These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of December 31, 2015 and for the year then ended, which were filed with the Securities and Exchange Commission ("SEC") on Form 10-K on April 5, 2016.
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 June 30, 2016, the Company had a working capital deficiency of $5,112,553 and a stockholders' deficiency of $5,112,553. Furthermore, as of the date of this report, the Company has $295,000 and $1,455,359 of notes payable and convertible notes payable, respectively, which have matured and are in default. 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 June 30, 2016, the Company secured additional debt financing in the form of notes payable from a related party aggregating $80,000. The Company expects that its current cash on hand will fund its operations only through August of 2016. The Company currently intends to raise additional capital through private placements of debt and equity securities. 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, or even if the Company is able to secure additional funds, that it will be on terms acceptable to the Company or its shareholders. Further, 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.
Agreement and Plan of Merger
On July 1, 2016, the Company and its wholly owned subsidiary, OH Acquisition Corp, a Minnesota corporation formed on July 1, 2016 ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with OrangeHook, Inc., a Minnesota corporation ("OrangeHook"). Such Merger became probable during the second fiscal quarter of 2016.
The Merger Agreement and the transactions contemplated thereby and in connection therewith shall be referred to herein together as the "Transaction."
OrangeHook Business
OrangeHook was formed on October 17, 2014 as a holding company to incubate selective and unique consumer, business, and governmental software applications.
OrangeHook acquired Salamander Technologies, Inc., a Michigan corporation, ("Salamander") on October 1, 2015. Salamander is engaged in the business of providing installed software and Software as a Service ("SaaS") for situational awareness of all resources during emergency or catastrophic situations (responders, assets, volunteers, and victims).
OrangeHook acquired Agilivant, LLC, a Washington limited liability company ("Agilivant") on February 12, 2016. Agilivant offers a real-time debit based banking and payment system.
OrangeHook acquired a 99% ownership interest in LifeMed ID, Inc., a California corporation ("LifeMed ID") on July 12, 2016. LifeMed ID is a U.S. identity solution that automates patient identity validation, record matching, and overall registration workflow using healthcare providers' current point-of-service terminals and software vendors.
Pursuant to the Merger Agreement, Merger Sub will merge with and into OrangeHook (the "Merger"), with OrangeHook remaining as the surviving company and a wholly-owned subsidiary of the Company. In connection with the Merger, Merger Sub will cease to exist. 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 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").
The Merger Agreement contains certain termination rights. Among those rights, the Company or OrangeHook may terminate the Merger Agreement if the Merger has not occurred on or before September 15, 2016, or such later date as the Company and OrangeHook may mutually agree.
Based on its current structure, the Company plans to account for the Transaction as a reverse acquisition in which OrangeHook will be deemed the accounting acquirer. The Company hopes to complete the Merger during the third quarter of 2016. However, completion of the Merger and consummation of the other components of the Transaction remain subject to completion of negotiation among the parties, the execution and delivery of definitive transactions documents and the satisfaction or waiver of closing conditions contained in such documents. There is no assurance that the Merger will occur on this timeframe, or at all, or even if the Merger does occur, there can be no assurance that results of such Merger will be successful.
The proposed Transaction became probable during the six months ended June 30, 2016. The pro-forma combined results of operations of the Company and OrangeHook for each of the six months ended June 30, 2016 and 2015, respectively, as if the Merger had taken place at the beginning of each of the periods are not available as of the date of this report.
Mr. James L. Mandel is a member of the Company's Board of Directors. Mr. Mandel is also the President and Chief Executive Officer of OrangeHook, Inc.
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 U.S. GAAP 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 the Company's stock, debt discount, derivative liabilities and the valuation allowance relating to the Company's deferred tax assets.
