fair value of the common stock was $171,269 based on the market price of our common stock on the date of conversion of $5.75. The fair value of the three year warrants to purchase 29,786 shares of our common stock at an exercise price of $3.75 per share was $121,556 and fair value of the three year warrants to purchase 32,857 shares of our common stock at an exercise price of $11.00 per share was $103,811. We recognized a loss on debt conversion for the six months ended June 30, 2012 in the amount of $292,387.

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The fair value of the warrants was computed using the Black Scholes Option Pricing model using the following assumptions – expected life – 3 years, risk free interest rate – 0.82%, volatility – 103.6%, and an expected dividend rate of 0%.

Total principal payments for future years for the Convertible Bridge Loans and the Convertible Debentures described in Note 5 are as follows as of June 30, 2012:

	June 30, 2012
2012	$	-
2013		4,507,000
	$	4,507,000

NOTE 7 – DERIVATIVE WARRANT LIABILITY

On February 9, 2011, we issued five-year warrants to purchase 262,750 shares of our common stock at an exercise price of $12.00 per share in conjunction with the private placement as of that date. If we issue common stock or common stock equivalents at a price per share less than the exercise price of the warrants, the exercise price of the warrants is decreased to equal the price at which the common stock or common stock equivalents were issued. The exercise price cannot be reduced below $9.00 per share. We determined that the potential adjustment to the exercise price of the warrants exceeded the economic dilution suffered and therefore the warrants are not to be considered indexed to our common stock and caused the warrants to be a derivative liability. Derivative financial instruments are classified as liabilities and carried at fair value at each reporting date, with changes reflected in the statements of operations.

On June 22, 2011, the exercise price of the warrants was reduced from $12.00 per share to $11.00 per share as a result of the issuance of the convertible debentures at a conversion price of $11.00 per share as described in Note 5.

On January 24, 2012, the exercise price of the warrants was further reduced to $9.00 per share in conjunction with the private placement as described in Note 8. 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 three months ended March 31, 2012. As a result of this reduction, the exercise price no longer has the potential for further adjustment, and we determined that the warrants no longer represented a derivative liability, and the remaining balance of the derivative liability was recognized as a derivative gain in the amount of $639,227.

The following table summarizes the components of changes in our derivative warrant liabilities during the three and six months ended June 30, 2012 and 2011:

	Three Months ended June 30,					Six Months ended June 30,
	2012		2011			2012			2011
Beginning balance	$	-	$	1,749,516		$	592,783		$	-
Derivative recognized upon issuance		-					-			2,090,648
Fair value changes due to repricing, included in income		-		39,503			46,444			39,503
Unrealized fair value changes, included in income		-		(346,633	)		(639,227	)		(687,765	)
Ending balance	$	-	$	1,442,386		$	-		$	1,442,386

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The Company uses the Black-Scholes option valuation model to measure the fair value of the warrants, and based on the following assumptions, a summary of the fair values are as follows:

	January 24, 2012			June 30, 2012
Trading market price	$	4.15		$	9.40
Expected life (years)		4.04			4.86
Equivalent volatility		81.0	%		99.5	%
Expected dividend rate		0.00	%		0.00	%
Risk-free interest rate		0.66	%		2.24	%

NOTE 8 – STOCKHOLDERS’ EQUITY

Preferred Stock

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

Common Stock

Unit Offering

From January 24 to June 30, 2012 we sold 344,207 units at a subscription price of $3.50 per unit for net proceeds of $1,204,717 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 344,207 shares of common stock and warrants to purchase 344,207 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 29,786 shares of our common stock and 29,786 warrants issued upon the conversion of a loan totaling $104,249 (including accrued interest of $4,249). Also included in these amounts is $105,000 and $15,000 received from two of our board members.

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 $572,107 and the balance of the proceeds of $632,610 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	$3.08 to $6.00
Estimated volatility	81.0% to 103.6%
Risk free interest rate	0.38% to 0.56%
Expected divident rate	-
Expected life	3 years

Issuances of common stock

During the six months ended June 30, 2012 we issued 344,207 shares of common stock in our unit offering described above.

