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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.

 

Certain statements in this Report constitute forward looking statements. These 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.

 

The "Company," "we," "us," and "our," refer to (i) Nuvel Holdings, Inc., a Florida corporation, and (ii) Nuvel, Inc., a Delaware corporation, which is a wholly- owned subsidiary of Nuvel Holdings, Inc.

Recent Developments

Letter of Intent with OrangeHook

On October 24, 2014, the Company entered into a letter of intent (the "Letter of Intent") with OrangeHook, Inc., a Minnesota corporation ("OrangeHook") setting forth a proposed business combination whereby the Company and OrangeHook would merge or combine their assets (the "Transaction").  The parties continue to negotiate the terms of the Transaction.  Based on current negotiations, the parties contemplate merging a newly formed and wholly-owned subsidiary of the Company with and into OrangeHook, with OrangeHook remaining as the surviving company and a wholly owned subsidiary of the Company (the "Merger").  At the effective time of the Merger, outstanding shares of OrangeHook capital stock and other securities convertible into OrangeHook's capital stock would be exchanged for new series of preferred stock of the Company and securities convertible into such preferred stock, as applicable.  The closing of the Merger would be subject to satisfaction or waiver of various closing conditions including, among others, (i) OrangeHook obtaining approval for the Merger from its shareholders; (ii) holders of the Company's outstanding preferred stock agreeing to convert their preferred shares into common stock immediately prior to the effective time of the Merger.  Following the Merger, the parties contemplate that the Company would seek shareholder approval to effect a recapitalization in which the Company would complete a significant reverse split of its common stock (the "Reverse Split") and thereafter increase the number of shares of its authorized common stock (together with the Reverse Split, the "Recapitalization").  Upon completion of the Recapitalization, shares of Company's common stock outstanding immediately prior thereto would represent a mere nominal interest in the Company, and the economic benefit to holders of such shares will be the right to participate in the contingent issuance of the Earn-out Shares (as defined below).

The Transaction also contemplates that the Company's noteholders would convert their outstanding notes into shares of the Company's post-Recapitalization common stock  (the "Nuvel Note Conversion").  As currently structured, after giving pro forma effect to the Merger, the Recapitalization, and the Nuvel Note Conversion, and further assuming that no additional securities of the Company or OrangeHook are issued, the Company estimates that shares of its common stock issued to its noteholders would represent between 4 and 5% of the Company's outstanding securities on a fully-diluted basis.  The Transaction also contemplates that the Company would subsequently issue shares of its post-Recapitalization common stock (the " Earn-out Shares ") to the holders of its common stock at the time of the Merger contingent on the business conducted by Nuvel, Inc., the Company's current wholly-owned subsidiary, satisfying certain post-closing revenue related earn-out objectives.

As of the date of this report, OrangeHook has provided $ 1,081,249 as bridge financing to the Company, in the form of unsecured loans to assist the Company in completing the necessary filings with the SEC.

 

 

 

 

 

 

 

 

Plan of Operations

In addition to operating the OrangeHook business after the Transaction, the Company, through its wholly -owned subsidiary Nuvel DE, plans to continue its business of seeking to engage 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 private Enterprise networks, or across an enterprise's gateway to the public Internet (also known as the Web). Our products will strive to 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 with the intent to accelerate and optimize the performance of our end users' business applications and content, whether used internally or hosted by external providers.

 

Our primary activities have been working on developing the design and development of our products, seeking to negotiate strategic alliances and other agreements and attempting to raise capital. We have not commenced our principal operations, nor have we generated any material revenues. Since inception, we have incurred substantial losses. As of March 31, 2016, our accumulated deficit was $16,436,390, our stockholders' deficiency was $4,785,701, and our working capital deficiency was $4,785,701. Furthermore, as of the date of this filing, the Company has $295,000 and $1,480,359 of notes payable and convertible notes payable, respectively, that have matured and are in default. We have not yet generated material 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 March 31, 2016 and the lack of any revenues, we require equity and/or debt financing to continue our operations. Subsequent to March 31, 2016, the Company secured additional debt financing from OrangeHook in the form of Notes Payable resulting in gross proceeds of $130,000. The Company intends to raise additional capital from 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 financings.  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.

Three Months Ended March 31, 2016 compared with Three Months Ended March 31, 2015

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, 2016, marketing and promotion expenses decreased by $503 as compared to the three months ended March 31, 2015, as the Company had limited marketing and promotional efforts due to cost cutting efforts.

 

Payroll and benefits

Payroll and benefits consist primarily of salaries and benefits to employees.  For the three months ended March 31, 2016, payroll and benefits decreased by $38,860 as compared to the three months ended March 31, 2015. The decrease was primarily due to an employee leaving the Company during 2015.

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, 2016, general and administrative expenses decreased by $43,379 as compared to the three months ended March 31, 2015. During the prior period the Company incurred higher legal and audit fees pertaining to becoming current on the Company's public filings, and the planned OrangeHook merger.

 

 

 

 

 

 

 

Research and development expenses

 

Research and development expenses consist primarily of consulting fees paid to develop our software products.  We expense research and development costs as incurred until such time that technological feasibility of our product has been established.  During the past three years, due to cash restrictions, the Company has curtailed expenses on research and development. However, the Company understands the vital importance of research and development for its overall success. The Company is committed to continue to conduct research and development activities to strive to have the most advanced technology within its industry, when liquidity permits.

 

Interest expense

 

For the three months ended March 31, 2016, interest expense increased by $25,611, or 47%, as compared to the three months ended March 31, 2015. The increase was primarily attributable to an increase in the interest rate on certain debt in default.

  

Net loss

 

For the three months ended March 31, 2016, the net loss was $346,435 versus $403,912 for the three months ended March 31, 2015. The decrease in the loss compared to the prior period is primarily attributable to the decrease in operating expenses and increase in other expense items discussed above.

 

Net Cash Used in Operating Activities

 

We experienced negative cash flows from operating activities for the three months ended March 31, 2016 and 2015 in the amounts of $(134,938) and $(164,276), respectively. The cash used in operating activities during the three months ended March 31, 2016 was primarily due to cash used to fund operations of the Company and to become current on its public filings.  

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities for three months ended March 31, 2016 and 2015 was $85,000 and $154,000, respectively.  The cash provided by financing activities for the three months ended March 31, 2016 and 2015 was attributable to the proceeds from the unsecured loans from Orange Hook. In addition, during the three months ended March 31, 2016 the Company repaid note principal in the amount of $10,000.

 

 

 

 

 

 

Availability of Additional Funds

 

Based upon our working capital deficiency as of March 31, 2016 and the lack of any revenues, we require equity and/or debt financing to continue our operations. Subsequent to March 31, 2016, the Company secured additional debt financing from OrangeHook in the form of Notes Payable resulting in gross proceeds of $130,000. The Company is seeking 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 financings. 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 condensed consolidated financial statements included elsewhere in this quarterly 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 condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed 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 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 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

See Note 3 to our condensed consolidated financial statements for the three months ended March 31, 2016, included elsewhere in this document.

 

Off Balance Sheet Arrangements

As of March 31, 2016 and December 31, 2015, there were no off balance sheet arrangements.

 

Contractual Obligations

 

The following is a summary of our contractual obligations as of March 31, 2016 and December 31, 2015: