UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
(Mark One)
|
|
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the fiscal year ended December 31, 2013
|
|
|
OR
|
|
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
| For the transition period from _________ to __________ | |
Commission file number:
0-54249
Nuvel Holdings, Inc.
(Exact name of registrant as specified in its charter)
|
Florida
|
27-1230588
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
20 S. Santa Cruz Avenue, Suite 300
Los Gatos, California 95030
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
408 234-3808
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has 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
o
No
þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
The aggregate market value of the registrant’s Common Stock held by non-affiliates as of June 30, 2014 was $1,223,210, based on the price of $0.37 per share of Common Stock on June 30, 2014. The aggregate market value of the registrant’s Common Stock held by non-affiliates was $2,609,586 as of June 30, 2013, based on the price of $0.88 per share of Common Stock on June 30, 2013. Shares of Common Stock known by the registrant to be beneficially owned as of June 30, 2014 and 2013 by the registrant’s directors and the registrant’s executive officers subject to Section 16 of the Securities Exchange Act of 1934 are not included in the computation. The registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.
As of November 17, 2014, there were 13,884,033 shares of the registrant’s Common Stock issued and outstanding.
Nuvel Holdings, Inc.
FORM 10-K
For The Fiscal Year Ended December 31, 2013
|
Page
|
|||
|
PART I
|
|||
|
Item 1.
|
4 | ||
|
Item 1A.
|
13 | ||
|
Item 1B.
|
13 | ||
|
Item 2.
|
13 | ||
|
Item 3.
|
13 | ||
|
Item 4.
|
13 | ||
|
PART II
|
|||
|
Item 5.
|
14 | ||
|
Item 6.
|
15 | ||
|
Item 7.
|
15 | ||
|
Item 7A.
|
27 | ||
|
Item 8.
|
27 | ||
|
Item 9.
|
27 | ||
|
Item 9A.
|
27 | ||
|
Item 9B.
|
28 | ||
|
PART III
|
|||
|
Item 10.
|
29 | ||
|
Item 11.
|
31 | ||
|
Item 12.
|
33 | ||
|
Item 13.
|
35 | ||
|
Item 14.
|
36 | ||
|
PART IV
|
|||
|
Item 15.
|
36 | ||
Explanatory Notes
This report on Form 10-K constitutes a comprehensive filing covering information that would have been reported not only in this Form 10-K for the fiscal year ended December 31, 2013, but also in a Form 10-K for the fiscal year ended December 31, 2012 and in Forms 10-Q for the fiscal quarters ended March 31, 2013, June 30, 2013 and September 30, 2013. We have been delinquent in the filing of all such reports. It is noted that the filing of this report will not result in us becoming “current” in our reporting requirements under the Securities Exchange Act of 1934.
The financial information included in this report consists of:
|
--
|
audited consolidated financial statements for each fiscal year from 2011 through 2013;
|
|
|
--
|
unaudited condensed consolidated financial statements in a level of detail consistent with Regulation S-X rule 10-01(a) and (b) for each fiscal quarter of year 2013; and
|
|
--
|
management discussion and analysis based upon all the annual and quarterly financial information included in this report.
|
In this Annual Report on Form 10-K, Nuvel Holdings, Inc. is sometimes referred to as the “Company”, “Nuvel”. “we”, “our”, “us” or “registrant” and U.S. Securities and Exchange Commission is sometimes referred to as the “SEC”.
PART I
Our History
The Company is a Florida corporation incorporated on October 19, 2009. On December 30, 2011, the Company completed an acquisition of Nuvel, Inc. (“Nuvel DE”) pursuant to a Share Exchange Agreement, among the Company, certain shareholders of the Company, Nuvel DE and all shareholders of Nuvel DE (the “Share Exchange Transaction”). As a result of the Share Exchange Transaction, Nuvel DE, which was incorporated in Delaware on January 20, 2010, became our direct wholly-owned subsidiary effective on December 30, 2011. Such acquisition of Nuvel DE was accounted for as a reverse merger and recapitalization effected by a share exchange transaction. Nuvel DE is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized.
On March 20, 2012, the Company acquired the 100% outstanding shares of HRMY Sub, Inc. (“HRMY Sub”), a newly set up Florida corporation. On April 10, 2012, the Company merged HRMY Sub into itself and changed the Company’s name into “Nuvel Holdings, Inc.” to better reflect the business and operations of the Company. The Company’s CUSIP number was changed from
413248 105
to
67091E 108
. The stock symbol of the Company was changed from “HRMY” to “NUVL,” effective on April 10, 2012.
The following sets forth the structure of the Company as of the date of this Report herein:
From February 2010 through December 2011, Nuvel DE conducted a bridge offering of approximately $2,700,000 of its Secured Convertible Promissory Notes (the “Bridge Notes”) and Warrants (the “Bridge Warrants”) to 24 accredited investors (the “Bridge Investors”) pursuant to certain Subscription Agreements as amended on July 5, 2011 and December 30, 2011. The Bridge Notes may be convertible into the Company's securities sold in a Qualified Financing at a conversion price of the lower of $0.54 or the price of the securities sold in a Qualified Financing, which is defined as an offering of the Company’s securities for gross proceeds of no less than $1,500,000. Since no Qualified Financing was consummated, the conversion price of the Bridge Notes was set to be $0.54. The Company’s obligations under the Bridge Notes were originally secured by a first priority security interest in the Company’s assets pursuant to a Security & Collateral Agent Agreement, as amended (the “Bridge Security Agreement”). The Bridge Warrants entitled the Bridge Investors to purchase the number of shares that are calculated by dividing (x) 50% of the outstanding principal plus interest of the Bridge Notes by (y) the conversion price of the Bridge Notes.
In addition, from April 29, 2010 through April 5, 2012, Nuvel DE took short term loans of a total of approximately $750,000 from eight accredited investors (of which $305,000 have been repaid) and all such investors elected to convert their outstanding short term loans into Bridge Notes. Some of such converted short term loans originally matured on approximately April 18, 2012 and they were later extended until March 31, 2013. These investors also received certain number of warrants in the form of the Bridge Warrant in connection with the short term loans.
In connection with the consummation of the Share Exchange Transaction, Nuvel DE received a loan of $390,000 from Paragon Capital, LP and its affiliate Paragon Capital Offshore LP (collectively, “Paragon”) bearing interest at an annual rate of 8% pursuant to a note dated December 30, 2011 (the “Paragon Note”). The loan was originally due on December 31, 2012 but was later extended until March 31, 2013 and further extended until September 30, 2014. This loan was secured pursuant to a Security Agreement, dated December 30, 2011 and the Company provided a guaranty to Paragon for securing the Paragon Note. In addition, Paragon and its designated person received an aggregate of 1,739,706 shares of common stock of the Company and a warrant to purchase 2,000,000 shares of common stock at an exercise price of $0.40 per share with a term of 7 years (the “Paragon Warrant”). On December 23, 2013, Paragon sold and assigned its rights under the Paragon Note to Gibralt US, Inc. (“Gibralt”)
On August 20, 2012, for an aggregate purchase price of $385,000, the Company issued and sold to a number of accredited investors (the “Series A Preferred Investors”) an aggregate of 641,668 shares of its Series A Preferred Stock, par value $.001 per share (“Series A Preferred Stock”) and warrants (“Series A Warrants”) to purchase 50% of the shares of Common Stock that the purchased Series A Preferred Stock would be able to be converted into at an exercise price of $0.60 per share.
On November 21, 2012, the Company entered into and consummated the sale to Alpha Capital Anstalt (“ACA”) pursuant to the Subscription Agreement (the “ACA Subscription Agreement”) of Secured Convertible Promissory Note due May 21, 2014 (the “ACA Note”) in the principal amount of $500,000 with the conversion price of $0.54 per share, and warrants to purchase 462,963 shares of its common stock at an exercise price of $0.70 per share (the “ACA Warrants”). In connection with the sale of the ACA Note and ACA Warrant, the Company paid to ACA’s designee a due diligence fee in cash equal to 4% of the gross proceeds of the offering and issued to ACA’s designee an unsecured note substantially in the same form as the ACA Note in the principal amount of $20,000 (the “ACA Diligence Note,” together with the “ACA Note” referred to as the “ACA Notes”).
The Company’s obligations under the ACA Subscription Agreement and the ACA Notes were secured by a first priority interest in all assets of the Company pursuant to a Security Agreement, dated as of November 21, 2012 (the “ACA Security Agreement”). As a precondition to the closing of the transactions under the ACA Subscription Agreement, on November 16, 2012, the Company obtained consent and waiver from all the Bridge Investors and Paragon to extend the Bridge Notes and the Paragon Note to March 31, 2013 and to subordinate their security interest to the one granted to ACA and its designee under the ACA Security Agreement pursuant to those amendments to the Bridge Subscription Agreement and the Paragon Note (the “Subordination Amendments”). In consideration of such waiver, the Subordination Amendments provided to each Bridge Investor and Paragon the following: (i) the issuance of a warrant to purchase a number of shares of Common Stock equals (x) the principal amount of the Bridge Note/Paragon Note, divided by (y) 10, (ii) a higher redemption amount of 150% of the principal amount of the Bridge Note/ in the event of a Sale or Merger Transaction (as defined in the Bridge Notes).
Recent Developments
During December 2012 through January 2014, the business activities of the Company reduced while the Company was seeking to raise capital and reduce overall operating costs. In February 2014, in view of potential business development opportunity in the Company’s products, the Company decided to restructure its capital structure to rebrand and revive the Company’s offerings.
ACA Amendments
On April 8, 2014, the Company entered into a series of amendment agreements with ACA to amend and extend the ACA Notes (collectively, the “ACA Amendments”). Pursuant to the First Amendment to the Subscription Agreement, ACA waived its rights with respect to the defaults on the part of the Company, among other things, of its obligations under the ACA Subscription Agreement, the ACA Notes and ACA Security Agreement, its reporting responsibilities under the Securities Exchange Act of 1934, its listing status on the OTCQB marketplace, and its state and federal tax filings, etc., the Company covenanted to ACA that it will be current with its tax filings since May 30, 2014 and it will be compliant with its reporting responsibilities no later than September 30, 2014.
Pursuant to the First Amendment to Secured Convertible Promissory Notes, ACA and its designee agreed, among other things: (i) to extend the maturity date of the ACA Notes to April 8, 2015, which may be extended for an additional six months at the option of the holders of the ACA Notes, (ii) to amend the interest rate to be 10% per annum and payable in arrears semiannually, (iii) to amend the conversion price of the ACA Notes to be $0.18 per share, (iv) to add a mandatory conversion provision where the Company’s Common Stock reaches certain threshold of trading volume and trading price, the ACA Notes will automatically convert, and (v) to waive any default on the part of the Company under the ACA Notes.
Pursuant to the First Amendment to Security Agreement, ACA agreed that the notes to be offered in a new bridge financing of the Company for proceeds of $1,000,000 which was expected to occur in April 2014 and a qualified financing of the Company for proceeds of $2,000,000 which was expected to occur in September 2014 would be secured by a security interest that is pari passu to the first priority security interest granted to ACA pursuant to the ACA Security Agreement.
In consideration of ACA’s foregoing waivers and amendments, the Company also agreed: (i) to lower the exercise price of the ACA Warrant to $0.25 per share and to increase the number of shares issuable upon the exercise of the ACA Warrant to 1,800,412 shares, and (ii) to issue shares of Series D Preferred Stock to ACA and its designee, which may be converted into an aggregate of 1,767,358 shares of Common Stock.
New Bridge Financing
Starting in April 2014, the Company has been seeking additional investment from accredited investors in a new bridge financing (the “New Bridge Financing”) of the Company’s secured promissory notes (the “New Bridge Notes”) and warrants to purchase the Company’s Common Stock (the “New Bridge Warrants”) for proceeds of up to $1,000,000 pursuant to the Subscription Agreement, dated April 2014 (the “New Bridge Subscription Agreement”). The New Bridge Notes accrue interest at 8% per annum and may increase to 18% in the event of default on the part of the Company. The New Bridge Notes may be converted into shares of Common Stock at the conversion price of $0.18 but also subject to a mandatory conversion provision, where they will automatically convert into shares of Common Stock in the event of a Qualified Financing (as defined below) at the conversion price of 90% of the offering price of the Qualified Financing. Qualified Financing for the purpose of the New Bridge Notes is defined as an offering of the Company’s debt or equity securities for gross proceeds of at least $2,000,000. The New Bridge Notes are secured by a first priority security interest in all of the assets of the Company pursuant to the Security & Collateral Agent Agreement. The Bridge Warrants are for a term of five years and entitle their holders to purchase a number of shares of Common Stock equals (x) 50% of the principal amount of the New Bridge Notes, divided by (ii) $0.18. As of the date of this report, the Company has received gross proceeds of an aggregate of $382,750 for the New Bridge Financing.
Bridge and Gibralt Waiver and Amendments
Beginning in May 2014, the Company reached out to all the Bridge Investors and Gibralt to seek their consent to the waiver and amendments to the Bridge Notes and the Paragon Note. Pursuant to the Waiver and Amendment Agreement dated May 5, 2014 (the “Note Waiver and Amendments”), the Bridge Investors and Gibralt agreed: (i) to convert all the outstanding principal and accrued interest of the Bridge Notes and the Paragon Note into Series B Convertible Preferred Stock of the Company (the “Series B Preferred Stock”) at a conversion price of $5.00, (ii) to waive any default on the part of the Company under the Bridge Notes or the Paragon Note, (iii) to waive the default interest under the Bridge Notes or the Paragon Note and to receive a one-time interest of 24% for the entire term of the Bridge Notes and the Paragon Note, (iv) that the Company’s obligations under the Bridge Subscription Agreement, the Bridge Security Agreement and other relevant transaction documents would terminate, and (v) to amend the Bridge Warrants to have a lower exercise price of $0.30 per share and the extended expiration date of June 1, 2019. Series B Preferred Stock acknowledges the original price of a 20% premium to the Bridge Investors’ original investment in the Bridge Notes and the Series B Preferred may be converted into 20 shares of Common Stock at the option of it holders and will automatically convert into shares of Common Stock if the Common Stock meets certain criteria of trading price and trading volume.
In the meantime, the Company was seeking additional investment from the Bridge Investors and Gibralt in the New Bridge Financing. As an incentive, the Note Waiver and Amendments provided that any Bridge Investor that invests in the New Bridge Financing for an amount of more than 15% of its original investment in the Bridge Note, such Bridge Investor may be entitled to more favorable terms of the amendments pursuant to an optional addendum agreement, where (i) such Bridge Investor’s Bridge Note will be converted into Series C Convertible Preferred Stock of the Company (the “Series C Preferred Stock”) at the conversion price of $3.6923, (ii) the Company will acknowledge a one-time interest of 30% for the entire term of the Bridge Note held by such Bridge Investor, and (iii) such Bridge Investor’s Bridge Warrant will be amended to have a lower exercise price of $0.25. Series C Preferred Stock acknowledges the original price of a 30% premium to the Bridge Investors’ original investment in the Bridge Notes and provides a liquidation preference of 1.3 times of the original purchase price of the Series C Preferred Stock. The Series C Preferred may be converted into 20 shares of Common Stock at the option of it holders and will automatically convert into shares of Common Stock if the Common Stock meets certain criteria of trading price and trading volume.
As of the date of this Report, Bridge Investors holding Bridge Notes of an aggregate principal amount of $3,785,000 consented to the Note Waiver and Amendments. As of the date of this Report, the Company has received gross proceeds of an aggregate of $382,750 from the Bridge Investors for the New Bridge Financing.
Series A Preferred Waiver and Amendments
In July 2014, the board of directors of the Company approved and the holders of a majority of the outstanding Series A Preferred Stock also consented: (i) to correct and amend the Original Purchase Price and the Conversion Price, both of which are defined under the Certificate of Designations, Preferences and Rights (the “Series A Preferred COD”) of Series A Preferred Stock, to be $0.60 in lieu
of $0.70, and (ii) to acknowledge and correct the number of shares of Series A Preferred Stock that were issued and outstanding based on the corrected Original Purchase Price.
The Company has also reached out to all the Series A Preferred Investors to seek their consent to the waiver and amendments to the transaction documents for the offering of the Series A Preferred Stock. Pursuant to the Waiver and Amendment Agreement dated May 5, 2014 which was later closed in August 2014 (the “Series A Preferred Waiver and Amendments”), the Series A Preferred Investors agreed: (i) to convert every 8.3333 shares of Series A Preferred Stock into one share of Series B Preferred Stock, (ii) to waive any default on the part of the Company under the transaction documents in connection with the offering of the Series A Preferred Stock, (iii) to terminate the Company’s obligations under the relevant transaction documents for the offering of the Series A Preferred Stock, including the Series A Preferred COD and (iv) to amend the Series A Warrants to have a lower exercise price of $0.30 per share and the extended expiration date of June 1, 2019. Series B Preferred Stock acknowledges the original price of a 20% premium to the Series A Preferred Investors’ original investment in the Series A Preferred Stock and the Series B Preferred may be converted into 20 shares of Common Stock at the option of it holders and will automatically convert into shares of Common Stock if the Common Stock meets certain criteria of trading price and trading volume.
In the meantime, the Company was seeking additional investment from the Series A Preferred Investors in the New Bridge Financing. As an incentive, the Series A Preferred Waiver and Amendments provided that any Series A Preferred Investor that invests in the New Bridge Financing for an amount of more than 15% of its original investment in the Series A Preferred Stock, such Series A Preferred Investor may be entitled to more favorable terms of the amendments pursuant to an optional addendum agreement, where (i) Every 6.15384 shares of such Series A Preferred Investor’s Series A Preferred Stock will be converted into one share of Series C Convertible Preferred Stock of the Company (the “Series C Preferred Stock”), and (ii) such Series A Preferred Investor’s Series A Warrant will be amended to have a lower exercise price of $0.25. Series C Preferred Stock acknowledges the original price of a 30% premium to the Series A Preferred Investors’ original investment in the Series A Preferred Stock and provides a liquidation preference of 1.3 times of the original purchase price of the Series C Preferred Stock. The Series C Preferred may be converted into 20 shares of Common Stock at the option of it holders and will automatically convert into shares of Common Stock if the Common Stock meets certain criteria of trading price and trading volume.
As of the date of this Report, holders of all of the outstanding Series A Preferred Stock consented to the Note Waiver and Amendments. As of the date of this Report, the Company has received gross proceeds of an aggregate of $31,250 from the Series A Preferred Investors for the New Bridge Financing.
Letter of Intent with OrangeHook
On October 24, 2014, Nuvel Holdings Inc., the Company, entered into a letter of intent (the “Letter of Intent”) with OrangeHook, Inc., a Minnesota corporation. Pursuant to the Letter of Intent, Nuvel and OrangeHook will merge or combine their assets, with Nuvel as the surviving corporation (the “Transaction”). The anticipated closing date is to be on or before December 31, 2014 (“the Closing”). As a result of the intended business combination, Nuvel will acquire all of the equity or assets of OrangeHook subject to the terms of the Letter of Intent. Nuvel will issue common stock to the shareholders of OrangeHook such that after the Transaction (and prior to any financing at the time of the Transaction), OrangeHook shareholders will own approximately 85% of Nuvel and the pre-Transaction Nuvel shareholders will own approximately 15% of Nuvel, which is subject to adjustment by negotiation of the parties. Pursuant to the Letter of Intent, OrangeHook provided $60,000 as bridge financing to Nuvel, in the form of an unsecured loan to assist Nuvel in completing the necessary filings with the Securities and Exchange Commission (“SEC”) such that it will be current in its reporting. Prior to the Transaction, OrangeHook anticipates raising up to an additional $2 million, approximately $250,000 of which will be used to loan monies to Nuvel for its operations and which will convert into equity at closing of the Transaction. On or about the same day as the Transaction, Nuvel and OrangeHook anticipate initiating an equity raise of up to $5 million of financing for the combined companies. Conditions to Closing include that Nuvel be current in its SEC reports; that each of the financings set forth in the Letter of Intent have occurred and that any necessary shareholder approval has been obtained.
Business Operations
Overview
Nuvel Holdings, Inc. the Company, through its wholly-owned subsidiary Nuvel, Inc., engages in the business of designing, developing and selling software products and services that deliver data acceleration and management solutions that enable companies and individuals to transfer large amounts of data at high speeds, while optimizing the flow of information over the Internet, and maximizing network performance and data security. Nuvel is shaping the future of data transfer through transforming how people connect, communicate and collaborate. Since TCP is a very old and poorly designed data transfer protocol Nuvel's products solve the TCP problem. Nuvel also helps our customers become more productive by leveraging cloud-based applications. Nuvel Inc. is shaping the future of data acceleration and transfer by creating unprecedented value and opportunity for moving data quickly and securely throughout the world, and by transforming how people connect, communicate and collaborate today. Network Data Tunnel (NDT), Nuvel’s solution uses proprietary protocol optimization, on the fly lossless compression, and encryption to achieve blazing fast performance over existing bandwidth from 10 to 200 times faster. Benefits include increased speed, decrease in time and ultimately reduced bandwidth requirements.
Product Offerings
Our principal product offerings are the following:
Network Data Tunnel (“NDT”)
Our purpose-built Network Data Tunnel application is designed from inception for high-performance software-based data acceleration. Our NDT application provides high data throughput and reduced latency, or the time between initiating a request for data and the completion of the actual data transfer. Our application simultaneously retrieves numerous objects from the origin server. In many cases, our solution offers upward of 10 times to 200 times speed improvement. Our products are designed for easy installation and maintenance, reducing the costs and time required for implementation and use. In many cases, our Network Data Tunnel can be installed in under ten minutes. All of our products provide customers with a range of management features, functions, user interfaces
and modes of operation. In addition, our application solutions are designed to efficiently interact with our customers' existing networking equipment. By accelerating the transfer of data, especially across longer distances (Hops), enterprises and ISPs employing our Network Data Tunnel require less network capacity and can reduce data transmission costs. Our customers better utilize the capacity of their existing network and are able to move data far more efficiently and quickly. The need for enterprises to engage in e-commerce to purchase additional servers could be reduced since our Network Data Tunnel eliminates a significant amount of traffic that could otherwise overload their existing servers, requiring incremental server capacity. Our NDT products also help to improve the productivity of Internet users by reducing web response time. Faster downloading of web content increases productivity and end-user satisfaction. Our applications run on existing consumer-deployed networks and data center equipment, which means that it is designed to be less vulnerable to unauthorized entry than the deployment of new hardware or dedicated appliances. The Network Data Tunnel Solution was designed specifically for data acceleration. In addition, NDT employs authentication and filtering capabilities that prohibit unauthorized users from accessing or penetrating the application by adhering to the clients’ security protocols.
Nuvel WAN acceleration and optimization
The Company designs, develops, markets, and sells Internet acceleration applications and management solutions which include specialized software tools that are purpose-built to accelerate and optimize the flow of information over the Internet. Our products improve response time for Internet users and provide network administrators and managers a high degree of control over the access, flow and delivery of Internet content. Our products work in conjunction with caching technologies to reduce the number of redundant requests for information that must be processed and delivered, thus reducing the load on the Internet and corporate networks. We have developed an innovative and comprehensive solution that broadly addresses the inter-related root causes of poor performance of wide-area distributed computing: latency and protocol inefficiencies, and bandwidth limitations. By simultaneously addressing these causes, we are able to improve significantly the performance of applications and access to data across WANs and enable the consolidation of costly IT infrastructure.