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

Stock issuances

On June 1, 2012 we issued 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 issuance. The shares vest on June 1, 2013. We recognized a total of $40,115 of compensation expense as general and administrative expenses for the three and six months ended June 30, 2012.

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At June 30, 2012, there are 148,500 shares of unvested restricted stock representing $464,785 of unrecognized compensation expense of which we anticipate$254,528 will be recognized through December 31, 2012 and $210,257 will be recognized through the vesting date of June 1, 2013, respectively.

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 will vest in twelve equal monthly installments over the term of his employment agreement. Mr. Hamlin resigned his position as President and Chief Operating Officer effective May 11, 2012. We recognized a total of $11,762 and $37,869 of compensation expense relative to the 1,471 and 4,735 shares of common stock that vested for the three and six months ended June 30, 2012. A total of 2,795 shares of common stock were forfeited.

Option issuances

No options were issued during the six months ended June 30, 2012.

We recognized compensation expense of $51,337, $159,989, $130,484 and $568,021 related to the vested portion of stock options based on their estimated grant date fair value as sales and marketing expense, research and development expense or general and administrative expense based on the specific recipient of the award for the three and six months ended June 30, 2012 and 2011, respectively.

At June 30, 2012, we have unrecognized compensation expense related to stock options of $17,393, of which we anticipate $3,865 will be recognized through December 31, 2012 and $7,730 and $5,798 will be recognized in 2013 and 2014, respectively.

Warrants

During the six months ended June 30, 2012 we issued three year warrants at an exercise price of $3.75 per share to purchase 344,207 shares of common stock in our unit offering described above. On February 7, 2012 we issued three year warrants at an exercise price of $11.00 per share to purchase 32,857 shares of common stock to an investor upon the conversion of a convertible bridge note as described in Note 6.

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 six months ended June 30, 2012 warrants to purchase a total of 66,401 shares of common stock with an exercise price of $15.00 expired unexercised.

A summary of our outstanding warrants at June 30, 2012 is as follows:

				Weighted-Average
Exercise		Warrants		Remaining Contractual		Number
Price		Outstanding		Life (Years)		Exercisable
	$3.75		344,207		2.7		344,207
	$7.60		3,750		0.8		3,750
	$9.00		262,750		3.6		262,750
	$11.00		32,857		2.6		32,857
	$13.00		213,380		4.0		213,380
	$15.00		332,087		0.7		332,087
	$20.00		43,595		0.5		43,595
			1,232,626		2.5		1,232,626

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NOTE 9 – RELATED PARTY TRANSACTIONS

In September 2010, we entered into an agreement with Integrated Sales Solutions II, LLC (“ISS”) to enhance our capabilities in designing and establishing sales strategy and distribution channels with retail, electrical utilities, electrical distributors and government agencies. In April 2011, we entered into an agreement with Hamlin Consulting, LLC to advise and assist us in defining logistics, warehousing, finished good requirements, distribution, packaging, merchandising and support for our ESL bulbs. ISS and Hamlin Consulting are owned by Bill K. Hamlin, a former director of our company and our former President and Chief Operating Officer. We have paid $13,268 to ISS and $45,000 to Hamlin Consulting during the six months ended June 30, 2012.

During the six months ended June 30, 2012 we paid consulting fees of $75,000 to SAM Advisors, LLC for services rendered to the Company. SAM Advisors LLC is owned by William B. Smith, our Chairman.

Two of our board members invested $105,000 and $15,000 in our unit private placement as discussed in Note 8.

During the six months ended June 30, 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 10 – SUBSEQUENT EVENTS

From July 3 to July 25, 2012 we sold 25,429 units at a subscription price of $3.50 per unit for net proceeds of $99,000 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 25,429 shares of common stock and three-year warrants to purchase 25,000 shares of common stock at an exercise price of $3.75 were issued.

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.

On July 31, 2012 our Board of Directors and our Chief Executive Officer and Chairman, William B. Smith agreed that Mr. Smith’s monthly fee of $12,500 payable to SAM Advisors, LLC will be converted to restricted common stock each month based on the closing market price of our common stock on the last business day of each month commencing August 1, 2012.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report.

