Attached files
| file | filename |
|---|---|
| EX-31.1 - XCel Brands, Inc. | v174199_ex31-1.htm |
| EX-21.1 - XCel Brands, Inc. | v174199_ex21-1.htm |
| EX-32.1 - XCel Brands, Inc. | v174199_ex32-1.htm |
| EX-32.2 - XCel Brands, Inc. | v174199_ex32-2.htm |
| EX-31.2 - XCel Brands, Inc. | v174199_ex31-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the
fiscal year ended December 31, 2007
OR
¨ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
Commission
File Number: 0-21419
NETFABRIC
HOLDINGS, INC.
(Name
of Small Business Issuer in Its Charter)
|
Delaware
|
76-0307819
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
299
Cherry Hill Road, Parsippany, New Jersey
|
07054
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
|
(973)
537-0077
(Issuer's
Telephone Number, Including Area
Code)
|
|
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
|
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
|
Common
Stock, $.001 Par Value
|
Over-the-Counter
Pink
Sheets
|
Check
whether the issuer is not required to file reports pursuant to
Section
13 or 15(d) of the Exchange Act. ¨
Check
whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ¨ No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during
the preceding 12 months ( or for such shorter period that the registrant was
required to submit and post such files) Yes ¨ No x.
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small r5eporting
company.
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-
accelerated filer ¨
|
Small
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
State
issuer's revenues for its most recent fiscal year. $16,223,871
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. $40,565 as of January 8,
2010.
APPLICABLE
ONLY TO CORPORATE REGISTRANTS
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date.97,053,044 shares of Common Stock, $0.001 par
value, outstanding as of January 8, 2010.
Transitional
Small Business Disclosure Format (Check One): Yes ¨ No x
From time
to time, including in this annual report on Form 10-K, NetFabric Holdings, Inc.
(the "Company", "NetFabric", "our" or "we") may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, future operations, new products, research and development
activities and similar matters. A variety of factors could cause our actual
results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development and results of our business
include, without limitation, the following: general economic and business
conditions, both nationally and in our markets; our expectations and estimates
concerning future financial performance, financing plans, acquisitions or
mergers, and the impact of competition; our ability to implement our acquisition
and growth strategy; anticipated trends in our business; advances in
technologies; and, other risk factors set forth under "Risk Factors" beginning
on page 16 in this report.
RECENT
DEVELOPMENT
On August
24, 2009, the “Company” along with its wholly-owned subsidiary, NetFabric
Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”) and Fortify Infrastructure
Services, Inc. (“Fortify) entered into Amendment No. 1 (“Amendment”) to the
Option and Purchase Agreement (“Option Agreement”) in connection with
the closing of Fortify’s purchase of all of the outstanding capital
stock of UCA upon exercise of its option granted under the Option Agreement.
Pursuant to the Amendment, among other things, the Secured Convertible
Promissory Note in the principal amount of $5 million issued by UCA to Fortify
was cancelled, releases of certain obligations of the parties were granted as
specified in the Amendment , and the commencement date and measurement period
for the earn-out and bonuses provided for in the Option Agreement were
modified.
After the
divesture of UCA, the Company does not have any operations.
On March
13, 2009, the Company along with its wholly-owned subsidiary, UCA entered into a
Convertible Note Purchase Agreement dated March 12, 2009 with Fortify. Pursuant
to the Convertible Note Purchase Agreement, Fortify purchased a Secured
Convertible Promissory Note (the “Note”) from UCA in the principal amount of $5
million with the Company being a guarantor for UCA’s borrowings. Fortify, UCA
and the Company also entered into the Option Agreement. Pursuant to the Option
Agreement, Fortify has an option to acquire all of the outstanding shares of
common stock of UCA.
The holders of a majority of
the Company’s outstanding common stock had previously approved the terms of the
Option Agreement by a written consent as detailed in the Company’s Definitive
Schedule 14 C Information Statement filed with the Securities and
Exchange Commission (the “SEC”) on July 9, 2009.
ITEM
1. DESCRIPTION OF BUSINESS
We were
incorporated in the State of Delaware on August 31, 1989 as Houston Operating
Company. On December 9, 2004, we acquired NetFabric Corporation ("NetFabric
Corp.") and on April 19, 2005, we changed our name to NetFabric Holdings, Inc.
On May 20, 2005, we acquired UCA.
We are
now organized into two distinct divisions. NetFabric Holdings, Inc. is the
holding company that houses the finance and administrative functions and is
responsible for financing transactions and regulatory compliance activities. UCA
provides IT services and solutions to a wide range of clients in the financial
industry as well as the pharmaceutical, healthcare and hospitality
sectors.
NetFabric
Corp. Acquisition
On
December 9, 2004, we entered into an acquisition agreement (the "Acquisition
Agreement") with all of the stockholders of NetFabric Corp. At the closing,
which occurred simultaneously with the execution of the Acquisition Agreement,
we acquired all of the issued and outstanding capital stock of NetFabric Corp.
from the stockholders in exchange for an aggregate of 32,137,032 newly-issued
shares of our common stock. The acquisition was accounted for as a reverse
merger whereby NetFabric Corp. was treated as the acquirer. NetFabric Corp. was
incorporated in the State of Delaware on December 17, 2002, as a new corporation
and not as a result of a material reclassification, merger, consolidation,
purchase or divesture.
Prior to
our acquisition of NetFabric Corp., we did not have any operations, and we were
a shell company whose primary business objective was to merge and become public.
Immediately prior to the NetFabric Corp. acquisition, our directors were Wesley
F. Whiting and Redgie Green. Our officers were, Wesley F. Whiting - President
and Redgie Green - Secretary. The directors of NetFabric Corp. were Jeff
Robinson (Chairman), Richard Howard and Charlotte Denenberg. The officers of
NetFabric Corp. were, Jeff Robinson - Chief Executive Officer, Walter
Carozza- Chief
Financial Officer, Philip Barak - Vice President of Finance, and Victoria
Desidero - Vice President of Marketing.
UCA
Acquisition
On May
20, 2005, we entered into and closed on a share exchange agreement, whereby we
purchased all of the issued and outstanding shares of UCA from its shareholders
in exchange for the issuance of 24,096,154 shares of our common
stock.
On
February 13, 2006, we entered into an agreement with UCA to amend the terms of
the share exchange agreement between the Company and the UCA shareholders, dated
May 20, 2005. Pursuant to the amendment, we issued an aggregate of nine million
shares of our common stock to the former shareholders of UCA. In return, the
former shareholders of UCA released the Company from the capital raising
covenant of the share exchange agreement. To facilitate the transaction, Mr.
Jeff Robinson, our Chief Executive Officer, surrendered nine million shares of
our common stock owned by him.
-1-
Discontinued
Operations
NetFabric
Corp. provided hardware and services to small to mid-sized businesses ("SMBs")
that utilized the Internet for telephone communications or Voice over Internet
Protocol ("VoIP"). NetFabric Corp. developed and marketed appliances, or
Customer Premises Equipment ("CPE") that simplified the integration of standard
telephone systems with an IP infrastructure. With minimal revenues from VoIP
operations, we concluded that we could not implement our original business for
VoIP operations within our resources or with the additional capital we could
raise in the near term. On May 5, 2006, our Board of Directors decided that the
Company should exit from the hardware-based VoIP communications product line
(including resale of transport services) targeted at SMBs. In accordance with
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the results of
operations from the VoIP business segment have been reclassified as discontinued
operations for all periods presented. After the discontinuation of VoIP
operations, our only operations are that of UCA, which are discussed in more
detail in Item 6 below.
Our
Services
We
served the information and communications needs of a wide range of
Fortune 500 and SMB clients in the financial markets industry, as well as the
pharmaceutical, health care and hospitality sectors. Our broad range of services
included (i) Managed Services (ii) Professional Services (iii) IT
Infrastructure & Communications Services and Maintenance, and (iv)
Application Development and Maintenance.
Managed
Services
In
Managed Services, we served clients seeking to outsource management of some or
all of their IT applications. As a result, their internal management and staff
are able to focus on projects that create and foster initiatives leading to a
competitive advantage for their company. Our services in this area
included data center services, help desk and facilities management.
We also provided a fully managed suite for storage management,
information protection (backup and recovery) and information optimization
(archival services) from the data center to the desktop.
Professional
Services
We
provided a wide range of IT staffing services to clients in diversified vertical
markets, including financial services, telecommunications, manufacturing,
information technology, pharmaceutical, transportation and health care.
Consultative and staffing resources may be used to undertake a role on a
long-term strategic project or fill a short-term need for a technology skill
set. We delivered qualified consultants and project managers for contract
assignments and full-time employment across many technology disciplines. Areas
of expertise included project management, business analysis, systems
architecture and design, database architecture and design, application code
development, network engineering, quality assurance and testing.
IT
Infrastructure & Communications Services
We
provided customers with IT infrastructure (such as personal computers, printers,
phone systems, networks, servers and switches) design, development, deployment
services from project planning and implementation to full-scale network, server
and workstation installations. We also provided an end-to-end solution for
automating the deployment/version upgrades of desktop and server operating
systems, including the associated packaging required to migrate a client's
enterprise applications to computers across an organization quickly and
reliably.
-2-
Application
Development and Maintenance
We helped
organizations plan, develop, integrate and manage custom applications software,
packaged software and industry-specific software solutions. We offered
applications development and maintenance-support solutions for our customers,
including shared risk engagements and fully outsourced projects, managed quality
assurance and testing services, including functional testing, compatibility
tests, performance testing, regression testing and benchmarking. Benefits to
clients using these services included reduced costs, extended value
of technology investments, information sharing and enhanced ability to adapt to
market changes.
Sales
and Marketing
We sold
our IT services through a direct sales force located principally in the New York
area. These sales associates, also known as client executives, were supported by
sales support personnel.. We had approximately 10 sales associates and sales
support personnel selling our IT services. We also had independent sales agents
(non-employees), who sell our services on a commission basis. In addition, three
large providers of software and solutions services marketed our services as a
part of their sales effort to their customers where our services are part of an
overall package. Our marketing strategy was to develop long-term partnership
relationships with existing and new clients that will lead to us becoming a
preferred provider of information technology services. We sought to employ a
cross-selling approach, where appropriate, to expand the number of services
utilized by a single client.
Competition
The
information technology services industry is highly competitive and served by
numerous international, national, regional and local firms, all of which are our
existing or potential competitors. Our primary competitors were software
consulting and implementation firms, applications software firms, service groups
of computer equipment companies, general management consulting firms,
programming companies, offshore firms and temporary staffing firms, as well as
the internal information technology staff of our clients. We believed that the
principal competitive factors in the information technology services industry
include the range of services offered, cost, technical expertise, responsiveness
to client needs, speed in delivering information technology solutions, quality
of service and perceived value. A critical component of our ability to compete
in the marketplace was our ability to attract, develop, motivate and retain
skilled professionals. We believed that we can compete favorably in
hiring such personnel by offering competitive compensation packages and
attractive assignment opportunities. Many of our competitors had stronger brand
recognition and significantly greater financial, technical, marketing and other
resources than we did Our share of the market compared to theirs was too small
to quantify.
Seasonality
Our
business was affected by the seasonal fluctuations in corporate IT expenditures.
Generally, expenditures were lowest during the first quarter of the year when
our clients are finalizing their IT budgets. In addition, our quarterly results
fluctuated depending on, among other things, the number of billing days in a
quarter and the seasonality of our clients' businesses. Our business was also
affected by the timing of holidays and seasonal vacation patterns, generally
resulting in lower revenues and gross margins in the fourth quarter of each
year. In addition, we experienced an increase in our cost of sales and a
corresponding decrease in gross profit and gross margin in the first quarter of
each year as a result of resetting certain state and federal employment tax
salary limitations.
Major
Customers/ Clients
We
derived a significant portion of our service revenue from a limited number of
corporate clients. Our two largest clients for the year ended December 31, 2007
accounted for 39% and 10%, respectively, of our revenues. The volume of work we
performed for specific clients may vary from year to year, particularly since we
typically were not the only outside service provider for our clients. Thus, a
major client in one year may not provide the same level of revenue in a
subsequent year. In certain cases, clients have reduced their spending on IT
services due to economic conditions and consequently have reduced the volume of
business from us.
-3-
Employees
As of
December 31 2007, we had 75 employees, including 24 employees and 51 billable
consultants. We have 10 employees in sales, 8 in service/products delivery
management, and 6 in executive and administrative positions. In addition to the
51 billable consultants who are employees, we utilize the services of
approximately 100 to 125 billable independent contractors.
As of
April 1, 2008, we have not filed annual, quarterly or periodic with the
Securities and Exchange Commission (the "SEC"). Prior to April 1, 2008, we filed
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC").The public may read and
copy any materials that we have filed with the SEC at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains the
reports, proxy and information statements and other information regarding the
Company that we have filed electronically with the SEC. The address of the SEC's
Internet site is http://www.sec.gov.
ITEM
2. DESCRIPTION OF PROPERTY
Description
of Property
We do not
own any real property. We lease our office space. The office space is located at
299 Cherry Hill Road, Parsippany, New Jersey. The total office space
is 6,500 square feet for a 64 month term through September of 2012, with an
annual rent of approximately $130,000.
We also
have another leased office space in St. Louis, Missouri through March 2010. This
office space is for approximately 1,000 square feet with an annual rent of
approximately $16,000. The Company believes that the leased office spaces are
adequate and in good condition.
ITEM
3. LEGAL PROCEEDINGS
We are
not a party to, nor is any of our property the subject of, any pending legal
proceedings other than routine litigation that is incidental to our
business.
ITEM
4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
-5-
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock was quoted on the NASD's Over-the-Counter Bulletin Board ("OTCBB")
under the trading symbol "NFBH". Our common stock has been quoted on the NASD's
OTCBB since March of 2001. On April 19, 2005, our name was changed from Houston
Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed
from "HOOC" to "NFBH". Our common stock has been quoted on the Pink
Sheets under the ticker symbol “NFBH” since May 7, 2008.
The
following table sets forth the high and low bid prices for our common stock for
the periods indicated as reported by the NASDAQ OTCBB. The source of this data
is Bloomberg Profession Services. The data does not reflect
inter-dealer prices and the quotations are without retail mark-ups, mark-downs
or commissions, may not represent actual transactions, and have not been
adjusted for stock dividends or splits.
|
High
|
Low
|
|||||||
|
YEAR
ENDING DECEMBER 31, 2007
|
||||||||
|
First
Quarter
|
$ | 0.14 | $ | 0.12 | ||||
|
Second
Quarter
|
$ | 0.10 | $ | 0.10 | ||||
|
Third
Quarter
|
$ | 0.11 | $ | 0.11 | ||||
|
Fourth
Quarter
|
$ | 0.08 | $ | 0.07 | ||||
|
YEAR
ENDED DECEMBER 31, 2006
|
||||||||
|
First
Quarter
|
$ | 0.95 | $ | 0.68 | ||||
|
Second
Quarter
|
$ | 0.90 | $ | 0.35 | ||||
|
Third
Quarter
|
$ | 0.33 | $ | 0.09 | ||||
|
Fourth
Quarter
|
$ | 0.12 | $ | 0.10 | ||||
As of
January 8, 2010, the number of stockholders of record was approximately 467
(excluding beneficial owners and any shares held in street name or by
nominees).
In the
past three years, we have not paid any dividends upon our common stock. The
payment of common stock dividends, if any, in the future rests within the
discretion of our Board of Directors and will depend upon, among other things,
our earnings, capital requirements and financial condition, as well as other
relevant factors. Recent Sales of Unregistered Securities; Use of Proceeds From
Registered Securities
During
the three months ended December 31, 2007:
We issued
two individuals warrants to acquire 390,000 shares of our common stock at an
exercise price of $0.01 per share as additional consideration for borrowings
from them pursuant to promissory notes issued by the Company.
The
foregoing shares were issued pursuant to exemptions from registration under
Sections 3(a)(9) and 4(2) of the Securities Act of 1933.
-6-
Equity
Plan Compensation Information
The
following table sets forth information as of December 31, 2007 regarding
compensation plans under which our equity securities are authorized for
issuance.
|
Number
of Securities
|
||||||||||||
|
Remaining
Available for
|
||||||||||||
|
Number
of Securities
|
Future
Issuance Under
|
|||||||||||
|
to
be Issued Upon
|
Weighted
Average
|
Equity
Compensation
|
||||||||||
|
Exercise
of
|
Exercise
Price of
|
Plans
(Excluding
|
||||||||||
|
Outstanding
Options,
|
Outstanding
Options,
|
Securities
Reflected in
|
||||||||||
|
Warrants
and Rights
|
Warrants
and Rights
|
Column
(a))
|
||||||||||
|
Plan
Category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity
Compensation Plans(1)
|
6,225,085 | $ | 0.41 | 2,774,915 | ||||||||
|
Equity
compensation plans not approved by
|
||||||||||||
|
equity
holders(2)
|
6,320,419 | 0.44 | 0 | |||||||||
|
Total
|
12,545,504 | 2,774,915 | ||||||||||
(1)
Pursuant to our 2005 Stock Option Plan.
(2)
Outstanding warrants to acquire shares of common stock. The warrants expire at
various times through 2011.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis and results of operations should be read in
conjunction with the unaudited condensed consolidated financial statements and
accompanying notes and the other financial information appearing elsewhere in
this report and reports included herein by reference. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements.
Our
independent registered public accounting firm has indicated in their report,
dated May 11, 2009, on our December 31, 2007 financial statements
since we have experienced net losses since inception and have a working capital
deficiency their report indicates that these matters raise substantial doubt
about our ability to continue as a going concern. Our plan with regard to this
matter is discussed elsewhere in this document. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
CORPORATE
HISTORY
We were
formerly known as Houston Operating Company and were incorporated in Delaware on
August 31, 1989. On December 9, 2004, we entered into an Acquisition Agreement
with all of the stockholders of NetFabric Corp., a Delaware corporation.
NetFabric Corp. was incorporated in Delaware on December 17, 2002 and began
operations in July 2003. At the closing, which occurred simultaneously with the
execution of the Acquisition Agreement, we acquired all of the issued and
outstanding capital stock of NetFabric Corp. from the stockholders in exchange
for an aggregate of 32,137,032 newly-issued shares of our common stock. The
acquisition was accounted for as a reverse merger whereby NetFabric Corp. was
treated as the acquirer. On April 19, 2005, our name was changed from Houston
Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed
from "HOOC" to "NFBH."
UCA
SERVICES, INC. ACQUISITION
On May
20, 2005, we entered into and closed on a share exchange agreement, whereby we
purchased all of the issued and outstanding shares of UCA Services, Inc., a New
Jersey company (“UCA Services”) from its shareholders in exchange for the
issuance of 24,096,154 shares of our common stock. UCA Services is an IT
services and solutions company that serves the information needs of a wide range
of Fortune 500 clients in the financial markets industry and the pharmaceutical,
health care and hospitality sectors. UCA Services delivers a broad range of IT
services in managed services, professional services, infrastructure building and
maintenance, application development and maintenance areas. The acquisition was
accounted for using the purchase method of accounting with UCA Service’s results
of operations included in our consolidated financial statements from the date of
acquisition.
DISCONTINUED
OPERATIONS
Prior to
acquiring NetFabric Corp., Houston Operating Company did not have any
operations, and we were a shell company whose primary business objective was to
merge and become public. NetFabric Corp. was a provider of hardware and services
to small to mid-sized businesses ("SMBs") that utilized the Internet for
telephone communications or Voice over Internet Protocol ("VoIP"). It developed
and marketed appliances or Customer Premises Equipment ("CPE") that simplified
the integration of standard telephone systems with an IP infrastructure. In
addition, NetFabric Corp resold transport services of a third party VoIP
transport provider.
Our
operations, prior to the UCA Services acquisition, consisted of developing VoIP
appliances, including research and product development activities. We also hired
additional personnel for sales and marketing and developed our sales and
marketing programs.
-7-
With
minimal revenues from VoIP operations, we concluded that we could not implement
our original business plan for VoIP operations within our resources or with the
additional capital we could raise in the near term. On May 5, 2006, our Board of
Directors decided that the Company should exit the hardware-based VoIP
communications product line (including resale of transport services) that is
targeted to SMBs. In accordance with Statement of Financial Accounting Standards
(‘SFAS’) No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", ("SFAS No. 144"), the results of operations from the VoIP business
segment has been reclassified as discontinued operations for all periods
presented. After the discontinuation of VoIP operations, our only operations are
that of UCA Services.
OVERVIEW
OF UCA SERVICES BUSINESS
UCA
Services derived revenues primarily from managed IT services, professional
services, application development services and business process management
services. Service arrangements with customers were generally on a time and
material basis or fixed-price, fixed-timeframe revenue basis. UCA Services
principal operating expenses were direct employee costs, consultant expenses and
selling, general and administrative expenses. The principal components of
selling, general and administrative expenses were salaries of sales and support
personnel, and office rent. Direct employee costs and consultant expenses were
comprised primarily of the costs of consultant labor, including employees,
subcontractors and independent contractors, and related employee benefits.
Approximately 50% of our consultants were employees and the remainder are
subcontractors and independent contractors.
We
compensated most of our consultants only for the hours that we bill
to our clients for projects undertaken, which allowed us to better match our
labor costs with our revenue generation. With respect to our consultant
employees, we were responsible for employment-related taxes, medical and health
care costs and workers' compensation. Labor costs are sensitive to shifts in the
supply and demand of IT professionals, as well as increases in the costs of
benefits and taxes.
