NUVEL HOLDINGS, INC. AND SUBSIDIARY(A COMPANY IN THE DEVELOPMENT STAGE)CONDENSED CONSOLIDATED BALANCE SHEETSAssets

September 30,


December 31,2012


2011Current assets:

(unaudited)Cash

$
-


$
34,792Prepaid expenses


1,000



2,900Deferred financing costs, net


-



36,666Total current assets


1,000



74,358Capitalized software costs


68,560



-Total assets

$
69,560


$
74,358Liabilities and Stockholders’ DeficiencyCurrent liabilities:Accounts payable

$
490,525


$
246,545Advances from related party


124,200



-Cash overdraft


8,010



-Accrued interest


615,135



306,060Accrued payroll and related expenses


632,665



375,333Other accrued expenses


-



25,000Notes payable, net of debt discount of $0 and $80,500 as ofSeptember 30, 2012 and December 31, 2011, respectively (see notes 2 & 5)


1,015,000



484,500Convertible notes payable, net of debt discount of $0 and $1,316,849 as ofSeptember 30, 2012 and December 31, 2011, respectively (sees note 2 & 4)


2,820,000



1,383,151Warrant liabilities


1,206,049



2,331,149Total current liabilities


6,911,584



5,151,738Commitments and ContingenciesStockholders' deficiency:Preferred stock, $0.001 par value; authorized, 15,000,000 shares; 550,000 andoutstanding in the following class:Series A Preferred Stock, $0.70 stated value, 7,150,000 shares authorized; 550,000shares issued and outstanding (aggregate liquidation preferences $385,000 and


550



-$0 as of September 30, 2012 and December 31, 2011, respectively)Common stock, $0.001 par value; authorized, 100,000,000 shares;issued and outstanding, 11,838,040 and 11,764,706 shares as of September 30, 2012 and December 31, 2011


11,838



11,765Common stock issuable


75,490



-Additional paid in capital


2,327,492



1,881,115Deficit accumulated during the development stage


(9,257,394
)


(6,970,260
)Total stockholders' deficiency


(6,842,024
)


(5,077,380
)Total liabilities and stockholders' deficiency

$
69,560


$
74,358The accompanying notes are an integral part of these condensed consolidated financial statements.
      
     NUVEL HOLDINGS, INC. AND SUBSIDIARY(A COMPANY IN THE DEVELOPMENT STAGE)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)Three Months Ended

September 30, 2012


Three Months Ended

September 30, 2011


Nine Months Ended

September 30, 2012


Nine Months Ended

September 30, 2011


Period from

January 20, 2010

(Inception) to

September 30, 2012Revenue

$
-


$
-


$
-


$
-


$
-Operating expenses:Marketing and promotion


32,425



24,690



63,432



42,263



169,507Payroll and benefits


310,882



327,663



903,198



734,691



2,832,675Merger costs


-



-



-



-



2,614,780General and administrative


108,564



92,348



414,234



222,482



911,603Research and development


67,521



73,923



209,790



232,411



744,153519,392



518,624



1,590,654



1,231,847



7,272,718Total operating expensesOperating loss


(519,392
)


(518,624
)


(1,590,654
)


(1,231,847
)


(7,272,718
)Other income (expense)Change in fair value of warrant liabilities


527,022



(239,400
)


1,213,700



(224,525
)


1,010,800Amortization of debt discount


(119,370
)


(73,587
)


(1,561,439
)


(112,608
)


(1,960,338
)Amortization of deferred financing costs


-



(69,916
)


(39,666
)


(194,083
)


(420,000
)Interest expense


(108,547
)


(141,036
)


(309,075
)


(300,264
)


(615,138
)Total other income (expense)


299,105



(523,939
)


(696,480
)


(831,480
)


(1,984,676
)Net loss


(220,287
)


(1,042,563
)


(2,287,134
)


(2,063,327
)


(9,257,394
)Preferred stock contractual dividends


13,493



-



13,493



-



13,493Net loss available to common stock holders

$
(233,780
)

$
(1,042,563
)

$
(2,300,627
)

$
(2,063,327
)

$
(9,270,887
)Net loss per common share: basic and diluted

$
(0.02
)

$
(0.10
)

$
(0.19
)

$
(0.21
)Weighted average number of common sharesoutstanding: basic and diluted


11,811,735



10,000,000



11,780,497



10,000,000The accompanying notes are an integral part of these condensed consolidated financial statements.
       