NDT Packaging
Enterprise Edition
(
Available in 50Mbps, 100Mbps & 1Gbps)
The Nuvel Network Data Tunnel Enterprise Edition is focused on the larger corporate bandwidth customers looking to move time sensitive and very large data sets. The Enterprise Edition is available in three options based on bandwidth.
Small Business Edition (Available in 5Mbps & 10Mbps)
Targeted at the small business market where Internet upload and download speeds are limited and yet the demand still warrants efficient use and time is most important.
Service Provider Edition
Our XaaS edition is tailored to each service provider based on their unique challenges and target customers.
Technologies
Our products are based on three core technologies:
WAN optimization
The new global enterprise is burdened with several challenges, which include a diverse workforce, multiple software applications and varying means of data access. Driven by an increasing demand for bandwidth to reliably and effectively support remote offices, the need for a better-functioning, faster, cheaper, and easier to implement and use WAN solution, has never been greater. Hardware-based application acceleration and WAN optimization solutions available today address only a part of the problem faced by the modern global enterprises. What these traditional solutions do not address are the needs for ease of deployment, ease of use and operation, better economics and fit for purpose – crucial requirements of modern businesses. The hardware approach to WAN optimization requires numerous costly and complex appliances resulting in geometrically multiplying hardware, operations and maintenance costs. Furthermore, the “optimization in hardware” approach results in other undesirable characteristics that include costly and often delayed upgrades, and significant staff and time commitments to provide, manage and maintain complex installations of appliances. Our WAN optimization products are deployed by our customers throughout their network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network security. Our target customers include large and small ISPs, large corporate enterprises and small and medium size businesses in industries such as finance, engineering, professional services, manufacturing, media, healthcare, utilities, telecom, retail and cloud-based service providers. These companies would purchase our products in order to improve the performance of their networks and to accelerate and optimize the delivery of content to other companies or end-users over the Internet. Our WAN optimization products are designed to help distributed enterprises optimize the transferring of data both internally and externally.
Compared with the traditional WAN optimization solutions, our WAN optimization and acceleration technology provides key capabilities that are designed to optimize the delivery of data to users across the distributed enterprise, and to customers. As compared to traditional solutions, the NDT gets up to 150X speed and is not bound by either point to point transmission or network equipment constraints including:
|
●
|
Bandwidth management
—the ability to assign a set level of bandwidth to specific users and applications and prioritize delivery of that traffic over the WAN;
|
|
●
|
Protocol optimization
—a technique that enhances the efficiency of protocols by reducing the communication required between the user and the application; and
|
|
●
|
Compression
—a technique that uses an industry standard algorithm to package and unpackage information for efficient transmission across the WAN.
|
The Network Data Tunnel enhances the performance of the TCP protocol by increasing the amount of data carried per TCP round trip, thereby reducing the number of round trips required to move a given amount of data over the WAN.
Enterprises and ISPs have varying capacity, reliability and data throughput needs, depending on the size and nature of their operations. We offer a wide range of products to meet different price, performance and reliability requirements, and provide an upgrade path to our customers as they expand their networks. Our products can be deployed in a variety of environments, ranging from small or remote network locations to large ISPs or enterprise headquarters. Trying to store content closer to the user may increase network efficiency, but creates the risk that the content delivered is not up-to-date, or fresh. Network Data Tunnel avoids this by increasing the speed in which original content can be moved to the serving location. Unlike traditional software or hardware cache solutions that have no mechanisms to monitor and ensure freshness, our Network Data Tunnel can actively check the origin servers and update content through efficient and sophisticated algorithms.
Cloud Computing
Based on “cloud computing” models, we are releasing a revolutionary approach to data acceleration, and a fundamental architectural shift in the delivery of this solution. Instead of a data acceleration optimization controller or a managed appliance model per customer, Nuvel is a true innovator in software-based data optimization, designed for an enterprise. It offers data acceleration, as well as cost-effective, scalable and reliable connectivity between enterprise locations. Our revolutionary technology offers enterprises enhanced performance throughout their global network. With Nuvel, users can start with a network of any size, configuration and scale based on the organization’s demands. Users in branch offices or remote locations exchanging vital information with headquarters need a reliable and fast solution that can keep pace with the increasing demands.
Services and Support
We provide a comprehensive range of service and support options to our end user customers and our channel partners, which are delivered directly by our service and support organization. Our service and support options are for software support. Additionally, our professionally skilled staff ensures all installations are performed to the client’s exact specifications.
Research and Development
We believe that innovation and strong internal product development capabilities are essential to our continued success and growth. We continue to add new features, strengthen existing features of our products and invest in exploring new and adjacent markets and products that build on our core competence. In year 2011, we invested in developing our cloud-based service; we anticipate that this subscription-based service will materially add to revenue in the next few years.
Our research and development team consists of engineers with extensive technical backgrounds in relevant disciplines. We believe that the experience and capabilities of our research and development professionals is one of our significant competitive advantages. We also work closely with our beta customers to understand their business needs and to focus our development of new products and product enhancements to better meet customer needs.
For the years ended December 31, 2013, 2012 and 2011, the Company incurred research and development expenses of $51,625, $258,383 and $345,455.
Intellectual Property
We depend significantly on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, copyright and trademark laws and patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary.
We currently have one pending U.S. patent application and when this is issued, we will apply for foreign patents.
|
Title of Patent Application
|
Date of Filing
|
Application No.
|
||
|
System and method for providing a network proxy data tunnel
|
12/14/2011
|
13/326,189
|
There can be no assurance that any of our pending patent applications will be issued or that the patent examination process will not result in our narrowing the claims applied for. Furthermore, there can be no assurance that we will be able to detect any infringement of patents or, if infringement is detected, that our patents will be enforceable or that any damages awarded to us will be sufficient to adequately compensate us. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Any issued patent may not preserve our proprietary position, and competitors or others may develop technologies similar to or superior to our technology. Our failure to enforce and protect our intellectual property rights could harm our business, operating results and financial condition.
Sales and Marketing
Our objective is to be a leading provider of software-based data acceleration by delivering a high-performance, innovative Network Data Tunnel solution. Key elements of our strategy include applying our data acceleration focus to targeted market segments. Since our inception, we have focused on developing a software only data acceleration product line. We believe this focus helps us to rapidly identify and target attractive market opportunities. We are directing our product development, marketing and sales activities at specific market segments that we believe represent attractive opportunities based on a demonstrated need for software-based data acceleration, the opportunity to sell to numerous customers and the level of existing competition. We focus on three market segments: service providers, enterprise proxy server replacement, and “Ground to Cloud.” We intend to use our customer relationships in these market segments to further penetrate these segments as well as other related markets.
We intend to utilize a combination of our direct sales force, resellers, systems integrators and original equipment manufacturers as appropriate for each of our target markets. We will support our distribution channels with systems engineers and customer support personnel that provide technical service and support to our customers.
We intend to pursue relationships with additional resellers and original equipment manufacturers to implement our distribution strategy and to expand our customer base. We have also been expanding our sales force, and plan to continue to do so in the future. Our marketing efforts focus on increasing the market awareness of our products and technology and promoting the Nuvel brand. Our strategy is to create this awareness by distinguishing our products based on their high level of performance.
Broaden Distribution Channels
We intend to extend our distribution channels to meet the anticipated growth in demand for software-based data acceleration. We plan to continue to expand both our direct and indirect sales channels in order to continue to extend our marketing reach and increase our volume distribution. In particular, we plan to enter into relationships with additional resellers, systems integrators and original equipment manufacturers to increase penetration of the enterprise and ISP markets.
Marketing Programs
We have a number of marketing programs to support the sale and distribution of our products and to inform existing and potential customers within our target market segments about the capabilities and benefits of our products. Our marketing efforts include participation in industry trade shows, sales training, maintenance of our website, on-line advertising and public relations. Affiliate programs and marketing efforts through them will be key for Nuvel’s growth going forward.
Our Business Strategy
We intend to establish Nuvel as the premier brand in Internet acceleration. We believe that brand awareness is important to increase market acceptance of Network Data Tunnel and to identify us as a leading provider of software-based data acceleration solutions. The amount of noise and confusion in this market makes it very challenging. We intend to continue to educate customers, resellers, systems integrators and original equipment manufacturers about the value of implementing all of our current and future products. We
believe a thorough process of explanation and education of our products will help to promote brand recognition and to further an overall acceptance and understanding of our solutions. To this end, we intend to increase our investments in a broad range of marketing and educational programs.
Customers
Our NDT products are installed for beta testing in some of the largest companies worldwide in major industries including: finance, engineering, professional services, manufacturing, media, healthcare, utilities, telecom, retail, and technology. Our products will be deployed in a wide range of organizations, from large global organizations with hundreds or thousands of locations to smaller organizations with as few as two locations.
In 2011, we signed up key beta customers to test the full capability of our product. These beta customers represent major market segments.
Industry Background
The Global Demand for Data
Organizations have become more geographically dispersed, and increasingly mobile workforces depend on access to data from remote locations and a variety of client devices such as cellular telephones, personal digital assistants and notebook computers. In addition, we believe the continued growth of Internet usage will be driven by new applications, such as “Web Services” and “Voice over IP”, the growth of mobile and broadband Internet access, and new usage and infrastructure models such as “cloud computing.” In conjunction with the growth of Internet traffic, the proliferation of data and, in particular, unstructured data such as voice, video, images, email, spreadsheets and formatted text files, presents an enormous and increasing challenge to IT organizations. Along with the growing volume of unstructured data that is business critical and must be retained and readily accessible to individuals and applications, new regulations mandate that company email, web pages and other files must be retained indefinitely.
Gartner, Inc. (“Gartner”), a leading technology information group, estimates the number of U.S. companies with remote offices in excess of 4 million and many indications are that the mobile workforce is here to stay. The increased demand for data acceleration is not just domestic but spans the globe. The good news for Nuvel is this means a growing dependence on the performance of every network, real-time access to data, anytime and anywhere.
The Internet is dramatically changing the way businesses and individuals communicate and conduct commerce. As a result, the increasing volume of Internet traffic is much more than just web surfing; it's big business. According to Gartner, the amount of data produced across the world will grow by 650 percent over the next few years, and 80 percent of it will be unstructured. The research firm adds that 40 exabytes of new data are expected over the next five years, which is greater than all the data of the past 5,000 years. With this rising volume of traffic, Internet and Intranet infrastructures are quickly reaching capacity. Slow response times and site outages due to heavy demand are common outcomes of these overburdened network infrastructures. For organizations that rely on the web for commerce and/or operational purposes, these problems can be expected to have a direct, adverse impact on both the top and bottom lines. In the past, sites that wanted to avoid these issues had few choices but to invest in more infrastructure--more servers, more network equipment, more staff and more data center space. Now, through the emergence of data acceleration technology, these sites can effectively address the problems of performance, scaling and management. Nuvel optimizes how content is delivered by accelerating it either direction. There are two primary types of data acceleration solutions: software-based solutions and hardware based groups. Software-based approaches consist of a software application running on a general-purpose operating system like Solaris, Linux or Windows. These systems offer superior flexibility. Hardware providers promote a singular design, simple install, but have been significantly overpriced for many companies. Much as network routing has evolved from a general-purpose to a purpose-built solution, so has data acceleration. The advantages of a specialized application are clear. When an application is designed to perform a dedicated task, it will perform that task more effectively than a multi-function alternative. The results of a proxy-based application approach to optimization are significant: reduced web response times, simpler administration and management, lower network and data center costs, higher reliability, robust data security and always-accurate content.
Increasingly Distributed Organizations and Workforces
Organizations are becoming more geographically distributed, placing operations closer to customers and partners to improve efficiency and responsiveness. Businesses are becoming more global by expanding into new markets, migrating manufacturing facilities to lower-cost locations and outsourcing certain business processes. In addition, mergers, acquisitions, partnerships and joint ventures continue to expand the geographic scope of existing enterprises.
Organizations are Increasingly Dependent on Timely Access to Critical Data and Applications
Application performance and effective access to data are critical to executing, maintaining and expanding business operations. Employees are increasingly dependent on a wide array of software applications to perform their jobs effectively, such as E-mail, document management, enterprise resource planning and customer relationship management.
Wide-Area Distributed Computing Challenges
Technological advances in computing, networking, semiconductor and storage technologies have improved users’ ability to access data and use applications rapidly across their Local Area Networks (“LANs”) and store enormous amounts of information economically. However, these same applications and storage technologies, which were often designed to operate optimally on LANs, perform slowly across WANs and frequently exhibit performance challenges such as: delays in accessing, saving and transferring files, incomplete or inconsistent back-up and recovery of sensitive data and loss of worker productivity and increased end-user frustration.
Although many companies have attempted to solve these problems solely by adding bandwidth, we believe these performance problems can best be solved by addressing not only bandwidth challenges but also, and usually more importantly, the effects of latency and protocol inefficiencies:
Latency and protocol inefficiencies — “Latency” is the amount of time it takes data to travel distances across a network. The inefficiencies come from the numerous interactions between clients and servers that are often required by applications or network transport protocols to complete an operation or transfer data. When combined in geographically distributed computing environments, latency and these inefficiencies result in dramatically slower performance. For example, a simple request to open a file may require hundreds if not thousands of sequential round-trip interactions that, when aggregated, can result in substantial delays. This problem arises from two distinct sources:
|
●
|
Network Protocol inefficiencies — Most business applications were designed for optimal use within LAN environments and employ unique communications procedures that result in slow performance when transmitted over a WAN. Transmission Control Protocol (TCP), the underlying transport protocol for most WAN traffic, divides data into relatively small packets that are sent sequentially across the WAN, and require return acknowledgement from the recipient. These numerous round trips across the WAN result in slow performance for the end-user.
|
|
●
|
Bandwidth limitations — Bandwidth is defined as the amount of data that can traverse a network in a given amount of time and is typically measured in megabits per second (Mbps). While most organizations’ LANs typically operate at 100 or 1,000 Mbps, their remote office WAN connections typically operate at 2 Mbps or less. This often results in WAN congestion and poor application and data services performance. In addition, WAN outages limit the effectiveness of workers who are dependent on remote access to data and applications.
|
Critical Partners
We believe that our business benefits greatly from working closely with other leading companies and suppliers in each market. By collaborating with others, we are able to design products that integrate more easily with other devices, add features and functionality to our products and expand our distribution channels, enabling us access to additional customers and markets. We are focusing our strategic relationships internationally with the intent to have more than 50% of our revenue from international sales within 5 years.
Competition
The expanding capabilities of our product offerings have enabled us to address a growing array of opportunities, many of which are not addressed by our competitors. The design of the Network Data Tunnel is unique compared to the other products in this market and we are truly a disruptive technology for existing solutions. Our competitor’s product offerings include hardware appliances as a major part of their solution. The major benefits of our Network Data Tunnel are: software only solution, easy to install and implement, scalable from very small to very large networks, and priced extremely competitive with a subscription model. With this model, we can easily migrate down to the consumer level, which is where the biggest demand will come in the future.
In the WAN Acceleration market, we compete with large companies such as Cisco Systems, Citrix Systems, Riverbed Technology, Silver Peak and Blue Coat Systems. The principal competitive factors in the market in which we compete include: product performance and features; customer support; brand recognition; the scope of distribution and sales channels; and pricing. Many of our competitors have a longer operating history and greater financial, technical, marketing and other resources than we do. These larger competitors also have a more extensive customer base and broader customer relationships, including relationships with many of our current and potential customers.
Employees
The Company currently employs full time and contract employees.
Not applicable.
None.
Our principal executive offices are located at 20 S. Santa Cruz Ave., Los Gatos, California. We occupy the premises pursuant to a one year lease that expires in December of 2015, and provides for a base monthly rent of $1,000. Pursuant to the lease, we have the right to extend the term of the lease any time prior to its expiration.
We are not a party to any legal proceedings, nor are we aware of any threatened litigation whatsoever.
Not applicable
PART II
Market Information
Our common stock has been approved for quotation on the over-the-counter bulletin board market under the symbol, initially as "HRMY" and since April 10, 2012 as “NUVL” on OTC Pink Marketplace. Our common stock did not have any trading activities until February 2012.
The following table sets forth, for the calendar quarters indicated, the reported high and low bid quotations per share of the Common Stock as reported on the OTCBB and Pink Sheets. Such quotations reflect inter-dealer quotations without retail mark-up, markdowns or commissions, and may not necessarily represent actual transactions.
Fiscal Year Ended December 31, 2012
| Common Stock | High | Low | |||||||
|
First Quarter
|
$
|
1.25
|
$
|
0.51
|
|||||
|
Second Quarter
|
1.70
|
1.20
|
|||||||
|
Third Quarter
|
1.80
|
0.83
|
|||||||
|
Fourth Quarter
|
1.64
|
0.88
|
Fiscal Year Ended December 31, 2013
|
First Quarter
|
$
|
1.50
|
$
|
0.21
|
|||||
|
Second Quarter
|
1.48
|
0.11
|
|||||||
|
Third Quarter
|
0.40
|
0.10
|
|||||||
|
Fourth Quarter
|
0.40
|
0.12
|
The transfer agent for the Company's common stock is Globex Transfer, LLC at the address of 780 Deltona Blvd., Suite 202, Deltona, FL 32725.
Stockholders
As of December 31, 2012, there were approximately 25 holders of record of our Common Stock.
As of December 31, 2013, there were approximately 31 holders of record of our Common Stock.
As of the date of this Report, there were approximately 37 holders of record of our Common Stock.
Dividends
The Company has never paid a cash dividend on its common stock and has no present intention to declare or pay cash dividends on the common stock in the foreseeable future. The Company intends to retain any earnings which it may realize in the foreseeable future to finance its operations. Future dividends, if any, will depend on earnings, financing requirements and other factors.
Securities authorized for issuance under equity compensation plans
We do not expect to adopt an equity incentive plan during the next 12 months. When we adopt an equity incentive plan, the purposes of the proposed equity incentive plan are to attract and retain qualified persons upon whom our sustained progress, growth and profitability depend, to motivate these persons to achieve long-term company goals and to more closely align these persons' interests with those of our other shareholders by providing them with a proprietary interest in our growth and performance. Our executive officers will be eligible to participate in the plan. We have not determined the amount of shares of our common stock to be reserved for issuance under the proposed equity incentive plan.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
We have not repurchased any shares of our common stock during the fiscal years ended December 31, 2013 and 2012.
Not applicable.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Certain statements in this Report, and the documents incorporated by reference herein, constitute forward-looking statements. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.
Overview
The Company, through its wholly-owned subsidiary Nuvel DE, engages in the business of designing, developing and selling a family of proxy and other appliances, and related software and services that secure, accelerate and optimize the delivery of business applications, Web content and other information to distributed users over a Wide Area Network (“WAN”), or across an enterprise’s gateway to the public Internet (also known as the Web). Our products provide our end user customers with information about the applications and Web traffic running on their networks, including the ability to discover, classify, manage
and control communications between users and applications across internal networks, the WAN and the Internet. Our products are also designed to accelerate and optimize the performance of our end users’ business applications and content, whether used internally or hosted by external providers. We have also developed and designed personal safety applications that are accessible via various mobile and tablet platforms.
Our primary activities have been the design and development of our products, negotiating strategic alliances and other agreements and raising capital. We have not commenced our principal operations, nor have we generated any material revenues.
Since inception, we have incurred substantial losses. As of December 31, 2013, 2012 and 2011, our accumulated deficit was $10,561,878, $10,569,721 and $6,970,260, respectively, our stockholders’ deficiency was $7,981,799, $8,057,642 and $5,077,380, respectively, and our working capital deficiency was $7,533,918, $7,900,839 and $5,077,380, respectively. We have not yet generated revenues and our losses have principally been operating expenses incurred in design, development, marketing and promotional activities in order to commercialize our products. We expect to continue to incur additional costs for operating and marketing activities over at least the next year.
Based upon our working capital deficiency as of December 31, 2013, 2012 and 2011 and the lack of any revenues, we require equity and/or debt financing to continue our operations. The Company's primary source of operating funds since inception has been note financings. Subsequent to December 31, 2013, the Company secured additional debt financing in the form of Notes Payable aggregating $382,750 and has converted notes payable and convertible notes payable totaling $3,260,000 into preferred stock (see Note 10). The Company expects that its current cash on hand will fund its operations only through November 2014. The Company intends to raise additional capital through private debt and equity investors. The Company needs to raise additional capital in order to be able to accomplish its business plan objectives. The Company is continuing its efforts to secure additional funds through debt or equity instruments due to the impending lack of funds. Management believes that it will be successful in obtaining additional financing based on its limited history of raising funds; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds it raises will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. See “Liquidity and Capital Resources” and “Availability of Additional Funds” below.
On October 24, 2014, the Company entered into a letter of intent (the “Letter of Intent”) with OrangeHook, Inc., (“Orange Hook”) a Minnesota corporation. Pursuant to the Letter of Intent, The Company and OrangeHook will merge or combine their assets, with the Company as the surviving corporation (the “Transaction”). The anticipated closing date is to be on or before December 31, 2014 (“the Closing”). As a result of the intended business combination, the Company will acquire all of the equity or assets of OrangeHook subject to the terms of the Letter of Intent. The Company will issue common stock to the shareholders of OrangeHook such that after the Transaction (and prior to any financing at the time of the Transaction), OrangeHook shareholders will own approximately 85% of the Company and the pre-Transaction Nuvel shareholders will own approximately 15% of the Company, which is subject to adjustment by negotiation of the parties. Pursuant to the Letter of Intent, OrangeHook provided $60,000 as bridge financing to the Company, in the form of an unsecured loan to assist the Company in completing the necessary filings with the Securities and Exchange Commission (“SEC”) such that it will be current in its reporting. Prior to the Transaction, OrangeHook anticipates raising up to an additional $2 million, approximately $250,000 of which will be used to loan monies to the Company for its operations and which will convert into equity at closing of the Transaction. On or about the same day as the Transaction, the Company and OrangeHook anticipate initiating an equity raise of up to $5 million of financing for the combined companies. Conditions to Closing include that the Company be current in its SEC reports, that each of the financings set forth in the Letter of Intent have occurred and that any necessary shareholder approval has been obtained. There can be no assurance that the Transaction will be successful.
Year Ended December 31, 2013 compared with Year End December 31, 2012
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the year ended December 31, 2013, marketing and promotion expenses decreased by $68,598, or 85%, as compared to the year ended December 31, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to suspend its marketing efforts. During the year ended December 31, 2012, the Company primarily spent monies on advertising fees for internet search words as well as stock based compensation in connection with common stock issued to a sales consultant.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the year ended December 31, 2013, payroll and benefits decreased by $973,443, or 79%, as compared to the year ended December 31, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to lay off its seven full time employees.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the year ended December 31, 2013, general and administrative expenses decreased by $468,748, or 78%, as compared to the year ended December 31, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to significantly scale down operations, whereas in the previous year, it incurred legal significant costs related to its reverse merger, and costs related to keeping current with its SEC filings.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the year ended December 31, 2013, research and development expenses decreased by $206,758, or 80%, as compared to the year ended December 31, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013. In the prior year, the Company incurred research and development expenses to develop the Company’s products to work seamlessly on any system without data disruption and to include using the socket secure proxy protocol to a network data tunnel server.