As
previously noted, the December 9, 2004 acquisition of NetFabric Corp. was
accounted for as a reverse merger whereby NetFabric Corp. was treated as the
acquirer. Accordingly, the historical financial statements of NetFabric Corp.
have been presented for all periods required. NetFabric Corp. began operations
in January 2003 and was a development stage company until the UCA acquisition.
The UCA acquisition was accounted for using the purchase method of accounting
with the results of the operations included in the Company's consolidated
financial statements from the date of acquisition.
Comparison
of Years Ended December 31, 2007 and 2006:
Revenues.
Revenues
for the year ended December 31, 2007, decreased by $1,375,432 or 7.8% over the
prior year. The decreases in revenues were due to non replacement or non renewal
of certain projects undertaken in 2006.
Direct
employee compensation and consultant expenses.
Excluding
non-cash share based compensation, for the year ended December 31, 2007, our
direct employee compensation and consultant expenses decreased by $847,147 or
6.40% to $12,482,919. The decrease was due to decreased revenues in 2007.
Excluding non-cash share based compensation as a percentage of revenues our
direct employee compensation and consultant expenses was 76.9%, compared to
75.7% in 2006. The increase in employee compensation and consultant expenses as
a percentage of revenues was due to the nature projects performed in
2007.
Selling,
general and administrative expenses.
Excluding
non-cash share based compensation, our selling, general and administrative
expenses decreased for the year ended December 31, 2007 by $1,003,302, or 17.7%,
to $4,662,684. The decreases in our selling, general and administrative expenses
in 2007 compared to 2006 was due expense reductions implemented in
the latter half of 2006 and the third quarter of 2007.
Amortization
of debt discount.
Amortization
of debt discount for the year ended December 31, 2007 decreased by $2,061,278,
or 73.1%, to $758,011. A significant amount of amortization of debt discount
resulting from the allocation of value to certain equity instruments issued in
connection with debt were amortized in 2006 and due to repayment of certain
underlying debt, amortization of debt discount decreased in 2007. At December
31, 2007, the aggregate unamortized debt discount was $855,162, which will be
amortized and charged to operations over the term of the respective
debt.
Depreciation
and amortization.
For the
year ended December 31, 2007, depreciation and amortization decreased by
$27,908, or 8.1%, to $316,938.
Debt
issuance costs.
The
Company paid approximately $282,005 fees in connection with its short term fees
during the year ended December 31, 2007 and were charged to operation. In 2006,
the Company did not have any material amounts paid as fees for short term
borrowings.
-8-
Interest
expense.
For the
year ended December 31, 2007, interest expense decreased by $1,304, or 0.4 %, to
$315,135.Since the borrowings and interest levels were generally at the same
levels in 2007, interest expense did not vary significantly.
Derivative
Financial Instruments.
In July
2005, we entered into an agreement pursuant to which we sold Cornell Capital
Partners ("Cornell") secured convertible debentures (the "Cornell Debentures")
in the aggregate principal amount of $1,000,000. In October 2005, we entered
into a securities purchase agreement with Cornell whereby both parties agreed to
amend and consolidate all of the convertible debentures issued to Cornell into
one new secured convertible debenture in the principal amount of $1,658,160
("October Convertible Debenture"). As a result of the change in the conversion
terms of the October Convertible Debentures, on October 27, 2005, we determined
that the embedded conversion feature of the October Cornell Debentures became
subject to the provisions of SFAS No. 133. Therefore, we accounted for the
embedded conversion feature as a liability in accordance with the guidance of
EITF 00-19, "Accounting for Derivative Financial Instruments.
Indexed
to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19").
Accordingly, we recorded the fair value of the embedded conversion feature of
$784,784 as a non-current liability on the balance sheet as of October 27, 2005
and a portion of the amounts previously recorded to additional paid-in capital
as part of the Original Cornell Debentures were reclassified from equity to
liabilities. For the year ended December 31, 2006, we recorded a gain in value
for derivative financial instruments of $336,352 related to the change in fair
value of the embedded conversion feature, which is recorded in the accompanying
consolidated statement of operations. For the year ended December 31, 2005, we
recorded a charge in value for derivative financial instruments of $2,131,109
related to the change in fair value of the embedded conversion feature which is
recorded in the accompanying consolidated statement of operations. In February
2006, we paid the October Convertible Debenture (the "Cornell Repayment") and
accordingly, the value of the embedded conversion future was reclassified to
additional paid-in capital.
Debt
extinguishment costs.
In August
2007, we entered into an Agreement to Convert (“ Agreement”) with Fred Nazem, a
stockholder. Pursuant to this Agreement, the stockholder agreed to convert
$218,882 due to him in outstanding convertible debentures and accrued interest
($18,882) into 5,472,050 shares of common stock, including 4,900,394 shares as
an inducement for conversion. The fair value of the inducement to convert
approximated $539,000 and was charged to operations in the three months ended
September 30, 2007 as debt extinguishment costs.
As part
of the Cornell Repayment, we paid an early redemption charge of 15% of the
principal amount redeemed or $248,724, which charge is included on the
accompanying consolidated statement for operations for the year ended December
31, 2006. In connection with the Cornell Repayment, we also agreed to reduce the
exercise price of the 560,000 warrants from $0.50 to $0.40. The change in
exercise price of the warrants was treated as a new issuance of warrants and was
valued using the Black Scholes option-pricing model. The reduction in exercise
price resulted in a fair value of $372,353 for the warrants, which was charged
to operations for the year ended December 31, 2006.
On May
24, 2006, we entered into a Waiver and Agreement to Convert (the "Waiver
Agreement") with Macrocom Investors LLC ("Macrocom"). Pursuant to the Waiver
Agreement, Macrocom agreed immediately to convert a note issued by us due on
October 10, 2006 in the principal amount of $500,000 (the "Note"), including all
interest accrued thereon, into 1,000,000 shares of restricted common stock of
the Company. In addition, Macrocom and we agreed to waive and release each other
from any claims in connection with the Note and all other agreements executed to
date between Macrocom and us. In exchange for the waiver and the early
conversion, we agreed to issue an additional 1,500,000 shares of restricted
common stock to Macrocom. The fair value of the additional consideration was
$1,125,000 and the amount was charged to operations during the year ended
December 31, 2006 as debt extinguishment costs.
Non-cash
charge for dispute settlement.
In
January 2006, we entered into a termination agreement with a consultant. In
connection with the termination, an officer, director and stockholder of the
Company transferred 1,000,000 shares of our common stock owned by him to the
consultant. We accounted for the settlement as an expense in our consolidated
financial statements as a non-cash charge for dispute settlements, based on the
value of the option of $0.94 per share on the date of settlement, with a
corresponding credit to contributed (paid-in) capital from the officer, director
and stockholder during the year ended December 31, 2006. In February 2006, we
entered into an amendment agreement with the former UCA shareholders. Pursuant
to the amendment agreement, an officer, director and stockholder of the Company
transferred 9,000,000 shares of our common stock owned by him to the former UCA
shareholders. Since the settlement was not a contingency associated with the
acquisition of UCA Services, we accounted for the shares transferred by the
individual as an expense, based on the value of the shares on the settlement
date, February 13, 2006.
In
process research and development.
In August
2006, the Company entered into an agreement with Utek Corporation ("Utek"), an
unaffiliated specialty finance company focused on technology transfers, to
acquire a technology license for intrusion detection software developed by a
university. We anticipate further development and testing of the technology.
Because of the uncertainties surrounding the ultimate commercial deployment of
the technology and due to the technology not having alternative use, we charged
the cost of the license agreement of $160,000 as in process research and
development costs during the year ended December 31, 2006.
-9-
Goodwill
impairment
Pursuant
to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the
Company performed its annual testing of goodwill impairment in the second
quarter of 2007. As a part of goodwill impairment testing, management reviewed
various factors, such as the market price of the Company’s common stock,
discounted cash flows from projected earnings and values of comparable companies
to determine whether impairment exists. Based on this evaluation it was
determined that the goodwill was impaired. The impairment was
due to a continued decline in our market capitalization during the past year,
and due to lower future cash flows expected to be generated by the business due
to working capital constraints. The implied value of the goodwill was
$10,585,000 compared to a carrying value of $13,982,451, indicating an
impairment of $3,397,451. The impairment loss was charged to operations during
the three months ended June 30, 2007.
We
evaluated our business conditions and future strategic direction including the
delisting of its common shares from trading on the Bulletin Board (“OTCBB”) and
concluded that an interim testing of goodwill is warranted at December 31, 2007.
As a part of the interim goodwill impairment testing, management reviewed
various factors and used a market approach (comparison of financial data for
publicly traded companies engaged in similar lines of business) to determine
whether impairment exists. Based on this evaluation, it was determined that the
goodwill was impaired. The impairment was, in part, due to decreased values of
comparable companies. The implied value of goodwill was $5,704,000 compared to
carrying value of $10,585,000, indicating an impairment of $4,881,000. The
additional impairment loss was charged to operations during the three months
ended December 31, 2007. In total an impairment loss of $8,278,451 was charged
to operations during the year ended December 31, 2007.
Discontinued
Operations.
On May 5,
2006, our Board of Directors decided to exit from the hardware-based VoIP
communications product line (including resale of transport services) that is
targeted to SMBs. In accordance with Statement of Financial Accounting Standards
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS
No. 144"), the results of operations from the VoIP business segment has been
reclassified as discontinued operations for all periods presented. For the year
ended December 31, 2006, loss from discontinued operations decreased by
$421,013, or 88.7%, from$474,411 in the prior year. The decreases were due to
our scaling back of VoIP operations in 2006 and eventual exit from the business
during 2006. Revenues from VoIP operations have been nominal in all periods
presented and operating expenses are the losses reported.
Net
loss.
As a
result of the foregoing, for the year ended December 31, 2007, net loss
decreased by $5,259,399, or 30.8%, to a loss of $11,810,610, compared to a net
loss of $17,070,009 in the year ended December 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
On
December 31, 2007, our working capital deficiency was $4,937,149, compared to a
working capital deficiency of $3,767,282 on December 31, 2006. The increase in
the working capital deficiency was principally due to operating losses. During
the year ended December 31, 2007, our operating activities from continuing
operations used approximately $266,000 of cash, compared to
approximately $1,019,000 used during the year ended December 31,
2006.
During
the year ended December 31, 2006, our operating losses, after adjusting for
non-cash items, utilized approximately $1,237,000 of cash, and working capital
items provided approximately $970,000 of cash. The principal component of these
working capital changes was an increase in our accounts payable and decrease in
accounts receivable. During the year ended December 31, 2006, our operating
losses, after adjusting for non-cash items, utilized approximately $1,715,000 of
cash, and working capital items used approximately $690,000 of
cash.
In July
2007, we sold an aggregate of 11,250,000 shares of our common stock, par value
$0.01 (the “Common Stock”) to four investors, for an aggregate purchase price of
$450,000, including $100,000 from Fred Nazem, a stockholder of the
Company.
During
the year ended December 31, 2007, we borrowed an aggregate of $1,170,00 from
five individuals, including $50,000 from a officer and director and repaid
$200,000 of that prior to December 31, 2007. The amount outstanding as of
December 31, 2007 is $970,000 and is due at various dates between January and
February 2008. In January and February 2008, we repaid an aggregate amount of
$620,000. The borrowings are unsecured and bear nominal interest. The Company
paid financing costs of $282,005 to third parties and lenders and this amount is
being amortized over the term of the borrowings. In 2007, $282,005 was charged
to operations as amortization of debt issuance costs. With respect to the
borrowings from the officer and director the Company did not pay any financing
costs.
In
connection with the borrowings, we issued the lenders warrants to acquire an
aggregate of 890,000 shares of our common stock. The warrants expire in three
years from the date of issuance. The relative fair value of the warrants
approximated $68,668 and was recorded as additional discount and is being
amortized over the borrowings. For the year ended December 31, 2007, $68,668, of
debt discount was accreted and recorded as amortization of debt discounts. With
respect to the borrowings from the officer and director, the Company did not
issue any warrants.
-10-
In
February 2006, we along with our subsidiaries, entered into a Security
Agreement, dated February 10, 2006 ( the "Security Agreement") with Laurus
Master Fund, Ltd., a Cayman Islands company ("Laurus"). Under the Security
Agreement, Laurus purchased from the Company a Secured Convertible Note (the
"Laurus Convertible Note"), with a maturity date of February 10, 2009, in the
aggregate principal amount of $1,500,000, and a Secured Non-Convertible
Revolving Note (the "Laurus Revolving Note") in the aggregate principal amount
of $1,500,000. The Laurus Convertible Note and Laurus Revolving Note are
collectively referred to as the "Laurus Notes". Availability under the Laurus
Notes is based on an advance rate equal to 90% of eligible accounts receivable,
and Laurus has agreed to provide us an over advance for a specified period. The
Laurus Convertible Note has a three-year term, and bears interest at 1% above
the prime rate, with a minimum interest rate of 8%. Laurus has the option, but
not the obligation, at any time until the maturity date, to convert all or any
portion of the Laurus Convertible Note and accrued interest thereon into shares
of our common stock at an exercise price of $0.91 per share. If converted in
full, we would be obligated to issue an aggregate of 1,648,352 shares of our
common stock to Laurus. We have the option to prepay the Laurus Convertible Note
by paying Laurus the applicable redemption premium. The Laurus Revolving Note
has a three-year term, and bears interest at 1% above the prime rate, with a
minimum interest rate of 8%.
In
connection with the borrowing, we issued to Laurus a common stock purchase
option (the "Option") to purchase up to 4,256,550 shares of our common stock for
nominal consideration. Additionally, we entered into a registration rights
agreement with Laurus (the "Registration Rights Agreement"), covering the
registration of common stock underlying the Laurus Convertible Note and the
Option. Our obligations under the Laurus Notes are secured by first liens on all
of our assets, and Laurus may accelerate all obligations under the Laurus Notes
upon an event of default.
Our
initial borrowing was approximately $2,300,000 and we utilized approximately
$1,900,000 of the initial borrowing to repay all amounts owed to Cornell
pursuant to the October Convertible Debenture, including a redemption premium.
At December 31, 2007, borrowing with Laurus was approximately $2,777,000 (face
amount).
In
October 2007, we entered into an extensions agreement with Laurus (the
“Extension Agreement’). The Extension Agreement provides for the extension of
the over advance feature until February 2009 .However, the over advance amount
will reduce by $5,000 each month from November 2007 to February 2008 and by
$50,000 each month from March of 2008.
In 2006,
we sold eight Convertible Debentures (the " 2006 Convertible Debentures") in the
face amount of $800,000 to six individuals (the "Debenture Holders" or a
"Debenture Holder") including $150,000 face value to an officer and director,
and $50,000 face value to a stockholder of the Company. The 2006 Convertible
Debentures bear interest at 8% and were for a term of three months. At the
option of the Debenture Holders, the 2006 Convertible Debentures can be
converted into shares of the Company's common stock at a conversion price of
$.50 per share. In connection with the sale, we issued warrants to three
Debenture Holders to acquire an aggregate of 750,000 shares of its common stock
with a nominal exercise price. The warrants expire in three years from the date
of issuance. The remaining three Debenture Holders received an aggregate of
225,000 shares of our common stock as additional consideration.
The
Company used part of the proceeds from the sale of the 2006 Debentures to repay
$500,000 due to the Macrocom Investors, LLC ("Macrocom") pursuant to a debenture
issued in July of 2005.
In 2006,
we repaid one 2006 Convertible Debenture in the face amount of $100,000. The
Company and the Debenture holders agreed to extension of the term of duration by
months on two occasions in 2006. In exchange for the extension we issued the
holders an aggregate of 350,000 shares of our common stock and warrants to
acquire an aggregate of 600,000 shares of our common stock with a nominal
exercise price. The warrants expire in three years from the date of
issuance. No consideration was issued for the extension with respect to the 2006
Convertible Debentures issued to the officer and director and to the
stockholder. In January and February of 2007, we repaid five of the seven 2006
Convertible Debentures in the aggregate face amount of $500,000.
In
December 2006, we agreed with the officer and director and the stockholders to
extend the term of two of 2006 Convertible Debentures in the face amount of
$200,000 to April 30, 2007. The term of the Convertible Debenture due to the
officer and director was extended to December 31, 2007 was repaid in 2008. In
August 2007, we and the stockholder entered into an agreement to convert $50,000
face amount of 2006 Convertible Debentures into shares of the Company’s common
stock as described below.
On June
8, 2006, we sold a Convertible Debenture in the face amount of $150,000 to a
stockholder (the "Stockholder Convertible Debenture"). The Stockholder
Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the
option of the holder, the Stockholder Convertible Debenture can be converted
into shares of our common stock at a conversion price of $.50 per share. In
connection with the sale, we issued 300,000 shares of our common stock as
additional consideration.
In August
2007, we entered into an Agreement to Convert (the “Agreement”) with Fred Nazem,
a stockholder. Pursuant to this Agreement, the stockholder agreed to convert
$218,882 due to him in outstanding convertible debentures and accrued interest
of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394
shares as an inducement for conversion. The principal amount of
$200,000 consisted of $150,000 of Stockholder Convertible Debenture and $50,000
of 2006 Convertible Debenture. The fair value of the inducement to convert
approximated $539,000 and was charged to operations during the year ended
December 31, 2007 as debt extinguishment costs.
-11-
We
evaluated several options for obtaining financing to fund our working capital
requirements and to retire our debt upon maturity. We had approximately $3.8
million debt that was due in the first quarter of 2009. After several
discussions and negotiations, we concluded that the most viable option would be
to sell the operations of UCA Services. This would not only provide us financing
but also enable UCA Services to grow to its optimal potential with appropriate
financial backing.
On March
12, 2009, we along with our wholly-owned subsidiary, NetFabric Technologies,
Inc., d/b/a UCA Services, Inc. (“UCA”) entered into a Convertible Note Purchase
Agreement with Fortify Infrastructure Services, Inc. (“Fortify). Pursuant to the
Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible
Promissory Note (the “Note”) from UCA in the principal amount of $5 million with
the Company being a guarantor for UCA’s borrowings.
The Note
has a six-month term, and bears interest at 8% per annum, compounded annually.
The Note is secured by (i) all of the assets of
UCA and the Company, and (ii) all of the equity securities of UCA currently
owned or hereafter acquired by the Company. At the exclusive option of Fortify,
Fortify may convert the entire principal amount of, and accrued and unpaid
interest on, the Note into shares of Series A Preferred Stock of
UCA. The conversion price shall be at a price equal to the price per
share reflecting a valuation of UCA equal to $5 million, on an as-converted
basis.
Fortify,
UCA and the Company also entered into a Credit Agreement whereby Fortify agreed
to provide UCA a revolving line of credit of up to $1 million for working
capital purposes. Amounts borrowed under the line of credit are secured by (i) all of the assets of
UCA and the Company and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by the Company.
Fortify,
UCA and the Company also entered into an Option and Purchase Agreement (“Option
Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire
all of the outstanding shares of common stock of UCA upon effectiveness of this
Information Statement. Upon exercise of the Option by Fortify, we
will (a) receive an aggregate purchase price of $500,000, less the amount of accrued
and unpaid interest, if any, on the Note, and (b) be released from the guaranty
obligations of the Note. The Company and certain employees of UCA will also be
eligible to receive earn-out payments in connection with the closing of the
Option based upon achievement of certain financial thresholds during a 24-month
period following the closing.
We used
approximately $3 million from the proceeds of the Note to repay all amounts owed
to Laurus Master Fund. The balance of the proceeds was used for repayment of
debt, other payables and for working capital purposes.
On August
24, 2009, we along with our wholly-owned subsidiary, UCA and Fortify entered
into Amendment No. 1 (“Amendment”) to the Option and Purchase Agreement (“Option
Agreement”) in connection with the closing of Fortify’s purchase of
all of the outstanding capital stock of UCA upon exercise of its option granted
under the Option Agreement. Pursuant to the Amendment, among other things, the Secured Convertible
Promissory Note in the principal amount of $5 million issued by UCA to Fortify
was cancelled, releases of certain obligations of the parties were granted as
specified in the Amendment , and the commencement date and measurement period
for the earn-out and bonuses provided for in the Option Agreement were
modified.
After the
divesture of UCA, we will have no operations. However, the Company will be debt
free. We will explore strategic alternatives, including merging with another
entity. Currently, we do not have any agreement or understanding with any entity
and there is no assurance that such a transaction will ever be
consummated.
-12-
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
discussion and analysis and plan of operation is based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition, accounts
receivable and long-lived assets. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
current circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We
believe the following critical accounting policies affect the judgment and
estimates used in preparation of our consolidated financial
statements:
Revenue
Recognition
We derive
revenue as a provider of IT services.
In
accordance with the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 104, "Revenue Recognition," revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product or services has
occurred, the fee is fixed and determinable, collectibility is reasonably
assured, contractual obligations have been satisfied, and title and risk of loss
have been transferred to the customer.
Arrangements
with customers for services are generally on a time and material basis or
fixed-price, fixed-timeframe basis. Revenue on time-and-material contracts is
recognized as the related services are performed. Revenue for fixed-price,
fixed-timeframe services is recognized as the service is performed. Revenue from
fixed-price, fixed-timeframe service contracts is recognized ratably over the
term of the contract, as per the proportional performance method. When we
receive cash advances from customers in advance of the service period, amounts
are reported as advances from customers until the commencement of the service
period. Billings and collections in excess of revenue recognized are classified
as deferred revenue.