     NUVEL HOLDINGS, INC. AND SUBSIDIARY(A COMPANY IN THE DEVELOPMENT STAGE)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Nine Months Ended September 30, 2012


Nine Months Ended September 30, 2011


Period from January 20, 2010 (Inception) to September 30, 2012Cash flows from operating activities:Net loss

$
(2,287,134
)

$
(2,063,327
)

$
(9,257,394
)Adjustments to reconcile net loss to net cashused in operating activities:Amortization of debt discount


1,561,439



112,608



1,960,338Amortization of deferred financing costs


39,666



194,083



420,000Stock-based compensation


62,000



-



62,000Change in fair value of warrant liabilities


(1,213,700
)


224,525



(1,010,800
)Non-cash merger costs


-



-



2,224,780Changes in operating assets and liabilities:Accounts payable


243,980



97,556



490,526Accrued interest


309,075



300,264



615,135Accrued payroll and related expenses


257,332



70,088



632,665Other accrued expenses


(25,000
)


-



-Prepaid expenses


1,900



-



(1,000
)Net cash used in operating activities


(1,050,442
)


(1,064,203
)


(3,863,750
)Cash flows from investing activities:Capitalized Software


(68,560
)


-



(68,560
)Net cash used in investing activities


(68,560
)


-



(68,560
)Cash flows from financing activities:Proceeds from notes payable


450,000



105,000



1,320,000Repayment of notes payable


-



(105,000
)


(305,000
)Proceeds from convertible notes payable


120,000



1,475,000



2,820,000Proceeds from issuance of preferred stock


385,000



-



385,000Cash overdraft


8,010



-



8,010Fees paid to third parties in connection withconvertible notes payable


(3,000
)


(217,000
)


(420,000
)Advance from a related party


124,200



-



124,200Proceeds from initial capital contribution


-



-



100Net cash provided by financing activities


1,084,210



1,258,000



3,932,310Net (decrease) increase in cash


(34,792
)


193,797



-Cash, beginning of the period


34,792



10,083



-Cash, end of the period

$
-


$
203,880


$
-Non-Cash Investing and Financing Activities:Value of warrants recorded as debt discount inconnection with convertible notes payable

$
56,400


$
270,725


$
1,852,649Value of warrants recorded as debt discount inconnection with notes payable

$
32,200



-


$
112,700Reclassification of warrant liability uponsurrender of warrants

$
-


$
102,000


$
588,000Value of common stock recorded as debtdiscount in connection with issuance ofnotes payble

$
75,490


$
-


$
75,490Issuance of founders’ shares

$
-


$
-


$
10,000The accompanying notes are an integral part of these condensed consolidated financial statements.
   
 
 
  
 
 Note 1.  Business Organization, Nature of Operations and Basis of Presentation
 
 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 solely to effect a name change and changed its name to Nuvel Holdings, Inc. (the "Company").
 
 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. Following the close of the Share Exchange Agreement, Harmony succeeded to the business of Nuvel DE as its sole line of business. 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 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.
 
 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 Company also develops mobile applications on innovative platforms of smart phones and tablet devices.
 
 The Company has been presented as a "development stage enterprise.” 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 revenues from its operations through September 30, 2012.
 
 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 consolidated financial statements of the Company as of September 30, 2012, for the three and nine months ended September 30, 2012 and 2011 and for the period from January 20, 2010
(inception) to September 30, 2012. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year ending December 31, 2012. 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, 2011 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on April 13, 2012.
  