Loss on write-off of capitalized software costs
In 2013, the Company abandoned further development of its vSOS software platform since the Company depleted its cash reserves by the end of the first quarter of 2013. Accordingly, the Company wrote-off the entire cost of $68,560 as a Loss on write-off of capitalized software costs.
Interest expense
For the year ended December 31, 2013, interest expense increased $63,649, or 15%, as compared to the year ended December 31, 2012. Additional notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the year ended December 31, 2013, amortization of debt discount decreased $1,391,284, or 86%, as compared to the year ended December 31, 2012. Amortization of the debt discount in 2012 resulting from short term notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the year ended December 31, 2013, amortization of deferred financing costs increased $7,741, or 17%, as compared to the year ended December 31, 2012 as additional charges relating to raising funds were incurred.
Change in fair value of derivative liabilities
For the year ended December 31, 2013, change in fair value of derivative liabilities increased $639,382, or 96%, as compared to the year ended December 31, 2012. The increase in the gain resulted from the larger decrease in the Company’s estimated stock price during the year ended December 31 2013 as opposed to during the year ended December 31, 2012, and a decrease in the remaining term of the instruments underlying the derivative liabilities.
Net Income
For the year ended December 31, 2013, net income was $7,843 versus a net loss of $3,599,461 for the year ended December 31, 2012. The change was primarily attributable to the change in the value of the derivative liabilities, a significant reduction in operating expenses due to the Company depleting its cash reserves and prior year costs related to financing activity.
Three Months Ended September 30, 2013 compared with Three Months Ended September 30, 2012
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the three months ended September 30, 2013, marketing and promotion expenses decreased by $32,425, or 100%, as compared to the three months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to suspend its marketing efforts. During the three months ended September 30, 2012, the Company primarily spent monies on advertising fees for internet search words as well as stock based compensation in connection with common stock issued to a sales consultant.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the three months ended September 30, 2013, payroll and benefits decreased by $310,882, or 100%, as compared to the three months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to lay off its seven full time employees.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the three months ended September 30, 2013, general and administrative expenses decreased by $108,114, or 100%, as compared to the three months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to significantly scale down operations, whereas in the previous year, it incurred legal significant costs related to keeping current with its SEC filings.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the three months ended September 30, 2013, research and development expenses decreased by $67,521, or 100%, as compared to the three months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013. In the prior year, the Company incurred research and development expenses to develop the Company’s products to work seamlessly on any system without data disruption and to include using the socket secure proxy protocol to a network data tunnel server.
Interest expense
For the three months ended September 30, 2013, interest expense increased $15,112, or 14%, as compared to the three months ended September 30, 2012. Additional notes convertible notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the three months ended September 30, 2013, amortization of debt discount decreased $73,005, or 61%, as compared to the three months ended September 30, 2012. Amortization of the debt discount in 2012 resulting from short term notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the three months ended September 30, 2013, amortization of deferred financing costs increased $13,333 as compared to the three months ended September 30, 2012 as additional charges relating to raising funds were incurred.
Change in fair value of derivative liabilities
For the three months ended September 30, 2013, change in fair value of derivative liabilities decreased $449,464, or 85%, as compared to three months ended September 30, 2012. The decrease in the gain resulted from the smaller decrease in the Company’s estimated stock price during the three months ended September 30, 2013, as opposed to during the three months ended September 30, 2012.
Net Loss
For the three months ended September 30, 2013, the net loss was $106,249 versus a net loss of $220,287 for the three months ended September 30, 2012.
Nine Months Ended September 30, 2013 compared with Nine Months Ended September 30, 2012
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the nine months ended September 30, 2013, marketing and promotion expenses decreased by $51,432, or 81%, as compared to the nine months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to suspend its marketing efforts. During the nine months ended September 30, 2012, the Company primarily spent monies on advertising fees for internet search words as well as stock based compensation in connection with common stock issued to a sales consultant.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the nine months ended September 30, 2013, payroll and benefits decreased by $645,649, or 71%, as compared to the nine months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the nine months ended September 30, 2013, general and administrative expenses decreased by $281,388, or 68%, as compared to the nine months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to significantly scale down operations, whereas in the previous year, it incurred legal significant costs related to keeping current with its SEC filings.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the nine months ended September 30, 2013, research and development expenses decreased by $162,822, or 78%, as compared to the nine months ended September 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013. In the prior year, the Company incurred research and development expenses to develop the Company’s products to work seamlessly on any system without data disruption and to include using the socket secure proxy protocol to a network data tunnel server.
Loss on write-off of capitalized software costs
In the first half of 2013, the Company abandoned further development of its vSOS software platform since the Company depleted its cash reserves by the end of the first quarter of 2013. Accordingly, during the nine months ended September 30, 2013, the Company wrote-off the entire cost of $68,560 as a Loss on write-off of capitalized software costs.
Interest expense
For the nine months ended September 30, 2013, interest expense increased $57,868, or 19%, as compared to the nine months ended September 30, 2012. Additional notes convertible notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the nine months ended September 30, 2013, amortization of debt discount decreased $1,374,089, or 88%, as compared to the nine months ended September 30, 2012. Amortization of the debt discount in 2012 resulting from short term notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the nine months ended September 30, 2013, amortization of deferred financing costs increased $334, or 1%, as compared to nine months ended September 30, 2012.
Change in fair value of derivative liabilities
For the nine months ended September 30, 2013, change in fair value of derivative liabilities decreased $718,862, or 59%, as compared to the nine months ended September 30, 2012. The decrease in the gain resulted from the smaller decrease in the Company’s estimated stock price during the nine months ended September 300, 2013 as opposed to during the nine months ended September 30, 2012.
Net Loss
For the nine months ended September 30, 2013, the net loss was $616,184 versus a net loss of $2,287,134 for the nine months ended September 30, 2012.
Three Months Ended June 30, 2013 compared with Three Months Ended June 30, 2012
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the three months ended June 30, 2013, marketing and promotion expenses decreased by $12,895, or 100%, as compared to the three months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to suspend its marketing efforts. During the three months ended June 30, 2012, the Company primarily spent monies on advertising fees for internet search words as well as stock based compensation in connection with common stock issued to a sales consultant.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the three months ended June 30, 2013, payroll and benefits decreased by $298,720, or 100%, as compared to the three months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to lay off its seven full time employees.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the three months ended June 30, 2013, general and administrative expenses decreased by $78,129, or 84%, as compared to the three months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to significantly scale down operations, whereas in the previous year, it incurred legal significant costs related to keeping current with its SEC filings.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the three months ended June 30, 2013, research and development expenses decreased by $13,688, or 64%, as compared to the three months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013. In the prior year, the Company incurred research and development expenses to develop the Company’s products to work seamlessly on any system without data disruption and to include using the socket secure proxy protocol to a network data tunnel server.
Interest expense
For the three months ended June 30, 2013, interest expense increased $20,773 or 20%, as compared to the three months ended June 30, 2012. Additional notes convertible notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the three months ended June 30, 2013, amortization of debt discount decreased $146,117, or 76%, as compared to the three months ended June 30, 2012. Amortization of the debt discount in 2012 resulting from short term notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the three months ended June 30, 2013, amortization of deferred financing costs increased $5,166, or 63%, as compared to the three months ended June 30, 2012 as additional charges relating to raising funds were incurred.
Change in fair value of derivative liabilities
For the three months ended June 30, 2013, change in fair value of derivative liabilities decreased $546,253, or 94%, as compared to three months ended June 30, 2012. The decrease in the gain resulted from the smaller decrease in the Company’s estimated stock price during the three months ended June 30, 2013, as opposed to during the three months ended June 30, 2012.
Net Loss
For the three months ended June 30, 2013, the net loss was $170,934 versus a net loss of $148,314 for the three months ended June 30, 2012.
Six Months Ended June 30, 2013 compared with Six Months Ended June 30, 2012
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the six months ended June 30, 2013, marketing and promotion expenses decreased by $19,007, or 61%, as compared to the six months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to suspend its marketing efforts. During the six months ended June 30, 2012, the Company primarily spent monies on advertising fees for internet search words as well as stock based compensation in connection with common stock issued to a sales consultant.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the six months ended June 30, 2013, payroll and benefits decreased by $334,767 or 57%, as compared to the six months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to lay off its seven full time employees.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the six months ended June 30, 2013, general and administrative expenses decreased by $173,274, or 57%, as compared to the six months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to significantly scale down operations, whereas in the previous year, it incurred legal significant costs related to keeping current with its SEC filings.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the six months ended June 30, 2013, research and development expenses decreased by $95,301, or 67%, as compared to the six months ended June 30, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013. In the prior year, the Company incurred research and development expenses to develop the Company’s products to work seamlessly on any system without data disruption and to include using the socket secure proxy protocol to a network data tunnel server.
Loss on write-off of capitalized software costs
In the first half of 2013, the Company abandoned further development of its vSOS software platform since the Company depleted its cash reserves by the end of the first quarter of 2013. Accordingly, during the six months ended June 30, 2013, the Company wrote-off the entire cost of $68,560 as a Loss on write-off of capitalized software costs.
Interest expense
For the six months ended June 30, 2013, interest expense increased $42,756, or 21%, as compared to the six months ended June 30, 2012. Additional notes convertible notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the six months ended June 30, 2013, amortization of debt discount decreased $1,301,084, or 90%, as compared to the six months ended June 30, 2012. Amortization of the debt discount in 2012 resulting from short term notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the six months ended June 30, 2013, amortization of deferred financing costs decreased $12,999, or 33%, as compared to six months ended June 30, 2012 as less charges relating to raising funds were incurred.
Change in fair value of derivative liabilities
For the six months ended June 30, 2013, change in fair value of derivative liabilities decreased $269,398, or 39%, as compared to the six months ended June 30, 2012. The decrease in the gain resulted from the smaller decrease in the Company’s estimated stock price during the six months ended June 30, 2013 as opposed to during the six months ended June 30, 2012.
Net Loss
For the six months ended June 30, 2013, the net loss was $509,935 versus a net loss of $2,066,847 for the six months ended June 30, 2012.
Three Months Ended March 31, 2013 compared with Three Months Ended March 31, 2012
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the three months ended March 31, 2013, marketing and promotion expenses decreased by $6,112, or 34%, as compared to the three months ended March 31, 2012. The decrease resulted primarily as the Company depleted its cash reserves by the end of the first quarter of 2013 and had to suspend its marketing efforts. During the three months ended March 31 , 2012, the Company primarily spent monies on advertising fees for internet search words as well as stock based compensation in connection with common stock issued to a sales consultant.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the three months ended March 31, 2013, payroll and benefits decreased by $36,047 or 12%, as compared to the three months ended March 31, 2012. The decrease was
attributable to the cancellation of medical and dental benefits after January 2013.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the three months ended March 31, 2013, general and administrative expenses decreased by $95,145, or 45%, as compared to the three months ended March 31, 2012. The decrease was attributable to the professional fees incurred in the comparable prior period in connection with the initial SEC filings.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the three months ended March 31, 2013, research and development expenses decreased by $81,613 or 67%, as compared to the three months ended March 31, 2012. The decrease resulted primarily from maintaining two developers at the same time during the first quarter of 2012 as the Company transitioned to a more cost effective developer.
Interest expense
For the three months ended March 31, 2013, interest expense increased $21,984, or 22%, as compared to the three months ended March 31, 2012. Additional notes are convertible notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the three months ended March 31, 2013, amortization of debt discount decreased $1,154,967, or 92%, as compared to the three months ended March 31, 2012. Amortization of the debt discount in 2012 resulting from short term notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the three months ended March 31, 2013, amortization of deferred financing costs decreased $18,166, or 58%, as compared to the three months ended March 31, 2012 as less charges relating to raising funds were incurred.
Change in fair value of derivative liabilities
For the three months ended March 31, 2013, change in fair value of derivative liabilities increased $276,855, or 259%, as compared to three months ended March 31, 2012. The decrease in the gain resulted from the larger decrease in the Company’s estimated stock price during the three months ended March 31, 2013, as opposed to during the three months ended March 31, 2012.
Net Loss
For the three months ended March 31, 2013, the net loss was $339,001 versus a net loss of $1,918,533 for the three months ended March 31, 2012.
Year Ended December 31, 2012 compared with Year End December 31, 2011
Marketing and promotion expenses
Marketing and promotion expenses include costs related to the advertising, marketing, and promotion of our products. For the year ended December 31, 2012, marketing and promotion expenses increased by $1,678, or 2%, as compared to the year ended December 31, 2011.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the year ended December 31, 2012, payroll and benefits increased by $45,507, or 4%, as compared to the year ended December 31, 2011.
Merger Costs
Merger costs during the year ended December 31, 2011 totaled $2,614,780 and consisted of $2,224,780 recorded for the stock and warrants that were issued to Paragon, $350,000 of other costs related to the reverse merger and $40,000 in legal fees. There were no such merger costs during the year ended December 31, 2012.
General and administrative expenses
General and administrative expenses consist primarily of corporate support expenses such as legal and professional fees, investor relations and telecommunications expenses. For the year ended December 31, 2012, general and administrative expenses increased by $253,601, or 72%, as compared to the year ended December 31, 2011. The increase resulted primarily from an increase in professional fees related to initial SEC filings, note and convertible note extensions as well as stock-based compensation issued in connection with common stock issued to investor relations consultants.
Research and development expenses
Research and development expenses consist primarily of consulting fees paid to develop our software products. Research and development expenses are expensed as they are incurred. For the year ended December 31, 2012, research and development expenses decreased by $87,072, or 25%, as compared to the year ended December 31, 2011. The decrease resulted primarily from the Company’s transition to a more cost effective developer as well as the capitalization of software costs during the year ended December 31, 2012 as the Company’s mobile application product reached technological feasibility in October 2011.
Interest expense
For the year ended December 31, 2012, interest expense increased $191,314, or 81%, as compared to the year ended December 31, 2011. Additional notes are convertible notes were issued throughout 2012 and certain maturity dates were extended.
Amortization of debt discount
For the year ended December 31, 2012, amortization of debt discount increased $1,287,391, or 381%, as compared to the year ended December 31, 2011. Additional notes and convertible notes issued in 2012 and the amortization of the Third Amendment warrants in 2012 accounted for the variance.
Amortization of deferred financing costs
For the year ended December 31, 2012, amortization of deferred financing costs decreased $202,658, or 82%, as compared to the year ended December 31, 2011 as less charges relating to raising funds were incurred.
Change in fair value of derivative liabilities
The Company marked certain warrants to fair value which accounted for a gain of $669,373 relating to the change in fair value of warrant liabilities for the year ended December 31, 2012 as a result of decreases in the Company’s estimated stock price and in the remaining term of the warrants. This compared to a loss of $209,525 in the prior year resulting from a modification of the terms of the warrant, specifically a reduction in the exercise price of the warrants.
Net Loss
For the year ended December 31, 2012, the net loss was $3,599,461 versus a net loss of $5,605,531 for the year ended December 31, 2011.
Liquidity and Capital Resources
We measure our liquidity in a number of ways, including the following:
|
December 31, 2013
|
December 31, 2012
|
December 31, 2011
|
||||||||||
|
Cash
|
$ | - | $ | 441 | $ | 34,792 | ||||||
|
Working Capital Deficiency
|
$ | (7,533,918 | ) | $ | (7,900,839 | ) | $ | (5,077,380 | ) | |||
|
Debt (Current)
|
$ | 3,785,000 | $ | 3,785,000 | $ | 3,265,000 | ||||||
From January 1, 2011 through December 31, 2012, we raised a total of $1,045,000 from the issuance of notes payable and $2,295,000 from the issuance of convertible notes (of which $255,000 was repaid). During the year ended December 31, 2012, we raised a total of $385,000 from the issuance of Series A Preferred Stock. Subsequent to December 31, 2013, we secured additional debt financing of $382,750.
Net Cash Used in Operating Activities
We experienced negative cash flow from operating activities for the years ended December 31, 2013, 2012 and 2011 in the amounts of $25,275, $1,471,251 and $1,803,291, respectively.
The cash used in operating activities in the year ended December 31, 2013 was primarily due to cash used to fund operations of the Company.
The cash used in operating activities for the year ended December 31, 2012 was due to cash used to fund a net loss of $3,599,461, adjusted for non-cash expenses related to amortization of debt discount, amortization of deferred financing costs, stock based compensation and the change in fair value of warrant liabilities in the aggregate amount of $1,068,718, as well as a change in accounts payable, accrued expenses, and prepaid expenses of $1,059,492.
The cash used in operating activities for the year ended December 31, 2011 was due to cash used to fund a net loss of $5,605,531, adjusted for non-cash expenses related to amortization of debt discount, amortization of deferred financing costs, stock based compensation, change in fair value of warrant liabilities and non-cash merger costs in the aggregate amount of $3,020,163, as well as a change in accounts payable, accrued expenses, and prepaid expenses of $782,077.
Net Cash Used in Investing Activities
During the year ended December 31, 2012, the Company invested $68,560 in its vSOS software platform.
Net Cash Provided by Financing Activities
Cash provided by financing activities for the year ended December 31, 2013 was $24,834, resulting from advances from related parties.
Cash provided by financing activities for the year ended December 31, 2012 was $1,505,460 primarily from the issuance of notes payable, convertible notes and preferred stock, as well as related party advances.
Cash provided by financing activities for the year ended December 31, 2011 was $1,828,000 primarily from the issuance of notes payable and convertible notes.
Availability of Additional Funds
Based upon our working capital deficiency as of December 31, 2013, 2012 and 2011 and the lack of any revenues, we require equity and/or debt financing to continue our operations. The Company's primary source of operating funds since inception has been note financings. Subsequent to December 31, 2013, the Company secured additional debt financing in the form of Notes Payable aggregating $382,750 and has converted notes payable and convertible notes payable totaling $3,260,000 into preferred stock. The Company expects that its current cash on hand will fund its operations only through November 2014. The Company intends to raise additional capital through private debt and equity investors. The Company needs to raise additional capital in order to be able to accomplish its business plan objectives. The Company is continuing its efforts to secure additional funds through debt or equity instruments due to the impending lack of funds. Management believes that it will be successful in obtaining additional financing based on its limited history of raising funds; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds it raises will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations.
We may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms. Debt financing may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness, and may contain other terms that are not favorable to our stockholders or us. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or to obtain funds by entering into financing agreements on unattractive terms.
These matters raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements included elsewhere in this Annual Report have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Critical Accounting Policies and Estimates Use of Estimates
The preparation of consolidated 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 and disclosure of contingent liabilities at dates of the consolidated financial statements and the reported amounts of revenue and expenses during the periods. Actual results could differ from these estimates. Our significant estimates and assumptions include amortization, the fair value of our stock, debt discount, warrant liabilities, and the valuation allowance relating to the Company’s deferred tax assets.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
.
Amendments in this Update create Topic 606,
Revenue from Contracts with Customers,
and supersede the revenue recognition requirements in Topic 605,
Revenue Recognition,
including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts,
and create new Subtopic 340-40,
Other Assets and Deferred Costs—Contracts with Customers.
In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2011-230—Revenue Recognition (Topic 605) and Proposed Accounting Standards Update 2011–250—Revenue Recognition (Topic 605): Codification Amendments, both of which have been deleted. Accounting Standards Update 2014-09. The amendments in this Update are effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
The Company is currently evaluating the effects of ASU 2014-09 on the consolidated financial statements.
In June 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-10,
Development Stage Entities
.
The amendments in this Update remove the definition of a development stage entity from Topic 915, thereby removing the distinction between development stage entities and other reporting entities from U.S. GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows, and shareholder’s equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. Finally, the amendments also remove paragraph 810-10-15-16, which states that a development stage entity does not meet the condition in paragraph 810-10-15-14(a) to be a variable interest entity (VIE) if (1) the entity can demonstrate that the equity invested in the legal entity is sufficient to permit it to finance the activities it is currently engaged in and (2) the entity’s governing documents and contractual arrangements allow additional equity investments. Under the amendments, all entities within the scope of the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall, would be required to evaluate whether the total equity investment at risk is sufficient using the guidance provided in paragraphs 810-10-25-45 through 25-47, which requires both qualitative and quantitative evaluations.
This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-320—Development Stage Entities (Topic 915), which has been deleted.
The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein, and early adoption is required. The Company has decided to early adopt the ASU 2014-10 effective as of January 1, 2013.
In June 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-11,
Transfers and Servicing
.
The amendments in this Update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions.
This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-10—Transfers and Servicing (Topic 860), which has been deleted.
The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. ASU 2014-11 is not expected to have a material impact on the consolidated financial statements.
In June 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-12,
Compensation- Stock Compensation
.
The amendments in this update apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted.
The proposed amendments would apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target could be achieved after the requisite service period.
This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF-13D—Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted.
The Company is currently evaluating the effects of ASU 2014-12 on the consolidated financial statements.
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15,
Presentation of Financial Statements- Going Concern.
The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300—Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been deleted. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently evaluating the effects of ASU 2014-15 on the consolidated financial statements.
Off Balance Sheet Arrangements
As of December 31, 2013, 2012 and 2011, there were no off balance sheet arrangements.
Contractual
Obligation
s
The following is a summary of our contractual obligations and their respective maturity dates as of December 31, 2013 after giving effect to certain extensions secured subsequent to year-end:
|
Contractual Obligations
|
Total
|
2014
|
2015
|
|||||||||
|
Debt Obligations
|
$ | 4,305,000 | $ | 3,785,000 | $ | 520,000 | ||||||
Not applicable.
The Company's consolidated financial statements, together with the report of the independent registered public accounting firm thereon and the notes thereto, are presented beginning at page F-1.
None.
New Independent Registered Public Accounting Firm
On February 21, 2012, the Board of Directors of the Company ratified the appointment of Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2011 and the period from January 20, 2010 (inception) to December 31, 2010. Marcum is located at 750 Third Avenue, 11th Floor, New York, NY 10017.
During the Company's previous fiscal years ended September 30, 2011 and 2010 and through February 21, 2012, neither the Company nor anyone on the Company's behalf consulted with Marcum regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or (ii) any matter that was either the subject of a disagreement or a reportable event as defined in Item 304(a)(1)(v) of Regulation S-K. Prior to the Share Exchange Transaction, Nuvel DE had been audited by Marcum.
Disclosure Controls and Procedures
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 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, we are required to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on the Company’s evaluation, management concluded that the Company’s disclosure controls and procedures were not effective at a reasonable assurance level such that the information relating to us and our consolidated subsidiary required to be disclosed in our Exchange Act reports (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure as of December 31, 2013 and 2012. Due to this ineffectiveness and lack of resources with respect to financial reporting, the Company has had a lack of timely SEC filings and has at times had difficulties with regard to the documentation required to timely account for and disclose certain transactions and to support the complexity of its financial reporting.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over reporting, because of its inherent limitations, may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2013 and 2012 and for each of the quarterly periods therein, we had identified certain matters that constituted a material weakness in our internal controls over financial reporting. Specifically, we have limited segregation of duties within our accounting and financial reporting functions. Segregation of duties within our company is limited due to limited financial resources and the small number of employees that are assigned to positions that involve the processing of financial information. We have taken steps to address this matter, including the retaining an outside accounting consulting firm to assist with the accounting reporting in May 2014. We believe that we have made some progress towards remediating this weakness; however, we must still complete the process of design-specific control procedures and testing them for effectiveness before we can report that this weakness has been fully remediated. Although we believe that these steps have enabled us to improve our internal controls, additional time is still required to fully document our systems, implement control procedures and test their operating effectiveness before we can definitively conclude that we have remediated our material weakness.