Allowance
for Doubtful Accounts
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. These estimated losses
are based upon historical bad debts, specific customer creditworthiness and
current economic trends. If the financial condition of a customer deteriorates,
resulting in the customer's inability to make payments within approved credit
terms, additional allowances may be required. We perform credit evaluations of
our customers' financial condition on a regular basis.
Fair
Value of Financial Instruments
The fair
value of the Company's assets and liabilities that qualify as financial
instruments under Statement of Financial Accounting Standards ("SFAS") No. 107
"Disclosure about Fair Value of Financial Instruments", presented in the
consolidated balance sheet as of December 31, 2007 approximate their carrying
amounts.
We
account for derivative instruments in accordance with SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities," as amended, ("SFAS No. 133")
which establishes accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments
imbedded in other financial instruments or contracts and requires recognition of
all derivatives on the balance sheet at fair value. Accounting for the changes
in the fair value of the derivative instruments depends on whether the
derivatives qualify as hedge relationships and the types of the relationships
designated are based on the exposures hedged. Changes in the fair value of
derivative instruments which are not designated as hedges are recognized in
earnings as other income (loss).
-13-
We have
issued financial instruments which have required a determination of the fair
value of certain related derivatives, where quoted market prices were not
published or readily available at the date of issuance. We base its fair value
determinations on an evaluation of the facts and circumstances and valuation
techniques that require judgments and estimates.
Goodwill
and Other Intangibles
Goodwill
and other intangibles represent the allocation, pursuant to an independent
appraisal of the cost to acquire UCA Services, in excess of the fair value of
assets acquired. Under SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is not amortized but is reviewed for impairment annually, as well as
when a triggering event indicates impairment may have occurred. The goodwill
test for impairment consists of a two-step process that begins with an
estimation of the fair value of the reporting unit. The first step of the
process is a screen for potential impairment and the second step measures the
amount of impairment, if any. We will perform a goodwill impairment test
annually, as well as when a triggering event indicates impairment may have
occurred. Application of the goodwill impairment test requires significant
judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth, the useful life
over which cash flows will occur, and determination of cost of capital. Changes
in these estimates and assumptions could materially affect the determination of
fair value and/or conclusions on goodwill impairment.
Intangible
assets are accounted for under the provisions of SFAS No. 142. Intangible assets
arise from business combinations and consist of customer relationships and
restricted covenants related to employment agreements that are amortized, on a
straight-line basis, over periods of up to six years. The Company follows the
impairment provisions and disclosure requirements of SFAS No. 142. Accordingly
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
Stock-Based
Compensation
Beginning
January 1, 2006, we account for stock-based compensation in accordance with the
fair value recognition provisions of SFAS 123R. Under the fair value recognition
provisions of SFAS 123R, share-based compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the
vesting period. Stock-based compensation expense is calculated using the Black
Scholes option pricing model on the date of grant. This option valuation model
requires input of highly subjective assumptions. These assumptions include
estimating the length of time employees will retain their vested stock options
before exercising them (the "expected term"), the estimated volatility of our
common stock price over the expected term, and the number of options that will
ultimately not complete their vesting requirements ("forfeitures"). Changes in
these assumptions can materially affect the estimate of the fair value of
employee stock options, and consequently, the related amount of stock-based
compensation expense recognized in the consolidated statements of
operations.
-14-
RISK
FACTORS
We Are
Subject To Various Risks That May Materially Harm Our Business, Financial
Condition And Results Of Operations
You
should carefully consider the risks and uncertainties described below and the
other information in this filing before deciding to purchase our common stock.
If any of these risks or uncertainties actually occurs, our business, financial
condition or operating results could be materially harmed. In that case, the
trading price of our common stock could decline and you could lose all or part
of your entire investment.
WHILE
ATTEMPTING TO IDENTIFY A SUITABLE CANDIDATE, WE WILL INCUR FURTHER EXPENSES THAT
CURRENTLY CANNOT BE SPECIFIED.
Our Board
assumes that we will be able to identify as merger candidates privately held
companies with attractive business prospects that have the potential to increase
stockholder value to a greater extent than our current business. At this time,
the Board has not identified a definitive candidate. Following the sale of UCA,
the Company will no longer have any full-time employees. However, the Board of
Directors will continue to serve and, along with the present Chief Executive
Officer, is charged with identifying a target company to acquire. Without
full-time employees, it may take a significant amount of time to identify a
suitable candidate for a business combination with us. During such time, we will
have further expenses such as general legal and accounting/auditing fees, none
of which can be specified at this time, but will deplete our financial resources
and thereby make it more difficult for the Company to identify a suitable
candidate for a business combination on satisfactory terms, if at
all.
WE
MAY NOT BE ABLE TO ACQUIRE A COMPANY WITH ONGOING BUSINESS
OPERATIONS.
Our Board
believes that privately held companies will be interested in a merger with our
Company that, after the sale of UCA, would allow the private company to "go
public," i.e., have publicly traded securities without an initial public
offering. However, many private companies seeking to "go public" may prefer an
initial public offering to a merger with a public shell (a public traded company
with no operating business). Moreover, the Securities and Exchange Commission
typically evaluates the merger of a public shell with a private company. This
can be a time-consuming and cost-intensive review process for the parties
involved in the merger that could discourage privately held companies from any
transaction with a public shell. If, subsequent to the sale of UCA, we are not
able to merge with an operating company, whether a privately held company or a
company subject to the reporting obligations of the Securities Exchange Act from
1934, our financial reserves will most likely not be sufficient for us to start
any kind of operating business on our own.
Therefore, there can be no guarantee that we will operate any business after the
sale of UCA.
-15-
WE
DO NOT KNOW WHICH BUSINESS WE WILL OPERATE IN THE FUTURE, IF ANY.
As
described above, we do not know which business, if any, we will be operating in
the future, subsequent to a sale of UCA. Even if we are able to commence new
business operations, there can be no guarantee that we will be
successful.
"GOING
CONCERN" QUALIFICATION IN AUDIT OPINION.
The
Company received a report from its independent registered public accounting firm
for the year ended December 31, 2007, containing an explanatory paragraph
stating that the Company's recurring losses from continuing operations and the
Company's intention to sell its sole operating business raise substantial doubt
about the Company's ability to continue as a going concern during the twelve
months ending December 31, 2008.
LIQUIDITY
RISK: THERE MAY NOT BE ADEQUATE RESOURCES TO FUND THE OPERATIONS OF THE
COMPANY.
There is
no assurance that the future expenses of the Company (including the expenses of
maintaining the Company as a public company under SEC regulations) will not be
greater than anticipated, and that, as a result, a liquidity problem may arise
as we may have insufficient funds to operate any business.
OUR
PRINCIPAL STOCKHOLDERS CAN CONTROL OUR BOARD OF DIRECTORS
Five of
our principal stockholders, including directors and officers, own approximately
63.2% of our outstanding common stock. They can effectively elect a majority of
our directors and thereby control our management.
IF
WE DO NOT MAKE FUTURE FILINGS WITH THE SEC IN A TIMELY MANNER, OUR STOCKHOLDERS
MAY BE NEGATIVELY AFFECTED.
As of
April 1, 2008 , we have not filed any annual, quarterly or periodic reports with
the SEC and received notice from the OTC that we were not in compliance with its
rules, which require timely filing of periodic reports in order to maintain our
continued quotation on the bulletin boa r d. As a result, the Company’s common
stock is currently quoted on the Pink Sheets. Future delays in the filing of
timely periodic reports may negatively affect the quotation of our common stock.
As a consequence, an investor could find it more difficult t o dispose of, or to
obtain quotations as to the price of, our common stock, and the liquidity of the
Company ’ s common stock will be greatly reduced. In addition, the lack of
regular current filings may affect the value of the share price since it may be
difficult for a shareholder to evaluate properly the Company’s performance and
future prospects. Furthermore, the Company could be subject to enforcement
action by the SEC if it does not file its periodic reports.
-16-
ITEM
8. FINANCIAL STATEMENTS
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
As
previously reported in the Company's Form 8-K filed on January 26, 2007, the
Board of Directors of the Company dismissed J.H. Cohn LLP (‘JHC”) as
the Independent Registered Public Accounting Firm of the Company on January 24,
2007.
On
January 24, 2007, the Company hired Goldstein Golub Kessler LLP ("GGK") to serve
as the Company's Independent Registered Public Accounting Firm. During the
period that JHC had acted as the Company's independent accountants, the Company
did not consult with GGK on any matter that (i) involved the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on the Company's financial
statements, in each case where written or oral advice was provided, that was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) was either the
subject of a disagreement or event, as that term is described in Item
304(a)(1)(iv)(A) of Regulation S-B.
During
the Company's December 31,2005 fiscal year and through January 24, 2007, there
were no disagreements with JHC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of JHC, would have caused
them to make reference to the subject matter of the disagreements in connection
with their reports. During our two most recent fiscal years, and the subsequent
interim period through the date JHC was dismissed, JHC did not advise the
Company as to any reportable events of the type described in Item
304(a)(1)(iv)(B) of Regulation S-B.
On
December 4, 2007, the Company was notified that certain of the partners of
Goldstein Golub Kessler LLP (GGK), became partners of McGladrey & Pullen,
LLP in a limited asset purchase agreement and that GGK resigned as independent
registered public accounting firm for the Company. McGladrey &
Pullen, LLP was appointed as the Company’s new independent registered public
accounting firm.
The audit
report of GGK on the consolidated financial statements of NetFabric Holdings,
Inc. and subsidiaries as of and for the year ended December 31, 2006 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. GGK's December
31, 2006 audit report relating to GGK's audit of Company's financial statements
for the fiscal year ended December 31, 2006 included an emphasis paragraph
relating to an uncertainty as to the Company's ability to continue as a going
concern.
The
decision to engage McGladrey & Pullen, LLP was approved by the board of
directors, effective December 4, 2007.
During
the Company’s most recent fiscal year ended December 31, 2006 and through
December 4, 2007, the Company did not consult with McGladrey & Pullen, LLP
on (i) the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that may be rendered
on the Company’s financial statements, and McGladrey & Pullen, LLP did not
provide either a written report or oral advice to the Company that McGladrey
& Pullen, LLP concluded was an important factor considered by the Company in
reaching a decision as to any accounting, auditing, or financial reporting
issue; or (ii) the subject of any disagreement, as defined in Item 304
(a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event
within the meaning set forth in Item 304(a)(1)(v) of Regulation
S-K.
In
connection with the audit of the Company's consolidated financial statements for
the fiscal year ended December 31, 2006 and through December 4, 2007, there
were: (i) no disagreements between the Company and GGK on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
GGK, would have caused GGK to make reference to the subject matter of the
disagreement in their report on the Company's financial statements for such
year, and (ii) no reportable events within the meaning set forth in Item
304(a)(1)(v) of Regulation S-K.
-17-
ITEM
9A. CONTROLS AND PROCEDURES
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including the Company’s Chief
Executive Officer and Principal Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Such controls and procedures, by
their nature, can provide only reasonable assurance regarding management’s
control objectives.
The
Company carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and
Principal Financial Officer, on the effectiveness of the design and operation of
its disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15 and 15d-15 as of December 31, 2007. However, disclosure
controls were not effective because the Company did not file this report on a
timely basis.
There was
no change in the Company’s internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, the chief executive officer
and principal financial officer and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Our
evaluation of internal control over financial reporting includes using the COSO
framework, an integrated framework for the evaluation of internal controls
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of our
control environment.
Based on
our evaluation under the frameworks described above, our management has
concluded that our internal control over financial reporting was effective as of
December 31, 2007.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation requirements by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this annual report.
ITEM
9B. OTHER INFORMATION
None.
-18-
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The
following table sets forth the names and positions of our executive officers and
directors. Our directors serve for one year or until successors are elected and
qualify. Our Board of Directors elect our officers, and their terms of office
are at the discretion of the Board, except to the extent governed by an
employment contract.
As
of January 8, 2010, our directors and executive officers,
their age, positions, the dates of their initial election or appointment as
directors or executive officers, and the expiration of their terms are as
follows:
|
Name
|
Age
|
Position
|
With Company Since
|
||||
|
Fahad
Syed
|
41
|
Chairman
and Chief Executive Officer
|
May
2005
|
||||
|
Vasan
Thatham
|
51
|
Chief
Financial Officer
|
June
2005
|
||||
|
Charlotte
G. Denenberg
|
61
|
Director
|
November
2004
|
||||
|
Joseph
Perno
|
66
|
Director
|
April
2006
|
Below are
the biographies of each of our officers and directors as of January
8, 2010.
FAHAD
SYED. Mr. Syed has been the Chairman and Chief Executive Officer of the Company
since May 2006. Mr. Syed has been a Director of the Company since May 2005. Mr.
Syed is an entrepreneur and co-founder of UCA Services, Inc. and has more than
14 years of experience in Global Services. Mr. Syed is an expert in the
development of best practices in IT, channel and direct sales strategies and
effective service delivery models. Mr. Syed was the Managing Director of UCA
Services, Inc, from June 2003 to May 2005 and he is currently the Chief
Executive Officer of UCA Services, Inc. Prior to that, Mr. Syed was Vice
President of IT services with UCA Computer Systems, Inc., a system integrator,
from December 1998 to May 2003. Previously, Mr. Syed held prominent positions in
development and management of financial products at the Housing Development
Finance Corporation (HDFC), a pioneer private sector housing finance institution
in India. Mr. Syed holds a Masters Degree in Development Sciences from Tata
Institute of Social Sciences, Mumbai, India, a Bachelors degree in Sociology
from Aligarh University, India and a Diploma in Systems from National Institute
of Information Technology, Mumbai, India.
VASAN
THATHAM. Vasan Thatham has been Vice President and Chief Financial Officer of
the Company since June 2005. Prior to joining the Company, from February 1999
through June 2005, Mr. Thatham was Vice President and Chief Financial Officer of
Provo International, Inc., a company engaged in providing Internet and
telecommunications services. Prior to that, Mr. Thatham held various positions
with Esquire Communications, Ltd., Strings Ltd., Ernst & Young in Kuwait and
KMPG Peat Marwick in India. Mr. Thatham is a chartered accountant under the laws
of India.
CHARLOTTE
G. DENENBERG. Ms. Denenberg has been a Director of the Company since November
2004. She received a BA in Psychology and Mathematics with Highest Distinction,
Phi Beta Kappa, from Northwestern University, and an MS and a PhD in Mathematics
from the Illinois Institute of Technology. For the past two years she has
consulted for a variety of companies in the telecommunications industry. From
1998 to 2002, she worked for Metromedia Fiber Network Services, Inc. (MFN) as
Vice President, Optical Infrastructure (December 1998 to June 2000) and as Vice
President and Chief Technology Officer (July 2000 to June 2002). MFN was engaged
in the design, installation and maintenance of inter-city and intra-city optical
fiber networks.
-19-
JOSEPH
PERNO. Mr. Perno has been a Director of the Company since April 2006. Since his
retirement in March 2003, he has been a consultant to emerging technology
companies. From March 1994 to March 2003, he was Senior Vice President of
Technology at Chubb Corporation, a provider of property and casualty insurance
to businesses and individuals worldwide. Prior to that, he was associated for 18
years with Chubb Corporation and Crum and Foster Insurance Organizations in
various capacities. Mr. Perno has been a member of the LOMA Property and
Casualty Systems Committee for twenty three years, serving as Chairman of that
organization from 1991 to 1992. He also served on the Boards of Directors of
ACORD, IVANS, the North River Insurance Company, US Fire Insurance Company, The
Westchester Insurance Company and the agency systems vendor, Redshaw,
Inc.
Family
Relationships
There are
no family relationships among the directors or executive officers of the
Company.
Involvement
In Certain Legal Proceedings
None of
our officers, directors, promoters or control persons have been involved in the
past five years in any of the following:
(1) Any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time;
(2) Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
(3) Being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, or any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; or
(4) Being
found by a court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
Code
of Ethics
On March
3, 2005, we adopted a Code of Ethics (the "Code") that applies to the Company,
our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. The
text of the Code will be provided, without charge, upon request sent to our
Secretary at 299 Cherry Hill Road, Parsippany, NJ 07054.
Audit
Committee
The Audit
Committee is responsible for making recommendations to the Board of Directors as
to the selection and independence of our independent registered public
accounting firm (the "Independent Auditor"), maintaining communication with the
Independent Auditor, reviewing the annual audit report submitted by the
Independent Auditor and determining the nature and extent of problems, if any,
presented by such audit warranting consideration by our Board of Directors.
Currently, the Company does not have an audit committee and in accordance with
ss.3(a)(58)(B) of the Securities Exchange Act of 1934, the entire Board of
Directors is acting as the Company's Audit Committee.
-20-
Compensation
Committee
The
Compensation Committee is a standing committee of the Board of Directors and is
authorized to review and make recommendations to the Board of Directors on all
matters regarding the remuneration of our executive officers, including the
administration of our compensation plans. The Compensation Committee is intended
to be comprised of at least three members. Currently, the Compensation Committee
is comprised of only Ms. Charlotte G. Denenberg.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires a company's directors, officers and
stockholders who beneficially own more than 10% of any class of equity
securities of the Company registered pursuant to Section 12 of the Exchange Act,
collectively referred to herein as the Reporting Persons, to file initial
statements of beneficial ownership of securities and statements of changes in
beneficial ownership of securities with respect to the company's equity
securities with the SEC. All Reporting Persons are required by SEC regulation to
furnish us with copies of all reports that such Reporting Persons file with the
SEC pursuant to Section 16(a). Based solely on our review of the copies of such
reports and upon written representations of the Reporting Persons received by
us, we believe that all Section 16(a) filing requirements applicable to such
Reporting Persons have been met for 2007.
ITEM
11. EXECUTIVE COMPENSATION
The
following table sets forth information regarding all cash and non-cash
compensation earned by or paid to all of the executive officers of the Company
who served during the fiscal year ended December 31, 2007 and 2006, for services
in all capacities to the Company:
Summary
Compensation Table
|
Nonqualified
|
||||||||||||||||||||||||||||||||||
|
Non-Equity
|
Deferred
|
|||||||||||||||||||||||||||||||||
|
Stock
|
Option
|
Incentive Plan
|
Compensation
|
All Other
|
||||||||||||||||||||||||||||||
|
Salary
|
Bonus
|
Awards
|
Awards(3)
|
Compensation
|
Earnings
|
Compensation
|
Total
|
|||||||||||||||||||||||||||
|
Name and Principal Positlion
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||||||||||||
|
Fahad
Syed
|
2007
|
335,000 | 335,000 | |||||||||||||||||||||||||||||||
|
Chief
Executive Officer (1)
|
2006
|
195,336 | 195,336 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||
|
Jeff
Robinson
|
2006
|
96,756 | 96,756 | |||||||||||||||||||||||||||||||
|
Chief
Executive Officer (2)
|
||||||||||||||||||||||||||||||||||
|
Vasan
Thatham
|
2007
|
150,000 | 80,124 | 230,124 | ||||||||||||||||||||||||||||||
|
Chief
Financial Officer (3)
|
2006
|
147,053 | 80,124 | 227,177 | ||||||||||||||||||||||||||||||
(1)
Effective May 5, 2006, Fahad Syed was appointed CEO and elected
Chairman.
(2)
Effective May 5, 2006, Jeff Robinson resigned as Chairman and CEO of the
Company.
(3) Value
of option awards is the dollar amount recognized for financial statements
reporting purposes with respect for fiscal year 2007 and 2006 . See Note 11 to
Consolidated Financial Statements.
-21-
Employment
Agreements
UCA
entered into an employment agreement with Fahad Syed in June of 2003 which will
expire in May 2008, subject to automatic successive one year renewals unless
either the Company or Mr. Syed give notice of intention not to renew the
agreement. The agreement provides for an annual base salary of $150,000, with
specified annual increases to the base salary. Pursuant to the employment
agreement, if we terminate Fahad Syed's employment without cause or good reason,
as defined in the employment agreement, we are obligated to pay a termination
benefit equal to the remaining annual base salary during the initial term of the
employment agreement. In June of 2008, UCA and
Mr. Syed entered into a new employment agreement for a term of three years. The
new agreement provided for an annual base salary of $250,000 with specified
increases and bonus based on the Company’s financial performance. . Pursuant to
the new employment agreement, if the Company terminates the officer's employment
without cause or good reason, as defined in the new employment agreement, the
Company will be obligated to pay a termination benefit equal to the remaining
annual base salary during term of the new employment agreement.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
|
Equity
|
||||||||||||||||||||||||||||||||||||
|
Equity
|
Incentive
|
|||||||||||||||||||||||||||||||||||
|
Incentive
|
Plan
|
|||||||||||||||||||||||||||||||||||
|
Plan
|
Awards:
|
|||||||||||||||||||||||||||||||||||
|
Awards:
|
Market or
|
|||||||||||||||||||||||||||||||||||
|
Equity
|
Number of
|
Payout
|
||||||||||||||||||||||||||||||||||
|
Incentive
|
Unearned
|
Value of
|
||||||||||||||||||||||||||||||||||
|
Number of
|
Plan Awards:
|
Market
|
Shares,
|
Unearned
|
||||||||||||||||||||||||||||||||
|
Securities
|
Number of
|
Number of
|
Number of
|
Value of
|
Units or
|
Shares,
|
||||||||||||||||||||||||||||||
|
Underlying
|
Securities
|
Securities
|
Shares or
|
Shares or
|
Other
|
Units or
|
||||||||||||||||||||||||||||||
|
Unexercised
|
Underlying
|
Underlying
|
Units of
|
Units of
|
Rights
|
Other
|
||||||||||||||||||||||||||||||
|
Options
|
Unexercised
|
Unexercised
|
Option
|
Option
|
Stock That
|
Stock That
|
That Have
|
Rights That
|
||||||||||||||||||||||||||||
|
(#)
|
Options (#)
|
Unearned
|
Exercise
|
Expiration
|
Have Not
|
Have Not
|
Not Vested
|
Have Not
|
||||||||||||||||||||||||||||
|
Name
|
Exercisable
|
Unexercisable
|
Options (#)
|
Plan ($)
|
Date
|
Vested (#)
|
Vested ($)
|
(#)
|
Vested ($)
|
|||||||||||||||||||||||||||
|
Fahad
Syed
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
(CEO)
|
||||||||||||||||||||||||||||||||||||
|
Vasan
Thatham
|
150,000 | 150,000 | - | $ | 1.40 |
06/22/15
|
- | - | - | - | ||||||||||||||||||||||||||
|
(CFO)
|
||||||||||||||||||||||||||||||||||||
Compensation
Of Directors
The
following table sets forth information with respect to director's compensation
for the fiscal year ended December 31, 2007.