 
 
 
 
 
 
 
 
 
 
 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, 2012, the Company had a cash overdraft of $8,010, working capital deficiency of $6,910,584 and stockholders’ deficiency of $6,842,024.  The Company has not generated any revenues and incurred net losses since inception.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  The unaudited 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 and equity issuances.  Subsequent to September 30, 2012 and through the date of this report, the Company secured additional financing aggregating $550,000 (See Note 9).  The Company currently has convertible notes payable aggregating $50,000 that are past maturity and in default.  As of the date of this report, management estimates that the Company’s availability of funds will fund its operations only through December 31, 2012.
 In November 2012, the Company obtained extensions from certain notes payable and convertible notes payable holders to extend the maturity date of their notes as the notes were in default as of September 30, 2012.  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.  In connection with the extension, the Company will issue warrants to purchase 56,500 shares of common stock at $0.70 per share.  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.  In connection with the extension, the Company will issue warrants to purchase 187,000
shares of common stock at $0.70 per share. In connection with the extensions of the notes payable and convertible notes payable, the holders of the respective notes agreed to waive all prior events of default (as defined in the respective agreements).  In addition, certain convertible notes payable holders converted their convertible notes aggregating $900,000 to 450,000 shares of common stock.
 
 
 The Company is currently a development stage enterprise and 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 and/or equity instruments due to the impending lack of funds.  Management believes that it will be successful in obtaining additional financing based on its 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.
 
 
 
 
 
 
 
 
 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 the Company’s stock, debt discounts, warrant 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 in accordance with Accounting Standards Codification ("ASC") 985 "Software".  Capitalized costs are amortized on a straight-line basis over the economic lives of the related products which is generally three years.  As of September 30, 2012, the Company's Wide Area Network ("WAN") product did not reach technological feasibility and, therefore, no costs associated with its development were capitalized.  The mobile application product reached technological feasibility in October 2011.  The Company has recorded capitalized software costs aggregating
$68,560 for the nine months ending September 30, 2012.
 
 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 for the three and nine months ended September 30, 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:
 
 September 30,2012


2011Warrants to purchase common stock


5,532,716



850,000Series A Convertible Preferred Stock


550,000



-Totals


6,082,716



850,000
 
 Preferred Stock
 
 The Company applies the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of 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 September 30, 2012, 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
 
 The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.  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.
 
 Stock-Based Compensation
 
 The Company accounts for equity instruments issued to non-employees at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instrument vests or becomes non-forfeitable. Non-employee stock-based compensation charges are amortized over the vesting period or as earned.
 
 Fair Value of Financial Instruments
 
 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.
 
 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.
 
 Financial liabilities as of September 30, 2012 and measured at fair value on a recurring basis are summarized below:
 
 September 30, 2012


Quoted prices in

active markets for

identical assets

(Level 1)


Significant

other

observable

inputs

(Level 2)


Significant

unobservable

inputs

(Level 3)Warrant liabilities

$
1,206,049


$
-


$
-


$
1,206,049
 
 Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the warrant liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Financial Officer, who reports to the Chief Executive Officer, determine 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 Financial Officer and are approved by the Chief Executive Officer.
 
 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 warrant 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.
 
 As of September 30, 2012, 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 warrant liabilities at September 30, 2012 are as follows:
 
 Dividend Yield


0
%Volatility


80.0
%Risk-free interest rate


0.17
%Expected lives

1.33 yearsWeighted average fair value per warrant

$
0.23
 
 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:
 
 Three

Months Ended

September 30, 2012


Nine

Months Ended

September 30, 2012Balance-beginning of period

$
1,733,071


$
2,331,149Aggregate fair value of warrant liabilities issued


-



94,100Reclassification to equity upon reclassification of warrants



-


(5,500
)Change in fair value of warrant liabilities


(527,022
)


(1,213,700
)Balance-end of period

$
1,206,049


$
1,206,049
  The significant assumptions and valuation methods that the Company used to determine the grant date fair value of the warrant liabilities are discussed in Notes 4 and 5.
 