This annual report also does not contain an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting and since the rules for smaller reporting companies do not require such attestation report.
Management’s report was not subject to attestation by the Company’s registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Controls Over Financial Reporting
On November 30, 2012, Jay Elliot resigned from his positions as the Company’s CEO and President but remained as Chairman of the Board of Directors of the Company. On March 31, 2013, Jorge Fernandez, our former Chief Financial Officer, resigned from all his positions in the Company. As discussed above, the Company hired an outside accounting consulting firm to assist with the accounting reporting. Except for the foregoing, there were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There exists no information required to be disclosed by us in a report on Form 8-K during the fourth quarter ended December 31, 2013, but not reported.
PART III
Directors and Executive Officers
The following table sets forth the name and position of our current executive officer and director.
|
Name
|
Age
|
Position
|
||
|
Jay Elliot
|
74
|
Chairman of the Board of Directors
|
Jay Elliot - CEO, President and Director
Mr. Elliot was previously Senior Executive Vice President of Apple Computer, reporting to Mr. Steve Jobs. Mr. Elliot also managed a software division of IBM with 16,000 employees as director of its Santa Theresa Software Laboratory in 1978, he served as director of Intel’s California operations in 1979 and CEO of New Health Systems in 1989, a company in the business of electronic health care records. Mr. Elliot is founder and chairman of Migo Software. Mr. Elliot graduated from San Jose State University in 1969 with a bachelor degree in Mathematics.
Director Qualifications
The Company’s Board of Directors believes that each director’s experience, qualifications, attributes, or skills on an individual basis and in combination with those of other directors lead to the conclusion that each director should serve in such capacity. Among the attributes or skills common to all of the Companies are their ability to review critically and to evaluate, question, and discuss information provided to them, to interact effectively with the other directors, officers and employees of the Company, as well as service providers, counsel, and the Company’s independent registered public accounting firm, and to exercise effective and independent business judgment in the performance of their duties as directors. The following is a discussion for each director of the specific experience, qualifications, attributes or skills that led the Board to conclude that the individual should be serving as a director of the Company:
Jay Elliot – Chairman of the Board of Directors
Mr. Elliot is the founder of Nuvel, Inc. and has more than 30-years of technology operations experience. His previous experience as Senior Executive Vice President of Apple Computer, as a director of Santa Theresa Software Laboratory, a software division of IBM and as a director of Intel’s California operations brings in to our Company the essential leadership and experience. We believe that Mr. Elliot is well suited to sit on our board based on his extensive business experience.
Family Relationships
There are no family relationships among any of the Company’s present directors and officers.
Board Composition and Committees
The Company’s Board of Directors is currently composed of one member, Jay Elliot.
We do not have a standing nominating, compensation or audit committee. Rather, our full board of directors performs the functions of these committees. Also, we do not have an “audit committee financial expert” on our board of directors as that term is defined by Item 407(d)(5)(ii) of Regulation S-K. We do not believe it is necessary for our board of directors to appoint such committees because the volume of matters that come before our board of directors for consideration permits the directors to give sufficient time and attention to such matters to be involved in all decision making.
Code of Ethics
Our Board of Directors will adopt a new code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The new code will address, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code.
Involvement in Certain Legal Proceedings
None of our directors, executive officers or control persons has been involved in any of the events prescribed by Item 401(f) of Regulation S-K during the past ten years, including:
|
1.
|
any petition under the Federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he or she was a general partner at or within two years before the time of such filing, or any corporation or business association of which he or she was an executive officer at or within two years before the time of such filing;
|
|
2.
|
any conviction in a criminal proceeding or being named a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
3.
|
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from, or otherwise limiting, the following activities:
|
i.
acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
ii.
engaging in any type of business practice; or
iii.
engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
|
4.
|
being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any type of business regulated by the Commodity Futures Trading Commission, securities, investment, insurance or banking activities, or to be associated with persons engaged in any such activity;
|
|
5.
|
being found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
|
|
6.
|
being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
|
|
7.
|
being subject to, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
|
|
i.
|
any Federal or State securities or commodities law or regulation; or
|
|
ii.
|
any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
|
|
iii.
|
any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
8.
|
being subject to, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
Compliance with Section 16(a) of the Act
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent (10%) of our shares of common stock, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent (10%) stockholders are required by regulations promulgated by the SEC to furnish us with copies of all Section 16(a) forms that they file.
Below is the information with respect to failures of directors, officers and/or beneficial owners of more than ten percent of any class of equity securities of the Company to timely file reports under Section 16(a) during fiscal years 2013 and 2012:
|
Name
|
Form Type
|
Date of Reporting Event
|
Required Filing Date
|
|||
|
Jay Elliot
|
Form 5
|
12/31/2013
|
02/14/2014
|
|||
|
Jay Elliot
|
Form 5
|
12/31/2012
|
02/14/2013
|
|||
|
Charles Resnick
|
Form 5
|
12/31/2012
|
02/14/2013
|
|||
|
Jorge Fernandez
|
Form 5
|
03/31/2013
|
04/10/2013
|
|||
|
Gregory Osborn
|
Form 3
|
01/16/2012
|
01/26/2012
|
|||
|
Gregory Osborn
|
Form 5
|
07/15/2012
|
07/25/2012
|
Compensation Discussion and Analysis
Executive Compensation
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by, or paid to the Company’s officers during the fiscal years ended December 31, 2013 and 2012 for services to the Company.
|
Name
|
Position
|
Year
Ended
&
Period
Ended
|
Salary
Paid ($)
|
Bonus ($)
|
Stock
Awards
($)(1) |
Option
Awards ($)
|
Non-
Equity
Incentive
Plan
Compen-
sation ($)
|
All
Other
Compen-
sation ($)
|
Total ($)
|
|||||||||
|
Jay Elliot
|
CEO
|
2013
|
40,149
|
-
|
-
|
-
|
-
|
-
|
40,149
|
|||||||||
|
2012
|
160,596
|
6,500
|
-
|
-
|
-
|
-
|
167,095
|
|||||||||||
|
Jorge Fernandez
(2)
|
CFO
|
2013
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||
|
2012
|
47,200
|
-
|
-
|
-
|
-
|
-
|
47,200
|
|||||||||||
|
Randy Hagin
(3)
|
SVP of Sales
|
2013
|
29,945
|
-
|
-
|
-
|
-
|
-
|
29,945
|
|||||||||
|
2012
|
119,780
|
5,000
|
-
|
-
|
-
|
-
|
124,780
|
|||||||||||
|
Syed Aamer Azam
(4)
|
CTO
|
2013
|
27,382
|
-
|
-
|
-
|
-
|
-
|
27,382
|
|||||||||
|
2012
|
109,530
|
4,500
|
-
|
-
|
-
|
-
|
114,030
|
|
(1)
|
The Company recorded the stock awards as founder’s shares valued at par value of the common stock of Nuvel DE.
|
|
(2)
|
Jorge Fernandez became the CFO of Nuvel in December 2011 and resigned from his position on March 31, 2013.
|
|
(3)
|
Randy Hagin resigned from his position on March 31, 2013.
|
|
(4)
|
Syed Aamer Azam resigned from his position on March 31, 2013.
|
Compensation of Directors
The following table sets forth the information concerning cash and non-cash compensation awarded to, earned by, or paid to the Company’s non-employee directors during fiscal years ended December 31, 2013 and 2012 for services to the Company’s subsidiary, Nuvel DE:
|
Name
|
Year
Ended
&
Period
Ended
|
Fees
Earned
or Paid
in
Cash
($) (1) |
Stock
Awards
($) (2) |
Option
Awards ($)
|
Non-
Equity
Incentive
Plan
Compen-
sation ($)
|
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compen-
sation ($)
|
Total ($)
|
||||||||
|
Jay Elliot
|
2013
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||
|
2012
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||
|
Charles Resnick
(3)
|
2013
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||
|
2012
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||
|
Gregory Osborn
(4)
|
2012
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(1)
|
The amounts in this column represent cash payments made to non-employee independent directors for base compensation for the years ended December 31, 2013 and 2012.
|
||||||||||||||||
|
(2)
|
The Company recorded the stock awards as founder’s shares valued at par value of the common stock of Nuvel DE.
|
|
(3)
|
The shares of common stock of Nuvel DE were awarded to Resnick Enterprises, a company owned by Charles Resnick, and recorded as founder shares.
|
|
(4)
|
Gregory Osborn resigned as a director of the board of the Company on July 15, 2012.
|
Employment Agreement and Benefits
We currently have one employee. Jay Elliot entered into employee agreements with Nuvel DE on July 15, 2010.
Pursuant to the employment agreement with Mr. Jay Elliot, Mr. Elliot’s employment with Nuvel DE is at-will and no other payments will be received upon termination of his employment except for the unpaid salaries and the continuing benefit plans/policies until expiration of such plans and policies. The employment agreement also contains a confidentiality provision, which requires each such employee to sign off a Proprietary Information and Inventions Agreement.
Potential Payments Upon Termination or Change in Control
As of the date of this report, there were no potential payments or benefits payable to our executive officers, upon their termination or in connection with a change in control.
Pension Benefits
No named executive officers received or held pension benefits during the fiscal years ended December 31, 2013 and 2012.
Nonqualified Deferred Compensation
No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal years ended December 31, 2013 and 2012.
Grants of Plan-Based Awards in Fiscal Years 2013 and 2012
For the years ended December 31, 2013 and 2012, we have not granted any plan-based awards to our executive officers.
Outstanding Equity Awards at Fiscal Year-End
No unexercised options or warrants were held by any of our named executive officers as of December 31, 2011. No equity awards were made during the fiscal year ended December 31, 2011.
Option Exercises and Stock Vested in Fiscal Years 2013 and 2012
For the years ended December 31, 2013 and 2012, our executive officers have neither been granted any options, nor did any unvested stock granted to executive officers vest. As of the date of this report, our executive officers do not have any stock options or unvested shares of stock of the Company.
Equity Incentive Plan
We do not expect to adopt an equity incentive plan during the next 12 months. When we adopt an equity incentive plan, the purposes of the proposed equity incentive plan are to attract and retain qualified persons upon whom our sustained progress, growth and profitability depend, to motivate these persons to achieve long-term company goals and to more closely align these persons' interests with those of our other shareholders by providing them with a proprietary interest in our growth and performance. Our executive officers will be eligible to participate in the plan. We have not determined the amount of shares of our common stock to be reserved for issuance under the proposed equity incentive plan.
Compensation Committee Interlocks and Insider Participation
During the fiscal years ended December 31, 2013 and 2012, we did not have a standing compensation committee. Our Board of Directors was responsible for the functions that would otherwise be handled by the compensation committee. All directors participated in deliberations concerning executive officer compensation, including directors who were also executive officers.
The following tables set forth information regarding the beneficial ownership of the Company’s Common Stock as of the date of this Report, by (x) each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s Common Stock, (y) the executive officers of the Company and (z) the directors and executive officers of the Company as a group. Unless otherwise noted, each person or company named in the tables has sole voting and investment power with respect to the shares that he or it beneficially owns. As of the date of this Annual Report, there were issued and outstanding 13,884,033 shares of Common Stock.
|
Title of Class
|
Name and Address of Beneficial Owner
(1)
|
Amount, Nature and Percentage of Beneficial Ownership
(2)
|
|||
|
Common Stock
|
Jay Elliot (CEO and Director)
|
2,881,814 shares
|
20.76%
|
||
|
All Directors and Officers, as a Group
|
2,881,814 shares
|
20.76%
|
|||
|
5% Security Holders
|
|||||
|
Common Stock
|
Aamer Azan
6650 Bollinger Road
San Jose, CA 95129
|
1,085,495 shares
|
7.46%
|
||
|
Common Stock
|
Alan Donenfeld
(3)
110 E. 59th St. 22nd Fl.
New York, NY 10022
|
1,615,638 shares
|
11.64%
|
||
|
|
Gregory Osborn
202 Mountain Avenue
Ridgewood, NJ 07450
|
5,963,252 shares
(4)
|
31.91%
|
||
|
Common Stock
|
Charley Krause
1219 Melrose Place
Ridgewood, NJ 07540
|
988,000 shares
|
7.12%
|
||
|
|
8,241,155 shares
(5)
|
38.87%
|
|||
|
Common Stock
|
Randy Hagin
2697 N. Kilbride Lane
Dublin, CA 94568
|
1,236,000 shares
|
10.23%
|
(1) The address for each officer and director is c/o Nuvel Holdings, Inc., 20 S. Santa Cruz Ave., Los Gatos, CA 95030.
(2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Beneficial ownership also includes shares of stock subject to options and warrants currently exercisable or exercisable within 60 days of the date of this table. In determining the percent of common stock owned by a person or entity as of the date of this Report, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on as of the date of this Annual Report (12,218,040), and (ii) the total number of shares that the beneficial owner may acquire upon exercise of the derivative securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
(3) Mr. Alan Donenfeld was the General Partner of Paragon Capital, LP, therefore Mr. Alan Donenfeld shall be deemed as the beneficial owner of the securities held by Paragon Capital, LP.
On 12/23/13 Paragon assigned their $390,000 Secured Promissory Note (issued by Nuvel on 12/30/11) to Gibralt, US, Inc.
(4) Including (i) 662,966 shares of Common Stock upon the exercise of the warrant held by Gregory Osborn and (ii) 694,444 shares of Common Stock upon the conversion of a note held by Gregory Osborn and (iii) 3,444,800 shares of Common Stock upon the conversion of Preferred B convertible shares held by Gregory Osborn.
(5) Including (i) 1,939,301 shares of Common Stock upon the exercise of the warrant held by Alpha Capital Anstalt and (ii) 3,676,545 shares of Common Stock upon the conversion of a note held by Alpha Capital Anstalt and (iii) 1,699,383 shares of Common Stock upon the conversion of Preferred D convertible shares.
The following tables set forth information regarding the beneficial ownership of the Company’s Series A Preferred Stock as of the date of this Report, by each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s Series A Preferred Stock. The Company’s executive officers and directors do not own any shares of Series A Preferred Stock as of the date of this Report. Unless otherwise noted, each person or company named in the tables has sole voting and investment power with respect to the shares that he or it beneficially owns. As of the date of this Annual Report, there were issued and outstanding 39,815 shares of Series A Preferred Stock.
|
Series A
Preferred Stock
|
George Rebensdorf
260 Newport Center Drive, Suite 500
Newport Beach, CA 92660
|
16,667 shares
|
41.86%
|
|
|
Series A Preferred Stock
|
Marc DeMars
9882 Cornerbrook Drive
Huntington Beach, CA 92646
|
23,148 shares
|
58.14%
|
|
Series B Preferred Stock
|
Gibralt US Inc.
2600-1075 West Georgia Street,
Vancouver, BC V6E 3C9 Canada
|
141,311 shares
|
28.53%
|
|
|
Series B Preferred Stock
|
Gregory Osborn
202 Mountain Avenue
Ridgewood, NJ 07450
|
43,409 shares
|
8.76%
|
|
|
Series B Preferred Stock
|
Ralph R. Cioffi
1085 Nelson's Walk,
Naples, FL 34102
|
72,403 shares
|
14.62%
|
|
|
Series B Preferred Stock
|
Richard O’Leary
37428 Rancho Manana,
Cave Creek, AZ 85331
|
45,380 shares
|
9.16%
|
|
|
Series B Preferred Stock
|
Phoenix-95 Investments, LLC
37428 Rancho Manana,
Cave Creek, AZ 85331
|
54,447 shares
|
10.99%
|
The following tables set forth information regarding the beneficial ownership of the Company’s Series C Preferred Stock as of the date of this Report, by each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s Series
C Preferred Stock. The Company’s executive officers and directors do not own any shares of Series C Preferred Stock as of the date of this Report. Unless otherwise noted, each person or company named in the tables has sole voting and investment power with respect to the shares that he or it beneficially owns. As of the date of this Annual Report, there were issued and outstanding 637,233 shares of Series C Preferred Stock.
|
Series C Preferred Stock
|
Gregory Osborn
202 Mountain Avenue
Ridgewood, NJ 07450
|
128,831 shares | 4.02% | |
|
Series C Preferred Stock
|
Harry Mittleman
810 Altos Oaks Drive
Los Altos, CA 94024
|
72,787 shares | 5.59% | |
|
Series C Preferred Stock
|
Kevin Daly
5263 Denver Street
Boulder, CO 80304
|
79,787 shares | 5.59% | |
|
Series C Preferred Stock
|
The Really Cool Group
1 Hastings Road
St. Helier Jersey, JE14HE United Kingdom
|
72,377 shares | 5.07% | |
|
Series C Preferred Stock
|
Sandor Capital Master Fund
2828 Routh Street, Suite 500,
Dallas, TX 75201
|
335,479 shares
|
23.50%
|
|
|
Series C Preferred Stock
|
Paragon Capital LP
(3)
110 E. 59th St. 22nd Fl.
New York, NY 10022
|
227,517 shares
|
15.93%
|
|
|
Series C Preferred Stock
|
Frederick Daniel Gabel Jr.
72 Jane St,
New York, NY 10014
|
100,226 shares
|
7.02%
|
The following tables set forth information regarding the beneficial ownership of the Company’s Series D Preferred Stock as of the date of this Report, by each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s Series D Preferred Stock. The Company’s executive officers and directors do not own any shares of Series D Preferred Stock as of the date of this Report. Unless otherwise noted, each person or company named in the tables has sole voting and investment power with respect to the shares that he or it beneficially owns. As of the date of this Annual Report, there were issued and outstanding 1,767,358 shares of Series D Preferred Stock.
|
Series D Preferred Stock
|
Alpha Capital Anstalt
Aulestrasse 60,
LI-9490 Vaduz
Liechtenstein
|
1,699,383 shares
|
96.15%
|
On February 1, 2010, Nuvel DE signed a placement agent agreement (the “Placement Agent Agreement”) with Middlebury Group LLC (“Middlebury”) to act as the placement agent in connection with private placement offerings comprised of bridge notes, convertible preferred stock, senior secured promissory notes, convertible notes, and warrants as required. The agreement provides for a monthly retainer fee of $10,000 and a placement fee equal to ten percent of the aggregate purchase price paid by each investor. This is a related party transaction because Gregory Osborn, our former director until July 15, 2012, was a partner at Middlebury at that time. During the fiscal years ended December 31, 2013, 2012 and 2011, the Company paid Middlebury $-, $- and $155,000, respectively, for the services rendered pursuant to the Placement Agent Agreement.
On December 30, 2011, pursuant to the Share Exchange Agreement, Jay Elliot, our Chairman and former President and Chief Executive Officer, Charles Resnick, our former director and Gregory Osborn, our former director, received 3,100,000 shares, 418,000 shares and 1,428,000 shares, respectively, of our Common Stock, in exchange for their ownership interests in Nuvel DE.
Except the above transactions, the Company was not a party to any transaction (where the amount involved exceeded the lesser of $120,000 or 1% of the average of our assets for the fiscal years ended December 31, 2013, 2012 and 2011) in which a director, executive officer, holder of more than five percent of our common stock, or any member of the immediate family of any such person have or will have a direct or indirect material interest and no such transactions are currently proposed.
The Company’s Board conducts an appropriate review of and oversees all related party transactions on a continuing basis and reviews potential conflict of interest situations where appropriate. The Board has not adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. However, the Board believes that the related party transactions are fair and reasonable to the Company and on terms comparable to those reasonably expected to be agreed to with independent third parties for the same goods and/or services at the time they are authorized by the Board.
We do not have an established policy regarding related transactions.
Director Independence
We do not have a standing nominating, compensation or audit committee. Rather, the board of directors performs the functions of these committees. We do not believe it is necessary for the board of directors to appoint such committees, because the volume of matters that come before the board of directors for consideration is not so substantial that our directors are usually allowed sufficient time and attention to such matters. We believe that Jay Elliot, our Chairman and sole director of the Board of Directors, is not considered as “independent” as such term is defined by the rules of the Nasdaq Stock Market.
Independent Public Accountants
Fees and Services of Independent Registered Public Accountants
The following table sets forth approximate fees billed or expected to be billed to Nuvel DE for the fees and services rendered by Marcum LLP during the years ended December 31, 2013, 2012 and 2011.
| 2013 | 2012 | 2011 | ||||||||||
|
Audit Fees
|
$ | 75,000 | $ | 95,000 | $ | 60,000 | ||||||
|
Audit-Related Fees
|
- | - | - | |||||||||
|
Tax Fees
|
- | - | - | |||||||||
|
All Other Fees
|
- | - | - | |||||||||
|
|
||||||||||||
|
Total
|
$ | 75,000 | $ | 95,000 | $ | 60,000 |
In addition, the Company incurred fees billed by its predecessor audit firm for the audit fees and audit-related fees aggregating $4,000 and $2,300 respectfully, during the year ended December 31, 2011.
(a)
Exhibits
The following exhibits are filed with this report on Form 10-K:
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Plan of Merger between the Company and HRMY Sub, Inc., dated March 20, 2012.
(4)
|
|
|
3.1
|
Articles of Incorporation of the Company, dated June 15, 2010.
(3)
|
|
|
3.2
|
Articles of Merger of the Company filed with the State of Florida on March 21, 2012.
(4)
|
|
|
3.3
|
Certificate of Designations, Preferences and Rights of Series A Preferred Stock, filed with the State of Florida on August 10, 2012.
(5)
|
|
|
3.4
|
||
|
3.5
|
||
|
3.6
|
||
|
3.7
|
||
|
3.8
|
Bylaws.
(3)
|
|
10.14
|
||
|
10.15
|
||
|
10.16
|
||
|
10.17
|
||
|
10.18
|
||
|
10.19
|
||
|
21.1
|
List of Subsidiaries.
(4)
|
|
|
31.1
|
|
32.1
|
||
|
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.
**
|
|
(1)
|
Included as an exhibit to the Company’s Current Report on Form 8-K filed on January 6, 2012.
|
|
(2)
|
Included as an exhibit to Amendment No.2 to the Company’s Current Report on Form 8-K/A filed on March 19, 2012.
|
|
(3)
|
Included as an exhibit to our Registration Statement on Form S-1 filed on November 5, 2010.
|
|
(4)
|
Included as an exhibit to the Annual Report on Form 10-K filed on April 13, 2012.
|
|
(5)
|
Included as an exhibit to our Current Report on Form 8-K filed on August 20, 2012.
|
|
(6)
|
Included as an exhibit to our Current Report on Form 8-K filed on November 28, 2012.
|
* Filed herewith.
** The XBRL-related information in Exhibits 101 to this Annual Report on Form 10-K shall not be deemed “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, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
NUVEL HOLDINGS, INC.
|
|||
|
Date: November 24, 2014
|
By:
|
/s/ Jay Elliot
|
|
|
Jay Elliot, Chairman of the Board of Directors
|
|||
|
(Principal Executive Officer, Principal Accounting and Financial Officer)
|
|||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
/s/ Jay Elliot
|
|
|
Jay Elliot
|
|
|
Chairman of the Board of Directors
(Principal Executive Officer, Principal Accounting and Financial Officer)
|
NUVEL HOLDINGS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
|
Page
|
|
| F - 1 | |
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
| F - 2 | |
| F - 3 | |
| F - 4 | |
| F - 5 | |
| F - 6 |
To the Board of Directors and Stockholders
of Nuvel Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Nuvel Holdings, Inc. (the “Company”) as of December 31, 2013, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nuvel Holdings, Inc., as of December 31, 2013, 2012 and 2011, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully disclosed in Note 2 to the consolidated financial statements, the Company has incurred net losses since inception and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum
llp
New York, NY
November 24, 2014
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
|
NUVEL HOLDINGS, INC. AND SUBSIDIARY
|
||||||||||||||||||||||||||||||||
|
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
|
||||||||||||||||||||||||||||||||
|
Series A
Preferred Stock |
Common Stock | Common Stock |
Additional
Paid-In |
Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issuable | Capital | Deficit |
Total
|
|||||||||||||||||||||||||
|
Balance as of December 31, 2010
|
- | $ | - | 10,000,000 | $ | 10,000 | - | $ | (9,900 | ) | $ | (1,364,729 | ) | $ | (1,364,629 | ) | ||||||||||||||||
|
Reclassification of warrant liability upon surrender of warrants
|
- | - | - | - | - | 588,000 | - | 588,000 | ||||||||||||||||||||||||
|
Issuance of shares pursuant to recapitalization on December 30, 2011 (at $0.001)
|
- | - | 25,000 | 25 | - | (25 | ) | - | - | |||||||||||||||||||||||
|
Issuance of common stock to investor as a transaction cost of the reverse recapitalization on December 30, 2011
|
- | - | 1,739,706 | 1,740 | - | 1,303,040 | - | 1,304,780 | ||||||||||||||||||||||||
|
Net loss for the year ended December 31, 2011
|
- | - | - | - | - | - | (5,605,531 | ) | (5,605,531 | ) | ||||||||||||||||||||||
|
Balance as of December 31, 2011
|
- | $ | - | 11,764,706 | $ | 11,765 | - | $ | 1,881,115 | $ | (6,970,260 | ) | $ | (5,077,380 | ) | |||||||||||||||||
|
Common stock issued for services rendered
|
- | - | 73,334 | 73 | 5,500 | 61,927 | - | 67,500 | ||||||||||||||||||||||||
|
Issuance of preferred stock
|
641,668 | 642 | - | - | - | 384,358 | - | 385,000 | ||||||||||||||||||||||||
|
Common stock issuable with notes payable
|
- | - | - | - | 86,274 | - | 86,274 | |||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
|
Issuance of warrants with extension of note maturity dates
|
- | - | - | - | - | 80,425 | - | 80,425 | ||||||||||||||||||||||||
|
Net loss for the year ended December 31, 2012
|
- | - | - | - | - | - | (3,599,461 | ) | (3,599,461 | ) | ||||||||||||||||||||||
|
Balance as of December 31, 2012
|
641,668 | $ | 642 | 11,838,040 | $ | 11,838 | $ | 91,774 | $ | 2,407,825 | $ | (10,569,721 | ) | $ | (8,057,642 | ) | ||||||||||||||||
|
Stock based compensation
|
170,000 | 170 | 67,830 | 68,000 | ||||||||||||||||||||||||||||
|
Common stock issued for services rendered
|
- | - | 210,000 | 210 | (91,774 | ) | 91,564 | - | - | |||||||||||||||||||||||
|
Net income for the year ended December 31, 2013
|
- | - | - | - | - | 7,843 | 7,843 | |||||||||||||||||||||||||
|
Balance as of December 31, 2013
|
641,668 | $ | 642 | 12,218,040 | $ | 12,218 | $ | - | $ | 2,567,219 | $ | (10,561,878 | ) | $ | (7,981,799 | ) | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business Organization, Nature of Operations and Reverse Recapitalization
Nuvel Holdings, Inc. is a Florida corporation incorporated on October 19, 2009. Nuvel Holdings, Inc. was previously known as Harmony Metals, Inc. prior to its name change effective on April 10, 2012. On March 20, 2012, Harmony Metals, Inc. acquired the outstanding shares of HRMY Sub, Inc., a newly formed Florida corporation. On April 10, 2012, Harmony Metals, Inc. merged HRMY Sub, Inc. into itself and changed its name to Nuvel Holdings, Inc. (the "Company") solely to effect a name change.
On December 30, 2011, the Company, certain stockholders of the Company (the “Company Stockholders”), Nuvel, Inc., a Delaware Company, (“Nuvel DE”) and all of the stockholders of Nuvel DE (the “Nuvel DE Stockholders”) entered into and consummated transactions pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”), whereby (i) the Company issued to the Nuvel DE Stockholders an aggregate of 7,508,333 shares of its common stock, par value $.001 (the “Common Stock”), in exchange for an aggregate of 10,000 shares of common stock of Nuvel DE held by the Nuvel DE Stockholders, and (ii) Nuvel DE acquired from the Company Stockholders a total of 6,580,000 shares of Common Stock for a total purchase price of $350,000. In connection with the Share Exchange Transaction, a total of 8,082,500 shares of Common Stock, including 6,580,000 shares acquired by Nuvel DE, were canceled. In connection with the Share Exchange, the Company received a loan from an investor and issued that investor and its affiliate an aggregate of 1,300,000 shares of common stock of the Company. Following the close of the Share Exchange Agreement, Harmony succeeded to the business of Nuvel DE as its sole line of business. On February 21, 2012, the Share Exchange Agreement was corrected to issue an additional 2,491,667 shares of Common Stock to the Nuvel DE Stockholders on a pro rata basis and 439,706 shares of Common Stock to the investor and its affiliate (see Note 9). As a result, after giving effect to the foregoing, there were a total of 11,764,706 shares of Common Stock issued and outstanding, of which 85% were held by the Nuvel DE Stockholders. The additional share issuance on February 21, 2012 was incorporated into the retroactive effect of the recapitalization in the Company’s consolidated financial statements. As a result of the Share Exchange Transaction, Nuvel DE became a wholly owned subsidiary of the Company, and the officers of Nuvel DE became officers of the Company. The transaction was being accounted for as a reverse recapitalization, whereby Nuvel DE is deemed to be the acquirer for accounting purposes. The financial statements set forth in this report for all periods prior to the reverse recapitalization are the historical financial statements of Nuvel DE, and have been retroactively restated to give effect to the Share Exchange Transaction.
The Company previously conducted its operations through a sole operating subsidiary, Harmony Metals Design, Inc., a Florida corporation, which was incorporated on June 17, 2010. On February 1, 2012, the Company assigned to Sahej Holdings, Inc. all of the outstanding shares of Harmony Metals Design, Inc. that it owned pursuant to an Assignment and Assumption Agreement. Harmony Metals Design, Inc. therefore ceased to be a wholly owned subsidiary of the Company.
Nuvel DE designs, develops and markets Wide Area Network Acceleration (WANa) Solutions that are built for the purpose of accelerating and optimizing the flow of information over the Internet. The Company’s products are able to be deployed by customers throughout their network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network security.
The Company’s primary activities since inception, have been the design and development of its products, negotiating strategic alliances and other agreements, and raising capital. The Company had not commenced its principal operations, nor had it generated any material revenues from its operations through December 31, 2013.
Note 2. Going Concern and Management Plans
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2013, the Company had a working capital deficiency of $7,533,918 and stockholders’ deficiency of $7,981,799. The Company has not generated any material revenues and incurred net losses since inception. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's primary source of operating funds since inception has been note financings. Subsequent to December 31, 2013, the Company secured additional debt financing in the form of Notes Payable aggregating $382,750 and has converted notes payable and convertible notes payable totaling $3,260,000 into preferred stock (see Note 10). The Company expects that its current cash on hand will fund its operations only through November 2014. The Company intends to raise additional capital through private debt and equity investors. The Company needs to raise additional capital in order to be able to accomplish its business plan objectives. The Company is continuing its efforts to secure additional funds through debt or equity instruments due to the impending lack of funds. Management believes that it will be successful in obtaining additional financing based on its
limited history of raising funds; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds it raises will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
On October 24, 2014, the Company entered into a letter of intent (the “Letter of Intent”) with OrangeHook, Inc., (“Orange Hook”) a Minnesota corporation. Pursuant to the Letter of Intent, the Company and OrangeHook will merge or combine their assets, with the Company as the surviving corporation (the “Transaction”). The anticipated closing date is to be on or before December 31, 2014 (“the Closing”). As a result of the intended business combination, the Company will acquire all of the equity or assets of OrangeHook subject to the terms of the Letter of Intent. The Company will issue common stock to the shareholders of OrangeHook such that after the Transaction (and prior to any financing at the time of the Transaction), OrangeHook shareholders will own approximately 85% of the Company and the pre-Transaction Nuvel shareholders will own approximately 15% of the Company, which is subject to adjustment by negotiation of the parties. Pursuant to the Letter of Intent, OrangeHook provided $60,000 as bridge financing to the Company, in the form of an unsecured loan to assist the Company in completing the necessary filings with the Securities and Exchange Commission (“SEC”) such that it will be current in its reporting. Conditions to Closing include that the Company be current in its SEC reports, that each of the financings set forth in the Letter of Intent have occurred and that any necessary shareholder approval has been obtained. There can be no assurance that the Transaction will be successful.
Note 3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Nuvel, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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 and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods. Actual results could differ from these estimates. The Company’s significant estimates and assumptions include amortization, the fair value of our stock, debt discount, derivative liabilities, and the valuation allowance relating to the Company’s deferred tax assets.
Reclassifications
Certain amounts in the prior period consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
Concentrations of Credit Risk
The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company has deposits in excess of federally insured limits.
Cash
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2013, 2012 and 2011, the Company did not have any cash equivalents.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Appropriate allowances for returns and discounts are recorded concurrent with revenue recognition.
Revenue has been de minimus to date. All of the revenue earned by the Company consisted of revenue pertaining to the Company’s mobile application product. In March 2013, due to a lack of funding, the Company could no longer support the mobile application product, and the Company did not generate any revenues subsequent to March 2013.
Advertising
Advertising costs are charged to operations as incurred. For the years ended December 31, 2013, 2012 and 2011, the Company incurred advertising costs of $0, $5,502 and $78,920, respectively.
Research and Development
Research and development expenses are charged to operations as incurred. For the years ended December 31, 2013, 2012 and 2011, the Company incurred research and development expenses of $51,625, $258,383 and $345,455, respectively.
Capitalized Software Costs
Software development costs incurred subsequent to establishing technological feasibility through general release of the software products are capitalized. Capitalized costs are amortized on a straight-line basis over the economic lives of the related products which are generally three years. As of December 31, 2013, the Company's Wide Area Network ("WAN") product did not reach technological feasibility and, therefore, no costs associated with its development were capitalized. The Company’s mobile application product reached technological feasibility in October 2011. The Company had recorded capitalized software costs aggregating $68,560 as of December 31, 2012. In March 2013, due to a lack of funding, the Company could no longer support the mobile application product. The Company wrote off the entire balance of its capitalized costs, which was recorded as Loss on write-off of capitalized software costs in the statement of operations.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax assets or liabilities are determined of the basis of the difference between the tax basis or assets or liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.
The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. No interest or penalties have been recognized as of December 31, 2013, 2012 and 2011.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements as of December 31, 2013, 2012 and 2011. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
Net Income (Loss) Per Share
The Company computes basic net income (loss) per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic and diluted loss per share for the years ended December 31, 2013, 2012 and 2011 excludes potentially dilutive securities because their inclusion would be anti-dilutive. Anti-dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
|
|
December 31,
|
|||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Warrants to purchase common stock
|
6,285,016 | 6,285,016 | 5,067,716 | |||||||||
|
Series A Convertible Preferred Stock
|
641,668 | 641,668 | - | |||||||||
|
Convertible Notes
|
962,963 | 962,963 | - | |||||||||
|
Totals
|
7,889,647 | 7,889,647 | 5,067,716 | |||||||||
Preferred Stock
Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity. Accordingly, as of December 31, 2013, 2012 and 2011, since the Company's preferred shares do not feature any redemption within the holders' control or conditional redemption features not within the Company's control, all issuances of preferred stock are presented as a component of consolidated stockholders’ deficiency.
Convertible Instruments
Applicable Generally Accepted Accounting Principles (“GAAP”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable GAAP.
For instruments in which the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
The Company’s free standing derivatives consist of warrants issued in connection with convertible note financing arrangements and in connection with the Share Exchange Agreement. The Company evaluated the common stock purchase warrants to assess their proper classification in the consolidated balance sheet as of December 31, 2013, 2012 and 2011 using the applicable classification criteria enumerated under GAAP.
Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Awards granted to directors are treated on the same basis as awards granted to employees.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable, accrued expenses, and notes payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of the Company’s short term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuance of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Financial liabilities as of December 31, 2013, 2012 and 2011 are measured at fair value on a recurring basis are summarized below:
|
December 31,
2013
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
Derivative conversion features and warrant liabilities
|
$
|
719,806
|
$
|
-
|
$
|
-
|
$
|
719,806
|
||||||||
|
December 31,
2012
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
| Derivative conversion features and warrant liabilities | $ | 2,028,561 | $ | - | $ | - | $ | 2,028,561 | ||||||||
|
December 31,
2011
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
Warrant liabilities
|
$
|
2,331,149
|
$
|
-
|
$
|
-
|
$
|
2,331,149
|
||||||||
The derivative conversion features and warrant liabilities are measured at fair value using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula and are classified within Level 3 of the valuation hierarchy.
Level 3 Valuation Techniques
Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The derivative liabilities are measured at fair value using a compound option model that includes characteristics of both a binomial lattice and Black-Scholes formula and are classified within Level 3 of the valuation hierarchy.
A significant decrease in the volatility or a significant increase in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in Change in Fair Value of Derivative Liabilities within Other Expense on the Company’s consolidated Statements of Operations.
For the years ended December 31, 2013, 2012 and 2011, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
The significant assumptions and valuation methods that the Company used to determine the fair value of the derivative liabilities at December 31, 2013 are as follows:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
46.0-88.0
|
%
|
||
|
Risk-free interest rate
|
0.36-1.75
|
%
|
||
|
Contractual term
|
0.386-5.134 years
|
|||
|
Weighted average fair value per warrant and conversion option
|
$
|
0.0001-0.134
|
||
The significant assumptions and valuation methods that the Company used to determine the fair value of the derivative liabilities at December 31, 2012 are as follows:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
74.0-97.0
|
%
|
||
|
Risk-free interest rate
|
0.14-1.18
|
%
|
||
|
Contractual term
|
1.386-6.134 years
|
|||
|
Weighted average fair value per warrant and conversion option
|
$
|
0.131-0.338
|
||
The significant assumptions and valuation methods that the Company used to determine the fair value of the derivative liabilities at December 31, 2011 are as follows:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.12-3.39
|
%
|
||
|
Contractual term
|
3-4 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.16
|
||
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the years ended December 31, 2013, 2012 and 2011:
|
2013
|
2012
|
2011
|
||||||||||
|
Balance-beginning of period
|
$
|
2,028,561
|
$
|
2,331,149
|
$
|
71,750
|
||||||
|
Aggregate fair value of derivatives issued
|
-
|
366,785
|
2,637,874
|
|||||||||
|
Reclassification to equity upon surrender of warrants
|
(588,000
|
)
|
||||||||||
|
Change in fair value of derivative liabilities
|
(1,308,755
|
)
|
(669,373
|
)
|
209,525
|
|||||||
|
Balance-end of period
|
$
|
719,806
|
$
|
2,028,561
|
$
|
2,331,149
|
The significant assumptions and valuation methods that the Company used to determine the fair value and the change in fair value of the derivative financial instruments are discussed in Note 5.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
.
Amendments in this Update create Topic 606,
Revenue from Contracts with Customers,
and supersede the revenue recognition requirements in Topic 605,
Revenue Recognition,
including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35,
Revenue Recognition—Construction-Type and Production-Type Contracts,
and create new Subtopic 340-40,
Other Assets and Deferred Costs—Contracts with Customers.
In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2011-230—Revenue Recognition (Topic 605) and Proposed Accounting Standards Update 2011–250—Revenue Recognition (Topic 605): Codification Amendments, both of which have been deleted. Accounting Standards Update 2014-09. The amendments in this Update are effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
The Company is currently evaluating the effects of ASU 2014-09 on the consolidated financial statements.
In June 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-10,
Development Stage Entities
.
The amendments in this Update remove the definition of a development stage entity from Topic 915, thereby removing the distinction between development stage entities and other reporting entities from U.S. GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows, and shareholder’s equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. Finally, the amendments also remove paragraph 810-10-15-16, which states that a development stage entity does not meet the condition in paragraph 810-10-15-14(a) to be a variable interest entity (VIE) if (1) the entity can demonstrate that the equity invested in the legal entity is sufficient to permit it to finance the activities it is currently engaged in and (2) the entity’s governing documents and contractual arrangements allow additional equity investments. Under the amendments, all entities within the scope of the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall, would be required to evaluate whether the total equity investment at risk is sufficient using the guidance provided in paragraphs 810-10-25-45 through 25-47, which requires both qualitative and quantitative evaluations.
This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-320—Development Stage Entities (Topic 915), which has been deleted.
The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein, and early adoption is required. The Company has decided to early adopt the ASU 2014-10 as of January 1, 2013.
In June 2014, the Financial Accounting Standards Board
issued Accounting Standards Update 2014-12,
Compensation- Stock Compensation
.
The amendments in this update apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted.
The proposed amendments would apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target could be achieved after the requisite service period.
This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF-13D—Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, and early adoption is permitted.
The Company is currently evaluating the effects of ASU 2014-12 on the consolidated financial statements.
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-15,
Presentation of Financial Statements- Going Concern.
The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2013-300—Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption, which has been deleted. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently evaluating the effects of ASU 2014-15 on the consolidated financial statements.
Subsequent Events
Management has evaluated subsequent events or transactions occurring through the date on which the financial statements were issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed
Note 4. Secured Convertible Promissory Notes
Old Convertible Notes
For the period from January 20, 2010 (inception) to June 30, 2011, the Company issued certain Secured Convertible Promissory Notes (the “Old Convertible Notes”) aggregating $1,700,000, of which $675,000 were issued during the year ended December 31, 2011. The Old Convertible Notes were collateralized by substantially all assets of the Company and were repayable six months from the date of issuance of the respective notes; however, the Company had the right to extend the maturity date for an additional two months. The Old Convertible Notes define a “Qualified Financing” as the sale for cash by the Company of securities generating aggregate gross proceeds of at least $2,000,000 (including the amounts due under the Old Convertible Notes that are converted into such securities). In the event of a Qualified Financing (as defined), the holder of the Old Convertible Notes would be able to elect to convert the principal and unpaid interest into common stock at a 10% discount of the Qualified Financing. The Company evaluated the conversion option in this instrument and determined that the instrument is contingently convertible since the Old Convertible Notes cannot be converted to equity until a Qualified Financing (as defined) has occurred.
During the initial six month period of the Old Convertible Notes, the rate of interest was 12% per annum. In the event that the Company exercises the extension period, the interest rate would retroactively increase to 15% per annum. Once the extension period has passed, the interest rate would be retroactively increased to 20% per annum. The Company considered provisions of ASC 470 “Debt” with respect to its increasing-rate debt and concluded that the overall effect was deemed de minimis to the consolidated financial statements.
In connection with the Old Convertible Notes, for the period from January 20, 2010 (inception) to June 30, 2011, the noteholders also received warrants to purchase an aggregate of 850,000 shares of common stock (the “Old Warrants”), of which 512,500 warrants were issued from January 20, 2010 (inception) to December 31, 2010 and 337,500 warrants were issued during the year ended December 31, 2011. The Old Warrants had an initial exercise price equal to 90% of the per share price paid by investors in a Qualified Financing (as defined). Per the terms of the Old Warrants, such exercise price was reduced to $1.50 per share since the Qualified Financing (as defined) did not occur within three months of the issuance of the warrant. The Old Warrants expire the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined).
In accordance with ASC 815-40, “Contracts in Entity’s Own Equity”, the Company determined that the common stock purchase warrants, as originally issued, did not contain fixed settlement provisions because the exercise price was subject to the completion of a Qualified Financing transaction. As such, the Company was required to record the Old Warrants as liabilities and mark to market the Old Warrants to fair value each reporting period through July 5, 2011, at which time these warrants were surrendered (see “New Convertible Notes” below).
The fair value of the Old Warrants on the respective issuance dates was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.12-3.39
|
%
|
||
|
Contractual term
|
3-4 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.15
|
||
|
Warrants issued
|
850,000
|
|||
|
Aggregate fair value
|
$
|
123,500
|
||
The aggregate fair value of $123,500 was applied to the principal amount of the Old Convertible Notes to determine the debt discount. Accordingly, the Company allocated $123,500 of the offering proceeds to the fair value of the warrants on their respective dates of issuance and recorded them as liabilities in the accompanying consolidated balance sheet. Such amount was amortized over the terms of the respective notes using the effective interest method. For the year ended December 31, 2011, the Company recognized $62,208 in amortization of the deferred debt discount relating to the Old Convertible Notes.
New Convertible Notes
On July 5, 2011, the outstanding Old Convertible Notes aggregating $1,700,000 were exchanged into new Senior Secured Convertible Promissory Notes (the “New Convertible Notes”). From the dates of issuance of the Old Convertible Notes to July 5, 2011, since the Qualified Financing (as defined in the Convertible Notes) did not occur, the Old Convertible Notes were not convertible into common stock. The New Convertible Notes were repayable six months from the date of issuance of the respective notes; however, the Company had the right to extend the maturity date for an additional two months. During the initial six month period of the notes, the rate of interest was 12% per annum. In the event that the Company exercised the extension period, the interest rate would retroactively increase to 15% per annum. Once the extension period had passed, the interest rate would be retroactively increased to 22% per annum.
In the event a Qualified Financing (as defined) was consummated by December 31, 2011, the noteholder shall have the option to (a) convert the principal amount of the New Convertible Notes, plus accrued but unpaid interest thereon (the “Conversion Amount”), into the same securities purchased by investors in the Qualified Financing, including any warrants issued in connection therewith, at the same terms received by such investors, at a conversion price equal to the lower of (1) 75% of the per share price paid by the investors in the Qualified Financing and (2) a price per share which represents a $7,000,000 valuation; or (b) tender their notes to the Company for immediate repayment of principal and accrued and unpaid interest. If the Qualified Financing does not occur by December 31, 2011, then the Conversion Price will be reduced to the lower of (1) 50% of the per share price paid by the investors in any equity related offering, or (2) a price per share which represents a $4,000,000 pre-offering valuation. Through December 30, 2011 (see “Third Amendment” below), the Company evaluated the conversion option in this instrument and determined that the instrument is contingently convertible since the New Convertible Notes could not be converted to equity, as a Qualified Financing (as defined) did not occur.