-22-
DIRECTORS
COMPENSATION
|
Fees
|
||||||||||||||||||||||||||||
|
Earned
|
||||||||||||||||||||||||||||
|
or
|
Non-Equity
|
Nonqualified
|
||||||||||||||||||||||||||
|
Paid
|
Incentive
|
Deferred
|
||||||||||||||||||||||||||
|
in
|
Stock
|
Option
|
Plan
|
Compensation
|
All Other
|
|||||||||||||||||||||||
|
Cash
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
||||||||||||||||||||||
|
Name
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||||||
|
Charlotte
G. Denenberg (1)
|
$ | 12,000 | $ | - | $ | 12,000 | ||||||||||||||||||||||
|
Joseph
Perno (1 & 2)
|
$ | 12,000 | $ | 34,874 | $ | 46,874 | ||||||||||||||||||||||
(1) Cash
payments made in fiscal year 2007.
(2) Value
of option awards is the dollar amount recognized for financial statements
reporting purposes with respect for fiscal year 2007. See Note 11 to
Consolidated Financial Statements.
Our non
executive directors will receive an initial grant of stock options to purchase
125,000 shares of common stock with an exercise price equal to the fair market
value. The options shall vest into 15,625 shares of common stock on the date of
grant and thereafter into 15,625 shares every three months for as long as the
board member is a member of our Board of Directors as of such date. The option
shall have a term of ten years from the date of grant. Every member of the Board
of Directors who is not an employee shall be entitled to a bi-annual grant of
Stock Options to purchase 125,000 shares of common stock on the two year
anniversary of the initial grant date and for every two year anniversary of such
date thereafter for as long as the member is a member of the Board of Directors.
The options shall vest into 15,625 shares of common stock on the date of grant
and into 15,625 shares of common stock every three months thereafter. The
options shall have a term of ten years. The exercise price shall be the fair
market value on the date of grant. Independent directors are also reimbursed for
out-of-pocket expenses in connection with attendance at board meetings and
committee meetings. In April 2006, we granted Joseph Perno stock options to
purchase 125,000 shares of our common stock. In March 2005, we granted each of
our then three non executive directors, Charlotte G. Denenberg, Richard R.
Howard and Madelyn M. DeMatteo, stock options to purchase 125,000 shares of
common stock. Each of our non-employee directors are entitled to receive 12,000
in 2006 for attending board Meetings
2005
Stock Option Plan
In March
2005, our Board of Directors and stockholders adopted our 2005 Stock Option
Plan, pursuant to which 9,000,000 shares of common stock were reserved for
issuance upon exercise of options. Our stock option plan is designed to serve as
an incentive for retaining qualified and competent employees, directors and
consultants. Our Board of Directors or a committee of our Board of Directors
administers our stock option plan and is authorized, in its discretion, to grant
options under our stock option plan to all eligible employees, including our
officers, directors (whether or not employees) and consultants. Our stock option
plan provides for the granting of both "incentive stock options" (as defined in
Section
422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock
options. Options can be granted under our stock option plan on such terms and at
such prices as determined by the Board of Directors or its committee, except
that the per share exercise price of options will not be less than the fair
market value of the common stock on the date of grant. In the case of an
incentive stock option granted to a stockholder who owns stock possessing more
than 10% of the total combined voting power of all of our classes of stock, the
per share exercise price will not be less than 110% of the fair market value on
the date of grant. The aggregate fair market value (determined on the date of
grant) of the shares covered by incentive stock options granted under our stock
option plan that become exercisable by a grantee for the first time in any
calendar year is subject to a $100,000 limit. Options granted under our stock
option plan will be exercisable during the period or periods specified in each
option agreement. Options granted under our stock option plan are not
exercisable after the expiration of 10 years from the date of grant (five years
in the case of incentive stock options granted to a stockholder owning stock
possessing more than 10% of the total combined voting power of all of our
classes of stock) and are not transferable other than by will or by the laws of
descent and distribution.
-23-
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
PRINCIPAL
STOCKHOLDERS
The table
below sets forth information with respect to the beneficial ownership of our
common stock as of January 8, 2010 for (i) persons who own more than 5% of our
outstanding common stock; (ii) each of our directors or those nominated to be
directors, and executive officers; and (iii) all of our directors and executive
officers as a group.
|
Name and Address
|
Amount and Nature of
|
Percentage
|
||||||
|
of Beneficial Owner
|
Beneficial Ownership
|
of Class(1)
|
||||||
|
Fred
Nazem
|
23,279,527 | (2) | 24.0 | % | ||||
|
44
East 73rd Street
|
||||||||
|
New
York, NY 10021
|
||||||||
|
Faisal
Syed
|
13,238,462 | 13.6 | % | |||||
|
12
Kings Brook Court
|
||||||||
|
Mendham,
NJ 07945
|
||||||||
|
Mohamed
Asif
|
13,238,462 | 13.6 | % | |||||
|
53
Burnet Hill Road
|
||||||||
|
Livingston,
NJ 07039
|
||||||||
|
Fahad
Syed
|
6,731,731 | 9.6 | % | |||||
|
c/o
NetFabric Holdings, Inc
|
||||||||
|
299
Cherry Hill Road
|
||||||||
|
Parsippany,
NJ 07054
|
||||||||
|
Jeff
Robinson
|
4,832,476 | 5.0 | % | |||||
|
Five
Tomaselli Court
|
||||||||
|
Ballston
Spa, NY 12020
|
||||||||
|
Vasan
Thatham
|
300,000 | (3) | * | |||||
|
c/o
NetFabric Holdings, Inc.
|
||||||||
|
299
Cherry Hill Road
|
||||||||
|
Parsippany,
NJ 07054
|
||||||||
|
Charlotte
G. Denenberg
|
125,000 | (4) | * | |||||
|
c/o
NetFabric Holdings, Inc.
|
||||||||
|
299
Cherry Hill Road
|
||||||||
|
Parsippany,
NJ 07054
|
||||||||
|
Joseph
Perno
|
125,000 | (4) | * | |||||
|
c/o
NetFabric Holdings, Inc.
|
||||||||
|
299
Cherry Hill Road
|
||||||||
|
Parsippany,
NJ 07054
|
||||||||
|
Laurus
Master Fund, Ltd.
|
5,221,393 | (5) | 5.3 | % | ||||
|
c/o
Laurus Capital Management, LLC
|
||||||||
|
335
Madison Avenue
|
||||||||
|
New
York, NY 10017
|
||||||||
|
All
Directors and Executive
|
||||||||
|
Officers
as a Group (4 persons)
|
7,281,731 | (6) | 7.5 | % | ||||
* Less
than 1%.
(1)
Applicable percentage of ownership is based on 97,053,044 shares of common stock
outstanding as of January 8, 2010 for each stockholder. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting of investment power with respect to securities. Shares of common
stock subject to securities exercisable or convertible into shares of common
stock that are currently exercisable or exercisable within 60 days of January
8,, 2010 are deemed to be beneficially owned by the person holding such options
for the purpose of computing the percentage of ownership of such persons, but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2)
Includes 6,592,212 shares held by the Fred F. Nazem Children's Trust, whose
trustees are Alexander Nazem, Farhad Nazem and Sohelya Gharib. Fred Nazem
disclaims beneficial ownership of these securities.
(3)
Includes 300,000 shares issuable upon exercise of options.
(4)
Includes 125,000 shares issuable upon exercise of options.
(5)
Includes 554,282 shares issuable upon exercise of
warrants. Laurus Capital Management, LLC manages Laurus Master Fund
Ltd. Eugene Grin and David Grin, through other entities, are the controlling
principals of Laurus Capital Management, LLC and share sole voting and
investment power over the securities owned by Laurus Master Fund
Ltd.
-24-
(6)
Includes 550,000 shares issuable upon exercise of options.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
In April
2006, we sold the 2006 Convertible Debentures in the face amount of $150,000 to
Fahad Syed, an officer and director and in the face amount of $50,000 to Fred
Nazem, a stockholder (For the purposes of this paragraph, Mr. Syed and Mr. Nazem
are collectively referred to as the "Debenture Holders"). The 2006 Convertible
Debentures bear interest at 8% and were due originally on June 17, 2006. At the
option of the Debenture Holders, the 2006 Convertible Debentures can be
converted into shares of the Company's common stock at a conversion price of
$.50 per share. In connection with the sale, we issued warrants to the two
Debenture Holders for an aggregate amount of 150,000 shares of the Company's
common stock as additional consideration. In December 2006, the Debenture
Holders extended the maturity of the 2006 Convertible Debentures to April 2007.
In April 2007, the maturity of Convertible Debenture due to Fahad Syed was
extended to December 2007 and repaid in 2008.
In June
2006, we sold a Stockholder Convertible Debenture in the face amount of $150,000
to Fred Nazem. The Stockholder Convertible Debenture bears interest at 8% and
was due on August 4, 2006. At the option of the holder, the Stockholder
Convertible Debenture can be converted into shares of the Company's common stock
at a conversion price of $.50 per share. In connection with the sale, we issued
300,000 shares of its common stock as additional consideration. In December
2006, Fred Nazem extended the maturity of the Stockholder Convertible Debenture
to April 2007. In August
2007, the Company entered into an Agreement to Convert (the “Agreement”) with
Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to
convert $218,882 due to him in outstanding convertible debentures and accrued
interest of $18,882 into 5,472,050 shares of common stock, which includes
4,900,394 shares as an inducement for conversion.
We had a
sublease with UCA Global, Inc., an entity affiliated with Faisal Syed, a
stockholder . The lease is for an office of 13,000 square feet for a three year
term through July 2008 with an annual rent of $144,000. The sublease rent was
determined by the landlord based on the area of usage and we pay our share of
rent directly to the landlord. Pursuant to
entering into a lease for a new office premises, the Company has terminated the
sublease arrangement effective June 2007.
Prior to
our acquisition of UCA, UCA issued a promissory note to Faisal Syed, a
stockholder, in the principal amount of $100,000. The note bears interest at the
rate of 6%. The promissory note, together with accrued but unpaid interest, was
due on June 16, 2005. We repaid the promissory note in February
2006.
In June
2005, Fred Nazem, a stockholder, advanced $70,000 to the Company for working
capital. The loan was interest free and not subject to any written agreement and
did not have any formal due date. We paid the note in February
2006.
In June
2005, Fahad Syed, an officer and director, advanced $200,000 to the Company for
working capital. Initially, the loan was interest free and not subject to any
written agreement. In December 2005, we issued a promissory note to formalize
our borrowing. The note bore interest at 5% and it was due in January 2006. We
paid the note in February 2006. In December 2005, we also issued a warrant to
acquire 300,000 shares of our common stock at $1.00 per share to Fahad Syed as
additional consideration. The warrant expires in January 2009.
-25-
In July
2005, we sold convertible debentures to a stockholder, Fred Nazem, and to CCS
Group, LLC. ("CCS"), an entity affiliated with Walter Carozza, our former
officer, in the face amounts of $50,000 each, repayable in April 2006. The
convertible debentures can be converted into 100,000 shares of our common stock
at a conversion price of $.50 per share. In connection with the sale, we issued
each of them warrants to acquire 100,000 shares of our common stock at an
exercise price of $1.50 per share. The warrants expire three years from the date
of issuance. We also issued to Mr. Nazem and CCS 37,500 shares each of our
common stock as additional consideration. Fred Nazem converted the debenture
into 100,000 shares of common stock in April 2006. The maturity date of the
convertible debenture held by CCS was extended to September 2006. In September,
CCS converted the convertible debenture into 100,000 shares of common stock. As
consideration for the conversion, we issued CCS 300,000 shares of our common
stock.
In the
normal course of business, the Company performed services for and billed Clear
to Close, Inc., an entity affiliated with the Company's stockholders, in the
amounts of $ 0 and $68,000, respectively, during the years ended December 31,
2007 and 2006. As of December 31, 2007, approximately $235,000 was owed to the
Company by Clear to Close, Inc. including amounts owed to UCA prior to the
acquisition and a full allowance is provided due to uncertainty over the
recovery of the amount.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Through
September 30, 2005, Goldstein Golub Kessler LLP ( "GGK") had a continuing
relationship with American Express Tax and Business Services Inc. ("TBS") from
which it leased auditing staff who were full time, permanent employees of TBS
and through which its partners provided non-audit services. Subsequent to
September 30, 2005 this relationship ceased and GGK established a similar
relationship with RSM McGladrey, Inc. GGK has no full time employees, and,
therefore, none of the audit services performed were provided by permanent,
full-time employees of the GGK. GGK manages and supervises the audit and audit
staff and is exclusively responsible for the opinion rendered in connection with
its examination. GGK performed an audit of our annual financial statements for
the year ended December 31, 2006.
Certain
of the partners of GGK became partners of McGladrey & Pullen, LLP in a
limited asset purchase agreement effective October 3, 2007. As a result, GGK
resigned as our auditors effective December 4, 2007 and McGladrey & Pullen,
LLP was appointed as the auditors of our annual financial statements for the
year ended December 31, 2007.
Audit
Fees
The
aggregate fees billed or to be billed for professional services rendered by our
independent registered public accounting firm for the audit of our annual
financial statements, review of financial statements included in our quarterly
reports and other fees that are normally provided by the accounting firm in
connection with statutory and regulatory filings or engagements for the fiscal
years ended December 31, 2007 and 2006 were $170,000 and $160,000, respectively.
For 2007, 125,000 of fees was billed by McGladrey & Pullen, LLP and $45,000
was billed by GGK. For 2006, $100,000 of fees were billed or to be billed by
our independent registered public accounting firm GGK and $60,000
were billed by JHC, our former independent registered public accounting
firm.
Audit
Related Fees
The
aggregate fees billed or to be billed for audit related services by our
independent registered public accounting firm that are reasonably related to the
performance of the audit or review of our financial statements, other than those
previously reported in this Item 14, for the fiscal years ended December 31,
2007 and 2006 were $0 and $0, respectively.
-26-
Tax
Fees
The
aggregate fees billed for professional services rendered by our independent
registered public accounting firm for tax compliance, tax advice and tax
planning for the fiscal years ended December 31, 2007 and 2006 were $0 and $0,
respectively.
All
Other Fees
There
were no other fees billed for services by our independent registered public
accounting firm for either audit related or non audit services for the fiscal
years ended December 31, 2007 and 2006.
The Audit
Committee considered and determined that the services performed are compatible
with maintaining the independence of the independent registered public
accounting firm.
Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditor
The Audit
Committee is responsible for pre-approving all audit and permitted non-audit
services to be performed for us by our Independent Registered Public Accounting
Firm as outlined in its Audit Committee charter. Prior to engagement of the
Independent Registered Public Accounting Firm for each year's audit, management
or the Independent Registered Public Accounting Firm submits to the Audit
Committee for approval an aggregate request of services expected to be rendered
during the year, which the Audit Committee pre-approves. During the year,
circumstances may arise when it may become necessary to engage the Independent
Registered Public Accounting Firm for additional services not contemplated in
the original pre-approval. In those circumstances, the Audit Committee requires
specific pre-approval before engaging the Independent Registered Public
Accounting Firm. Currently, the Company does not have an audit committee and in
accordance with ss.3(a)(58)(B) of the Securities Exchange Act of 1934, the
entire Board of Directors is acting as the Company's Audit Committee. The entire
Board of Directors does not delegate to management its responsibility to
pre-approve services performed by the Independent Registered Public Accounting
Firm.
-27-
ITEM
15. EXHIBITS.
|
A.
|
Exhibits
|
|
|
Exhibit
2.1
|
Share
Exchange Agreement between the Company, NetFabric, NetFabric’s
shareholders and Littlehampton LLC, dated December 9, 2004.
(1)
|
|
|
Exhibit
2.2
|
Share
Exchange Agreement between the Company, UCA Services, Inc. and all of the
Shareholders of UCA Services, Inc. dated 20, 2005. (4)
|
|
|
Exhibit
3.1
|
Articles
of Incorporation (12)
|
|
|
Exhibit
3.2
|
By-Laws.
(7)
|
|
|
Exhibit
10.1
|
Letter
Agreement between Houston Operating Company, NetFabric Corporation,
Macrocom Investors, LLC and Littlehampton Investments, LLC, dated March
25, 2005. (3)
|
|
|
Exhibit
10.2
|
Financing
Agreement between NetFabric and Macrocom, dated July 22, 2004.
(1)
|
|
|
Exhibit
10.3
|
Loan
Agreement between NetFabric and Macrocom, dated October 14, 2004.
(1)
|
|
|
Exhibit
10.4
|
Amendment
to Financing and Loan Agreement between NetFabric and Macrocom, dated
December 2, 2004. (1)
|
|
|
Exhibit
10.5
|
Distribution
Agreement between NetFabric and Williams, dated November 29, 2004.
(1)
|
|
|
Exhibit
10.6
|
Lease
Agreement between NetFabric and Silvermine, dated January 1, 2004.
(1)
|
|
|
Exhibit
10.7
|
2005
Stock Option Plan. (2)
|
|
|
Exhibit
10.8
|
Agreement
with Macrocom Investors, LLC for Convertible Debentures dated July 19,
2005. (5)
|
|
|
Exhibit
10.9
|
Warrant,
dated as October 27, 2005, issued by the Company to Cornell Capital
Partners, LP. (6)
|
|
|
Exhibit
10.10
|
Securities
Purchase Agreement, dated as of October 27, 2005, by and between the
Company and Cornell Capital Partners, LP. (6)
|
|
|
Exhibit
10.11
|
Investor
Registration Rights Agreement, dated as of October 27, 2005, by and
between the Company and Cornell Capital Partners, LP.
(6)
|
-28-
|
Exhibit
10.12
|
Escrow
Agreement, dated as of October 27, 2005, by and among the Company, Cornell
Capital Partners, LP and David Gonzalez, Esq., as escrow agent pursuant to
the Securities Purchase Agreement. (6)
|
|
|
Exhibit
10.13
|
Amended
and Restated Security Agreement, dated as of October 27, 2005, by and
between the Company and Cornell Capital Partners, LP.
(6)
|
|
|
Exhibit
10.14
|
Amended
and Restated Security Agreement, dated as of October 27, 2005, by and
between the Company and Cornell Capital Partners, LP.
(6)
|
|
|
Exhibit
10.15
|
Amended
and Restated Security Agreement, dated as of October 27, 2005, by and
between UCA Services, Inc. and Cornell Capital Partners, LP.
(6)
|
|
|
Exhibit
10.16
|
Officer
Pledge and Escrow Agreement, dated as of October 27, 2005, by and among
the Company, Cornell Capital Partners, LP and David Gonzalez, Esq., as
escrow agent. (6)
|
|
|
Exhibit
10.17
|
Form
of Secured Convertible Debenture issued to Cornell Capital Partners, LP
dated October 27, 2005. (6)
|
|
|
Exhibit
10.18
|
Employment
Agreements with Fahad Syed. (7)
|
|
|
Exhibit
10.19
|
Amendment
of The Share Exchange Agreement dated February 13, 2006 by and among
NetFabric, Holdings, Inc. UCA Services, Inc. and UCA Shareholders.
(8)
|
|
|
Exhibit
10.20
|
Security
Agreement, dated February 10, 2006, by and between the Company and Laurus
Master Fund, Ltd.
|
|
|
Exhibit
10.21
|
Secured
Convertible Note, dated February 10, 2006, by and between the Company and
Laurus Master Fund, Ltd. (9)
|
|
|
Exhibit
10.22
|
Secured
Non-Convertible Note, dated February 10, 2006, by and between the Company
and Laurus Master Fund, Ltd. (9)
|
|
|
Exhibit
10.22
|
Option,
dated February 10, 2006, by the Company. (9)
|
|
|
Exhibit
10.23
|
Registration
Rights Agreement, dated February 10, 2006, by and between the Company and
Laurus Master Fund, Ltd. (9)
|
|
|
Exhibit
10.24
|
Subsidiary
Guaranty, dated February 10, 2006 from NetFabric Corporation and UCA
Services, Inc. (9)
|
|
|
Exhibit
10.25
|
Letter
agreement, dated February 10, 2006 between the Company and Laurus Master
Fund. (9)
|
|
|
Exhibit
10.27
|
Form
of Convertible Debenture dated April 19, 2006 issued by the Company.