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 six months ended June 30, 2016 and 2015, respectively, are as follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
20,556,642
|
|
|
|
20,556,642
|
|
Unvested restricted common stock
|
|
|
500,001
|
|
|
|
-
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
25,000
|
|
Series B convertible preferred stock
|
|
|
8,169,680
|
|
|
|
10,995,900
|
|
Series C convertible preferred stock
|
|
|
29,422,420
|
|
|
|
29,422,420
|
|
Series D convertible preferred stock
|
|
|
1,767,358
|
|
|
|
1,767,358
|
|
Convertible Notes
|
|
|
8,085,323
|
|
|
|
7,209,463
|
|
Totals
|
|
|
68,501,424
|
|
|
|
69,976,783
|
|
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. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company's Chief Executive Officer determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company's Chief Executive Officer.
Financial liabilities that are measured at fair value on a recurring basis include the derivative conversion features and warrant liabilities. Since the value of the common stock was de minimus as of June 30, 2016 and 2015, the values of the derivative conversion features and warrant liabilities were also de minimus as of June 30, 2016 and 2015.
Recently Issued Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board ('FASB") issued Accounting Standards Update ("ASU") No. 2016-10, "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing" (topic 606). In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-08, "Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net)" (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, "Revenue from Contracts with Customers". The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity's promise to grant a license provides a customer with either a right to use an entity's intellectual property or a right to access an entity's intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity's adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard.
In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606) - Narrow- Scope Improvements and Practical Expedients." ASU No. 2016-12 maintains the core principles of Topic 606 on revenue recognition, but addresses collectability, sales tax presentation, noncash consideration, contract modifications at transition and completed contracts at transition. The amendments in ASU 2016-12 affect the guidance of ASU 2014-09 which is not yet effective. The Company is currently evaluating the impact of the new standard.
There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2015 Annual Report on Form 10-K that had, or are expected to have, a material impact on our condensed consolidated financial position, results of operations or cash flows.
Subsequent Events
Management has evaluated subsequent events or transactions occurring through the date 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 condensed consolidated financial statements, except as disclosed.
Note 4. Convertible Promissory Notes
Bridge notes
During the six months ended June 30, 2016, the Company paid $35,000 of principal on convertible bridge notes.
Conversion of notes and interest
From January 1, 2016 through the date of this filing, sixteen noteholders have elected to automatically convert approximately $600,000 of notes payable along with accrued interest into approximately 232,000 shares of the Company's common stock immediately following the OrangeHook Transaction. The conversion of the notes and interest is contingent upon the closing of the Merger Agreement, therefore the accounting implication cannot be measured at this time.
Note 5. Notes Payable – Related Party
Unsecured Bridge Loan (see Note 2)
OrangeHook, a related party, provided $340,000 as bridge financing to the Company during the six months ended June 30, 2016. As of June 30, 2016 and December 31, 2015 the outstanding principal balance was $1,196,249 and $856,249, respectively. The loans are unsecured, bear interest at 2% per annum and are due on demand. As of June 30, 2016 and December 31, 2015 accrued interest on the loans was $19,398 and $9,591, respectively and is shown in accrued interest at June 30, 2016 and December 31, 2015 in the condensed consolidated Balance Sheets.
Note 6. Commitments and Contingencies
Services Agreement
On March 11, 2014, the Company signed a services agreement with Richard Resnick to provide services equivalent to a Chief Executive Officer. The Company agreed to pay Mr. Resnick $25,000 per month in bi-monthly installments. Either party is entitled to terminate the services agreement by providing the other party 15 days written notice of such desired termination. As of June 30, 2016 and December 31, 2015, the Company owed Mr. Resnick $453,500 and $416,500, respectively, under the services agreement, which is included as accounts payable in the accompanying condensed consolidated balance sheets.
Operating Lease
In April 2014, the Company leased a satellite office in Los Gatos, California at a variable monthly rate based on office usage.
Rent expense amounted to $450 and $1,052 for the six months ended June 30, 2016 and 2015, respectively.
Payroll Tax Liabilities
As of June 30, 2016 and through the date of this report, the Company has not filed certain federal and state income and payroll tax returns nor has it paid the payroll tax amounts and related interest and penalties relating to such returns. Amounts due under these returns have been accrued as a component of accrued payroll and related expenses as of June 30, 2016 and December 31, 2015.
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.
In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company's business, financial position, and results of operations or cash flows.