Reverse Split

All share and per share information in this Form 10-Q has been retrospectively adjusted for a 1-for-20 reverse stock split of our outstanding shares of common stock, effective November 23, 2011.

Overview

We are focused on designing, developing and selling a line of mercury-free, energy efficient lighting products based on our proprietary light-emitting technology.  For the past several years, we have primarily focused our efforts on research and product development of our Electron Stimulated Luminescence™ (ESL) technology.  In 2007, we formed Sendio s.r.o. in the Czech Republic as a wholly-owned subsidiary for continued development of our lighting products, and to design the manufacturing processes required for commercialization and manufacturing.  During 2010, we continued our development work on the technology to refine the prototype with the miniaturization of the electronics and improvements to the efficiency of the products and the design and implementation of the processes required to manufacture our lights.  During the second quarter of 2010, we submitted our initial light for safety certification to Underwriters Laboratories (UL®) and, in October 2010, we received that certification. 

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

On February 13, 2012, Sendio filed a petition of insolvency with the Regional Court in Olomouc, Czech Republic. In March, 2012 the court determined that Sendio was insolvent, and control of the legal entity passed to a court appointed trustee. The trustee will oversee the orderly sale of the assets and use proceeds to satisfy the liabilities of Sendio. Our lease obligation and the obligation to purchase the Sendio facility were terminated. Our lease for the premises was terminated effective March 15, 2012 and our obligation to acquire the building was terminated on February 8, 2012. All of the employees of Sendio resigned or were terminated during March, 2012.

Our efforts are presently focused on this initial product, the R30 size light for recessed fixtures.  We are currently supporting initial production of this light and are continuing to enhance our manufacturing capabilities through an outsourcing arrangement in China. Vu1 entered into consulting arrangements with a select group of former Sendio engineers, who are working with our outsourced manufacturing vendor.  The commercial viability of our ESL technology will largely depend on these results, the ability to manufacture our products on a large scale commercial basis, market acceptance of the products and other factors.  During the first half of 2012, we had no revenues.  During the year ended December 31, 2011, we recognized revenue of approximately $8,000 from initial sales of our R30 reflector light.

Our independent registered public accounting firm has issued a “going concern” qualification in its report on our financial statements for the year ended December 31, 2011, stating that we had a net loss and negative cash flows from operations in fiscal 2011, and that we have an accumulated deficit.  Accordingly, those conditions raise substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements do not include any adjustments that might result from this going-concern uncertainty.

We will need to raise additional capital through debt or equity financings to support our operations. 

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Factors Affecting Financial Results

We had entered into an agreement to purchase the facility presently leased by Sendio in the Czech Republic.  During 2011, we used this facility for research and product development and initial production. In February, 2012 Sendio filed a petition for insolvency in the Czech Republic. The premises lease was terminated on March 15, 2012. In addition, our obligation to purchase the facility in Olomouc, Czech Republic was terminated on February 8, 2012 as a result of the insolvency proceedings. In addition, during March, 2012 all of the employees of Sendio resigned or were terminated by virtue of the insolvency proceedings of Sendio.

Our anticipated expenditures related to our current operations will primarily depend on personnel costs and additional equipment needs for continued development and manufacturing of our line of lighting products.  In addition, we anticipate we will incur substantial costs related to establishing the strategic business relationship with our product manufacturer, as well as for sales, marketing and distribution-related costs, and increased administrative costs.  An overall estimate of our capital expenditures is primarily dependent upon the success of our development and the commercial manufacturing results for our lighting products, and as such cannot be presently estimated. 

Our anticipated costs in 2012 for the completion of our line of ESL lighting products cannot be reasonably estimated due to the inherent uncertainty of the research and feasibility of the manufacturing processes.  There can be no assurance that this development process will be successful or, if successful, that the technology will find a market and achieve sales that can sustain our operations without additional funding.

Our emphasis on the development of our planned products, the additional manufacturing processes required by our product manufacturer, the distribution, marketing and branding of products and the development of sales channels relating to our lighting products will command management’s primary attention during the next 12 months.  It will also comprise the primary use of our financial resources. In 2012, our success will depend on our ability to secure additional funding, reach commercial manufacturing levels for our R30, R40 and A19 lights, generate market awareness and acceptance of our current and planned lighting products, protect our technology through patents and trade secrets, and develop our planned products to meet industry standards.  If we are unable for technological, financial, competitive or other reasons to successfully take these steps, our business and operations will be adversely affected.