(10)
|
|
|
Exhibit
10.28
|
Form
of Warrant, dated April 19, 2006 issued by the Company.
(10)
|
|
|
Exhibit
10.28
|
Agreement
and Plan of Acquisition by and between Intrusion Detection Technologies,
Inc., UTEK Corporation and NetFabric Holdings, Inc.
(11)
|
|
|
Exhibit
14.1
|
Code
of Business Conduct and Ethics. (3)
|
|
|
Exhibit
21.1
|
Subsidiaries
of the Registrant*
|
|
|
Exhibit
31.1
|
Rule
13a-14(a)/15d-14(a) Certification (CEO)*
|
|
|
Exhibit
31.2
|
Rule
13a-14(a)/15d-14(a) Certification (CFO)*
|
|
|
Exhibit
32.1
|
Section
1350 Certification (CEO)*
|
|
|
Exhibit
32.2
|
Section
1350 Certification
(CFO)*
|
-29-
(1) Filed
as an Exhibit to the Company's 8-K filed on December 15, 2004.
(2) Filed
with Schedule 14C Information on March 21, 2005.
(3) Filed
as an Exhibit to the Company's 10K/A filed on December 19, 2005.
(4) Filed
as an Exhibit to the Company's Form 8-K on May 26, 2005
(5) Filed
as an Exhibit on the Company's 8-K filed on July 25, 2006.
(6) Filed
as an Exhibit on the Company's SB-2 on November 2, 2005
(7) Filed
as an Exhibit on the Company's 10KSB filed on April 15, 2006
(8) Filed
as an Exhibit to the Company's Form 8_8K filed on February 15, 2006
(9) Filed
as an Exhibit to the Company's Form 8-K filed on February 15, 2006
(10)
Filed as an Exhibit to the Company's Form 8-K filed on April 19,
2006
(11)
Filed as an Exhibit to the Company's Form 8-K filed on August 16,
2006
-30-
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Date:
February 18, 2010
|
/s/
FAHAD SYED
|
|
Fahad
Syed, Chairman and
|
|
|
Chief
Executive Officer
|
|
|
(principal
executive officer)
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Date:
February 18, 2010
|
/s/
FAHAD SYED
|
|
Fahad
Syed, Chairman
|
|
|
and
Chief Executive Officer
|
|
|
(principal
executive officer)
|
|
|
Date:
February 18, 2010
|
/s/
VASAN THATHAM
|
|
Vasan
Thatham, Chief Financial
|
|
|
Officer
(principal accounting officer)
|
|
|
Date:
February 18, 2010
|
/s/
JOSEPH PERNO
|
|
Joseph
Perno, Director
|
|
|
Date:
February 18, 2010
|
/s/
CHARLOTTE G. DENENBERG
|
|
Charlotte
G. Denenberg,
Director
|
-31-
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
NetFabric
Holdings, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of NetFabric Holdings, Inc.
and Subsidiaries as of December 31, 2006, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NetFabric
Holdings, Inc. and Subsidiaries as of December 31, 2006 and their consolidated
results of operations and their cash flows for the year then ended, in
conformity with United States generally accepted accounting
principles.
As
discussed in Note 11 to the consolidated financial statements, the Company
changed the manner in which it accounts for stock-based compensation in
2006.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has had net losses from inception
and has a working capital deficiency. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
GOLDSTEIN
GOLUB KESSLER LLP
New York,
New York
April 13,
2007
-32-
To the
Board of Directors and Stockholders
NetFabric
Holdings, Inc.
We have
audited the consolidated balance sheet of NetFabric Holdings, Inc. and
Subsidiaries (hereafter referred to as “NetFabric”) as of December 31, 2007, and
the related statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NetFabric as of
December 31, 2007, and the results of their operations and their cash flows
for the year then ended in conformity with U.S. generally accepted accounting
principles.
We were
not engaged to examine management's assertion about the effectiveness of
NetFabric’s internal control over financial reporting as of December 31, 2007
included in the “Management’s Report on Internal Control Over Financial
Reporting” and, accordingly, we do not express an opinion thereon.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has had net losses from inception and has a
working capital deficiency. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
McGLADREY
& PULLEN, LLP
New York,
New York
May 11,
2009
-33-
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
|
$ | 15,224 | $ | 13,437 | ||||
|
Trade
accounts receivable, net
|
1,758,821 | 2,149,680 | ||||||
|
Prepaid
expenses and other current assets
|
34,012 | 5,110 | ||||||
|
Total
current assets
|
1,808,057 | 2,168,227 | ||||||
|
Property
and equipment, net
|
206,329 | 197,215 | ||||||
|
Goodwill
|
5,704,000 | 13,982,451 | ||||||
|
Other
intangibles, net
|
659,687 | 879,702 | ||||||
|
Other
assets
|
22,929 | 55,028 | ||||||
|
TOTAL
ASSETS
|
$ | 8,401,002 | $ | 17,282,623 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Convertible
debentures, net of unamortized discounts
|
$ | 150,000 | $ | 685,170 | ||||
|
Notes
payable to officer, net of unamortized discounts
|
150,000 | |||||||
|
Short
term borrowings
|
970,000 | |||||||
|
Accounts
payable and accrued liabilities
|
3,976,771 | 3,747,807 | ||||||
|
Accrued
compensation
|
554,880 | 338,283 | ||||||
|
Deferred
revenues and customer advances
|
112,000 | |||||||
|
Revolving
note, net of unamortized discount
|
981,555 | 1,014,249 | ||||||
|
Total
current liabilities
|
6,745,206 | 5,935,509 | ||||||
|
Convertible
note, net of unamortized discount
|
940,232 | 443,430 | ||||||
|
Total
liabilities
|
7,685,438 | 6,378,939 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||
|
Common
Stock, $.001 par value, authorized shares 200,000,000, 96,053,044 and
75,023,883 shares issued and outstanding, respectively
|
96,053 | 75,024 | ||||||
|
Additional
paid-in capital
|
37,802,940 | 36,201,479 | ||||||
|
Accumulated
deficit
|
(37,183,429 | ) | (25,372,819 | ) | ||||
|
Total
stockholders' equity
|
715,564 | 10,903,684 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 8,401,002 | $ | 17,282,623 | ||||
See
accompanying notes to consolidated financial statements.
-34-
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
|
YEAR
|
YEAR
|
|||||||
|
ENDED
|
ENDED
|
|||||||
|
December 31, 2007
|
December 31, 2006
|
|||||||
|
Revenues
|
$ | 16,223,871 | $ | 17,599,303 | ||||
|
OPERATING
EXPENSES:
|
||||||||
|
Direct
employee compensation and
|
||||||||
|
consultant
expenses (includes share based compensation
|
||||||||
|
of
$45,584 and $22,792)
|
12,528,503 | 13,352,858 | ||||||
|
Selling,
general and administrative expenses (includes
|
||||||||
|
share
based compensation of $300,303 and $606,574)
|
4,962,997 | 6,272,570 | ||||||
|
Non-cash
charge for dispute settlements
|
9,492,070 | |||||||
|
Non-cash
goodwill impairment
|
8,278,451 | |||||||
|
In
process research and development
|
160,000 | |||||||
|
Depreciation
and amortization
|
316,938 | 344,846 | ||||||
|
Total
operating expenses
|
26,086,889 | 29,622,344 | ||||||
|
Loss
from operations
|
(9,863,018 | ) | (12,023,041 | ) | ||||
|
OTHER
INCOME / (EXPENSE):
|
||||||||
|
Amortization
of debt discounts
|
(758,011 | ) | (2,819,289 | ) | ||||
|
Amortization
of debt issuance cost
|
(282,005 | ) | ||||||
|
Interest
and bank charges
|
(315,135 | ) | (316,439 | ) | ||||
|
Gain/(charge)
on derivative financial instruments & financing costs
|
336,352 | |||||||
|
Debt
extinguishment costs
|
(539,043 | ) | (1,773,181 | ) | ||||
|
Total
other income / (expense)
|
(1,894,194 | ) | (4,572,557 | ) | ||||
|
Loss
before provision for income taxes
|
(11,757,212 | ) | (16,595,598 | ) | ||||
|
Provision
for income taxes
|
- | - | ||||||
|
LOSS
FROM CONTINUING OPERATIONS
|
(11,757,212 | ) | (16,595,598 | ) | ||||
|
DISCONTINUED
OPERATIONS:
|
||||||||
|
Loss
from discontinued operations
|
(53,398 | ) | (474,411 | ) | ||||
|
NET
LOSS
|
$ | (11,810,610 | ) | $ | (17,070,009 | ) | ||
|
Net
loss from continuing operations per common share, basic and
diluted
|
$ | (0.14 | ) | $ | (0.24 | ) | ||
|
Net
loss from discontinued operations per common share, basic and
diluted
|
- | $ | (0.01 | ) | ||||
|
Net
loss per common share, basic and diluted
|
$ | (0.14 | ) | $ | (0.25 | ) | ||
|
Weighted
average number of shares outstanding, basic and diluted
|
84,617,063 | 68,056,366 | ||||||
See
accompanying notes to consolidated financial statements.
-35-
NETFABRIC
HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
COMMON STOCK
|
||||||||||||||||||||||||
|
ADDITIONAL
|
DEFERRED
|
ACCUMULATED
|
TOTAL
|
|||||||||||||||||||||
|
SHARES
|
PAR VALUE
|
PAID-IN CAPITAL
|
COMPENSATION
|
DEFICIT
|
STOCKHOLDERS' EQUITY
|
|||||||||||||||||||
|
Balances
at December 31, 2005
|
62,448,357 | $ | 62,448 | $ | 16,657,804 | $ | (36,478 | ) | $ | (8,302,810 | ) | $ | 8,380,964 | |||||||||||
|
Issuance
of common shares in connection with settlement of payables
|
60,526 | 61 | 57,439 | 57,500 | ||||||||||||||||||||
|
Value
of contributions from shareholder in connection with
|
||||||||||||||||||||||||
|
settlement
of disputes
|
- | - | 9,492,070 | 9,492,070 | ||||||||||||||||||||
|
Employee
share-based compensation
|
- | - | 493,762 | 493,762 | ||||||||||||||||||||
|
Reclassification
of deferred employee stock option compensation
|
- | - | (36,478 | ) | 36,478 | |||||||||||||||||||
|
Allocation
of value to beneficial conversion feature in
|
||||||||||||||||||||||||
|
connection
with issuance of convertible note
|
- | - | 511,577 | 511,577 | ||||||||||||||||||||
|
Issuance
of options and warrants in connection with debt financing
|
- | - | 1,432,743 | 1,432,743 | ||||||||||||||||||||
|
Reissuance
of warrants in connection with debt extinguishment
|
- | - | 372,353 | 372,353 | ||||||||||||||||||||
|
Reclassification
of derivative financial instrument
|
||||||||||||||||||||||||
|
relating
to beneficial conversion feature
|
- | - | 804,307 | 804,307 | ||||||||||||||||||||
|
Reclassification
of derivative financial instrument relating
|
||||||||||||||||||||||||
|
to
warrants
|
- | - | 2,946,858 | 2,946,858 | ||||||||||||||||||||
|
Settlement
of bridge loans with common stock
|
2,500,000 | 2,500 | 1,622,500 | 1,625,000 | ||||||||||||||||||||
|
Conversion
of convertible debenture issued to officer with common
stock
|
500,000 | 500 | 129,500 | 130,000 | ||||||||||||||||||||
|
Issuance
of shares in connection with extension of convertible debenture
to
|
||||||||||||||||||||||||
|
officer
|
100,000 | 100 | 29,900 | 30,000 | ||||||||||||||||||||
|
Allocation
of value to beneficial conversion feature issued in
|
||||||||||||||||||||||||
|
connection
with issuance of convertible debenture
|
- | - | 322,755 | 322,755 | ||||||||||||||||||||
|
Allocation
of value for warrants issued in connection with
convertible
|
||||||||||||||||||||||||
|
debentures
|
- | - | 133,969 | 133,969 | ||||||||||||||||||||
|
Allocation
of value for common shares issued in connection with
convertible
|
||||||||||||||||||||||||
|
debentures
|
525,000 | 525 | 164,510 | 165,035 | ||||||||||||||||||||
|
Allocation
of value for warrants issued in connection with extension
|
||||||||||||||||||||||||
|
of
convertible debentures
|
- | - | 115,908 | 115,908 | ||||||||||||||||||||
|
Allocation
of value of common shares issued in connection with
extension
|
||||||||||||||||||||||||
|
of
convertible debentures
|
350,000 | 350 | 55,992 | 56,342 | ||||||||||||||||||||
|
Issuance
of common shares in connection with convertible debenture
|
- | - | - | |||||||||||||||||||||
|
Issuance
of common shares for services
|
290,000 | 290 | 40,744 | 41,034 | ||||||||||||||||||||
|
Issuance
of warrants for services
|
- | - | 51,516 | 51,516 | ||||||||||||||||||||
|
Issuance
of shares for licensing agreement acquisition
|
8,250,000 | 8,250 | 801,750 | 810,000 | ||||||||||||||||||||
|
Net
loss
|
(17,070,009 | ) | (17,070,009 | ) | ||||||||||||||||||||
|
BALANCES
AT December 31, 2006
|
75,023,883 | 75,024 | 36,201,479 | - | (25,372,819 | ) | 10,903,684 | |||||||||||||||||
|
Issuance
of common shares for services
|
640,000 | 640 | 76,960 | 77,600 | ||||||||||||||||||||
|
Sale
of common shares in private placement
|
11,250,000 | 11,250 | 438,750 | 450,000 | ||||||||||||||||||||
|
Employee
share-based compensation
|
268,297 | 268,297 | ||||||||||||||||||||||
|
Conversion
of warrants to common shares
|
3,667,111 | 3,667 | (3,667 | ) | ||||||||||||||||||||
|
Allocation
of value for warrants issued in connection with short term
borrowings
|
68,668 | 68,668 | ||||||||||||||||||||||
|
Conversion
of convertible debenture issued to shareholder with common
stock
|
5,472,050 | 5,472 | 752,453 | 757,925 | ||||||||||||||||||||
|
Net
Loss
|
(11,810,610 | ) | (11,810,610 | ) | ||||||||||||||||||||
|
BALANCES
AT December 31, 2007
|
96,053,044 | $ | 96,053 | $ | 37,802,940 | $ | 0 | $ | (37,183,429 | ) | $ | 715,564 | ||||||||||||
See
accompanying notes to consolidated financial statements.
-36-
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
Year ended
December 2007
|
Year ended
December 2006
|
|||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
loss
|
$ | (11,810,610 | ) | $ | (17,070,009 | ) | ||
|
Loss
from discontinued operations
|
53,398 | 474,411 | ||||||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Non-cash
charge for interest expense
|
22,500 | |||||||
|
Non-cash
charge for settlement of disputes
|
9,492,070 | |||||||
|
Non-cash
charge in connection with settlement of debt
|
539,043 | 1,152,104 | ||||||
|
Non-cash
charge for in process R&D
|
160,000 | |||||||
|
Non-cash
charge for reissuance of warrants in connection with
|
||||||||
|
debt
extinguishment
|
372,353 | |||||||
|
Common
stock issued for services
|
77,600 | 150,000 | ||||||
|
Non-cash
charge for employee share based compensation
|
268,297 | 629,366 | ||||||
|
Non-cash
gain on debt extinguishment
|
(32,638 | ) | ||||||
|
Non-cash
gain on derivative financial instrument
|
(336,352 | ) | ||||||
|
Allowance
for bad debts
|
107,344 | |||||||
|
Non-cash
goodwill impairment
|
8,278,451 | |||||||
|
Amortization
of debt discounts
|
758,011 | 2,819,289 | ||||||
|
Amortization
of debt issuance costs
|
282,005 | |||||||
|
Depreciation
and amortization
|
316,938 | 344,846 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Trade
accounts receivable
|
390,859 | (59,479 | ) | |||||
|
Due
from related party
|
84,712 | |||||||
|
Prepaid
expenses and other current assets
|
(28,902 | ) | 29,956 | |||||
|
Other
assets
|
31,502 | (47,098 | ) | |||||
|
Accounts
payable and accrued liabilities
|
248,428 | 796,496 | ||||||
|
Accrued
compensation
|
216,597 | (42,439 | ) | |||||
|
Deferred
revenues and advances
|
112,000 | (66,019 | ) | |||||
|
Net
cash used in continuing operations
|
(266,383 | ) | (1,018,587 | ) | ||||
|
Net
cash used in discontinued operations
|
(53,398 | ) | (454,344 | ) | ||||
|
Net
cash used in operating activities
|
(319,781 | ) | (1,472,931 | ) | ||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Purchases
of property and equipment
|
(106,024 | ) | (132,667 | ) | ||||
|
Net
cash used in investing activities
|
(106,024 | ) | (132,667 | ) | ||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Proceeds
from issuance of common stock
|
450,000 | - | ||||||
|
Proceeds
from short term borrowings
|
1,170,000 | |||||||
|
Repayment
of short term borrowings
|
(200,000 | ) | ||||||
|
Repayment
of note to officer
|
(200,000 | ) | ||||||
|
Convertible
debentures issued (repaid)
|
950,000 | |||||||
|
Repayments
of bridge loans
|
(500,000 | ) | ||||||
|
Proceeds
(repayment) of convertible debentures
|
(1,658,160 | ) | ||||||
|
Cash
received of issuance of stock
|
500,000 | |||||||
|
Proceeds
from issuance (repayment of)of revolving note, net
|
(210,403 | ) | 1,417,852 | |||||
|
Proceeds
from issuance of convertible note, net
|
1,430,500 | |||||||
|
Debt
issuance costs
|
(282,005 | ) | (60,697 | ) | ||||
|
Repayment
of convertible debenture
|
(500,000 | ) | (100,000 | ) | ||||
|
Repayment
of loans from officer and director
|
(170,000 | ) | ||||||
|
Net
cash provided by financing activities
|
427,592 | 1,609,495 | ||||||
|
Net
increase in cash
|
1,787 | 3,897 | ||||||
|
Cash
at beginning of year
|
13,437 | 9,540 | ||||||
|
Cash
at end of year
|
$ | 15,224 | $ | 13,437 | ||||
|
Supplemental
cash flow information:
|
||||||||
|
Cash
paid for interest
|
$ | 322,000 | $ | 261,000 | ||||
|
Cash
paid for income taxes
|
$ | - | $ | - | ||||
See
accompanying notes to consolidated financial statements.
-37-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS
NetFabric
Holdings, Inc. ("Holdings" or the "Company") (formerly known as Houston
Operating Company) was incorporated under the laws of the State of Delaware on
August 31, 1989. On December 9, 2004, Holdings entered into an Exchange
Agreement (the "Acquisition Agreement" or "Share Exchange") with all of the
stockholders of NetFabric Corporation ("NetFabric") whereby Holdings acquired
all of the issued and outstanding capital stock of NetFabric and NetFabric
became a wholly-owned subsidiary of Holdings. Upon completion of the merger, the
NetFabric stockholders controlled approximately 95% of the then issued and
outstanding stock. NetFabric's business activities were the activities of the
merged company and Holdings was a shell corporation without any operations. As a
result of these factors, this transaction was treated as a reverse merger for
financial reporting purposes
NetFabric,
a Delaware corporation incorporated on December 17, 2002, began operations in
July 2003. NetFabric developed and marketed Voice Over Internet Protocol
("VoIP") appliances that simplified the integration of standard telephone
systems with an IP infrastructure. On May 5, 2006, the Company announced its
decision to exit from the hardware-based VoIP communications product line
(including resale of transport services) that is targeted at small to mid-sized
businesses ("SMB's"). In accordance with Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", ("SFAS No. 144"), the Company has presented the results of operations
from its VoIP business segment as discontinued operations in the accompanying
consolidated balance sheets, statements of operations and statements of cash
flows (Note 3).
On May
20, 2005, Holdings entered into and closed on a share exchange agreement
("Exchange Agreement"), whereby Holdings acquired all of the issued and
outstanding shares of UCA Services, Inc. ("UCA Services"), a New Jersey company,
from its shareholders in exchange for the issuance of 24,096,154 shares of
common stock of Holdings. Holdings emerged from the development stage upon the
acquisition of UCA Services. In May 2007, UCA Services changed its
legal name to NetFabric Technologies, Inc.
UCA
Services, a New Jersey company, is an information technology ("IT") services
company that serves the information and communications needs of a wide range of
Fortune 500 and small to mid-size business clients in the financial markets
industry as well as the pharmaceutical, health care and hospitality sectors. UCA
Services delivers a broad range of IT services in the practice areas of
infrastructure builds and maintenance, managed services and professional
services.
Management's
plans
The
accompanying consolidated financial statements have been prepared on a going
concern basis. As shown in the accompanying consolidated financial statements,
the Company has incurred accumulated losses totaling $37,183,429 and has a
working capital deficit of $4,937,149 at December 31, 2007. These factors, among
others, indicate that the Company may be unable to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Management
recognizes that the Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to allow the Company to continue
the development of its business plans and satisfy its current and long-term
obligations on a timely basis. The Company believes that it will be able to
complete the necessary steps in order to meet its cash requirements throughout
fiscal 2008 and continue its business development efforts.