On July 5, 2011, in connection with the conversion of the Old Convertible Notes into the New Convertible Notes, the 850,000 Old Warrants were surrendered to the Company and the investors received warrants to purchase an aggregate of 1,020,000 of the Company’s common stock with an exercise price of $1.00 per share (as adjusted) and expiring the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined), (the “New Warrants”). The Company accelerated the amortization of the remaining debt discount totaling $23,187 upon surrender of the Old Warrants. In addition, on July 5, 2011, the Company marked to market the Old Warrants and reclassified the resulting warrant liability aggregating $102,000 to stockholders’ deficiency. From July 5, 2011 through December 30, 2011, the Company issued an additional $1,000,000 in New Convertible Notes. These noteholders received an aggregate of 600,000 New Warrants.
The Company determined that the New Warrants, as originally issued, did not contain fixed settlement provisions because the exercise price was subject to a Qualified Financing. As such, the Company was required to record the New Warrants as liabilities and mark to market all such derivatives to fair value each reporting period through December 30, 2011, at which time these warrants were surrendered (see “Third Amendment” below).
The aggregate fair value of $261,600 was applied to the principal amount of the New Convertible Notes to determine the debt discount. Accordingly, the Company allocated $261,600 of the offering proceeds to the fair value of the warrants on their respective dates of issuance and recorded them as liabilities in the accompanying consolidated balance sheet. Such amount is being amortized over the terms of the respective notes using the effective interest method.
During the year ended December 31, 2011, the Company recognized $261,600 in amortization of the deferred debt discount relating to the New Convertible Notes.
The fair value of the New Warrants on the respective issuance dates was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.12-3.39
|
%
|
||
|
Contractual term
|
3-4 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.16
|
||
|
Warrants issued
|
1,620,000
|
|||
|
Aggregate fair value
|
$
|
261,600
|
||
During the year ended December 31, 2011, the Company marked these warrants to fair value and recorded a charge of $202,900 relating to the change in fair value of warrant liabilities.
In connection with the Old Convertible Notes and the New Convertible Notes, the Company incurred placement agent fees of $471,000, of which $237,000 were incurred during the year ended December 31, 2011, which were amortized as deferred financing costs on a straight-line basis over the stated term of the loan. During the year ended December 31, 2011, amortization of deferred financing costs relating to the Old Convertible Notes and the New Convertible Notes totaled $248,250.
Third Amendment
On December 30, 2011, the Company entered into an agreement amending the New Convertible Notes (the “Third Amendment”). Prior to this date, a majority of the New Convertible Notes were past maturity and in default. Under the Third Amendment, each Investor waived the defaults and agreed to extend the Maturity Date of its Note until the later of (i) two (2) months from the Maturity Date of each individual Investor’s Note (after giving effect to any extension options exercised by the Company) or February 28, 2012 to grant the Company additional time necessary to complete the Qualified Financing. In the event a Qualified Financing (as defined) is consummated by the Company, the noteholder shall have the option to (a) convert the principal amount of the New Convertible Note, plus accrued but unpaid interest, into the same securities purchased by investors in the Qualified Financing. The noteholder shall also be entitled to receive warrants issued in connection therewith, with the same terms received by such investors at a conversion price equal to the lower of (x) the price per share of the Qualified Securities and (y) $0.54 per share (the “Conversion Price”), or (b) tender their notes to the Company for immediate repayment of principal and accrued and unpaid interest. A Qualified Financing is defined as the sale for cash by the Company or any company with which it completes a reverse merger or any business combination of debt or equity securities generating aggregate gross proceeds of at least $1,500,000. As of December 31, 2011, since a Qualified Financing had not occurred, the notes were not convertible.
On December 30, 2011, in connection with the conversion of the New Convertible Notes into the Third Amendment Convertible Notes, an aggregate of 1,620,000 New Warrants were surrendered to the Company and the investors received an aggregate of 2,862,716 warrants to purchase the Company’s common stock exercisable at $0.54 per share. These warrants expire on the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined) (the “Third Amendment Warrants”). The Company accelerated the amortization of the remaining debt discount totaling $98,400 upon surrender of the New Warrants. In addition, on December 30, 2011, the Company marked to market the New Warrants and reclassified the resulting warrant liability aggregating $486,000 to stockholders’ deficiency.
The Company determined that the Third Amendment Warrants did not contain fixed settlement provisions because the exercise price can be adjusted based on new issuances. As such, the Company was required to record the Third Amendment Warrants as liabilities and mark to market all such derivatives to fair value each reporting period through December 31, 2013.
The aggregate fair value of $1,316,849 was applied to the principal amount of the New Convertible Notes under the Third Amendment to determine the debt discount. Accordingly, the Company allocated $1,316,849 of the fair value of the warrants on December 30, 2011 and recorded the warrants as derivative liabilities in the accompanying consolidated balance sheet. Such amount was amortized over the terms of the notes using the effective interest method.
The fair value of the Third Amendment Warrants on the issuance date was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.12-3.39
|
%
|
||
|
Contractual term
|
3-4 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.46
|
||
|
Warrants issued
|
2,862,716
|
|||
|
Aggregate fair value
|
$
|
1,316,849
|
||
In January 2012, the Company issued convertible notes payable under the terms of the Third Amendment aggregating $120,000. The note bears interest at the rate of 12% per annum. The Company evaluated the conversion option in these instruments and determined that the instruments are contingently convertible since the Third Amendment notes could not be converted to equity, as a Qualified Financing (as defined above) did not occur.
In connection with the Third Amendment convertible notes payable issued in January 2012, the Company issued these note holders an aggregate of 120,000 warrants to purchase common stock with an exercise price of $0.54. These Third Amendment warrants expire on the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined). The Company determined that the Third Amendment Warrants did not contain fixed settlement provisions because the exercise price can be adjusted based on new issuances. As such, the Company was required to record the Third Amendment Warrants as liabilities and mark to market all such derivatives to fair value each reporting period through December 31, 2013. The aggregate grant date fair value of $56,400 was applied to the principal amount of the convertible notes payable to determine the debt discount. Accordingly, the Company allocated $56,400 of the offering proceeds to the fair value of the warrants on their respective dates of issuance and recorded them as liabilities in the accompanying consolidated balance sheet. Such debt discount was amortized through May 2012, when the notes matured.
During the year ended December 31, 2012, the Company recognized $1,373,249 in amortization of the debt discount relating these Third Amendment convertible notes payable.
The fair value of the warrants was calculated on the issuance date using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.22
|
%
|
||
|
Contractual term
|
2 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.47
|
||
|
Warrants issued
|
120,000
|
|||
|
Aggregate fair value
|
$
|
56,400
|
||
During the years ended December 31, 2013 and 2012, the Company marked the Third Amendment warrants to fair value and recorded gains of $585,639 and $381,073, respectively relating to the change in fair value of warrant liabilities issued in connection with the Third Amendment convertible notes.
In November 2012, the Company obtained extensions from certain convertible notes payable holders to extend the maturity date of their notes as the notes were in default. The holders of convertible notes payable in the aggregate amounts of $728,000 and $1,142,000 extended the due date of their notes to December 31, 2012 and March 31, 2013, respectively. Subsequent to December 31, 2013, the Company received waivers from the noteholders for all of the convertible notes payable. The holders of the respective notes agreed to waive all prior events of default (as defined in the respective agreements). If the waivers had not been obtained, the interest rate would have been retroactively increased to 22% per annum.
In connection with the note maturity extensions, the Company issued warrants to purchase 187,000 shares of common stock at a fixed exercise price of $0.70 per share. The aggregate grant date fair value of $61,764 was applied to the principal amount of the notes to determine the debt discount. Accordingly, the Company allocated $61,764 of the fair value of the warrants and recorded the warrants as a debt discount in the accompanying consolidated balance sheet. Such amount will be amortized over the terms of the note maturity extension period using the effective interest method. During the years ended December 31, 2013 and 2012, the Company recognized $37,058 and $24,706, respectively, in amortization of the debt discount relating to the note maturity extensions.The fair value of warrants on the issuance dates was calculated using a Black-Scholes-Merton model with the following assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
89.00
|
%
|
||
|
Risk-free interest rate
|
1.01-1.19
|
%
|
||
|
Contractual term
|
7 years
|
|||
|
Weighted average unit fair value
|
$
|
0.33
|
||
|
Warrants issued
|
187,000
|
|||
|
Aggregate fair value
|
$
|
61,764
|
||
November 2012 Notes
On November 21, 2012, the Company entered into the Subscription Agreement (the “Subscription Agreement”) of Secured Convertible Promissory Notes (the “November 2012 Notes”) in the aggregate principal amount of $500,000. The November 2012 Notes bear interest at 10% per annum and mature on May 21, 2014. As noted in Note 10, in April 2014, the maturity date of the November 2012 Notes was extended to April 8, 2015, and accordingly, such notes were reclassified on the accompanying balance sheet as non-current as of December 31, 2013. The November 2012 Notes are collateralized by all of the assets of the Company, as the holder of the November 2012 Notes has a first priority security interest, a lien upon and right of set-off against all of the Company’s assets.
The November 2012 Notes have a conversion price of $0.54 per share, subject to downward adjustment to 80% of the average closing stock price for the 5 previous days if that average closing price is less than the conversion price. The November 2012 Notes also contain a provision to lower the exercise price to any subsequent common stock issuance at a lower price, if any convertible debt subsequently issued has a lower conversion price or if any options or warrants have lower exercise prices. The Company determined that the conversion feature of the November 2012 Notes did not contain fixed settlement provisions because the conversion price can be adjusted based on new issuances, and accordingly, the Company recorded the note conversion feature as a liability and mark to market the derivative to fair value each reporting period.
The aggregate fair value of the conversion option of $131,481 was applied to the principal amount of the November 2012 Notes to determine the debt discount. Accordingly, the Company allocated $131,481 of the offering proceeds to the fair value of the note conversion feature on the date of issuance and recorded it as a liability in the accompanying consolidated balance sheet. Such amount was being amortized over the terms of the November 2012 Notes using the effective interest method. During the years ended December 31, 2013 and 2012, the Company recognized $87,660 and $9,740, respectively, in amortization of the debt discount relating to the November 2012 Notes.
The fair value of the conversion feature of the November 2012 Notes on the issuance date was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
76.00
|
%
|
||
|
Risk-free interest rate
|
0.17
|
%
|
||
|
Contractual term
|
1.5 years
|
|||
|
Weighted average unit fair value
|
$
|
0.142
|
||
|
Common shares assumed issued
|
925,926
|
|||
|
Aggregate fair value
|
$
|
131,481
|
||
During the years ended December 31, 2013 and 2012, the Company marked the conversion feature of the November 2012 Notes to fair value and recorded a gain of $126,433 and $10,021, respectively, relating to the change in fair value of the conversion feature on the November 2012 notes.
The note holders also received five year warrants to purchase 462,963 shares of its common stock at an exercise price of $0.70 per share “November 2012 Warrants.” The warrants contain a provision to lower the exercise price to any subsequent common stock issuance at a lower price, if any convertible debt subsequently issued has a lower conversion price or if any options or warrants have lower exercise prices. The Company determined that the warrants did not contain fixed settlement provisions and the Company was required to record the warrants as liabilities and mark to market all such derivatives to fair value each reporting period.
The aggregate fair value of $141,667 was applied to the principal amount of the November 2012 Notes to determine the debt discount. Accordingly, the Company allocated $141,667 of the fair value of the warrants and recorded the warrants as derivative liabilities in the accompanying consolidated balance sheet. Such amount will be amortized over the terms of the November 2012 Notes using the effective interest method. During the years ended December 31, 2013 and 2012, the Company recognized $94,440 and $10,493, respectively, in amortization of the debt discount relating to the November 2012 Notes. The fair value of the November 2012 Warrants on the issuance date was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
97.00
|
%
|
||
|
Risk-free interest rate
|
0.69
|
%
|
||
|
Contractual term
|
5 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.306
|
||
|
Warrants issued
|
462,963
|
|||
|
Aggregate fair value
|
$
|
141,667
|
||
During the years ended December 31, 2013 and 2012, the Company marked the November 2012 warrants to fair value and recorded a gain of $114,815 and $1,389, respectively, relating to the change in fair value of warrant liabilities issued in connection with the November 2012 notes.
In connection with the sale of the November 2012 Notes and warrants, the Company paid to the investor and its designee a due diligence fee in cash equal to 4% of the gross proceeds of the offering and issued to the investor’s designee an unsecured note substantially in the same form as the November 2012 Notes in the principal amount of $20,000. The grant date fair value of the note conversion feature was $5,037 and was applied to the principal amount of the note to determine the debt discount. Accordingly, the Company allocated $5,037 of the note conversion feature on the date of issuance and recorded it as a liability in the accompanying consolidated balance sheet. Such amount is being amortized over the terms of the respective note using the effective interest method. During the years ended December 31, 2013 and 2012, the Company recognized $3,360 and $373, respectively, in amortization of the debt discount relating to this note.
In connection with the Third Amendment Notes and the November 2012 Notes, the Company incurred placement agent fees in 2012 of $83,000 which were amortized as deferred financing costs on a straight-line basis over the stated term of the respective loans. During the years ended December 31, 2013 and 2012, amortization of deferred financing costs relating to the Convertible Notes aggregated $53,333 and $45,592, respectively.
Note 5. Notes Payable
During the year ended December 31, 2011, the Company issued certain notes payable totaling $545,000 and repaid $155,000. The notes bear interest between 0% and 12% per annum (weighted average of 6.25% per annum). The Company calculated the imputed interest associated with non-interest bearing notes and the resulting expense was deemed de minimis to the financial statements for the year ended December 31, 2011. The outstanding notes payable totaling $175,000 matured on December 31, 2011. These notes have not yet been repaid.
On December 30, 2011, the Company extended the terms of certain notes payable aggregating $250,000 which were either at or near maturity. In connection with the extension, the Company issued these note holders an aggregate of 205,000 warrants to purchase common stock at an exercise price of $0.54. These warrants expire on the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined). The aggregate grant date fair value of $94,300 was applied to the principal amount of the notes payable to determine the debt discount. Accordingly, the Company allocated $94,300 of the offering proceeds to the fair value of the warrants on their respective dates of issuance and recorded them as liabilities in the accompanying consolidated balance sheet. During the years ended December 31, 2012 and 2011, the Company recognized $80,500 and $13,800, respectively, in amortization of the debt discount relating to the notes payable.
The Company determined that the warrants did not contain fixed settlement provisions because the exercise price can be adjusted based on new issuances. As such, the Company was required to record the warrants as liabilities and mark to market all such derivatives to fair value each reporting period through December 31, 2013. The fair value of the warrants on the issuance date was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.12-3.39
|
%
|
||
|
Contractual term
|
3-4 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.46
|
||
|
Warrants issued
|
205,000
|
|||
|
Aggregate fair value
|
$
|
94,300
|
In connection with the Share Exchange (see Note 1), in December 2011 the Company received a loan from an investor in the aggregate amount of $390,000. The note bears interest of 8% per annum and matured on December 31, 2012.
During the first quarter of 2012, the Company issued certain notes payable aggregating $100,000. The notes bear interest at the rate of 12% per annum and matured on March 7, 2012. In connection with these notes payable, the Company issued the note holders an aggregate of 70,000 warrants to purchase common stock with an exercise price of $0.54. The Company determined that the warrants did not contain fixed settlement provisions and the Company was required to record the warrants as liabilities and mark to market all such derivatives to fair value each reporting period. These warrants expire on the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined). The aggregate grant date fair value of $32,200 was applied to the principal amount of the notes payable to determine the debt discount. Accordingly, the Company allocated $32,200 of the offering proceeds to the fair value of the warrants on their respective dates of issuance and recorded them as liabilities in the accompanying consolidated balance sheet. Such amount was amortized over the terms of the notes using the effective interest method. Such debt discount was being amortized through May 2012 when the notes matured. During the year ended December 31, 2012, the Company recognized $32,200 in amortization of the debt discount relating to the notes payable.
The Company determined that the warrants did not contain fixed settlement provisions because the exercise price can be adjusted based on new issuances. As such, the Company was required to record the warrants as liabilities and mark to market all such derivatives to fair value each reporting period through December 31, 2013. The fair value of the warrants on the issuance date was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.30
|
%
|
||
|
Contractual term
|
2 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.46
|
||
|
Warrants issued
|
70,000
|
|||
|
Aggregate fair value
|
$
|
32,200
|
||
During the years ended December 31, 2013 and 2012, the Company marked these warrants to fair value and recorded a gain of $481,928 and $276,890, respectively, relating to the change in fair value of warrants issued in connection with notes payable.
From July to October of 2012, the Company issued certain notes payable aggregating $400,000. These notes bear interest at the rate of 12% per annum and matured 30 days from the issuance date. In connection with these notes, the Company granted the note holders an aggregate 200,000 shares of common stock with a grant date fair value of $110,000. The aggregate grant date fair value of the common stock was applied to the principal amount of these notes payable to determine the debt discount. Accordingly, the Company allocated $86,274 of the offering proceeds to the relative fair value of the common stock on their respective grant dates and recorded them as Common Stock Issuable in the accompanying consolidated balance sheet, as the shares were not issued until January 2013 due to the delays in issuing the stock certificates. During the year ended December 31, 2012, the Company recognized $86,274 in amortization of the deferred debt discount relating to these notes payable.
In November 2012, the Company obtained extensions from certain notes payable holders to extend the maturity date of their notes as the notes were in default. The holders of notes payable in the aggregate amounts of $70,000 and $895,000 extended the due date of their notes to December 31, 2012 and March 31, 2013, respectively. The holders of the respective notes agreed to waive all prior events of default (as defined in the respective agreements).
In connection with the note maturity extensions, the Company issued warrants to purchase 56,500 shares of common stock at a fixed exercise price of $0.70 per share. The aggregate grant date fair value of $18,661 was applied to the principal amount of the notes to determine the debt discount. Accordingly, the Company allocated $18,661 of the fair value of the warrants and recorded the warrants as a debt discount in the accompanying consolidated balance sheet. Such amount was amortized over the terms of the note maturity extension period using the effective interest method. During the years ended December 31, 2013 and 2012, the Company recognized $11,197 and $7,464, respectively, in amortization of the debt discount relating to the note maturity extensions.
The fair value of warrants on the issuance dates was calculated using a Black-Scholes-Merton model with the following assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
89.00
|
%
|
||
|
Risk-free interest rate
|
1.01-1.19
|
%
|
||
|
Contractual term
|
7 years
|
|||
|
Weighted average unit fair value
|
$
|
0.33
|
||
|
Warrants issued
|
56,500
|
|||
|
Aggregate fair value
|
$
|
18,661
|
||
In November 2012, the Company repaid $100,000 of notes payable.
Note 6. Income Taxes
The tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2013, 2012 and 2011 are presented below:
|
Deferred Tax Assets:
|
2013
|
2012
|
2011
|
|||||||||
|
Accrued Interest
|
$ | 487,000 | $ | 292,000 | - | |||||||
|
Warrant Liability
|
287,000 | 757,000 | ||||||||||
|
Net operating loss carryforward
|
3,311,000 | 3,042,000 | $ | 1,621,000 | ||||||||
|
Total deferred tax asset
|
4,085,000 | 4,091,000 | 1,621,000 | |||||||||
|
Valuation allowance
|
(4,085,000 | ) | (4,091,000 | ) | (1,621,000 | ) | ||||||
|
Deferred tax asset, net of valuation allowance
|
$ | - | $ | - | $ | - | ||||||
|
Change in Valuation Allowance
|
$ | 6,000 | $ | (2,470,000 | ) | $ | 1,077,000 | |||||
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
For the year ended
December 31, 2013
|
For the year ended
December 31, 2012
|
For the year ended
December 31, 2011
|
||||||||||
|
U.S. statutory federal rate
|
34.0 | % | (34.0 | ) % | (34.0 | ) % | ||||||
|
State income taxes, net of federal tax benefit
|
5.8 | % | (5.8 | ) % | (5.8 | ) % | ||||||
|
Stock Compensation
|
40.6 | % | 0.3 | % | - | % | ||||||
|
Non-deductible merger costs
|
- | % | - | % | 1.5 | % | ||||||
|
Other permanent differences
|
1.3 | % | (29.1 | ) % | 18.6 | % | ||||||
|
Change in valuation allowance
|
(81.7 | ) % | 68.6 | % | 19.7 | % | ||||||
|
Income tax provision (benefit)
|
- | % | - | % | - | % | ||||||
The income tax provision (benefit) consists of the following:
|
For the year ended
December 31, 2013
|
For the year ended
December 31, 2012
|
For the year ended
December 31, 2011
|
||||||||||
|
Federal
|
||||||||||||
|
Current
|
$ | - | $ | - | $ | - | ||||||
|
Deferred
|
5,000 | (2,109,000 | ) | (920,050 | ) | |||||||
|
State and local
|
||||||||||||
|
Current
|
- | - | ||||||||||
|
Deferred
|
1,000 | (360,000 | ) | (156,950 | ) | |||||||
|
Change in valuation allowance
|
(6,000 | ) | 2,469,000 | 1,077,000 | ||||||||
|
Income tax provision (benefit)
|
$ | - | $ | - | $ | - | ||||||
The Company assesses the likelihood that deferred tax assets will be realized. To the extent that realization is not likely, a valuation allowance is established. Based upon the Company’s losses since inception, management believes that it is more likely than not that future benefits of deferred tax assets will not be realized.
The Company is required to file income tax returns in U.S. federal and various state jurisdictions. The Company has not yet filed its federal and state income tax returns for the period from January 20, 2010 (inception) through December 31, 2010 and for the years ended December 31, 2011 and 2012 and 2013, respectively. These returns will be subject to examination by tax authorities when filed.
At December 31, 2013, 2012 and 2011, the Company had approximately $8,300,000, $7,600,000 and $4,100,000, respectively, of federal and state net operating loss carryovers that may be available to offset future taxable income. The Company will not be able to utilize these carryovers until the related tax returns are filed. The net operating loss carry overs, if not utilized, will expire 20 years from the date that the losses were incurred. These losses could be subject to limitation under Section 382 of the Internal Revenue Code should there be a greater than 50% ownership change as determined under the regulations. Based on the Company's evaluation of the impact of Section 382 on the revenue recapitalization, the Company has estimated that such losses are not subject to limitation.
The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits." A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise's potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as Interest expense in the statement of operations. Penalties would be recognized as a component of General and administrative expenses in the statement of operations.
No interest or penalties on unpaid tax were recorded durng the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, 2012 and 2011, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.
Note 7. Commitments and Contingencies
Operating Lease
Beginning in August 2010, the Company leased office space in Campbell, California (Silicon Valley) under a renewable six month operating lease. Beginning in November 2011, the Company leased office space in Los Gatos, California pursuant to a one year lease at a monthly rate of $1,050 that expired on October 31, 2012. In November 2012, the lease was renewed on a month-to-month basis at a monthly rate of $1,100. In March 2013, the Company terminated the lease. Rent expense amounted to $3,200, $13,661 and $17,176 for the years ended December 31, 2013, 2012 and 2011, respectively.
Litigations, Claims and Assessments
In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such matters as of December 31, 2013, 2012 and 2011.
As of December 31, 2013, the Company has not filed certain federal and state income and payroll tax returns. Amounts due under these returns have been accrued as a component of accrued payroll and related expenses as of December 31, 2013.
Saggezza Consulting Agreements
Pursuant to a consulting agreement entered into as of April 29, 2010, the Company retained a development company to develop the vSOS App for iPhone and Android, along with the vSOS Server. The agreement provides for total compensation of $53,000. On August 16, 2010, the Company entered into another consulting agreement with the same company to develop the product NDT – Network Data Tunnel. The project requires six dedicated engineers and provides for compensation of $27,000 a month through February 28, 2012 (as amended). For the years ended December 31, 2013, 2012 and 2011, the Company incurred an expense of $0, $54,000 and $277,000, respectively, for services rendered under the consulting agreement.
Apptology Consulting Agreement
Pursuant to a consulting agreement entered into as of January 10, 2011, the Company retained a development company to create an integration to vSOS for iPhone and PayPal as well as to assist in improving the logo design. In addition, the development company is to write and distribute one press release discussing the product (with Nuvel’s written permission). The agreement provides for compensation of $2,500 per month. On April 14, 2011, the Company entered into another consulting agreement with the same company to develop a new product called Distracted Driver Android App. The agreement provides for compensation of $8,000 per month through December 31, 2011. For the years ended December 31, 2013, 2012 and 2011, the Company incurred an expense of $0, $81,680 and $41,740, respectively, for services rendered under the consulting agreement.
Note 8. Stockholders’ Deficiency
Authorized Capital
The Company is authorized to issue up to 100,000,000 shares of common stock, $0.001 par value. The holders of the Company’s common stock are entitled to one vote per share. The Company is authorized to issue up to 15,000,000 shares of preferred stock, $0.001 par value.
Common Stock
In connection with the Share Exchange, the Company issued 1,739,706 shares of common stock of the Company valued at $1,304,780 to an investor and its affiliate. Such costs were expensed as merger costs on the date of the Share Exchange.
In June 2012, the Company entered into an agreement with a consultant to provide social and digital media strategy services to the Company for a period of one year. Pursuant to the agreement, the Company agreed to issue the consultant 50,000 shares of common stock as compensation for services provided. The Company determined that the estimated fair value of the common stock was more readily determinable than the fair value of the services rendered. Pursuant to the agreement, the shares were fully vested and non-forfeitable at the time of issuance. Accordingly, during the year ended December 31, 2012, the Company recorded $35,000 of stock compensation expense related to this agreement, which was recorded as general and administrative expense in the accompanying consolidated statement of operations.
In June 2012, the Company entered into an agreement with a consultant to provide product marketing services to the Company for a period of twelve months. Pursuant to the agreement, the Company agreed to pay the consultant a fee of $20,000 in shares of common stock at $1.50 per share. Pursuant to the agreement, the shares were fully vested and non-forfeitable at the time of issuance. Accordingly, during the during the year ended December 31, 2012, the Company issued 13,334 shares of common stock and recorded $20,000 of stock compensation expense related to this agreement, which was recorded as marketing and promotion expense in the accompanying consolidated statement of operations.
In July 2012, the Company entered into an agreement with a consultant to provide investment banking services to the Company for a period of nine months. Pursuant to the agreement, the Company agree to issue to the consultant 10,000 shares of common stock. The Company determined that the estimated fair value of the common stock was more readily determinable than the fair value of the services rendered. Pursuant to the agreement, the shares were fully vested and non-forfeitable at the time of issuance. Accordingly, during the year ended December 31, 2012, the Company recorded $7,000 of stock compensation expense related to this agreement, which was recorded as general and administrative expense in the accompanying consolidated statement of operations.
In August 2012, the Company entered into an agreement with a consultant to provide marketing, communications and lead generation program services to the Company for a period of 90 days. Pursuant to the agreement, the Company agreed to pay the consultant a one-time non-refundable retainer of 10,000 shares of common stock. The Company determined that the estimated fair value of the common stock was more readily determinable than the fair value of the services rendered. Pursuant to the agreement, the shares were fully vested and non-forfeitable at the time of issuance. During the year ended December 31, 2012, the Company recorded $5,500 of stock compensation expense related to this agreement, which was recorded as general and administrative expense in the accompanying consolidated statement of operations. The Company had recorded the transaction as Common Stock Issuable in the accompanying consolidated balance sheet, as the shares were not issued until May 2013 due to the delay in issuing the stock certificate.
In January 2013, the Company entered into an agreement with a consultant to investor relations services to the Company for a period of six months. Pursuant to the agreement, the Company agreed to issue the consultant 150,000 shares of common stock as compensation for services provided. The Company determined that the estimated fair value of the common stock was more readily determinable than the fair value of the services rendered. Pursuant to the agreement, the shares were fully vested and non-forfeitable at the time of issuance. Accordingly, during the year ended December 31, 2013, the Company recorded $60,000 of stock compensation expense related to this agreement, which was recorded as general and administrative expense in the accompanying consolidated statement of operations.
In January 2013, the Company entered into a consultant retainer agreement with a consultant to retain the services of the consultant on a non-exclusive basis. Pursuant to the agreement, the Company agreed to issue the consultant 10,000 shares of common stock as compensation for services provided. The Company determined that the estimated fair value of the common stock was more readily determinable than the fair value of the services rendered. Pursuant to the agreement, the shares were fully vested and non-forfeitable at the time of issuance. Accordingly, during the year ended December 31, 2013, the Company recorded $4,000 of stock compensation expense related to this agreement, which was recorded as general and administrative expense in the accompanying consolidated statement of operations.
In May 2013, the Company entered into an agreement with a consultant to provide marketing, communications and lead generation program services to the Company. Pursuant to the agreement, the Company agreed to pay the consultant a one-time non-refundable retainer of 10,000 shares of common stock. The Company determined that the estimated fair value of the common stock was more readily determinable than the fair value of the services rendered. During the year ended December 31, 2013, the Company recorded $4,000 of stock compensation expense related to this agreement, which was recorded as general and administrative expense in the accompanying consolidated statement of operations.
Preferred Stock Subscription Agreement
The Company has designated 7,150,000 shares of its authorized preferred stock with par value of $.001 per share as Series A Preferred Stock (“Series A Preferred”). The holders of the Series A Preferred shall be entitled to cumulative dividends at the rate of 8% of the Original Purchase Price per annum (as defined below). In the event of any liquidation, dissolution or winding-up of the Company, the assets of the Company shall be distributed first to the holders of Series A Preferred an amount
per share of Series A Preferred equal the sum of (i) two times the original purchase price and (ii) any declared and unpaid dividends, which shall be paid in cash. Each holder of shares of Series A Preferred shall be entitled to one vote for each whole share of Common Stock into which such shares of Series A Preferred could be converted. At the option of the holder, the outstanding shares of Series A Preferred are convertible into shares of Common Stock at the rate which is calculated by dividing the Original Purchase Price by the Conversion Price of $0.60 per share within thirty six months after the original issue date (the “Conversion Rate”). The Series A Preferred Stock will automatically convert into shares of the Company's common stock at the Conversion Rate (1) on the third anniversary of the original issuance date or (2) if the Company's average stock price is $1.20 for 20 consecutive trading days and trading volume is at least $150,000.
During the year ended December 31, 2012, the Company entered into a subscription agreement with certain investors for an aggregate of 641,668 shares of the Company's Series A Preferred Stock and Warrants to purchase 50% of the shares of Common Stock that the Series A Preferred Stock would be converted into at a conversion price of $0.60 per share, an aggregate of 320,837 warrants. The Company received proceeds of $385,000 ($0.60 per unit, which shall be referred to as the “Original Purchase Price”) in connection with the subscription agreement. The warrants have a five year term, an exercise price of $0.80 per share, and were valued on the grant date at $98,286. Such warrants are subject to customary anti-dilution adjustments. The value of the warrants was a direct cost of the offering and has been recorded as a reduction in additional paid in capital. On August 20, 2012, the Company issued the 641,668 shares to the investors.
The fair value of the warrants on the issuance date was calculated using a Black-Scholes-Merton model with the following assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.80
|
%
|
||
|
Contractual term
|
5 years
|
|||
|
Fair value per warrant
|
$
|
0.36
|
||
|
Warrants issued
|
275,000
|
|||
|
Aggregate fair value
|
$
|
98,286
|
||
Warrants
In connection with the Share Exchange, in December 2011 the Company issued warrants to purchase 2,000,000 shares of common stock to an investor. Such warrants have an exercise price of $0.40 per share, and were valued at $920,000. These warrants expire on the earlier of seven years from the grant date or the closing of a sale or merger transaction (as defined). Such costs were expensed as merger costs on the date of the Share Exchange.
The Company determined that the warrants did not contain fixed settlement provisions because the exercise price can be adjusted based on new issuances. As such, the Company was required to record the warrants as liabilities and mark to market all such derivatives to fair value each reporting period through December 31, 2013. The fair value of the warrants on the issuance date was calculated using a compound option model that includes characteristics of both a binomial lattice and the Black-Scholes formula valued with the following weighted average assumptions:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
80.00
|
%
|
||
|
Risk-free interest rate
|
0.12-3.39
|
%
|
||
|
Contractual term
|
3-4 years
|
|||
|
Weighted average fair value per warrant
|
$
|
0.46
|
||
|
Warrants issued
|
2,000,000
|
|||
|
Aggregate fair value
|
$
|
920,000
|
||
Details of warrants outstanding are as follows:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Warrants outstanding and exercisable at January 1, 2011
|
512,500
|
$
|
1.50
|
6.56
|
$
|
-
|
||||||||||
|
Granted
|
7,025,216
|
0.77
|
5.99
|
|||||||||||||
|
Expired
|
-
|
-
|
||||||||||||||
|
Cancelled
|
(2,470,000
|
)
|
1.17
|
5.85
|
||||||||||||
|
Exercised
|
-
|
-
|
||||||||||||||
|
Warrants outstanding and exercisable at December 31, 2011
|
5,067,716
|
0.54
|
6.13
|
-
|
||||||||||||
|
Granted
|
1,217,300
|
0.70
|
5.326
|
|||||||||||||
|
Expired
|
-
|
-
|
||||||||||||||
|
Exercised
|
-
|
-
|
||||||||||||||
|
Warrants outstanding and exercisable at December 31, 2012
|
6,285,016
|
0.57
|
5.87
|
-
|
|
Granted
|
- | - | ||||||||||||||
|
Expired
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Warrants outstanding and exercisable at December 31, 2013
|
6,285,016 | $ | 0.57 | 4.87 | $ | - | ||||||||||
Note 9. Related Party Transactions
On February 1, 2010, the Company engaged a placement agent agreement (“Placement Agent Agreement”) with Middlebury Group LLC (“Middlebury”), where one director of the Company worked as a partner, to act as the placement agent in connection with a private placement offering comprised of bridge notes, convertible preferred stock, senior secured promissory notes, convertible notes, and warrants as required. The agreement provides for a monthly retainer fee of $10,000 and a placement fee equal to ten percent of the aggregate purchase price paid by each investor. During the years ended December 31, 2013, 2012 and 2011, the Company paid Middlebury $0, $0, and $155,000 for services rendered pursuant to the placement agent agreement. As of December 31, 2013, 2012 and 2011, the Company has amounts due to Middlebury of $75,000 for services rendered pursuant to the Placement Agent Agreement. Such amounts are included as part of a
ccounts payable - related parties.
During the years ended December 31, 2013 and 2012, the Company received advances of $24,834 and $256,132, respectively, from related parties. These advances are non-interest bearing and are due on demand. As of December 31, 2013 and 2012, the amounts due to these related parties totaled $187,294 and $163,460, respectively, and are included as part of accounts payable - related parties.
Note 10. Subsequent Events
Operating Lease
In April 2014, the Company leased a satellite office in Los Gatos, California at a variable monthly rate based on office usage.
Secured Convertible Promissory Notes
Amendment to November 2012 Notes
In April 2014, the Company entered into an amendment to the Subscription Agreement of the November 2012 Notes in the principal amount of $520,000. The maturity date of the notes were extended from May 21, 2014 to April 8, 2015, with an additional extension at the option of the investors. In exchange for extending the maturity date, the Company modified the following terms of the Subscription Agreement:
●
The combined principal of $520,000 and accrued interest of $71,660 on the original note was modified to a new principal balance of $636,249.
●
The conversion price of the notes was reduced from $.54 to $.18. The notes will automatically convert into common stock if no event of default occurs and if during any 20 trading days (i) the average daily trading volume is at least $50,000, (ii) the closing price of the stock is at least 250% of the conversion price and (iii) all conversion shares are registered for resale or are eligible for resale without restriction under Rule 144.
●
The warrants shares issued were increased from 462,963 to 1,800,412.
●
The exercise price of the warrants was reduced from $.70 to $.25.
●
1,767,358 shares of Series D Preferred Stock were issued.
Conversion of Accounts Payable into Convertible Notes
In April 2014, the Company reached a settlement agreement with a law firm on $146,055 of outstanding accounts payable. The Company issued the law firm a $138,555 convertible bridge note bearing interest at 8% and maturing in one year. The note converts into common stock at $.18 per share and will automatically convert at 90% of the common stock price if a qualified financing of $2 million occurs. The Company also agreed to pay the law firm $25,000 at a later date the contingent upon the Company receiving the first $1 million in gross proceeds from an upcoming bridge note or other qualified offering.
In May 2014, the Company reached a settlement agreement with a law firm on $49,613 in outstanding accounts payable. The Company issued the law firm a $39,690 convertible bridge note bearing interest at 8% and maturing in one year. The note converts into common stock at $.18 per share and will automatically convert at 90% of the common stock price if a qualified financing of $2 million occurs. The Company agreed to pay the remaining balance of $9,922 in accounts payable a later date contingent upon the Company receiving the first $1 million in gross proceeds from an upcoming bridge note or $2 million in upcoming qualified offering.
In July 2014, the Company reached a settlement agreement with a consultant on $160,460 of outstanding accounts payable by issuing a $125,000 convertible New Bridge Note and 347,222 five year warrants at an exercise price of $0.25.
The Company also agreed to pay the consultant the remaining $35,460 contingent upon the Company receiving the first $2 million in gross proceeds from an upcoming offering of securities. Since the Company didn’t receive the first $2 million in gross proceeds from an offering of securities by October 31, 2014, the Company issued a New Bridge Note to the consultant.
Waiver and Conversion into Series B and Series C Preferred Stock
In June 2014, certain investors signed a waiver and amendment agreement to convert their convertible promissory notes and accrued interest into Series B Preferred Stock. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving their default rights and default interest, the investors each received an additional one-time interest accrual of 24% of the face value of their respective notes over the entire term of the notes.
●
The principal and accrued interest on each promissory note converted into Series B Preferred Stock at a conversion price of $5.00. In total, $347,500 of principal and $449,290 in accrued interest converted into 159,359 shares of Series B Preferred Stock.
●
The exercise price of the 404,773 warrants attached to the convertible notes was reduced to $0.30 per share, and the expiration date of the warrants was changed to June 1, 2019.
●
The Company issued 150,000 shares of common stock.
In June 2014, certain investors signed a waiver and amendment agreement to convert their convertible promissory notes and accrued interest into Series C Preferred Stock and to invest at least 15% of their original investment in a New Bridge convertible note. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving their default rights and default interest, the investors each received an additional one-time interest accrual of 30% of the face value of their respective notes over the entire term of the notes.
●
The principal and accrued interest on each promissory note converted into Series C Preferred Stock at a conversion price of $3.6923. In total, $600,000 of principal and $675,244 in accrued interest converted into 345,379 shares of Series C Preferred Stock with a fair value of $1,243,364.
●
The exercise price of the 569,660 warrants attached to the convertible notes was reduced to $0.25 per share, and the expiration date of the warrants was changed to June 1, 2019.
In July, August and September 2014, certain investors signed a waiver and amendment agreement to convert their convertible promissory notes and accrued interest into Series B Preferred Stock. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving their default rights and default interest, the investors each received an additional one-time interest accrual of 24% of the face value of their respective notes over the entire term of the notes.
●
The principal and accrued interest on each promissory note converted into Series B Preferred Stock at a conversion price of $5.00. In total, $262,500 of principal and $328,583 in accrued interest converted into 118,217 shares of Series B Preferred Stock.
●
The exercise price of the 285,208 warrants attached to the convertible notes was reduced to $0.30 per share, and the expiration date of the warrants was changed to June 1, 2019.
In July, August and September 2014, certain investors signed a waiver and amendment agreement to convert their convertible promissory notes and accrued interest into Series C Preferred Stock and to invest at least 15% of their original investment in a New Bridge convertible note. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving their default rights and default interest, the investors each received an additional one-time interest accrual of 30% of the face value of their respective notes over the entire term of the notes.
●
The principal and accrued interest on each promissory note converted into Series C Preferred Stock at a conversion price of $3.6923. In total, $1,360,000 of principal and $1,922,318 in accrued interest converted into 888,965 shares of Series C Preferred Stock.
●
The exercise price of the 1,297,961 warrants attached to the convertible notes was reduced to $0.25 per share, and the expiration date of the warrants was changed to June 1, 2019.
●
The Company issued 175,000 shares of common stock to induce the investors to convert their notes.
New Bridge Notes
During the second quarter of 2014, the Company issued $158,750 in New Bridge convertible notes (“New Bridge Notes”) to noteholders and Series B Preferred Stockholders who decided to invest at least 15% of their original investments in the New Bridge notes. The New Bridge Notes bear interest at 8% and mature in one year. The maturity date can be extended by 60 days in exchange for increasing the interest rate to 18% retroactive to the note issuance date. If a qualified financing occurs, defined as a sale of debt or equity securities aggregating at least $2 million in gross proceeds, all principal and accrued interest will convert into common stock at 90% of the share price of the qualified securities. The New Bridge Notes are secured by a first priority security interest in all of the assets of the Company pursuant to a security & collateral agent agreement. The investors can convert the New Bridge Notes into common stock at $0.18 per share and the investors received five year warrants at an exercise price of the lesser of $0.25 or the per share price of the qualified securities (defined as gross proceeds from debt and equity securities sold plus debt canceled through conversion of principal and interest with respect to the notes and less repayment of note principal and interest in cash). The investor’s warrant share coverage equaled to 50% of the note divided by the conversion price. In total, the investors received 13,889 warrants. In addition, the Company received proceeds of $126,500 in intended New Bridge Notes.
Unsecured Bridge Loan
As disclosed in Note 2, OrangeHook entered into a Letter of Intent with the Company and provided $60,000 as bridge financing to the Company, in the form of an unsecured loan.
From July 1, 2014 through the date the financial statements were issued, the investors completed the necessary documentation for $126,500 of notes payable that was previously accounted for as non-interest bearing short term convertible promissory notes. Accordingly, the Company issued to the investors New Bridge Notes totaling $126,500. In addition, the Company issued $37,500 in New Bridge convertible notes to noteholders and Series B Preferred Stockholders who decided to invest at least 15% of their original investments in the New Bridge Notes. In total, the investors received 823,613 warrants.
Notes Payable
Settlement of Contract
In March 2014, The Company issued a note payable for $40,000 to settle a contract with a consulting Company. The note bears no interest unless an event of default occurs, in which the interest rate would adjust to the lesser of 1.5% per month or the maximum permitted under applicable law. The first $20,000 of the note payable is due upon the Company raising at least $500,000 in gross proceeds in a subsequent bridge note offering, and the other $20,000 of the note payable is due upon the Company raising at least $750,000 in gross proceeds in a subsequent bridge note offering.
Waiver and Conversion into Series B and Series C Preferred Stock
In June 2014, an investor signed a waiver and amendment agreement to convert his note payable and accrued interest into Series C Preferred Stock, and to invest at least 15% of his original investment in a New Bridge convertible note. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving his default rights and default interest, the investor received an additional one-time interest accrual of 30% of the face value of his note over the entire term of the note.
●
The $100,000 principal and $79,890 accrued interest on the investor’s promissory note converted into 48,720 shares of Series C Preferred Stock at a conversion price of $3.6923.
In July 2014, certain investors signed a waiver and amendment agreement to convert their notes payable and accrued interest into Series B Preferred Stock. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving their default rights and default interest, the investors each received an additional one-time interest accrual of 24% of the face value of their respective notes over the entire term of the notes.
●
The principal and accrued interest on each promissory note converted into Series B Preferred Stock at a conversion price of $5.00. In total, $390,000 of principal and $316,552 in accrued interest converted into 141,311 shares of Series B Preferred Stock.
●
The exercise price of the 2,039,000 warrants attached to the convertible notes was reduced to $0.30 per share, and the expiration date of the warrants was changed to June 1, 2019.
In July 2014, certain investors signed a waiver and amendment agreement to convert their notes payable and accrued interest into Series C Preferred Stock and to invest at least 15% of their original investment in a New Bridge convertible note. The terms of the waiver and amendment agreement were as follows:
●
In exchange for waiving their default rights and default interest, the investors each received an additional one-time interest accrual of 30% of the face value of their respective notes over the entire term of the notes.
●
The principal and accrued interest on each promissory note converted into Series C Preferred Stock at a conversion price of $3.6923. In total, $200,000 of principal and $157,479 in accrued interest converted into 96,818 shares of Series C Preferred Stock.
Stockholders’ Deficiency
Authorization of New Classes of Preferred Stock
In April 2014, the Company authorized the issuance of 2,000,000 shares of Series D Preferred Stock, which has the following characteristics:
●
Par value of $.001
●
Conversion to common stock at a one to one ratio
●
Shareholder rights equivalent to common shareholders
●
Liquidation preferences equivalent to common shareholders
●
Voting rights equivalent to common shareholders
In May 2014, the Company authorized the issuance of 2,000,000 shares of Series B Preferred Stock, which has the following characteristics:
●
Par value of $.001
●
Original purchase price of $6.00 per share
●
Conversion to common stock at $0.30 per share
●
Cumulative 6% dividends, which can be paid in common stock at a share price equal to the average of the weighted volume average price for the 20 business days preceding the dividend date
●
Voting rights are one vote for each whole share of common stock that the Series B Preferred Stock can convert into
●
Automatic conversion into Common Stock at the earlier of the third anniversary of the original issuance date or six months after the final closing of a qualified at a rate which is calculated by dividing the original purchase price by the conversion price if during 20 consecutive trading days the weighted volume average of Common Stock is at least $0.60, and trading volume is at least $150,000.
In May 2014, the Company authorized the issuance of 2,000,000 shares of Series C Preferred Stock, which has the following characteristics:
●
Par value of $.001
●
Original purchase price of $4.80 per share
●
Conversion to common stock at $0.24 per share
●
Cumulative 6% dividends, which can be paid in common stock at a share price equal to the average of the weighted volume average price for the 20 business days preceding the dividend date
●
Voting rights are one vote for each whole share of common stock that the Series C Preferred Stock can convert into
●
Automatic conversion into Common Stock at the earlier of the third anniversary of the original issuance date or six months after the final closing of a qualified at a rate which is calculated by dividing the original purchase price by the conversion price if during 20 consecutive trading days the weighted volume average of Common Stock is at least $0.60, and trading volume is at least $150,000.
●
Liquidation rights at 130% of the original purchase price
Conversion of Accounts Payable into Common Stock and Series A Preferred Stock
In April 2014, the Company reached a settlement agreement with a former CFO on $5,000 of outstanding accounts payable by issuing 16,667 shares of Series A Preferred Stock.
In April 2014, the Company reached a settlement agreement with a consultant on $75.000 of outstanding accounts by issuing 166,667 Common Stock. In addition, the Company issued the consultant five year warrants at a $0.30 exercise price.
