NETFABRIC
HOLDINGS, INC.
299
Cherry Hill Road,
Parsippany,
NJ 07054
Phone:
973-537-0077
Fax:
973-263-4746
November30,
2007
Ms.
Tia
Jenkins
Senior
Assistant Chief Accountant
Office
of
Beverages, Apparel and Health Care Services
Division
of Corporate Finance
U.S
Securities and Exchange Commission
100
F
Street N.E.
Mail
Stop
3561
Washington,
D.C. 20549-4561
| Re: | NetFabric Holdings, Inc. | |
|
Form
10-KSB/A
Filed
August 31, 2007
File
No. 000-31553
|
Dear
Ms.
Jenkins:
On
behalf
of NetFabric Holdings, Inc., (“NetFabric” or the “Company”), we hereby submit
NetFabric’s responses to the comments of the Staff (the “Staff”) of the
Securities and Exchange Commission (the “Commission”) set forth in the Staff’s
letter, dated October 29, 2007, regarding the above referenced Form
10-KSB/A.
For
the
convenience of the Staff, each of the Staff’s comments is included herein and is
followed by the corresponding response of NetFabric. References herein to “we,”
“us” and “our” refer to NetFabric unless the context indicates
otherwise.
Form
10-KSB For Fiscal Year Ended December
31, 2006
Notes
to Consolidate Financial Statements
Note
9- Debt Financings
2006
Convertible Debentures, F-20
| 1. |
We
have reviewed your response to our prior comment three, noting that
you
have recorded the shares of common stock and warrants issued as
consideration for the extension of 2006 Convertible Debentures at
their
relative fair value based on the guidance EITF 00-27, particularly
paragraph 32. The issuance of the shares of common stock and warrant
appear to be consideration issued for extension and do not appear
to
represent the issuance of convertible instrument for repayment of
nonconvertible instrument discussed in Issue 11 and paragraph 32
of EITF
00-27. It appears that shares of common stock and warrants issued
as
consideration for modification of debt should be recorded at their
fair
value. Please advise or revise.
|
Response:
The
instruments reissued in 2006 were convertible debentures. The Company applied
the provisions of EITF 00-27 “Application of Issue No.98-5 to Certain
Convertible Instruments” for accounting the extensions of 2006 Convertible
Debentures. First, the Company determined the fair value of detachable
instruments issued in the transaction. As a next step, pursuant to paragraph
5
of EITF 00-27, the Company allocated the proceeds received in the financing
to
convertible instruments and other detachable instruments on a relative fair
value basis. Thereafter, the Issue 98-5 Model was applied to the amount
allocated to the convertible instrument, and an effective conversion price
was
calculated and used to measure the intrinsic value, if any, of the embedded
conversion option. In order to evaluate whether the convertible instrument
has
intrinsic value, to comply with paragraph 7 of EITF 00-27, it was essential
to
allocate the proceeds on a relative fair value to various instruments issued
in
the transaction.
Based
on
the foregoing, the Company believes that it has appropriately accounted for
the
extension of 2006 Convertible Debentures. However to provide the Staff with
further analysis the Company determined that if the fair value was used the
discount would be $227,501 instead of the amount recorded of $172,250 (based
on
relative fair values), an increase of $55,251. Accordingly utilizing the fair
value would increase the discount amortized to expense by $55,251 for the year
ended December 31, 2006, which the Company believes is immaterial considering
the net loss for 2006 was approximately $17 million.
Laurus
Convertible Non-Convertible Financings, F-22
| 2. |
We
have reviewed your response to our prior comment five, noting that
you
applied the provisions of APB 14 for options issued with Laurus Revolving
Note. Please note that when equity instruments are issued in conjunction
with a revolving note, APB is not applicable and the full fair value
of
the equity instruments should be charged to debt issue costs and
amortized
over the term of the loan. Please
revise.
|
Response
The
Company entered into a Security Agreement with Laurus Master Fund, Ltd.
(“Laurus”) in February 2006. Pursuant to the Security Agreement, the Company
sold a Secured Convertible (‘Convertible Note”) and a Secured Non-Convertible
Revolving Note (“Revolving Note”) to Laurus. As an additional consideration the
Company issued Laurus options or warrants to purchase 4,256,550 shares of the
Company’s stock. Although the borrowing were contained in two instruments,
underlying Security Agreement was common to both the instruments. Similarly,
collateral, additional consideration and other matters were treated on a
combined basis for the entire credit facility.