-38-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In March
2009, the company entered into a transaction with Fortify Infrastructure
Services, Inc. See Note 15. Pursuant the transaction, the Company will transfer
its ownership interest in UCA Services. Out of proceeds from the transaction,
the Company repaid all of its debt. After the eventual divesture of
UCA, the Company will not have any operations. However, the Company will be debt
free. The Company will explore strategic alternatives including merger with
another entity. Currently, the Company does not have any agreement or
understanding with any entity and there is no assurance that such a transaction
will ever be consummated.
NOTE
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
Basis
of Presentation of Consolidated Financial Statements and Estimates
The
consolidated financial statements include the accounts of Holdings and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles 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 assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. The accounting estimates that require management's most
difficult and subjective judgments include the value and allocation of purchase
price in business combinations, provisions for bad debts,
depreciable/amortizable lives, impairment of goodwill and other long-lived
assets, the fair value of common stock and options issued for services as well
as the allocation of proceeds from the bridge loan to and financial instruments
and other reserves. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates.
Reclassifications
Certain
reclassifications have been made in the 2006 consolidated financial statements
to conform to the current presentation.
Revenue
Recognition
In
accordance with the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 104, "Revenue Recognition," revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product or services has
occurred, the fee is fixed and determinable, collectability is reasonably
assured, contractual obligations have been satisfied, and title and risk of loss
have been transferred to the customer.
The
Company derives revenue primarily from professional services, managed IT
services, application development services and from business process management
services. Arrangements with customers for services are generally on a time and
material basis or fixed-price, fixed-timeframe. Revenue on time-and-material
contracts is recognized as the related services are performed. Revenue from
fixed-price, fixed-timeframe service contracts is recognized ratably over the
term of the contract. When the Company receives cash advances from customers in
advance of the service period, amounts are reported as advances from customers
until the commencement of the service period.
Billings
and collections in excess of revenue recognized are classified as deferred
revenue.
-39-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. These
estimated losses are based upon historical bad debts, specific customer
creditworthiness and current economic trends. If the financial condition of a
customer deteriorates, resulting in the customer's inability to make payments
within approved credit terms, additional allowances may be required. The Company
performs credit evaluations of its customers' financial condition on a regular
basis, and has not experienced any material bad debt losses to date. The Company
recorded allowances for bad debts of $24,623 and $107,344 during years ended
December 31, 2007 and 2006, respectively. As of December 31, 2007 doubtful
allowance balances was $297,946.
Cash
and Cash Equivalents
The
Company considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.
Property
and Equipment
Property
and equipment, consisting principally of computer equipment and furniture and
fixtures, are recorded at cost. Depreciation and amortization are provided for
on a straight line basis over the following useful lives:
|
Equipment
|
3
years
|
|
Furniture
and fixtures
|
7
years
|
|
Leasehold
improvements
|
Lesser
of life of lease or useful
life
|
Repairs
and maintenance are charged to operations as incurred. When assets are retired
or otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the accounts and any resulting gain or loss is reported in the
period realized.
Long-Lived
Assets
Long-lived
assets, including property and equipment and intangible assets with finite
lives, are monitored and reviewed for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. The determination of recoverability is based on an estimate
of undiscounted cash flows expected to result from the use of an asset and its
eventual disposition. The estimated cash flows are based upon, among other
things, certain assumptions about expected future operating performance, growth
rates and other factors. Estimates of undiscounted cash flows may differ from
actual cash flows due to factors such as technological changes, economic
conditions, and changes in the Company's business model or operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
below the carrying value, an impairment loss is recognized, measured as the
amount by which the carrying value exceeds the fair value of the
asset.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company reduces credit risk by placing its cash and cash equivalents with major
financial institutions with high credit ratings. At times, such amounts may
exceed Federally insured limits. The Company reduces credit risk related to
accounts receivable by routinely assessing the financial strength of its
customers and maintaining an appropriate allowance for doubtful
accounts.
-40-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
Company's services have been provided primarily to a limited number of clients
located in a variety of industries. During the year ended December 31, 2007, the
Company had revenues from 2 clients representing 49% (39% and 10%, respectively)
of the revenues during the year. The Company had revenues from 2 clients
representing 46% (35% and 11%, respectively) of revenues during the year ended
December 31, 2006.
The
Company generally does not require its clients to provide collateral.
Additionally, the Company is subject to a concentration of credit risk with
respect to its accounts receivable. The Company had 3 clients accounting for
68.3% (41%, 14.7% and 12.6%, respectively) of total gross accounts receivable as
of December 31, 2007.
Goodwill
Goodwill
represents the Company's allocation of the cost to acquire UCA Services in
excess of the fair value of net assets acquired. The purchase price and its
allocation, to reflect the fair values of assets acquired and liabilities
assumed, have been based upon management's evaluation using accepted valuation
methodologies.
Under
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill
is not amortized but is reviewed for impairment annually. The Company performs
its annual goodwill impairment testing, by reporting units, in the second
quarter of each year, or more frequently if events or changes in circumstances
indicate that goodwill may be impaired. Application of the goodwill impairment
test requires significant judgments including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate of
growth for UCA Services, period over which cash flows will occur, and
determination of UCA Services cost of capital. Changes in these estimates and
assumptions could materially affect the determination of fair value and/or
conclusions on goodwill impairment for UCA Services. Goodwill at December 31,
2007 was $5,704,000.
Intangibles
Intangible
assets are accounted for under the provisions of SFAS No. 142. Intangible assets
arise from business combinations and consist of customer relationships and
restricted covenants related to employment agreements that are amortized, on a
straight-line basis, over periods of up to six years. The Company follows the
impairment provisions and disclosure requirements of SFAS No. 142. Accordingly
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Intangible assets at December 31, 2007 was $659,687.
Fair
Value of Financial Instruments
The fair
values of the Company's assets and liabilities that qualify as financial
instruments under statement of financial accounting standards ("SFAS") No. 107
approximate their carrying or principal amounts presented in the balance sheets
at December 31, 2007 and 2006.
The
Company accounts for derivative instruments in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended,
("SFAS No. 133") which establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments imbedded in other financial instruments or contracts and requires
recognition of all derivatives on the balance sheet at fair value. Accounting
for the changes in the fair value of the derivative instruments depends on
whether the derivatives qualify as hedge relationships and the types of the
relationships designated are based on the exposures hedged. Changes in the fair
value of derivative instruments which are not designated as hedges are
recognized in earnings as other income (loss).
-41-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
Company has issued financial instruments which have required a determination of
the fair value of certain related derivatives, where quoted market prices were
not published or readily available at the date of issuance. The Company bases
its fair value determinations on an evaluation of the facts and circumstances
and valuation techniques that require judgments and estimates.
Share-Based
Compensation Expense
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires
the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors based on estimated fair values.
SFAS 123(R) supersedes the Company's previous accounting under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") for periods beginning in fiscal 2006. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R).
The Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's consolidated
statements of operations. Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under the intrinsic value method, stock-based compensation expense was
recognized in the Company's consolidated statement of operations based on the
difference between the exercise price of the Company's stock options granted to
employees and directors, and the fair market value of the underlying stock at
the date of grant.
The
historical volatility of Company's stock is used as the basis for the volatility
assumption. The Company has never paid cash dividends, and does not currently
intend to pay cash dividends, and thus assumed a 0% dividend yield.
The
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1, 2006,
the first day of the Company's fiscal year. The Company's consolidated financial
statements as of and for the year ended December 31, 2006 reflect the impact of
adoption of SFAS 123(R). In accordance with the modified prospective transition
method, the Company's consolidated financial statements for prior periods have
not been restated to reflect, and do not include, the impact of adoption of SFAS
123(R).
Share-based
compensation expense recognized under SFAS 123(R) for the year ended December
31, 2007 and 2006 was $268,287 and $493,762, respectively. Share-based
compensation expense recognized in the Company's consolidated statements of
operations for the year ended December 31, 2006 includes compensation expense
for share-based payment awards granted prior to, but not yet vested as of
December 31, 2005, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123.
-42-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
SFAS
123(R) requires forfeitures to be estimated at the time of grant in order to
estimate the amount of share-based awards that will ultimately vest. As there
were only a nominal amount of option holders as of January 1, 2006, management
evaluated each of the grants outstanding upon adoption of SFAS 123(R) to
determine an appropriate forfeiture rate. Based on this evaluation and
considering options which were cancelled during management's evaluation in the
year ended December 31, 2006, the Company adjusted the value of the options
outstanding as of January 1, 2006 for actual cancellations during the year ended
December 31, 2006. After adjusting for the value such cancellations, management
determined that a forfeiture rate was not required for the remaining outstanding
option grants. This determination was based principally on the nature of the
option holders' involvement with the Company and the quantity held by such
individuals. In the Company's pro forma information required under SFAS 123 for
the periods prior to fiscal year 2006, the Company accounted for forfeitures as
they occurred. Effectively, for all periods presented forfeitures have been
accounted for as they occurred.
On
November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. FAS 123(R)-3 "Transition Election Related to Accounting for
Tax Effects of Share-Based Payment Awards." The Company has elected to adopt the
alternative transition method provided in the FASB Staff Position for
calculating the tax effects of stock-based compensation pursuant to SFAS
123(R).
Income
Taxes
Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Deferred tax assets are reduced by a valuation allowance if it is more
likely than not that the tax benefits will not be realized. The ultimate
realization of deferred tax assets depends upon the generation of future taxable
income during the periods in which those temporary differences become
deductible.
Effective
January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes. FIN48 prescribes a more-likely-than-not threshold
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.
As a
result of the implementation of FIN 48, the Company performed a review of its
portfolio of uncertain tax positions in accordance with recognition standards
established by FIN 48. In this regard, an uncertain tax position represents
the Company’s expected treatment of a tax position taken in a filed tax return,
or planned to be taken in a future tax return, that has not been reflected in
measuring income tax expense for financial reporting purposes. Based on its
review, the Company concluded that there are no significant unrecognized tax
positions requiring recognition in the Company’s financial statements. The
Company does not believe there will be any material changes in our unrecognized
tax positions over the next 12 months
The
Company files federal income tax returns, as well as multiple state, local and
foreign jurisdiction tax returns. The income tax returns are subject to
examinations by tax authorities. A number of years may elapse before our tax
positions are audited and finally resolved. While it is often difficult to
predict the final outcome or the timing of resolution of any particular
uncertain tax position, the Company believes its reserves for income taxes
reflect the most probable outcome. The Company adjusts these reserves, as well
as the related interest, in light of changing facts and circumstances. The
resolution of a matter would be recognized as an adjustment to its provision for
income taxes in the period of resolution.
The
Company’s policy is to recognize interest and penalties accrued as a component
of income tax expense. As of the date of adoption of FIN 48, the Company did not
have any penalties or tax-related interest, and there was no tax- related
interest or penalties recognized during the year December 31,
2007.
-43-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Earnings
(Loss) Per Share
The
Company calculates earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." SFAS No. 128 computes basic earnings (loss) per share by
dividing the net income (loss) by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings (loss) per share is
computed by dividing the net income (loss) by the weighted average number of
shares of common stock outstanding during the period plus the effects of any
dilutive securities. Diluted earnings (loss) per share considers the impact of
potentially dilutive securities except in periods in which there is a loss
because the inclusion of the potential common shares would have an anti-dilutive
effect. The Company's potentially dilutive securities include common shares
which may be issued upon exercise of its stock options, exercise of warrants or
conversion of convertible debt.
Diluted
loss per share for the year ended December 31, 2007 and 2006 exclude potentially
issuable common shares of approximately 14,493,856 and 19,581,124, respectively,
primarily related to the Company's outstanding stock options, warrants and
convertible debt, because the assumed issuance of such potential common shares
is antidilutive.
SEGMENT
REPORTING
The
Company determines and discloses its segments in accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
uses a "management" approach for determining segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of a company's
reportable segments. SFAS No. 131 also requires disclosures about products or
services, geographic areas and major customers. In 2006, we discontinued VoIP
segment and operate in one segment.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," (“SFAS
No. 157”), which defines fair value, establishes a framework for using fair
value to measure assets and liabilities, and expands disclosures about fair
value measurements. SFAS No. 157 applies whenever other statements require or
permit assets or liabilities to be measured at fair value. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact SFAS No. 157 will have on our consolidated financial
statements.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. (“FAS 159”) is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in FAS 159. Therefore, calendar-year companies
may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
FAS 159
allows entities to choose, at specified election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required
to be measured at fair value. If a company elects the fair value option for an
eligible item, changes in that item's fair value in subsequent reporting periods
must be recognized in current earnings. FAS 159 also establishes presentation
and disclosure requirements designed to draw comparisons between entities that
elect different measurement attributes for similar assets and liabilities.
Management is currently evaluating the effect of this pronouncement on financial
statements.
-44-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which
replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree, and the
goodwill acquired. The Statement also establishes disclosure requirements that
will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 (our Fiscal 2010). The Company
has not completed its evaluation of the potential impact, if any, of the
adoption of SFAS No. 141(R) on its consolidated financial position, results of
operations, and cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51,” which establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No.160 is effective as of the beginning of an entity’s fiscal year
that begins after December 15, 2008 (our Fiscal 2010). The Company has not
completed its evaluation of the potential impact, if any, of the adoption of
SFAS No. 160 on our consolidated financial position, results of operations, and
cash flows.
The
Company does not believe that any other recently issued, but not effective,
accounting standards, if currently adopted will have material effect on the
Company’s consolidated financial position, results of operations and cash
flows.
NOTE
3. DISCONTINUED OPERATIONS
On May 5,
2006, the Company announced its decision to exit from the hardware-based VoIP
communications product line (including resale of transport services) that is
targeted at SMB's. In accordance with Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", ("SFAS No. 144"), the Company recorded loss from discontinued
operations of $53,398 and $474,411 for the years ended December 31, 2007 and
2006, respectively. Revenues from VoIP operations have been nominal in all
periods presented and operating expenses are the losses reported.
NOTE
4 PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consists of the following at December 31, 2007 and 2006,
respectively:
|
2007
|
2006
|
|||||||
|
Equipment
|
$ | 476,712 | $ | 443,029 | ||||
|
Lease
improvements
|
106,907 | 54,631 | ||||||
|
Furniture
and fixtures
|
123,554 | 103,489 | ||||||
| 707,173 | 601,149 | |||||||
|
Less:
Accumulated deprecation and amortization
|
(500,844 | ) | (403,934 | ) | ||||
| $ | 206,329 | $ | 197,215 | |||||
-45-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Depreciation
and amortization expense was $96,910 and $80,369 for the years ended December
31, 2007 and 2006, respectively.
NOTE
5. INTANGIBLE ASSETS
The
Company's intangible assets consisting of customer contacts and restricted
covenants related to employment agreements were acquired and accounted for using
the purchase method of accounting. The following table summarizes the net asset
value for each intangible asset category as of December 31, 2007:
|
Net
|
||||||||||||||
|
Amortization
|
Gross
Asset
|
Accumulated
|
Asset
|
|||||||||||
|
Period
|
Value
|
Amortization
|
Value
|
|||||||||||
|
Customer
relationship
|
6
years
|
$ | 1,153,424 | $ | (504,623 | ) | $ | 648,801 | ||||||
|
Covenants
not to compete
|
3
years
|
83,333 | (72,447 | ) | 10,886 | |||||||||
| $ | 1,236,757 | $ | (557,070 | ) | $ | 659,687 | ||||||||
The
following table summarizes the net asset value for each intangible asset
category as of December 31, 2006:
|
Net
|
||||||||||||||
|
Amortization
|
Gross
Asset
|
Accumulated
|
Asset
|
|||||||||||
|
Period
|
Value
|
Amortization
|
Value
|
|||||||||||
|
Customer
relationship
|
6
years
|
$ | 1,153,424 | $ | (312,385 | ) | $ | 841,039 | ||||||
|
Covenants
not to compete
|
3
years
|
83,333 | (44,670 | ) | 38,663 | |||||||||
| $ | 1,236,757 | $ | (357,055 | ) | $ | 879,702 | ||||||||
-46-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Amortization
expense was $220,015 for the years ended December 31, 2007 and 2006,
respectively.
The
Company did not have any intangible assets prior to the acquisition of UCA
Services in May 2005.
Estimated
amortization expense related to intangible assets subject to amortization at
December 31, 2007 for each of the years in the five-year period ending December
31, 2011:
|
2008
|
$ | 203,123 | ||
|
2009
|
192,237 | |||
|
2010
|
192,237 | |||
|
2011
|
72,090 | |||
| $ | 659,687 |
NOTE
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities consist of the following at December 31, 2007
and 2006:
|
2007
|
2006
|
|||||||
|
Trade
accounts payable
|
$ | 3,592,213 | $ | 3,435,748 | ||||
|
Accrued
professional fees
|
316,592 | 218,000 | ||||||
|
Accrued
interest payable
|
67,966 | 94,059 | ||||||
| $ | 3,976,771 | $ | 3,747,807 | |||||
Accounts
payable and accrued expenses related to discontinued operations approximate
$153,000 and $163,000 at December 31, 2007 and 2006, respectively.
NOTE
7. IMPAIRMENT OF GOODWILL
Goodwill
represents the Company’s allocation of the cost to acquire UCA Services in
excess of the fair value of net assets acquired. The purchase price and its
allocation, to reflect the fair values of identifiable assets acquired and
liabilities assumed, have been based on management’s evaluation using accepted
valuation methodologies.
Pursuant
to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the
Company performed its annual testing of goodwill impairment in the second
quarter of 2007. As a part of goodwill impairment testing, management reviewed
various factors, such as the market price of the Company’s common stock,
discounted cash flows from projected earnings and values of comparable companies
to determine whether impairment exists. Based on this evaluation it was
determined that the goodwill was impaired. The impairment was due to a
continued decline in the Company’s market capitalization during
the past year, and due to lower future cash flows expected to be generated
by the business due to working capital constraints. The implied value of the
goodwill was $10,585,000 compared to a carrying value of $13,982,451, indicating
an impairment of $3,397,451. The impairment loss was charged to operations
during the three months ended June 30, 2007.
-47-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
Company evaluated its business conditions and future strategic direction
including the delisting of its common shares from trading on the Bulletin Board
(“OTCBB”) and concluded that an interim testing of goodwill is warranted at
December 31, 2007. As a part of the interim goodwill impairment testing,
management reviewed various factors and used a market approach (comparison of
financial data for publicly traded companies engaged in similar lines of
business) to determine whether impairment exists. Based on this evaluation, it
was determined that the goodwill was impaired. The impairment was, in part, due
to decreased values of comparable companies. The implied value of goodwill was
$5,704,000 compared to carrying value of $10,585,000, indicating an impairment
of $4,881,000. The additional impairment loss was charged to operations during
the three months ended December 31, 2007. In total an impairment loss of
$8,278,451 was charged to operations during the year ended December 31,
2007.
NOTE
8. TECHNOLOGY LICENSE ACQUISITION
On August
11, 2006, the Company entered into an agreement with Utek Corporation ("Utek"),
an unaffiliated specialty finance company focused on technology transfers, to
acquire a technology license for intrusion detection software developed by a
university. To facilitate the transfer of technology; Utek formed a subsidiary,
Intrusion Detection Technologies, Inc. ("ITDI"). IDTI did not have any business
operations and its assets consisted of cash and a license agreement with a
university for intrusion detection software by the university. The Company
acquired all of the outstanding shares of IDTI from Utek for consideration of
7,500,000 shares of the Company's common stock, including 375,000 shares
assigned by Utek to its consultant. In addition, the Company had a consultant
for the transaction to whom it paid $50,000 of cash and issued 750,000 shares of
its common stock. The term of the license agreement is until the later of 15
years from the date of filing of the licensed patents or the expiration of the
last patent.
The
university requires a royalty in the amount of five percent of net sales of the
licensed products. In the university requires certain minimum royalty from 2009
onwards.
Pursuant
to accepted valuation methodologies, the Company valued the transaction at
$660,000, including related expense. Net of cash acquired ($500,000 prior to
related expense); $160,000 was allocated to the licensing agreement. The cash
paid to the consultant and the fair value of the shares issued to the consultant
approximated $200,000, and was charged to selling general and administrative
expenses during the year ended December 31, 2006. The Company anticipates
further development and testing of the technology. Because of the uncertainties
surrounding the ultimate commercial deployment of the technology and due to the
technology not having alternative use, the Company charged the cost of the
license agreement as in process research and development costs during the year
ended December 31, 2006.