 Recent Accounting Pronouncements
 
 In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820). This updated accounting guidance establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures. This ASU is effective
for interim and annual periods beginning after December 15, 2011.  The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial position and results of operations.
 
 Subsequent Events
 
 Management has evaluated subsequent events or transactions occurring through the date on which the condensed consolidated 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 in Note 9.
 
 Note 4.  Secured Convertible Promissory Notes
 
 On December 30, 2011, the Company entered into an agreement amending certain convertible notes (the “Third Amendment”) totaling $2,700,000.  Under the Third Amendment, the maturity date of the notes were extended 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) and (ii) February 28, 2012 to grant the Company additional time necessary to complete the Qualified Financing. 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. In connection with the Third Amendment, the investors received an aggregate of 2,862,716 warrants to purchase the Company’s common stock exercisable at $0.54 per share (the “Third Amendment Warrants”).  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.
 
 During the nine months ended September 30, 2012, the Company issued convertible notes payable under the terms of the Third Amendment aggregating $120,000. The notes bear interest at the rate of 12% per annum.  Through September 30, 2012, 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.
 
 
 
 
 
 
 
 
 
 
 
 Note 4.  Secured Convertible Promissory Notes (continued)
 
 In connection with the Third Amendment convertible notes payable issued during the nine months ended September 30, 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 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 condensed consolidated balance sheet.  Such debt discount was amortized through May 2012, when the notes matured.
 
 During the three and nine months ended September 30, 2012, the Company recognized $43,880 and $1,373,249 in amortization of the deferred 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
%Expected lives
2 yearsWeighted average fair value per warrant

$
0.47Warrants issued


120,000Aggregate grant date fair value

$
56,400
 
 During the three and nine months ended September 30, 2012, the Company marked the Third Amendment warrants to fair value and recorded a gain of $298,272 and $687,225, respectively, relating to the change in fair value of warrant liabilities issued in connection with the Third Amendment convertible notes.
 
 As of the date of the report, convertible notes payable aggregating approximately $50,000 are past maturity and in default.
 
 
 
 
 
 Note 5.  Notes Payable
 
 During the third quarter of 2012, the Company issued certain notes payable aggregating $350,000.  These notes bear interest at the rate of 12% per annum and matured 30 days from the issuance date (See Note 9).  In connection with these notes, the Company granted the note holders an aggregate 175,000 shares of common stock with a grant date fair value of $96,250.  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 $75,490 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 condensed consolidated balance sheet, as the shares were not issued as of September 30, 2012 due to the delays in issuing the stock certificates.  During the three and nine months ended September 30, 2012, the Company recognized $75,490 in amortization of the deferred debt discount relating to these notes payable.
 
 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 (See Note 9).  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.  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 condensed consolidated balance sheet.  Such debt discount was being amortized through May 2012 when the notes matured.  During the three and nine months ended September 30, 2012, the Company recognized $0 and $112,700, respectively, in amortization of the deferred debt discount relating to these 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 September 30, 2012.  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
%Expected lives
2 yearsWeighted average fair value per warrant

$
0.46Warrants issued


70,000Aggregate grant date fair value

$
32,200
 
 During the three and nine months ended September 30, 2012, the Company marked these warrants to fair value and recorded a gain of $228,750 and $526,475, respectively, relating to the change in fair value of warrants issued in connection with notes payable.
 
 
 
 
 
 
 
 
 
 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 that are deemed material to the condensed consolidated financial statements as of September 30, 2012.
  As of September 30, 2012, 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, 2012.  The Company has estimated that any potential interest and penalties due related to these liabilities are de minimus to the consolidated financial statements as of September 30, 2012.
 
   
 
 
 
 
 
 
 
 
 Note 7.  Stockholders’ Deficiency
 
 Common Stock
 
 During the nine months ended September 30, 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 three and nine months ended September 30, 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 condensed consolidated statement of operations.
 