On July 29, 2016, the Company received a written letter from Velocity Media Ventures ("VMV") alleging that the Company has defaulted in an obligation to pay $20,000 to VMV under a Settlement Agreement and related Promissory Note, each dated March 25, 2014. The Company has delivered a written response denying VMV's allegation. To our knowledge, no legal proceedings have been commenced by VMV, as a result, the company has not accrued any additional penalties.
The Company intends to vigorously defend itself in this matter.
On February 10, 2016, the Company entered into a mutual general release and settlement agreement (the "Settlement Agreement") with Appcellence LLC (which does business as "Apptology") to settle a judgment against the Company in the sum of $49,200 entered pursuant to a lawsuit filed by Apptology against the Company (the "Action") in the Santa Clara County, California, Superior Court (Case Number 115C281865). In the Action, the plaintiff alleged that the Company owed the plaintiff past due amounts for research and development services provided to the Company. Pursuant to the Settlement Agreement, the Company agreed to pay Apptology $35,000 to be paid in installments with the total amount to be paid by February 12, 2017. The Settlement Agreement also contains a general release by Apptology of the Company relating to the Action, such release however is predicated on the Company making timely payments pursuant to the Settlement Agreement. Pursuant to the Settlement Agreement, within ten (10) business days after receipt of the full $35,000 by Apptology, the Company and Apptology shall execute a written stipulation to set aside the default and judgment against the Company and dismiss the Action with prejudice. During the six months ended June 30, 2016 the Company paid $21,500 towards the Settlement Agreement. As of June 30, 2016 the Company had accrued a liability of $27,700 related to the Settlement Agreement which has been included in accounts payable at June 30, 2016 in the condensed consolidated Balance Sheet.
Note 7. Stockholders' Deficiency
Conversion of series B preferred stock
On April 28, 2016, a holder of the Company's series B convertible preferred stock (the "Series B Preferred") elected to convert 141,311 shares of Series B Preferred into 2,826,220 shares of the Company's common stock.
Dividends in Arrears
Dividends in arrears on the Series A Preferred Stock totaled $2,840 as of June 30, 2016, and December 31, 2015, respectively. As of June 30, 2016 and December 31, 2015 there were no Series A Preferred shares issued and outstanding.
Dividends in arrears on the outstanding Series B Preferred Stock totaled $378,784, or $0.02 per share as of June 30, 2016, and totaled $288,776, or $0.02 per share as of December 31, 2015.
Dividends in arrears on the outstanding Series C Preferred Stock totaled $818,839, or $0.05 per share as of June 30, 2016, and totaled $606,997, or $0.04 per share as of December 31, 2015.
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
Agreement and Plan of Merger with OrangeHook
On July 1, 2016, the Company and its wholly owned subsidiary, OH Acquisition Corp, a Minnesota corporation formed on July 1, 2016 ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with OrangeHook, Inc., a Minnesota corporation ("OrangeHook"). Pursuant to the Merger Agreement, Merger Sub will merge with and into OrangeHook (the "Merger"), with OrangeHook remaining as the surviving company and a wholly-owned subsidiary of the Company. In connection with the Merger, Merger Sub will cease to exist. 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 Merger Agreement 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"). 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 Merger Agreement also contemplates that the Company's noteholders would convert their outstanding notes into shares of the Company's post-Recapitalization common stock . 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 Merger Agreement 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.
Based on its current structure, the Company plans to account for the Merger as a reverse acquisition in which OrangeHook will be deemed the accounting acquirer. The Company hopes to complete the Merger during the third quarter of 2016. However, completion of the Merger and consummation of the other components of the Merger Agreement remain subject to completion of negotiation among the parties, the execution and delivery of definitive transaction documents and the satisfaction or waiver of closing conditions contained in such documents. There is no assurance that the Merger or other components of the Merger Agreement will occur on this timeframe and on the terms outlined above (including the estimated ownership percentages identified above), or at all, or if they do occur, there can be no assurance that the result will be successful.