-48-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
9. DEBT FINANCINGS
Debt
financings consist of the following as of December 31, 2007 and
2006:
|
2007
|
||||||||||||
|
Unamortized
|
||||||||||||
|
Principal
|
debt discount
|
Net
|
||||||||||
|
Laurus
Revolving Note Due in February 2009
|
$ | 1,276,949 | $ | (295,394 | ) | $ | 981,555 | |||||
|
Laurus
Convertible Note Due in February 2009
|
1,500,000 | (559,768 | ) | 940,232 | ||||||||
|
2006
Convertible Debentures, due in December 2007
|
150,000 | 150,000 | ||||||||||
|
Short
Term Borrowings including $50,000 from an officer
and
director
|
970,000 | 970,000 | ||||||||||
| $ | 3,896,949 | $ | (855,162 | ) | $ | 3,041,787 | ||||||
|
2006
|
||||||||||||
|
Unamortized
|
||||||||||||
|
Principal
|
debt discount
|
Net
|
||||||||||
|
2006
Convertible Debentures, due at various date between December 2006
and April 2007
|
$ | 700,000 | $ | (14,830 | ) | $ | 685,170 | |||||
|
Convertible
Debenture payable to stockholder due in April
2007
|
150,000 | 150,000 | ||||||||||
|
Laurus
Revolving Note Due in February 2009
|
1,487,353 | (473,104 | ) | 1,014,249 | ||||||||
|
Laurus
Convertible Note Due in February 2009
|
1,500,000 | (1,056,570 | ) | 443,430 | ||||||||
| $ | 3,837,353 | $ | (1,544,504 | ) | $ | 2,292,849 | ||||||
Laurus
Convertible and Non Convertible Financings
On
February 14, 2006, the Company entered into a Security Agreement, dated February
10, 2006 with Laurus Master Fund, Ltd ("Laurus"). Under the Security Agreement,
Laurus purchased from the Company a Secured Convertible Note from the Company
with a maturity date of February 10, 2009 (the "Laurus Convertible Note") in the
aggregate principal amount of $1,500,000 and a Secured Non-Convertible Revolving
Note ("Laurus Revolving Note"), in the aggregate principal amount of $1,500,000.
The Laurus Convertible Note and the Laurus Revolving Note are collectively the
"Laurus Notes". The Company's ability to receive financing under the Laurus
Notes is based on an advance rate equal to 90% of eligible accounts receivable,
as defined.
However,
Laurus has agreed to provide the Company an over advance until July 30, 2007 and
the overadvance feature was extended in 2007. Through December 31, 2007
$1,500,000 was advanced for the Laurus Convertible Note and $1,276,949 was
outstanding for the Laurus Revolving Note. The Laurus Convertible Note has a
three-year term, and bears interest at 1% above the prime rate, with a minimum
interest rate of 8%. Laurus has the option, at any time until February 9, 2009
to convert all or any portion of the Laurus Convertible Note and accrued
interest into shares of the Company's common stock at a conversion price of
$0.91 per share. The Company has the option, to repay the Laurus Convertible
Note by paying Laurus the principal amount, accrued interest and a certain
redemption premium, as defined.
-49-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
Laurus Revolving Note has a three-year term and bears interest at 1% above the
prime rate, with a minimum interest rate of 8%.
In
connection with the Laurus Notes, the Company issued to Laurus an option (the
"Laurus Option") to purchase up to 4,256,550 shares of the Company's common
stock at an exercise price of $0.001 per share. Additionally, the Company and
Laurus entered into a registration rights agreement (the " Laurus Registration
Rights Agreement") covering the registration of common stock underlying the
Laurus Convertible Note and the Laurus Option.
The
Company's obligations under the Laurus Notes are secured by first liens on all
assets of the Company, and Laurus may accelerate all obligations under the
Laurus Notes upon an event of default.
The
Company allocated the $1,500,000 of proceeds from the Laurus Convertible Note
based on the computed relative fair values of the debt and stock instruments
issued. The Laurus Options were valued using a Black-Scholes option-pricing
model with the following assumptions: (1) common stock fair value of $0.95 per
share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.59%,
(4) life of 10 years and (5) no dividend, which resulted in a fair value of
$2,569,546 for the Laurus Options. The resulting relative fair value of the
Laurus Options was $918,923. Accordingly, the resulting relative fair value
allocated to the debt component of $511,577 was used to measure the intrinsic
value of the embedded conversion option of $1,054,357 which resulted in a
beneficial conversion feature of $511,577 recorded to additional paid-in
capital. The aggregate amounts allocated to the Laurus Options and beneficial
conversion feature, of $1,430,500 were recorded as a debt discount at the date
of issuance of the Laurus Convertible Notes and are being amortized to interest
expense using the interest method over the three-year term. For the years ended
December 31, 2007 and 2006, $499,544 and $443,431, respectively, of debt
discount was accreted and recorded as amortization of debt
discounts.
The
Company allocated the $1,028,000 of proceeds from the Laurus Revolving Note
based on the computed relative fair values of the debt and Laurus Options. The
Laurus Options were valued using a Black-Scholes option-pricing model with the
following assumptions: (1) common stock fair value of $0.95 per share (2)
expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of
10 years and (5) no dividend, which resulted in a fair value of $1,471,494 for
the options. The resulting relative fair value of the Laurus Options was
$513,820. Accordingly, the resulting relative fair value allocated to the debt
component was $275,680. The aggregate amount allocated to the options of
$513,820 was recorded as a debt discount at the date of issuance of the Laurus
Notes and are being amortized to interest expense using the interest method
three-year term. For the year ended December 31, 2007 and 2006, $177,709 and
$110,217, respectively, of debt discount was accreted and recorded as
amortization of debt discounts.
Transaction
fees of $139,000 paid to Laurus and its affiliates in connection with the Laurus
Notes were netted against the proceeds and considered in the calculation of the
beneficial conversion feature and accreted over the term of notes. Financing
costs of $20,696 paid to third parties associated with the Laurus Notes are
included as debt issuance costs in other assets and amortized over the term of
the debt.
The
Company utilized approximately $1.9 million of the initial borrowing from Laurus
to repay all amounts owed under all amounts owed under the October Cornell
Debenture.
In
October 2007, the Company and Laurus entered into an extensions agreement (the
“Extension Agreement’). The Extension Agreement provides for the extension of
the over advance feature until February 2009.However, the over advance amount
will reduce by $5,000 each month from November 2007 to February 2008 and by
$50,000 each month starting March of 2008. The Company paid $15,000 fees
to Laurus for the extension and the amount was charged to operations as
amortization of debt issuance cost during the year ended December 31,
2007.
-50-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
2006
Convertible Debentures
In 2006,
the Company sold eight Convertible Debentures (the " 2006 Convertible
Debentures") in the face amount of $800,000 to six individuals (the "Debenture
Holders" or a "Debenture Holder") including $150,000 face value to an officer
and director, and $50,000 face value to a stockholder of the Company. The 2006
Convertible Debentures bear interest at 8% and were for a term of three months.
At the option of the Debenture Holders, the 2006 Convertible Debentures can be
converted into shares of the Company's common stock at a conversion price of
$.50 per share. In connection with the sale, the Company issued warrants to
three Debenture Holders to acquire an aggregate of 750,000 shares of its common
stock with a nominal exercise price. The warrants expire in three years from the
date of issuance. The remaining three Debenture Holders received an aggregate of
225,000 shares of the Company's common stock as additional
consideration.
The
Company used part of the proceeds from the sale of the 2006 Debentures to repay
$500,000 due to the Macrocom Investors, LLC ("Macrocom") pursuant to a debenture
issued in July of 2005.
The
Company allocated the $800,000 of proceeds received from the 2006 Convertible
Debentures to debt, warrants and stock instruments issued based on the then
computed relative fair values. The fair value of the shares issued was $168,750
which resulted in a relative fair value of $103,271. The warrants issued were
valued using a Black-Scholes option-pricing model with the following
assumptions: (1) common stock fair value of $0.75 per share (2) expected
volatility of 71.26%, (3) risk-free interest rate of 4.86%, (4) life of 3 years
and (5) no dividend, which resulted in a fair value of $198,901 and a relative
fair value of $133,969. Additionally, the resulting relative fair value
allocated to the debt component was used to measure the intrinsic value of the
embedded conversion option of the 2006 Convertible Debentures which resulted in
a beneficial conversion feature with a fair value of $444,010. The relative fair
value of $305,990 was recorded to additional paid-in capital. The value of the
beneficial conversion feature was limited to the amount of the proceeds
allocated to the debt component of the 2006 Convertible Debentures. The
aggregate amounts allocated to the warrants, stock instruments and beneficial
conversion feature, of $543,220 were recorded as a debt discount at the date of
issuance of the 2006 Convertible Debentures and were amortized to interest
expense using the interest method over the originally stated term of the 2006
Convertible Debentures. During the years ended December 31, 2007 and 2006,
$14,832 and $528,388, respectively, of discount was
accreted and recorded as amortization of debt discounts and debt issuance costs
included in the accompanying consolidated statements of operations.
The
Company repaid one 2006 Convertible Debenture in the face amount of $100,000.
The Company and the Debenture holders agreed to extension of the term of
duration by months on two occasions in 2006. In exchange for the extension the
Company issued the holders an aggregate of 350,000 shares of its common stock
and warrants to acquire an aggregate of 600,000 shares of its common stock with
a nominal exercise price. The warrants expire in three years from the
date of issuance. No consideration was issued for the extension with respect to
the 2006 Convertible Debentures issued to the officer and director and to the
stockholder. The relative fair value of the shares of common stock and warrants
approximated $172,250 and was recorded as additional discount and is being
amortized over the new term of the 2006 Convertible Debentures. For the year
ended December 31, 2006, $172,250, of debt discount was accreted and recorded as
amortization of debt discounts
-51-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
January and February of 2007, the Company repaid five of the seven 2006
Convertible Debentures in the aggregate face amount of $500,000. In December
2006, the Company and the officer and director and the stockholders agreed to
extend the term of two of 2006 Convertible Debentures in the face amount of
$200,000 to April 30, 2007. The term of the Convertible Debenture due to the
officer and director was extended to December 31, 2007 and was repaid in 2008.
In August 2007, the Company and the stockholder entered into an agreement to
convert $50,000 face amount of 2006 Convertible Debentures into shares of the
Company’s common stock as described below.
Stockholder
Convertible Debenture
On June
8, 2006, the Company sold a Convertible Debenture in the face amount of $150,000
to a stockholder (the "Stockholder Convertible Debenture"). The Stockholder
Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the
option of the holder, the Stockholder Convertible Debenture can be converted
into shares of the Company's common stock at a conversion price of $.50 per
share. In connection with the sale, the Company issued 300,000 shares of its
common stock as additional consideration.
The
Company allocated the $150,000 of proceeds received from the Stockholder
Convertible Debenture based on the computed relative fair values of the debt and
stock instruments issued. The fair value of the common stock issued was $105,000
which resulted in a relative fair value of $61,764. Additionally, the resulting
relative fair value allocated to the debt component was used to measure the
intrinsic value of the embedded conversion option of the Stockholder Convertible
Debenture which resulted in a beneficial conversion feature of $16,765 recorded
to additional paid-in capital. The aggregate amounts allocated to the stock
instruments and beneficial conversion feature, of $78,529 were recorded as a
debt discount at the date of issuance of the Stockholder Convertible Debenture
and are being amortized to interest expense using the interest method over the
stated term of the Stockholder Convertible Debenture. During the year s ended
December 31, 2006, $78,529, of debt discount was accreted and recorded as
amortization of debt discounts. In August 2006, the Company and the stockholder
agreed to extend the maturity of the Stockholder Convertible Debenture to
December 15, 2006 without any additional consideration. In December 2006, the
Company and the stockholder agreed to further extend the maturity of the
Stockholder Convertible Debenture to April 30, 2007 without any additional
consideration.
In August
2007, the Company entered into an Agreement to Convert (the “Agreement”) with
Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to
convert $218,882 due to him in outstanding convertible debentures and accrued
interest of $18,882 into 5,472,050 shares of common stock, which includes
4,900,394 shares as an inducement for conversion. The principal amount of
$200,000 consisted of $150,000 of Stockholder Convertible Debenture and $50,000
of 2006 Convertible Debenture. The fair value of the inducement to convert
approximated $539,000 and was charged to operations during the year ended
December 31, 2007 as debt extinguishment costs.
-52-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Short
Term Borrowings
During
the year ended December 31, 2007, the Company borrowed an aggregate of
$1,170,000 from five individuals, including $50,000 from an officer and director
and repaid $200,000 of that prior to December 31, 2007. The amount outstanding
as of December 31, 2007 is $970,000 and is due at various dates between January
and February 2008. In January and February 2008, the Company repaid an aggregate
amount of $620,000. The borrowings are unsecured and bear nominal interest. The
Company paid financing costs of $267,005 to third parties and lenders and this
amount is being amortized over the term of the borrowings. In 2007, $267,005 was
charged to operations as amortization of debt issuance costs. With respect to
the borrowings from the officer and director the Company did not pay any
financing costs.
In
connection with the borrowings, the Company issued the lenders warrants to
acquire an aggregate of 890,000 shares of the Company’s common stock. The
warrants expire in three years from the date of issuance. The relative fair
value of the warrants approximated $68,668 and was recorded as additional
discount and is being amortized over the borrowings. For the year ended December
31, 2007, $68,668, of debt discount was accreted and recorded as amortization of
debt discounts. With respect to the borrowings from the officer and director,
the Company did not issue any warrants.
Cornell
Convertible Debentures
On July
5, 2005, the Company entered into an agreement pursuant to which the Company was
to sell Cornell Capital Partners, LP ("Cornell") secured convertible debentures
in the aggregate principal amount of $1,000,000, which are convertible, at
Cornell's discretion, into common stock of the Company. A $400,000 debenture was
funded in July 2005, and a $50,000 debenture was funded in September 2005
(collectively the "Original Cornell Debentures"). In connection with the
Original Cornell Debentures, the Company issued Cornell warrants to acquire
560,000 shares of its common stock at an exercise price of $0.50 per share as
additional consideration. The Original Cornell Debentures could have been
redeemed at the Company's option at any time, in whole or in part prior to
maturity at a redemption premium of 15% of the principal amount redeemed in
addition to principal and accrued interest.
On
October 27, 2005, the Company entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with Cornell whereby the Company and Cornell
agreed to amend and consolidate all of the Original Convertible Debentures, and
related accrued interest of $8,160, issued to Cornell through October 26, 2005
into one new secured convertible debenture in the principal amount of $1,658,160
(the "October Cornell Debenture"). The October Cornell Debentures had the same
terms and provisions of the Original Cornell Debentures except that the October
Cornell Debentures no longer had a fixed conversion by the holder but is
convertible at the option of the holder at the lesser of (i) $1.00 or (ii) an
amount equal to 95% of the lowest closing bid price of the Company's common
stock for the 30 trading days immediately proceeding the conversion date.
Pursuant to the Securities Purchase Agreement, Cornell funded the remaining
$1,200,000 balance of October Cornell Debenture on October 27, 2005. The October
Cornell Debenture was repaid in full in February 2006 (the "Cornell Repayment"),
with the proceeds received from a new debt financing described
above.
As a
result of the change in the conversion terms of the October Convertible
Debenture on October 27, 2005, the Company determined that the embedded
conversion feature of the October Cornell Debenture became subject to the
provisions of SFAS No. 133 and therefore the Company accounted for the embedded
conversion feature as a liability in accordance with the guidance of EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock"("EITF 00-19"). Accordingly, the Company
recorded the fair value of the embedded conversion feature of $784,784 as a
non-current liability on its balance sheet as of October 27, 2005 and a portion
of the amounts previously recorded to additional paid-in capital as part of the
Original Cornell Debentures were reclassified from equity to liabilities. For
the year ended December 31, 2006, the Company recorded a gain in value for
derivative financial instruments through the date of repayment of $201,754
related to the change in fair value of the embedded conversion feature which is
recorded in the accompanying consolidated statement of operations. Through
December 31, 2005 the Company recorded a charge for derivative financial
instruments of $221,277 related to the change in fair value of the embedded
conversion feature which is recorded in the accompanying consolidated statement
of operations. The fair value of the embedded conversion feature liability was
$1,006,061 as of December 31, 2005. As a result of the Cornell Repayment, the
value of the embedded conversion feature was reclassified to additional paid-in
capital in February 2006.
-53-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
After the
allocation of value to the embedded conversion feature of the October Cornell
Debenture the Company allocated the remaining $873,376 principal amount of the
total $1,658,160 October Cornell Debenture based on the computed relative fair
values of the debt and warrant components, which resulted in additional debt
discounts of $210,665. As a result of the Cornell Repayment, the remaining
unamortized debt discounts were amortized as of the date of the Cornell
Repayment. Accordingly, $1,046,101 of amortization expense related to discount
on the October Cornell Debentures was recorded in the accompanying consolidated
statement of operations during the year December 31, 2006.
As part
of the Cornell Repayment, the Company paid an early redemption premium charge of
$248,724, calculated based on 15% of the principal amount redeemed, which is
included in Debt extinguishment costs on the accompanying consolidated statement
of operations for the year ended December 31, 2006. In connection with the
Cornell Repayment, the Company also agreed to reduce the exercise price of the
560,000 warrants previously issued to Cornell from $0.50 to $0.40. The change in
exercise price of the warrants was treated as a new issuance of warrants and was
valued using the Black Scholes option-pricing model with the following
assumptions: (1) common stock fair value of $0.95 per share, (2) expected
volatility of 71.26%, (3) risk-free interest rate of 4.62%, (4) life of 2.71
years and (5) no dividend. The change in exercise price resulted in a fair value
of $372,353 for the warrants which was charged to debt extinguishment costs on
the accompanying consolidated statement of operations for the year ended
December 31, 2006.
Macrocom
Convertible Debentures
On July
19, 2005, the Company issued a convertible debenture in the amount of $500,000
to Macrocom (the "Macrocom Debenture"). The Macrocom Debenture bore interest at
5% per annum and was due on April 15, 2006. At the option of Macrocom, the
Macrocom Debenture could have been converted into shares of the Company's common
stock at a conversion price of $.50 per share. The Company also issued Macrocom
warrants to acquire 1,000,000 shares of the Company's common stock at an
exercise price of $1.50 per share. The warrants expire in three years from the
date of issuance. Additionally, the Company issued 375,000 shares of the
Company's common stock to Macrocom as additional consideration.
The
Company allocated the $500,000 of proceeds received from the Macrocom Debenture
to the debt, warrants and stock instruments issued based on the then computed
relative fair values. Additionally, the resulting relative fair value allocated
to the debt component was used to measure the intrinsic value of the embedded
conversion option of the Macrocom Debenture which resulted in a beneficial
conversion feature recorded to additional paid-in capital. The value of the
beneficial conversion feature was limited to the amount of the proceeds
allocated to the debt component of the Macrocom Debenture. The aggregate amounts
allocated to the warrants, stock instruments and beneficial conversion feature,
of $500,000 were recorded as a debt discount at the date of issuance of the
Macrocom Debenture and were charged to interest expense using the interest
method over the stated term of the Macrocom Debenture. During the year ended
December 31, 2006, $194,444 of debt discount was accreted and recorded as
amortization of debt discounts. In April 2006, the Macrocom Debenture was repaid
in full from the proceeds of the April 2006 Debenture debt
financing.
-54-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Macrocom
Bridge Loan
On May
24, 2006 the Company entered into a Waiver and Agreement to Convert (the "Waiver
Agreement") with Macrocom. Pursuant to the Waiver Agreement, Macrocom agreed to
convert a debenture issued by the Company in the principal amount of
$500,000, including all interest accrued thereon, into 1,000,000 shares of
restricted common stock of the Company. In addition, Macrocom and the Company
agreed to waive and release each other from any claims in connection with Loan
II and all other agreements executed to date between Macrocom and the Company.
In exchange for the Waiver Agreement and the loan conversion, the Company agreed
to issue to an additional 1,500,000 shares additional shares of its restricted
common stock. The fair value of the additional consideration was $1,125,000 and
the amount was charged to operations during the year December 31, 2006 as debt
extinguishment costs.
Stockholder
And Officer Convertible Debentures
On July
19, 2005, the Company agreed with a stockholder, and an entity affiliated with a
former officer of the Company, that aggregate advances of $100,000 made in June
2005 from the stockholder and an entity affiliated with the former officer to
the Company be structured as convertible debentures in the face amount of
$50,000 each ("Related Party Convertible Debentures"). During the year ended
December 31, 2006, $38,890 of debt discount was accreted and recorded as
amortization of debt discounts.
In 2006,
the holders of the Related Party Convertible Debentures in the face amount of
$100,000 converted the Related Party Convertible Debentures into 200,000 shares
of the Company common stock. In exchange for the conversion, the Company issued
to the holder of Related Party Convertible Debentures an additional 300,000
shares of restricted common stock of the Company to the holder. The fair value
of the additional consideration was $27,104 and the amount was charged to
operations during the year ended December 31, 2006 as debt extinguishment
costs.
NOTE
10. STOCKHOLDERS' EQUITY
The
Company issued 50,000 shares of common stock to Macrocom in January 2006 in
settlement of accrued interest of $25,000 for a loan. Based on the fair value of
shares, $22,500 was charged to operations as additional interest.
In
January 2006, the Company issued 10,526 shares of its Common Stock to a vendor
to offset outstanding trade payables of $10,000.
In May
2006, the Company entered into a consulting agreement with an unaffiliated
entity that agreed to provide new technology acquisition services to the Company
and amended the consulting agreement in August 2006. Pursuant to the consulting
agreement, the Company issued the consultant 40,000 shares of its common stock.
The Company had initially issued the consultant 160,000 shares of common stock
but the consultant surrendered 120,000 of the previously issued shares pursuant
to an amendment of the agreement. The fair value of the shares is charged to
operations as consulting expense. For the year ended December 31, 2006, $11,034
was charged to operations.