 During the nine months ended September 30, 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 agreed to pay the consultant a one-time non-fundable 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.  Accordingly, during the three and nine months ended September 30, 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 condensed consolidated statement of operations.
 
 During the nine months ended September 30, 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 three and nine months ended September 30, 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 condensed
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 $0.70 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 nine months ended September 30, 2012, the Company entered into a subscription agreement with certain investors for an aggregate of 550,000 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 $0.70 per share. The Company received proceeds of $385,000 ($0.70 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 a grant date fair value of $98,286. Such warrants are subject to customary anti-dilution
adjustments.  On August 20, 2012, the Company issued the 550,000 shares to the investors.
 
 Warrants
 
 Details of warrants outstanding as of September 30, 2012 are as follows:
 
 Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term


Aggregate

Intrinsic

ValueWarrants outstanding at January 1, 2012


5,067,716


$
0.54


5.87Granted


465,000


$
0.69



4.99Expired


-



-Exercised


-



-Warrants outstanding at September 30, 2012


5,532,716


$
0.55



5.11



-Exercisable


5,532,716


$
0.55



5.11



-
 
 
 
 
 
 
 
 Note 8.  Related Party Transactions
 
 During the three and nine months ended September 30, 2012, the Company received advances from a former director aggregating approximately $0 and $124,200.  These advances are non-interest bearing and are due on demand.
 
 
 
 
 
 
 
 
 Note 9. Subsequent Events
 
 On October 10, 2012, the Company issued a note payable aggregating $50,000.  This note bears interest at the rate of 12% per annum and matured 30 days from the issuance date.  In connection with this note, the Company granted the note holders an aggregate 25,000 shares of common stock.
 
 On November 21, 2012, the Company entered into the Subscription Agreement (the “Subscription Agreement”) of Secured Convertible Promissory Notes (the “Notes”) due May 21, 2014 in the aggregate principal amount of $500,000 with a conversion price of $0.54 per share.  The noteholders also received warrants to purchase 462,963 shares of its common stock at an exercise price of $0.70 per share. The aggregate grant date fair value of the warrants of $106,481 was recorded as a debt discount. The conversion price of the Note and the exercise price of the Warrants are subject to adjustment for certain events, including the dividends, distributions or split of common stock, the
Company’s consolidation, merger or reorganization, or in the event of the Company’s issuance of securities at a price lower than the per share conversion price or exercise price then in effect.
 
 In connection with the sale of the 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 Note in the principal amount of $20,000.
 
 In accordance with ASC 470, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” the Notes are considered to have an embedded beneficial conversion feature because the effective conversion price is less than the estimated fair value of the Company’s common stock at the issuance date. This beneficial conversion feature is calculated after the warrants have been valued with proceeds allocated on a fair value basis. The value of the beneficial conversion feature was calculated using, among other factors, the Company’s estimated stock price of $0.55 resulting in the recognition of an additional debt discount of approximately
$97,000 at the time of issuance.
 
 On November 23, 2012, the Company repaid a note payable in the aggregate amount of $100,000.
 
 In November 2012, the Company obtained extensions from certain notes payable and convertible notes payable holders to extend the maturity date of their notes as the notes were in default as of September 30, 2012.  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.  In connection with the extension, the Company will issue warrants to purchase 56,500 shares of common stock at $0.70 per share.  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.  In connection with the extension, the Company will issue warrants to purchase 187,000 shares of common stock at $0.70 per share.  In addition, certain convertible notes payable holders converted their convertible notes aggregating $900,000 to 450,000 shares of common stock.  In connection with the extensions of the notes payable and convertible notes payable, the holders of the respective notes agreed to waive all prior events of default (as defined in the respective agreements).
 
 Subsequent to September 30, 2012, the Company received advances from a former director aggregating approximately $83,260.  These advances are non-interest bearing and are due on demand.