Our cash as of June 30, 2012 is not sufficient to support our operations through fiscal 2012 and it will be necessary for us to seek additional financing. See “Liquidity and Capital Resources” below.

Results of Operations

Comparison of Results for the Three Months Ended June 30, 2012 and 2011

Revenues

We recognized no revenues for the three months ended June 30, 2012. We recognized revenues of $8,000 for the three months ended June 30, 2011 from initial sales of our R30 light bulb.

Research and Development Expenses

For the three months ended June 30, 2012 and 2011, we were involved in two projects to develop and commercialize our proprietary technology in our R30 and A19 sized light bulbs. Research and development expenditures for the three months ended June 30, 2012 were comprised of technical consulting expenses, material and travel. For the three months ended June 30, 2011, research and development expenses were comprised primarily of salary, rent, technical consulting expenses, supplies and travel, and other costs of the research and manufacturing development related operations in the Czech Republic through our wholly-owned subsidiary, Sendio. Research and development expenses decreased approximately $553,000 to $92,000 for the three months ended June 30, 2012 compared to $645,000 for the three months ended June 30, 2011. The decrease was primarily related to the expenses of Sendio as their operations were ceased during the three months ended March 31, 2012.

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General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2012 and 2011 were comprised of share-based compensation expenses, salaries, professional and legal fees, consulting expenses, insurance, travel and general corporate related overhead and office expenses. General and administrative expenses decreased by approximately $729,000 to $352,000 for the three months ended June 30, 2012 compared to $1,081,000 for the three months ended June 30, 2011. Non-cash charges related to share-based compensation expenses decreased $234,000 to $91,000 relating primarily to stock options issued to our former chief executive officer and directors for the three months ended June 30, 2012 compared to $324,000 for the three months ended June 30, 2011. The decrease was also related to the decrease of $292,000 for the expenses of Sendio as their operations were ceased during the three months ended June 30, 2012. The remainder of the decrease is due to lower levels of operations during the three months ended June 30, 2012.

Marketing Expenses

Marketing expenses for the three months ended June 30, 2012 and 2011 were comprised of consulting fees, share-based compensation expenses and office related expenses. Marketing expenses decreased by approximately $200,000 to $161,000 for the three months ended June 30, 2012 compared to $361,000 for the three months ended June 30, 2011. Non-cash charges related to share-based compensation expenses decreased $101,000 to $12,000 relating primarily to stock options issued to our former Chief Operating Officer compared to $113,000 for the three months ended June 30, 2011. The remaining decrease was due primarily to decreases in salaries and attendant costs, consulting fees related to public relations and investor relations and channel development for the three months ended June 30, 2012.

Other Income and Expense

Other income and expense for the three months ended June 30, 2012 was comprised of interest income and interest expense. Other income and expense for the three months ended June 30, 2011 also included derivative valuation gain. Interest income was $11 for the three months ended June 30, 2012 compared to $26 for the three months ended June 30, 2011. The decrease was due to lower average cash balances.

Interest expense for the three months ended June 30, 2012 increased $294,000 to $318,000 compared to $24,000 for the three months ended June 30, 2011. Interest expense for the three months ended June 30, 2012 and 2011 included the amortization related to the original issue discount, beneficial conversion feature, and loan costs for the convertible debentures as discussed in Note 5. Interest expense for the three months ended June 30, 2012 also included the interest for convertible bridge loans as discussed in Note 6. Interest expense for the three months ended June 30, 2011 also included interest expense related to Sendio’s loan and capital lease obligations.

Derivative valuation gain results from embedded derivative financial instruments that are required to be measured at fair value. Derivative valuation gain amounted to approximately $0 and $307,000 during the three months ended June 30, 2012 and 2011, respectively and are related to the derivative warrant liability as discussed in Note 7.

We value our derivative warrant liability using the Black Scholes valuation method. The changes in the fair value of our derivatives are significantly influenced by changes in our stock price and changes in interest rates in the public markets. Changes in these inputs will affect the carrying value of our derivative liabilities and therefore the amount of derivative valuation gain (loss) that we are required to record.