In
November 2006, the Company entered into a consulting agreement with an
unaffiliated entity. Pursuant to the consulting agreement, the Company issued
the consultant 250,000 shares of its common stock. The fair value of the shares
$30,000 was charged to operations as consulting expense during the year ended
December 31, 2006.
-55-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
October 2006, the Company's board of directors approved an amendment to the
Certificate of Incorporation to increase the number authorized common stock to
200 million shares. The change will become effective on or about November 16,
2006 following a written consent of the shareholders.
During
the year ended December 31, 2007, the Company entered into a placement agency
agreement with an unaffiliated entity and a consulting agreement with an
unaffiliated individual. Pursuant to the agreements, the Company issued an
aggregate of 640,000 shares of its common stock. The fair value of the shares
was $77,600 and was charged to operations as a consulting expense during the
year ended December 31, 2007.
In July
2007, the Company sold an aggregate of 11,250,000 shares of the Company’s common
stock, par value $0.01 (the “Common Stock”) to four investors, for an aggregate
purchase price of $450,000, including $100,000 from Fred Nazem, a stockholder of
the Company.
In July
and August 2007, Laurus Master Fund, Ltd. (“Laurus”) exercised 3,702,268 of its
warrants on a cashless basis, and Laurus was issued 3,667,111 shares of the
Company’s common stock.
CONTRACT
TERMINATION
In
January 2006, the Company and a consultant to the Company terminated a services
arrangement whereby the consultant was to provide services to the Company over a
certain future period. In connection with the termination of this arrangement,
an individual who is an officer, director and stockholder of the Company
transferred one million shares of the Company's common stock owned by the
officer, director and stockholder into escrow. The shares will be held in escrow
for a period of up to five years during which the consultant will have the
option to purchase the shares for an aggregate of $10,000 or $0.01 per share. As
a result, the consultant released the Company from all liabilities. The Company
has accounted for the settlement as an expense in the Company's financial
statements as a non-cash charge for dispute settlements based on the value of
the option of $0.94 per share on the date of settlement, with a corresponding
credit to contributed (paid-in) capital from the officer, director and
stockholder during the year ended December 31, 2006. The option was valued using
a Black-Scholes option-pricing model with the following assumptions: (1) common
stock fair value of $0.95 per share, (2) expected volatility of
71.26%,
(3)
risk-free interest rate of 4.59%, (4) life of 5 years and (5) no dividend, which
resulted in a fair value of $942,070.
EXCHANGE
AGREEMENT AMENDMENT
During
January and February 2006, the former shareholders of UCA Services with whom the
Company previously entered into an Exchange Agreement related to the acquisition
of UCA Services (See Note 7) and the Company entered into negotiations related
to a dispute over compliance with the provisions of the Exchange
Agreement.
In
connection with the discussions, the Company and the former UCA shareholders
entered into an Amendment to the Exchange Agreement ("Exchange Amendment") which
was executed in February 2006. The Exchange Amendment provides that an
individual who is an officer, director and stockholder of the Company transfer
9,000,000 shares (fair value of approximately $8,550,000) of the Company's
common stock owned by such individual to the former shareholders of UCA. This
arrangement was structured whereby the individual surrendered his shares to the
Company, and the Company reissued such shares to the former UCA
shareholders.
-56-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Since the
settlement was not a contingency associated with the acquisition of UCA
Services, the Company accounted for the shares transferred by the individuals as
an expense, based on the value of the shares, in the Company's consolidated
financial statements with a corresponding credit to contributed (paid-in)
capital by the individual during the year ended December 31, 2006. Management
determined the fair value of the shares issued based on the quoted market price
of the Company's common stock on the date of settlement.
Warrants
Outstanding
warrant securities consist of the following at December 31, 2007
|
Exercise
|
|||||||||
|
Price
|
Expiration
|
||||||||
|
Laurus
Warrants
|
554,282 | $ | 0.001 |
See
(1)
|
|||||
|
Macrocom
|
1,000,000 | $ | 1.50 |
July
2008
|
|||||
|
Cornell
|
560,000 | $ | 0.40 |
July
2008
|
|||||
|
2006
Private Placement
|
1,350,000 | $ | 0.01 |
April
to November 2009
|
|||||
|
2007
Short Term Financing
|
890,000 | $ | 0.01 |
April
to November 2010
|
|||||
|
Legacy
Warrants
|
1,966,137 | $ | 0.15 to $1.50 |
December
2008 to June 2011
|
|||||
| 6,320,419 | |||||||||
(1) No
expiration.
Since the
conversion of the October Cornell Debenture (see Note 9) could result in a
conversion into an indeterminable number of shares common stock, in October 2005
the Company determined that under the guidance of EITF 00-19, the Company could
not conclude that it had sufficient authorized and unissued shares to settle any
warrants or options issued to non-employees. Therefore in October 2005, the
Company reclassified the fair value of all warrants and options issued to
non-employees that were outstanding as of October 27, 2005 from equity to
liabilities. The fair value of the Company's warrants and options issued to
non-employees was estimated at approximately $3,065,000 on October 27, 2005
using a Black-Scholes option pricing model for each of the individual
securities.
As a
result, the Company incurred a charge of approximately $2,035,000 on October 27,
2005, which was computed based on the difference between the fair value of the
securities and the value of the securities as of October 27, 2005 which had
previously been recorded to additional paid-in capital. On December 31, 2005,
the fair value of the warrants and options issued to non-employees was
re-measured and estimated at $2,940,000 using a Black-Scholes option pricing
model for each of the individual securities. For the year December 31, 2006, the
Company recorded a gain of $134,598 on derivative financial instruments related
to the change in the fair value of the warrants through the repayment
date.
The
liability for warrants and options issued to non-employees was reclassified to
additional paid-in capital upon the Cornell Repayment in February 2006, which
terminated Cornell's conversion rights.
-57-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In June
2006, the Company entered into a consulting agreement with an unaffiliated
entity that agreed to provide investment banking services to the Company.
Pursuant to the agreement, the Company issued the consultant warrants to acquire
312,500 share of its common stock at $0.82 per share that vested over 60 day
period. The warrants expire five years from the date of issuance. The fair value
of the vested warrants is being charged to operations as a consulting expense.
The fair value of the warrants were measured using a Black-Scholes
option-pricing model with the following assumptions: (1) quoted market price of
the Company’s common stock at the end of each month during the vesting period
(2) expected volatility of 71% (3) risk-free interest rate in the range of 4.72%
to 5.10% (4) life of 5 years and (5) no dividend,, which resulted in a fair
value of $51,516, for the warrants. For the year ended December 31, 2006,
$51,516 was charged to operations for such services.
NOTE
11. STOCK-BASED COMPENSATION
As a
result of the Share Exchange, on March 3, 2005, the Board of Directors adopted
the 2005 Stock Option and Grant Plan (the "Plan") pursuant to which 9,000,000
shares of common stock were reserved for issuance upon exercise of options. The
purpose of the Plan is to encourage and enable the employees, directors and
consultants of the Company upon whose judgment, initiative and efforts the
Company largely depends for the successful conduct of its business to acquire a
proprietary interest in the Company. The Plan became effective on April 19,
2005.
From time
to time, the Company issues stock-based compensation to its officers, directors,
employees and consultants. The maximum term of options granted is generally 10
years and generally options vest over a period of one to four years. However,
the Board of Directors of the Company may approve other vesting schedules. The
Company has issued options to employees and non-employees under stock option
agreements. Options may be exercised in whole or in part.
The
exercise price of stock options granted is generally the fair market value of
the Company's common stock as determined by the Board of Directors on the date
of grant, considering factors such as the sale of stock, results of operations,
and consideration of the fair value of comparable private companies in the
industry.
The fair
value of each stock option award is estimated using a Black-Scholes option
pricing model based on the assumptions in the table below. The assumption for
expected term is based on evaluations of expected future employee exercise
behavior. The risk-free interest rate is based on the U.S. Treasury rates at the
date of grant with maturity dates approximately equal to the expected term at
the grant date. The historical volatility of comparables companies' stock is
used as the basis for the volatility assumption. The Company has never paid cash
dividends, and does not currently intend to pay cash dividends, and thus assumed
a 0% dividend yield. The Company did not grant any stock options during the year
ended December 31, 2007.
|
Years
ended
|
||||
|
December
31,
|
||||
|
2006
|
||||
|
Expected
dividend yield
|
0.0 | % | ||
|
Expected
stock price volatility
|
71.260 | % | ||
|
Risk-free
interest rate
|
4.59%
to 4.92
|
% | ||
|
Expected
life of options (in years)
|
5 | |||
-58-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following is a summary of the Company's stock option activity for the years
ended December 31, 2007 and 2006:
|
Weighted Average
|
Weighted Average
|
|||||||||||
|
Options
|
Exercise
Price
|
Fair
value
|
||||||||||
|
Outstanding,
December 31, 2005
|
3,869,010 | 0.63 | 0.48 | |||||||||
|
Options
granted
|
3,850,000 | 0.36 | 0.21 | |||||||||
|
Options
exercised
|
||||||||||||
|
Options
cancelled
|
(618,925 | ) | 1.57 | 1.19 | ||||||||
|
Outstanding,
December 31, 2006
|
7,100,085 | $ | 0.41 | $ | 0.27 | |||||||
|
Options
granted
|
||||||||||||
|
Options
exercised
|
||||||||||||
|
Options
cancelled
|
(875,000 | ) | 0.35 | 0.22 | ||||||||
|
Outstanding,
December 31, 2007
|
6,225,085 | $ | 0.41 | $ | 0.29 | |||||||
|
Exercisable,
December 31, 2007
|
4,159,460 | $ | 0.41 | $ | 0.29 | |||||||
|
Exercisable,
December 31, 2006
|
2,824,578 | $ | 0.41 | $ | 0.31 | |||||||
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2007
|
Outstanding
|
Exercisable
|
|||||||||||||||||||||||
|
Average
|
Weighted
|
Average
|
Weighted
|
|||||||||||||||||||||
|
Range
of exercise
|
Number
|
Exercise
|
remaining
|
Number
|
exercise
|
remaining
|
||||||||||||||||||
|
Price
|
of options
|
Price
|
contractual life
|
of options
|
price
|
contractual life
|
||||||||||||||||||
|
$0.15
to $0.34
|
2,575,085 | $ | 0.15 | 6.0 | 2,575,085 | $ | 0.15 | 6.0 | ||||||||||||||||
|
$0.35
to $0.50
|
2,850,000 | $ | 0.35 | 8.6 | 950,000 | $ | 0.35 | 8.6 | ||||||||||||||||
|
$0.51
and above
|
800,000 | $ | 1.52 | 7.4 | 634,375 | $ | 1.52 | 7.4 | ||||||||||||||||
| 6,225,085 | $ | 0.41 | 7.4 | 4,159,460 | $ | 0.41 | 6.8 | |||||||||||||||||
Nonvested
share activity under the Plans was as follows:
|
Average
grant
|
||||||||
|
Options
|
date fair value
|
|||||||
|
Nonvested
at December 31, 2006
|
4,275,507 | $ | 0.25 | |||||
|
Granted
|
||||||||
|
Vested
|
(2,209,882 | ) | $ | 0.24 | ||||
|
Nonvested
at December 31, 2007
|
2,065,625 | $ | 0.26 | |||||
-59-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
As of
December 31, 2007, the unvested portion of share-based compensation expense
attributable to employees and directors stock options and the period in which
such expense is expected to vest and be recognized is as follows:
|
Year
ending December 31, 2008
|
349,680 | |||
|
Year
ending December 31, 2009
|
180,607 | |||
|
Year
ending December 31, 2010
|
4,883 | |||
| $ | 537,170 |
As of
December 31, 2007 options outstanding and vested did not have any intrinsic
value.
12.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases two office spaces under operating leases. The future minimum cash
commitments as of December 31, 2007 under such operating leases are as
follows:
|
2008
|
$ | 147,276 | ||
|
2009
|
150,125 | |||
|
2010
|
142,058 | |||
|
2011
|
138,997 | |||
|
2012
|
92,665 | |||
| $ | 671,121 |
As
discussed in Note 13, the Company subleased certain office space under an
agreement with UCA Global, Inc. ("Global"), whereby the Company paid rent based
on the proportion of square footage occupied by the Company in the Global office
facility. Pursuant to entering into a lease for a new office premises, the
Company has terminated the sublease arrangement effective June
2007.
The
Company has an employment agreement with an officer which will expire in May
2008, subject to automatic successive one year renewals unless either the
Company or the employee gives notice of intention not to renew the agreement.
The agreement provides for an annual base salary of $150,000, with specified
annual increases to the base salary. Pursuant to the employment agreement, if
the Company terminates the officer's employment without cause or good reason, as
defined in the employment agreement, the Company will be obligated to pay a
termination benefit equal to the remaining annual base salary during the initial
term of the employment agreement. In June of 2008, the Company entered into a
new employment agreement with the officer for a term of three years. The new
agreement provided for an annual base salary of $250,000 with specified
increases and bonus based on the Company’s financial performance. . Pursuant to
the new employment agreement, if the Company terminates the officer's employment
without cause or good reason, as defined in the new employment agreement, the
Company will be obligated to pay a termination benefit equal to the remaining
annual base salary during term of the new employment agreement
-60-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Rent
expense incurred with Global during the years ended December 31, 2007 and 2006
was $63,750 and $127,500, respectively, and is included in selling, general and
administrative expense on the accompanying statements of operations. Rent
expense inclusive of rent paid to Global was $157,000 and $221,250 for the years
ended December 31, 2007 and 2006, respectively
NOTE
13. RELATED PARTY TRANSACTIONS
Loans and
advances payable to stockholders, officer and director on the accompanying
consolidated balance sheet at December 31, 2007 represent amounts owed to
stockholders and directors of the Company for advances of cash provided to the
Company. Convertible debentures payable to stockholders, officers and director
represent amounts received by the Company pursuant to a financing arrangement
(see Note 9).
The
Company subleased certain office space and incurs occupancy related costs under
an agreement with UCA Global, Inc. ("Global"), an entity affiliated with a
shareholder of the Company, whereby the Company paid rent and other occupancy
costs based on the proportion of square footage occupied by the Company in the
Global's office facility. Rent and occupancy expenses incurred by the Company
under this agreement, which commenced on May 20, 2005, during the years ended
December 31, 2007 and 2006 was, $63,750 and $127,500, respectively, and is
included in selling, general and administrative expense on the accompanying
statements of operations.
In the
normal course of business, the Company performed services and an entity
affiliated with the Company' stockholders, in the amount of $0 and $68,000,
respectively during the years ended December 31, 2007 and 2006. As of December
31, 2007 approximately $235,000 was owed to the Company, including amounts owed
to UCA Services prior to the acquisition and a full allowance is provided due to
uncertainty of the recovery of the amount.
NOTE
14. INCOME TAXES
A
reconciliation of the statutory U.S. federal income tax rate to the Company's
effective tax was as follows:
|
2007
|
2006
|
|||||||
|
Statutory
U.S. rate
|
(34.0 | )% | (34.0 | )% | ||||
|
Non
deductible expenses
|
31.7 | % | 29.4 | % | ||||
|
Effect
of valuation allowance
|
2.3 | % | 4.6 | % | ||||
|
Total
income tax expense (benefit)
|
0.0 | % | 0.0 | % | ||||
-61-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Significant
components of the Company's future tax assets at December 31, 2007 and 2006 are
as follows:
|
2007
|
2006
|
|||||||
|
Operating
loss carryforwards
|
$ | 2,881,000 | $ | 2,548,000 | ||||
|
Reserves
and allowances
|
167,000 | 213,000 | ||||||
|
Valuation
allowance
|
(3,048,000 | ) | (2,761,000 | ) | ||||
|
Net
deferred tax assets
|
$ | — | $ | — | ||||
The
Company had net operating loss carryforwards of approximately $8,473,000 at
December 31, 2007, which expire through 2026. The tax benefit of these losses
has been completely offset by a valuation allowance due to the uncertainty of
its realization. Internal Revenue Code Section 382 provides for limitations on
the use of net operating loss carryforwards in years subsequent to a more than
50% change in ownership (as defined by Section 382), which limitations can
significantly impact the Company's ability to utilize its net operating loss
carryforwards. As a result of the sale of the shares in private offering and
issuance of shares for acquisition and other transactions, and changes in
ownership may have occurred which might result in limitations on the utilization
of the net operating loss carryforwards. The extent of any limitations as a
result of changes in ownership has not been determined by the
Company.
NOTE
15. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
For
the Years ended
|
||||||||
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Repayment
of Convertible Debentures loan with common stock
|
$ | 200,000 | $ | 500,000 | ||||
|
Discount
on revolving note relating to warrants
|
$ | 513,820 | ||||||
|
Discount
on convertible note relating to warrants
|
$ | 919,923 | ||||||
|
Discount
on convertible debt relating to beneficial conversion
feature
|
$ | 511,577 | ||||||
|
Issuance
of common shares in connection with settlement of payables
|
$ | 35,000 | ||||||
|
Discount
on convertible debenture due to officer relating to common
stock
|
$ | 30,000 | ||||||
|
Discount
on convertible debenture due to a stockholder relating to common
stock
|
$ | 61,765 | ||||||
|
Discount
on convertible debenture due to a stockholder relating to beneficial
conversion feature
|
$ | 16,765 | ||||||
|
Discount
on 2006 Debentures relating to common stock
|
$ | 103,272 | ||||||
|
Discount
on relating to warrants issued with debt
|
$ | 68,668 | $ | 133,969 | ||||
|
Discount
on 2006 Debentures relating to beneficial conversion
feature
|
$ | 305,990 | ||||||
|
Discount
on 2006 Debentures extension relating to warrants
|
$ | 115,908 | ||||||
|
Discount
on 2006 Debentures extension relating to common stock
|
$ | 56,342 | ||||||
|
Conversion
of convertible debenture issued to stockholder and officer with common
stock
|
$ | 757,925 | $ | 130,000 | ||||
|
Common
stock issued for technology licensing acquisition
|
$ | 660,000 | ||||||
|
Options
issued to employees
|
$ | 268,297 | $ | 489,480 | ||||
|
Common
Stock issued for services
|
77,600 | $ | 191,034 | |||||
|
Warrants
and options issued for services
|
$ | 55,798 | ||||||
|
Common
Stock issued for inducement to convert bridge loan
|
$ | 1,125,000 | ||||||
|
Derivative
financial instrument related beneficial conversion feature
credited
|
$ | 804,307 | ||||||
|
Derivative
financial instrument related to warrants
|
$ | 2,946,858 | ||||||
-62-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
16. SUBSEQUENT EVENTS (unaudited)
In 2008,
the Company and Laurus entered into two waiver/ amendment agreements, pursuant
to which Laurus waived the Company’s non compliance of certain terms of the
Security Agreement including the Company’s decision to stop periodic filing
reports with the Securities and Exchange Commission. In exchange for the waivers
the Company issued Laurus 1,000,000 shares of its common stock. In addition, the
Company agreed to pay Laurus additional interest of 3.5% on the outstanding loan
balance from June 1, 2008. The additional interest will be payable to Laurus
upon maturity of the credit facility in February 2009.
On March
12, 2009, NetFabric Holdings, Inc. (the “Company”), along with its wholly owned
subsidiary, NetFabric Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”)
entered into a Convertible Note Purchase Agreement with Fortify Infrastructure
Services, Inc. (“Fortify). Pursuant to the Convertible Note Purchase Agreement,
Fortify purchased a Secured Convertible Promissory Note (the “Note”) from UCA in
the principal amount of $5 million with the Company being a guarantor for UCA’s
borrowings.
-63-
NetFabric
Holdings Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The Note
has a six-month term, and bears interest at 8% per annum, compounded annually.
The Note is secured by (i) all of the assets of
UCA and the Company and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by the Company. At the exclusive option of Fortify,
Fortify may convert the entire principal amount of, and accrued and unpaid
interest on, the Note into shares of Series A Preferred Stock of
UCA. The conversion price shall be at a price equal to the price per
share reflecting a valuation of UCA equal to $5 million, on an as-converted
basis.
Fortify,
UCA and the Company also entered into a Credit Agreement whereby Fortify agreed
to provide UCA a revolving line of credit of up to $1 million for working
capital purposes. Amounts borrowed under the line of credit are secured by (i) all of the assets of
UCA and the Company and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by the Company.
Fortify,
UCA and the Company also entered into an Option and Purchase Agreement (“Option
Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire
all of the outstanding shares of common stock of UCA upon on effectiveness of
the Company’s Definitive Schedule 14 C Information Statement to be filed with
the Securities and Exchange Commission (the “SEC”) in connection with certain
actions taken by the written consent of holders of a majority of the Company’s
outstanding common stock approving the terms of the Option Agreement, Fortify
will exercise the option. Upon exercise of the Option by Fortify, the Company
will (a) receive an aggregate purchase price of $500,000, less the amount of accrued
and unpaid interest, if any, on the Note, and (b) be released from the guaranty
obligations of the Note. The Company and certain employees of UCA will also be
eligible to receive earn-out payments in connection with the closing of the
Option based upon achievement of certain financial thresholds during a 24-month
period.
The
Company plans to file a Schedule 14C Information Statement with the SEC shortly
after completion of its audit for the years ended December 31, 2007 and
2008.
The
Company used approximately $3 million from the proceeds of the Note to repay all
amounts owed to Laurus Master Fund. The balance of the proceeds will be used for
repayment of debt, other payables and for working capital
purposes.
-64-