2
It
is
important to note that the warrants issued were additional consideration to
the
investor and not a fee paid to a third party. Given the Company’s size, lack of
historical profitability and lack of asset base, an investor looks at the
anticipated returns from the additional consideration as a part of the overall
economics of the investment.
The
Company accounted for the warrants issued to Laurus in accordance with
Accounting Principles Board Opinion No. 14 “Accounting for Convertible Debt
Issued with Stock Purchase Warrants”. The warrants were detachable warrants. The
fair value of the warrants were determined and as prescribed by Paragraph 16
pf
APB 14 allocated to Convertible Note and Revolving Note based on the relative
fair values at the time of issuance.
The
fair
value of warrants allocated to the Convertible Note was further allocated and
accounted in accordance provisions of EITF 00-27 “Application of Issue No.98-5
Certain Convertible Instruments” and EITF 98-5 “Accounting for Convertible
Securities with Beneficial Conversion Feature or Contingently Adjustable
Conversion Ratios”.
The
fair
value of warrants allocated to the Revolving Note was further allocated based
on
the relative fair value of debt and warrants at the time issuance. This was
in
accordance Paragraph 16 of APB 14.
The
warrants issued were to the investors as additional consideration and not to
a
third party as fees. Therefore, they need to be considered as a component of
the
transaction and treated as an issuance cost. This aspect is articulated in
Para
22 of EITF 0027 “ (a) issuance costs are limited to incremental and direct costs
incurred with parties other than the investor and (b) any amounts paid to the
investors when the transaction is consummated represent a reduction in the
proceeds received by the issued (not issuance cost)”.
Based
on
the foregoing, the Company believes its treatment of warrants is appropriate.
However, we would appreciate if you would cite specific authoritative literature
that should be applied if APB 14 is not applicable.
3
Stockholder
and Officer Convertible Debentures, F-27
| 1. |
We
have reviewed your response to our prior comment six, noting that
you have
recoded the shares of common stock issued as consideration for extension
of the Related Party Convertible Debentures at their relative fair
value
based on the guidance of EITF 00-27, particularly paragraph 32. The
issuance of the shares of common stock appear to be consideration
issued
for the extension and do not appear to represent the issuance of
a
convertible instrument for the repayment of a non-convertible instrument
as discussed in Issue 11 and paragraph 32 of EITF 00-27. It appears
that
the shares of common stock issued as consideration for modification
of the
debt should be recorded at their fair value. Please advise or
revise.
|
Response:
The
Company applied the provisions of EITF 00-27 “Application of Issue No.98-5 to
Certain Convertible Instruments” for accounting the extension of the Related
Party Convertible Debenture. First the Company determined the fair value of
detachable instruments issued in the transaction. As a next step, pursuant
to
paragraph 5 of EITF 00-27, the Company allocated the proceeds received in the
financing to convertible instruments and other detachable instruments on a
relative fair value. Thereafter, the Issue 98-5 Model was applied to the amount
allocated to the convertible instrument, and an effective conversion price
was
calculated and used to measure the intrinsic value, if any, of the embedded
conversion option. In order to evaluate whether the convertible instrument
has
intrinsic value, to comply with paragraph 7 of EITF 00-27, it was essential
to
allocate the proceeds on a relative fair value to various instruments issued
in
the transaction.
Based
on
the foregoing, the Company believes that it has appropriately accounted for
the
extension of the Related Party Convertible Debenture. However to provide the
Staff with further analysis the Company determined that if the fair value was
used the discount would be $75,000 instead of the amount recorded of $30,000
(based on relative fair values), an increase of $45,000. Accordingly utilizing
the fair value would increase the discount amortized to expense by $45,000
for
the year ended December 31, 2006, which the Company believes is immaterial
considering the net loss for 2006 was approximately $17 million.
We
hope
we have clarified our position. In the interest of quick resolution of the
matter, we will like to have a follow up call with you. Accordingly, we will
contact you in 15 days to set a conference call at a time convenient to
you.
The
Company hereby acknowledges the following:
| · |
the
Company is responsible for the adequacy and accuracy of the disclosure
in
the filing;
|
4
| · |
Staff
comments or changes to disclosure in response to Staff comments do
not
foreclose the Commission from taking any action with respect to the
filing; and
|
| · |
the
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person with the federal securities
laws
of the United States.
|
| Sincerely, | ||
| |
|
|
| /s/ Vasan Thatham | ||
|
Vasan Thatham |
||
|
cc:
|
Via
Facsimile
|
|
Fahad
Syed
NetFabric
Holdings, Inc.
Facsimile:
(973) 263-4746
|
5