Comparison of Results for the Six Months Ended June 30, 2012 and 2011

Revenues

We recognized no revenues for the six months ended June 30, 2012. We recognized revenues of $8,000 for the three months ended June 30, 2011 from initial sales of our R30 light bulb.

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Research and Development Expenses

For the six months ended June 30, 2012 and 2011, we were involved in two projects to develop and commercialize our proprietary technology in our R30 and A19 sized light bulbs. Research and development expenditures for the six months ended June 30, 2012 were comprised of technical consulting expenses, material and travel. For the six months ended June 30, 2011, research and development expenses were comprised primarily of salary, rent, technical consulting expenses, supplies and travel, and other costs of the research and manufacturing development related operations in the Czech Republic through our wholly-owned subsidiary, Sendio. Research and development expenses decreased approximately $906,000 to $307,000 for the six months ended June 30, 2012 compared to $1,213,000 for the six months ended June 30, 2011. The decrease was primarily related to the expenses of Sendio as their operations were ceased during the three months ended March 31, 2012.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2012 and 2011 were comprised of share-based compensation expenses, salaries, professional and legal fees, consulting expenses, insurance, travel and general corporate related overhead and office expenses. General and administrative expenses decreased by approximately $1,086,000 to $823,000 for the six months ended June 30, 2012 compared to $1,909,000 for the six months ended June 30, 2011. Non-cash charges related to share-based compensation expenses decreased $608,000 to $143,000 relating primarily to stock options issued to our former chief executive officer and directors for the six months ended June 30, 2012 compared to $751,000 for the six months ended June 30, 2011. The decrease was also related to the decrease of $532,000 for the expenses of Sendio as their operations were ceased during the six months ended March 31, 2012. The remainder of the decrease is due to lower levels of operations during the six months ended June 30, 2012.

Marketing Expenses

Marketing expenses for the six months ended June 30, 2012 and 2011 were comprised of consulting fees, share-based compensation expenses and office related expenses. Marketing expenses decreased by approximately $94,000 to $451,000 for the six months ended June 30, 2012 compared to $545,000 for the six months ended June 30, 2011. Non-cash charges related to share-based compensation expenses decreased $47,000 to $66,000 relating primarily to stock options issued to our former Chief Operating Officer compared to $113,000 for the six months ended June 30, 2011. The remaining decrease was due primarily to decreases in salaries and attendant costs, consulting fees related to public relations and investor relations and channel development for the six months ended June 30, 2012.

Other Income and Expense

Other income and expense for the six months ended June 30, 2012 and 2011 was comprised of interest income, interest expense, derivative valuation gain. Other income and expense for the six months ended June 30, 2012 also included loss on conversion of the convertible bridge note. Interest income was $19 for the six months ended June 30, 2012 compared to $72 for the six months ended June 30, 2011. The decrease was due to lower average cash balances.

Interest expense for the six months ended June 30, 2012 increased $601,000 to $626,000 compared to $25,000 for the six months ended June 30, 2011. Interest expense for the six months ended June 30, 2012 and 2011 included the amortization related to the original issue discount, beneficial conversion feature, and loan costs for the convertible debentures as discussed in Note 5. Interest expense for the six months ended June 30, 2012 also included the interest for convertible bridge loans as discussed in Note 6. Interest expense for the six months ended June 30, 2011 also included interest expense related to Sendio’s loan and capital lease obligations.

Loss on debt conversion for the six months ended June 30, 2012 was $292,000 and results from the conversion of the convertible bridge note as discussed in Note 6. There was no comparable prior year amount.

Derivative valuation gain results from embedded derivative financial instruments that are required to be measured at fair value. Derivative valuation gain amounted to approximately $593,000 and $648,000 during the six months ended June 30, 2012 and 2011, respectively and are related to the derivative warrant liability as discussed in Note 7.

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We value our derivative warrant liability using the Black Scholes valuation method. The changes in the fair value of our derivatives are significantly influenced by changes in our stock price and changes in interest rates in the public markets. Changes in these inputs will affect the carrying value of our derivative liabilities and therefore the amount of derivative valuation gain (loss) that we are required to record.