As of the date of this report, OrangeHook has provided $1,276,249 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 Merger, 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 June 30, 2016, our accumulated deficit was $16,763,242, our stockholders' deficiency was $5,112,553, and our working capital deficiency was $5,112,553. Furthermore, as of the date of this filing, the Company has $295,000 and $1,455,359 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 June 30, 2016 and the lack of any revenues, we require equity and/or debt financing to continue our operations. Subsequent to June 30, 2016, the Company secured additional debt financing from OrangeHook in the form of Notes Payable resulting in gross proceeds of $80,000. 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 June 30, 2016 compared with Three Months Ended June 30, 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 June 30, 2016, marketing and promotion expenses increased by $3,130 as compared to the three months ended June 30, 2015. Due to cash restrictions, the Company has undertaken limited marketing and promotional efforts.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the three months ended June 30, 2016, payroll and benefits decreased by $26,822 as compared to the three months ended June 30, 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 June 30, 2016, general and administrative expenses decreased by $47,118 as compared to the three months ended June 30, 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 June 30, 2016, interest expense increased by $31,298, or 65%, as compared to the three months ended June 30, 2015. The increase was primarily attributable to an increase in the interest rate on certain debt in default and higher debt principal.
Net loss
For the three months ended June 30, 2016, the net loss was $326,852 versus $366,098 for the three months ended June 30, 2015. The decrease in the loss compared to the prior period is primarily attributable to the decrease in operating expenses and increase in interest expense discussed above.
Six Months Ended June 30, 2016 compared with Six Months Ended June 30, 2015
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, 2016, marketing and promotion expenses increased by $2,627 as compared to the six months ended June 30, 2015. Due to cash restrictions, the Company has undertaken limited marketing and promotional efforts.
Payroll and benefits
Payroll and benefits consist primarily of salaries and benefits to employees. For the six months ended June 30, 2016, payroll and benefits decreased by $65,682 as compared to the six months ended June 30, 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 six months ended June 30, 2016, general and administrative expenses decreased by $90,497 as compared to the six months ended June 30, 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 six months ended June 30, 2016, interest expense increased by $57,539, or 55%, as compared to the six months ended June 30, 2015. The increase was primarily attributable to an increase in the interest rate on certain debt in default and higher debt principal.
Net loss
For the six months ended June 30, 2016, the net loss was $673,287 versus $770,010 for the six months ended June 30, 2015. The decrease in the loss compared to the prior period is primarily attributable to the decrease in operating expenses and increase in interest expense discussed above.
Liquidity and Capital Resources
We measure our liquidity in a number of ways, including the following:
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
Cash
|
|
$
|
12,811
|
|
|
$
|
49,938
|
|
Working Capital Deficiency
|
|
$
|
(5,112,553
|
)
|
|
$
|
(4,439,266
|
)
|
Debt (Current)
|
|
$
|
2,946,608
|
|
|
$
|
2,641,608
|
|
Net Cash Used in Operating Activities
We experienced negative cash flows from operating activities for the six months ended June 30, 2016 and 2015 in the amounts of $342,127 and $263,322, respectively. The cash used in operating activities during the six months ended June 30, 2016 was primarily due to cash used to fund operations of the Company and to remain current on its public filings.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for six months ended June 30, 2016 and 2015 was $305,000 and $262,000, respectively. The cash provided by financing activities for the six months ended June 30, 2016 and 2015 was attributable to the proceeds from the unsecured loans from Orange Hook. In addition, during the six months ended June 30, 2016 the Company repaid note principal in the amount of $35,000.
Availability of Additional Funds
Based upon our working capital deficiency as of June 30, 2016 and the lack of any revenues, we require equity and/or debt financing to continue our operations. Subsequent to June 30, 2016, the Company secured additional debt financing from OrangeHook in the form of Notes Payable resulting in gross proceeds of $80,000. 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 six months ended June 30, 2016, included elsewhere in this document.
Off Balance Sheet Arrangements
As of June 30, 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 June 30, 2016 and December 31, 2015:
Contractual Obligations
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June 30, 2016
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|
December 31, 2015
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|
|
|
|
|
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Debt Obligations - current
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$
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2,946,608
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|
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$
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2,641,608
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