In April 2014, the Company reached a settlement agreement with a former CFO on $7,160 of outstanding accounts payable by issuing 23,867 shares of Common Stock.
In April 2014, the Company reached a settlement agreement with a consultant by issuing 23,148 shares of Series A Preferred Stock.
In July 2014, the Company reached a settlement agreement with a former Chief Technology Officer on $41,874 of outstanding accounts payable amount by issuing 167,495 shares of Common Stock.
In July 2014 the Company reached a settlement agreement with a consultant on $18,285 of outstanding accounts payable by issuing 73,140 shares of Common Stock.
In August 2014, the Company reached a settlement agreement with a former Chief Executive Officer on $105,947 of outstanding accounts payable by issuing 423,789 shares of Common Stock.
In September 2014, the Company reached a settlement agreement with a consultant on $29,533 of outstanding accounts payable by issuing 118,132 shares of Common Stock that resulted in a $8,269 gain on settlement of accounts payable.
In September 2014, the Company reached a settlement agreement with their previous Chief Technology Officer extinguishing an accounts payable amount of $45,917 by issuing 183,670 shares of Common Stock.
During the month of September the Company reached a settlement agreement with a previous employee extinguishing an accounts payable amount of $17,013 by issuing 68,052 shares of Common Stock.
During the month of September the Company reached a settlement agreement with a consultant extinguishing an accounts payable amount of $29,045 by issuing 116,181 shares of Common Stock.
Waiver and Conversion of Series A Preferred Stock into Series B and Series C Preferred Stock
In June 2014, an investor signed a waiver and amendment agreement to convert shares of Series A Preferred Stock into shares of Series B Preferred Stock at a ratio to 8.3333 to 1. The investor exchanged 41,667 shares of Series A Preferred Stock for 5,000 shares of Series B Preferred Stock and the exercise price on the investor’s 20,834 warrants attached to the stock was reduced to $0.30.
In June 2014, an investor signed a waiver and amendment agreement to convert shares of Series A Preferred Stock into shares of Series C Preferred Stock at a ratio of 6.15384 to 1 and to invest at least 15% of his original investment in a New Bridge convertible note. The investor exchanged 41,667 shares of Series A Preferred Stock for 6,771 shares of Series B Preferred Stock and the exercise price on the investor’s 20,834 warrants attached to the stock was reduced to $0.25.
In July and August 2014, investors signed a waiver and amendment agreement to convert shares of Series A Preferred Stock into shares of Series B Preferred Stock at a ratio to 8.3333 to 1. The investors exchanged 308,334 shares of Series A Preferred Stock for 37,001 shares of Series B Preferred Stock and the exercise price on the investors’ 154,168 warrants attached to the stock was reduced to $0.30.
In July 2014, investors signed a waiver and amendment agreement to convert shares of Series A Preferred Stock into shares of Series C Preferred Stock at a ratio to 6.15384 to 1 and to invest at least 15% of their original investment in a New Bridge convertible note. The investors exchanged 250,000 shares of Series A Preferred Stock for 40,625 shares of Series C Preferred Stock and the exercise price on the investors’ 125,001 warrants attached to the stock was reduced to $0.25. In addition, the Company issued the investors New Bridge Notes totaling $27,500 and 76,389 five year warrants with an exercise price of $0.25.
NUVEL HOLDINGS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
|
Page
|
|
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
| F - 30 | |
| F - 31 | |
| F - 32 | |
| F - 33 | |
| F - 34 | |
| F - 35 | |
| F - 36 | |
| F - 37 | |
| F - 38 | |
| F - 39 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
NUVEL HOLDINGS, INC. AND SUBSIDIARY
|
||||||||
|
(UNAUDITED)
|
||||||||
|
For the Nine Months Ended
|
||||||||
|
September 30, 2013
|
September 30, 2012
|
|||||||
|
Cash Flows From Operating Activities:
|
||||||||
|
Net loss
|
$ | (616,184 | ) | $ | (2,287,134 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities
|
||||||||
|
Amortization of debt discount
|
187,350 | 1,561,439 | ||||||
|
Amortization of deferred financing costs
|
40,000 | 39,666 | ||||||
|
Loss on write-off of capitalized software
|
68,560 | - | ||||||
|
Stock based compensation
|
68,000 | 62,000 | ||||||
|
Change in fair value of derivative liabilities
|
(494,838 | ) | (1,213,700 | ) | ||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Prepaid expenses
|
1,000 | 1,900 | ||||||
|
Accounts payable
|
246,357 | 243,980 | ||||||
|
Accrued interest
|
366,941 | 309,075 | ||||||
|
Accrued payroll and related expenses
|
74,773 | 257,332 | ||||||
|
Other accrued expenses
|
40,000 | (25,000 | ) | |||||
|
Net Cash Used in Operating Activities
|
(18,041 | ) | (1,050,442 | ) | ||||
|
Cash Flows From Investing Activities:
|
||||||||
|
Capitalized software
|
- | (68,560 | ) | |||||
|
Net Cash Used in Investing Activities
|
- | (68,560 | ) | |||||
|
Cash Flows From Financing Activities:
|
||||||||
|
Proceeds from notes payable
|
- | 450,000 | ||||||
|
Proceeds from convertible notes payable
|
- | 120,000 | ||||||
|
Proceeds from issuance of preferred stock issuable
|
- | 385,000 | ||||||
|
Fees paid to third parties in connection with
|
||||||||
|
convertible notes payable
|
- | (3,000 | ) | |||||
|
Cash overdraft
|
- | 8,010 | ||||||
|
Advances from related parties
|
17,600 | 124,200 | ||||||
|
Net Cash Provided by Financing Activities
|
17,600 | 1,084,210 | ||||||
|
Net decrease in cash
|
(441 | ) | (34,792 | ) | ||||
|
Cash, beginning of the period
|
441 | 34,792 | ||||||
|
Cash, end of the period
|
$ | - | $ | - | ||||
|
Non-cash investing and financing activities:
|
||||||||
|
Value of warrants recorded as debt discount in connection with
|
||||||||
|
convertible notes payable
|
$ | - | $ | 56,400 | ||||
|
Value of warrants recorded as debt discount in connection with
|
||||||||
|
notes payable
|
$ | - | $ | 32,200 | ||||
|
Value of common stock recorded as debt discount in
|
||||||||
|
connection with issuance of notes payable
|
$ | - | $ | 75,490 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
NUVEL HOLDINGS, INC. AND SUBSIDIARY
|
||||||||
|
(UNAUDITED)
|
||||||||
|
For the Six Months Ended
|
||||||||
|
June 30, 2013
|
June 30, 2012
|
|||||||
|
Cash Flows From Operating Activities:
|
||||||||
|
Net loss
|
$ | (509,935 | ) | $ | (2,066,847 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities
|
||||||||
|
Amortization of debt discount
|
140,985 | 1,442,069 | ||||||
|
Amortization of deferred financing costs
|
26,667 | 39,666 | ||||||
|
Loss on write-off of capitalized software
|
68,560 | - | ||||||
|
Stock based compensation
|
68,000 | - | ||||||
|
Change in fair value of derivative liabilities
|
(417,280 | ) | (686,678 | ) | ||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Prepaid expenses
|
1,000 | 1,900 | ||||||
|
Accounts payable
|
245,906 | 173,151 | ||||||
|
Accrued interest
|
243,284 | 200,528 | ||||||
|
Accrued payroll and related expenses
|
74,772 | 149,559 | ||||||
|
Other accrued expenses
|
40,000 | (25,000 | ) | |||||
|
Net Cash Used in Operating Activities
|
(18,041 | ) | (771,652 | ) | ||||
|
Cash Flows From Investing Activities:
|
||||||||
|
Capitalized software
|
- | (48,000 | ) | |||||
|
Net Cash Used in Investing Activities
|
- | (48,000 | ) | |||||
|
Cash Flows From Financing Activities:
|
||||||||
|
Proceeds from notes payable
|
- | 100,000 | ||||||
|
Proceeds from convertible notes payable
|
- | 120,000 | ||||||
|
Proceeds from preferred stock issuable
|
- | 385,000 | ||||||
|
Fees paid to third parties in connection with
|
||||||||
|
convertible notes payable
|
- | (3,000 | ) | |||||
|
Cash overdraft
|
- | 58,660 | ||||||
|
Advances from related parties
|
17,600 | 124,200 | ||||||
|
Net Cash Provided by Financing Activities
|
17,600 | 784,860 | ||||||
|
Net decrease in cash
|
(441 | ) | (34,792 | ) | ||||
|
Cash, beginning of the period
|
441 | 34,792 | ||||||
|
Cash, end of the period
|
$ | - | $ | - | ||||
|
Non-cash investing and financing activities:
|
||||||||
|
Value of warrants recorded as debt discount in connection with
|
||||||||
|
convertible notes payable
|
$ | - | $ | 56,400 | ||||
|
Value of warrants recorded as debt discount in connection with
|
||||||||
|
notes payable
|
$ | - | $ | 32,200 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
NUVEL HOLDINGS, INC. AND SUBSIDIARY
|
||||||||
|
(UNAUDITED)
|
||||||||
|
For the Three Months Ended
|
||||||||
|
March 31, 2013
|
March 31, 2012
|
|||||||
|
Revenue
|
$ | 1,171 | $ | - | ||||
|
Operating expenses
|
||||||||
|
Marketing and promotion
|
12,000 | 18,112 | ||||||
|
Payroll and benefits
|
257,462 | 293,509 | ||||||
|
Merger costs
|
- | - | ||||||
|
General and administrative
|
117,668 | 212,813 | ||||||
|
Research and development
|
39,368 | 120,981 | ||||||
|
Loss on write-off of capitalized software costs
|
68,560 | - | ||||||
|
Total operating expenses
|
495,058 | 645,415 | ||||||
|
Operating loss
|
(493,887 | ) | (645,415 | ) | ||||
|
Other income (expense)
|
||||||||
|
Interest expense
|
(120,970 | ) | (98,986 | ) | ||||
|
Amortization of debt discount
|
(94,620 | ) | (1,249,587 | ) | ||||
|
Amortization of deferred financing costs
|
(13,333 | ) | (31,499 | ) | ||||
|
Change in fair value of derivative liabilities
|
383,809 | 106,954 | ||||||
|
Total other income (expense)
|
154,886 | (1,273,118 | ) | |||||
|
Net loss
|
(339,001 | ) | (1,918,533 | ) | ||||
|
Preferred stock contractual dividends
|
(7,700 | ) | - | |||||
|
Net loss available to common stockholders
|
(346,701 | ) | (1,918,533 | ) | ||||
|
Net loss per common share: basic and diluted
|
$ | (0.03 | ) | $ | (0.16 | ) | ||
|
Weighted average number of common shares outstanding
|
||||||||
|
- basic and diluted
|
11,991,373 | 11,764,706 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NUVEL HOLDINGS, INC. AND SUBSIDIARY
Note 1. Business Organization, Nature of Operations and Reverse Recapitalization
Nuvel Holdings, Inc. is a Florida corporation incorporated on October 19, 2009. Nuvel Holdings, Inc. was previously known as Harmony Metals, Inc. prior to its name change effective on April 10, 2012. On March 20, 2012, Harmony Metals, Inc. acquired the outstanding shares of HRMY Sub, Inc., a newly formed Florida corporation. On April 10, 2012, Harmony Metals, Inc. merged HRMY Sub, Inc. into itself and changed its name to Nuvel Holdings, Inc. (the "Company") solely to effect a name change.
On December 30, 2011, the Company, certain stockholders of the Company (the “Company Stockholders”), Nuvel, Inc., a Delaware Company, (“Nuvel DE”) and all of the stockholders of Nuvel DE entered into and consummated transactions pursuant to a Share Exchange Agreement.
The Company designs, develops and markets Wide Area Network Acceleration (WANa) Solutions that are built for the purpose of accelerating and optimizing the flow of information over the Internet. The Company’s products are deployed by its customers throughout their network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network security.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed financial position of the Company as of September 30, 2013, June 30, 2013 and March 31, 2013 and the results of operations and cash flows for the periods presented. The results of operations for the three months and nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full year ending December 31, 2013. The results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the operating results for the full year ending December 31, 2013. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year ending December 31, 2013.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company included in the Company’s annual Report on Form 10-K for the years ended December 31, 2013, 2012 and 2011, included elsewhere in this filing. The Company’s accounting policies are more fully described in the Notes to the consolidated financial Statements in its Annual Report on Form 10-K for the years ended December 31, 2013, 2012 and 2011.
Note 2. Going Concern and Management Plans
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2013, the Company had a working capital deficiency of $8,204,310 and stockholders’ deficiency of $8,605,826. The Company has not generated any material revenues and incurred net losses since inception. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's primary source of operating funds since inception has been note financings. Subsequent to December 31, 2013, the Company secured additional debt financing in the form of Notes Payable aggregating $382,750 and has converted notes payable and convertible notes payable totaling $3,260,000 into preferred stock. The Company expects that its current cash on hand will fund its operations only through November 2014. The Company intends to raise additional capital through private debt and equity investors. The Company needs to raise additional capital in order to be able to accomplish its business plan objectives. The Company is continuing its efforts to secure additional funds through debt or equity instruments due to the impending lack of funds. Management believes that it will be successful in obtaining additional financing based on its limited history of raising funds; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds it raises will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
On October 24, 2014, the Company entered into a letter of intent (the “Letter of Intent”) with OrangeHook, Inc., (“Orange Hook”) a Minnesota corporation. Pursuant to the Letter of Intent, the Company and OrangeHook will merge or combine their assets, with the Company as the surviving corporation (the “Transaction”). The anticipated closing date is to be on or before December 31, 2014 (“the Closing”). As a result of the intended business combination, the Company will acquire all of the equity or assets of OrangeHook subject to the terms of the Letter of Intent. The Company will issue common stock to the shareholders of OrangeHook such that after the Transaction (and prior to any financing at the time of the Transaction), OrangeHook shareholders will own approximately 85% of the Company and the pre-Transaction Nuvel shareholders will own approximately 15% of the Company, which is subject to adjustment by negotiation of the parties. Pursuant to the Letter of Intent, OrangeHook provided $60,000 as bridge financing to the Company, in the form of an unsecured loan to assist the Company in completing the necessary filings with the Securities and Exchange Commission (“SEC”) such that it will be current in its reporting. Conditions to Closing include that the Company be current in its SEC reports, that each of the financings set forth in the Letter of Intent have occurred and that any necessary shareholder approval has been obtained. There can be no assurance that the Transaction will be successful.
Note 3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Nuvel, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated 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 and disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the periods. Actual results could differ from these estimates. The Company’s significant estimates and assumptions include amortization, the fair value of our stock, debt discount, derivative liabilities, and the valuation allowance relating to the Company’s deferred tax assets.
Reclassifications
Certain amounts in the prior period condensed consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period condensed consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
Capitalized Software Costs
Software development costs incurred subsequent to establishing technological feasibility through general release of the software products are capitalized. Capitalized costs are amortized on a straight-line basis over the economic lives of the related products which is generally three years. The Company's Wide Area Network ("WAN") product did not reach technological feasibility and, therefore, no costs associated with its development were capitalized. The Company had recorded capitalized software costs aggregating $68,560 as of December 31, 2012. In March 2013, due to a lack of funding, the Company could no longer support the mobile application product. The Company wrote off the entire capitalized costs, which was recorded as Loss on write-off of capitalized software costs in the statement of operations.
Net Loss per Share
The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic and diluted loss per share excludes potentially dilutive securities because their inclusion would be anti-dilutive. Anti-dilutive securities excluded from the computation of basic and diluted net loss per share for the three months ended March 31, 2013, the six months ended June 30, 2013 and for the nine months ended September 30, 2013 are as follows:
|
March 31,
|
June 30,
|
September 30,
|
||||||||||
|
2013
|
2013
|
2013
|
||||||||||
|
Warrants to purchase common stock
|
6,285,016 | 6,285,016 | 6,285,016 | |||||||||
|
Series A Convertible Preferred Stock
|
641,668 | 641,668 | 641,668 | |||||||||
|
Convertible Notes
|
962,963 | 962,963 | 962,963 | |||||||||
|
Totals
|
7,889,647 | 7,889,647 | 7,889,647 | |||||||||
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable, accrued expenses, and notes payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of the Company’s short term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuance of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial liabilities as of September 30, 2013, June 30, 2013 and March 31, 2013 are measured at fair value on a recurring basis are summarized below:
|
September 30, 2013
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
Derivative conversion features and warrant liabilities
|
$ | 1,533,723 | $ | - | $ | - | $ | 1,533,723 | ||||||||
|
June 30, 2013
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
Derivative conversion features and warrant liabilities
|
$ | 1,611,281 | $ | - | $ | - | $ | 1,611,281 | ||||||||
|
March 31,
2013
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
|
Derivative conversion features and warrant liabilities
|
$ | 1,644,752 | $ | - | $ | - | $ | 1,644,752 | ||||||||
Level 3 Valuation Techniques
Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The derivative liabilities are measured at fair value using a compound option model that includes characteristics of both a binomial lattice and Black-Scholes formula and are classified within Level 3 of the valuation hierarchy.
A significant decrease in the volatility or a significant increase in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in Change in Fair Value of Derivative Liabilities within Other Expense on the Company’s condensed consolidated Statements of Operations.
For the nine months ended September 30, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
The significant assumptions and valuation methods that the Company used to determine the fair value of the derivative liabilities at September 30, 2013 are as follows:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
38.0-92.0
|
%
|
||
|
Risk-free interest rate
|
0.04-1.39
|
%
|
||
|
Contractual term
|
0.638-5.386 years
|
|||
|
Weighted average fair value per warrant and conversion feature
|
$
|
0.012-0.273
|
||
The significant assumptions and valuation methods that the Company used to determine the fair value of the derivative liabilities at June 30, 2013 are as follows:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
49.0-94.0
|
%
|
||
|
Risk-free interest rate
|
0.17-1.39
|
%
|
||
|
Contractual term
|
0.890-5.638 years
|
|||
|
Weighted average fair value per warrant and conversion feature
|
$
|
0.033-0.282
|
||
The significant assumptions and valuation methods that the Company used to determine the fair value of the derivative liabilities at March 31, 2013 are as follows:
|
Dividend Yield
|
0
|
%
|
||
|
Volatility
|
60.0-96.0
|
%
|
||
|
Risk-free interest rate
|
0.14-0.76
|
%
|
||
|
Contractual term
|
1.140-5.888 years
|
|||
|
Weighted average fair value per warrant and conversion feature
|
$
|
0.060-0.282
|
||
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
|
Balance- January 1, 2013
|
$ | 2,028,561 | ||
|
Change in fair value of derivative liabilities
|
(383,809 | ) | ||
|
Balance- March 31, 2013
|
$ | 1,644,752 | ||
|
Change in fair value of derivative liabilities
|
(33,471 | ) | ||
|
Balance- June 30, 2013
|
$ | 1,611,281 | ||
|
Change in fair value of derivative liabilities
|
(77,558 | ) | ||
|
Balance- September 30, 2013
|
$ | 1,533,723 |
Subsequent Events
Management has evaluated subsequent events or transactions occurring through the date on which the financial statements were issued (see Note 10 to the December 31, 2013 financial statements included elsewhere in this document).
Note 4. Secured Convertible Promissory Notes
During the three months ended September 30 2013 and 2012, the Company recognized $46,365 and $43,880 in amortization of the debt discount relating to convertible notes payable. During the nine months ended September 30, 2013 and 2012, the Company recognized $176,153 and $1,373,249 in amortization of the debt discount relating to convertible notes payable.
During the three months ended June 30, 2013 and 2012, the Company recognized $46,365 and $160,282 in amortization of the debt discount relating to convertible notes payable. During the six months ended June 30, 2013 and 2012, the Company recognized $129,788 and $1,329,369 in amortization of the debt discount relating to convertible notes payable.
During the three months ended March 31, 2013 and 2012, the Company recognized $83,423 and $1,169,087 in amortization of the debt discount relating to convertible notes payable.
During the three months ended September 30, 2013 and 2012, the Company marked the warrants and derivative conversion feature to fair value and recorded a gain of $53,878 and $298,272, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes. During the nine months ended September 30, 2013 and 2012, the Company marked the warrants and derivative conversion feature to fair value and recorded a gain of $340,463 and $687,225, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes.
During the three months ended June 30, 2013 and 2012, the Company marked the warrants and derivative conversion feature to fair value and recorded a gain of $33,401 and $328,099, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes. During the six months ended June 30, 2013 and 2012, the Company marked the warrants and derivative conversion feature to fair value and recorded a gain of $286,585 and $388,953, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes
During the three months ended March 31, 2013 and 2012, the Company marked the warrants and derivative conversion feature to fair value and recorded a gain of $253,184 and $58,854, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes.
Note 5. Notes Payable
During the three months ended September 30 2013 and 2012, the Company recognized $0 and 75,490 in amortization of the debt discount relating to notes payable. During the nine months ended September 30, 2013 and 2012, the Company recognized $11,197 and $188,190 in amortization of the debt discount relating to notes payable.
During the three months ended June 30, 2013 and 2012, the Company recognized $0 and $32,200 in amortization of the debt discount relating to notes payable. During the six months ended June 30, 2013 and 2012, the Company recognized $11,197 and $112,700 in amortization of the debt discount relating to notes payable.
During the three months ended March 31, 2013 and 2012, the Company recognized $11,197 and $80,500 in amortization of the debt discount relating to convertible notes payable.
During the three months ended September 30, 2013 and 2012, the Company marked the warrants to fair value and recorded a gain of $23,680 and $228,750, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes. During the nine months ended September 30, 2013 and 2012, the Company marked the warrants to fair value and recorded a gain of $154,375 and $526,475, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes.
During the three months ended June 30, 2013 and 2012, the Company marked the warrants to fair value and recorded a gain of $70 and $251,625, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes. During the six months ended June 30, 2013 and 2012, the Company marked the warrants to fair value and recorded a gain of $130,695 and $297,725, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes.
During the three months ended March 31, 2013 and 2012, the Company marked the warrants to fair value and recorded a gain of $184,939 and $48,100, respectively, relating to the change in fair value of derivative liabilities issued in connection with the convertible notes.
Note 6. Commitments and Contingencies
Litigations, Claims and Assessments
In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such matters as of September 30, 2013, June 30, 2013 and March 31, 2013, respectively.
As of the date of this filing, the Company has not filed certain federal and state income and payroll tax returns. Amounts due under these returns have been accrued as a component of accrued payroll and related expenses as of September 30, 2013, June 30, 2013 and March 31, 2013, respectively.
Note 7. Related Party Transactions
During the three months ended September 30 2013 and 2012, the Company received advances from related parties of $0. During the nine months ended September 30, 2013 and 2012, the Company received advances from related parties of $17,600 and $124,200, respectively
During the three months ended June 30, 2013 and 2012, the Company received advances from related parties of $0 and $94,200, respectively. During the six months ended June 30, 2013 and 2012, the Company received advances from related parties of $17,600 and $124,200, respectively.
During the three months ended March 31, 2013 and 2012, the Company received advances from related parties of $17,600 and $30,000, respectively.
These advances are non-interest bearing and are due on demand. As of September 30, 2013, June 30, 2013, and March 31, 2013 the amounts due to these related parties totaled $180,060, and are included as part of accounts payable.