Liquidity and Capital Resources

We had cash of $5,000 and $4,117,750 of short-term debt, exclusive of discount as of June 30, 2012.

From July 3 to July 25, 2012 we sold 25,429 units at a subscription price of $3.50 per unit for net proceeds of $99,000 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.

We do not anticipate that our existing cash will be sufficient to fund our operations and anticipated capital expenditures for the next twelve months. We anticipate that, with our cash on hand and the proceeds from the private placement described above, we will be able to fund our operations through August, 2012.

We expect to continue to seek additional financing in 2012 to fund our operations, research and product development and manufacturing activities, through one or more debt or equity financings.  Our efforts to raise sufficient capital may not be successful, and even if we are able to obtain additional financing, the terms of any such financing may be unfavorable to us and may be highly dilutive to existing stockholders.

If we are unable to obtain sufficient cash to continue to fund operations or if we are unable to locate a strategic partner, we may be forced to further curtail or even cease our operations.  Any inability to obtain additional cash as needed would have a material adverse effect on our financial position, results of operations and our ability to continue in existence.  Our independent registered public accounting firm added an explanatory paragraph to its opinion on our 2011 financial statements stating that there was substantial doubt about our ability to continue as a going concern.

Contractual Obligations

We have no contractual payment obligations for operating leases as of June 30, 2012.

Impact of Inflation

We expect to be able to pass inflationary increases for raw materials and other costs on to our customers through price increases, as required, and do not expect inflation to be a significant factor in our business.

Seasonality

Although our operating history is limited, we do not believe our products are seasonal.

Critical Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates that affect the reported amounts of assets, liabilities and expenses. We evaluate our estimates on an ongoing basis and base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances at that time.  The discussion below is intended as a brief discussion of some of the judgments and uncertainties that can impact the application of these policies and the dollar amounts reported on our financial statements.  Actual results may differ from these estimates under different assumptions or conditions. We believe that the following critical accounting policies affect our more significant estimates used in the preparation of our financial statements and are important to the understanding of our results of operations.  This is not a complete list of all of our accounting policies, and there may be other accounting policies that are significant to your understanding of our company.  For a detailed discussion on the application of these and our other accounting policies, see Note 2 to our Consolidated Condensed Financial Statements included in this Report.

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Share-Based Payments

We account for share-based compensation expense to reflect the fair value of share-based awards measured at the grant date.  This expense is recognized over the requisite service period and is adjusted each period for anticipated forfeitures. We estimate the fair value of each share-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Fair Value Measurements

ASC 820“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.Significant fair value measurements resulted from our discount and beneficial conversion feature and warrant allocation on our convertible notes and our share-based payment arrangements.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

ITEM 4. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of management, including our chief executive officer and chief financial officer. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at June 30, 2012.

There have been no changes in our internal controls over financial reporting in connection with this evaluation that occurred during the second quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

PART II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period covered by this Report, we have issued unregistered securities to the persons as described below. None of these transactions involved any underwriters, underwriting discounts or commissions, except as specified below, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof and/or Regulation D promulgated thereunder. All purchasers had adequate access to information about us.

On June 1, 2012 we issued a total of 148,500 shares of restricted common stock to the six non-executive board members for service on the board of directors.

From April 1, 2012 to June 30, 2012 we sold 41,143 units at a subscription price of $3.50 per unit for net proceeds of $144,000 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 41,143 shares of common stock and warrants to purchase 41,143 shares of common stock at an exercise price of $3.75 were issued.

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ITEM 6. EXHIBITS

31.1	Rule 13a-14(a)/15d-14(a) Certification of William B. Smith., Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certificationof Matthew DeVries, Chief Financial Officer
32.1	CertificationofWilliam B. Smith, Chief Executive Officer, and Matthew DeVries, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

VU1 CORPORATION          (Registrant)
Dated: August 14, 2012
By:	/s/ William B. Smith
	William B. Smith Chief Executive Officer (Principal Executive Officer)
By:	/s/ Matthew DeVries
	Matthew DeVries Chief Financial Officer (Principal Financial and Accounting Officer)

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