U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 0-21419
NETFABRIC HOLDINGS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 76-0307819
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
67 FEDERAL ROAD, BUILDING A
SUITE 300
BROOKFIELD, CT 06804
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS)
(203) 775-1178
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED
BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE LAST 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 |X| NO |_|
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE. AS OF APRIL 30,
2005, 37,652,204 SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
OF THE ISSUER WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES |_| NO |X|
NETFABRIC HOLDINGS, INC. AND SUBSIDIARY
INDEX
Page
----
PART I. FINANCIAL INFORMATION................................................3
Item 1. Financial Statements (Unaudited).....................................3
Condensed Consolidated Balance Sheets as of March 31, 2005
(Unaudited) and December 31, 2004..................................3
Condensed Consolidated Statements of Operations, for the
three months ended March 31, 2005 and 2004 and for the
period from inception (January 1, 2003) to March 31, 2005
(Unaudited)........................................................4
Condensed Consolidated Statements of Stockholders' Equity
(Deficit), for the period from inception (January 1,
2003) to December 31, 2003, for the year ended December 31,
2004 and for the three months ended March 31, 2005
(Unaudited)........................................................5
Condensed Consolidated Statements of Cash Flows, for the
three months ended March 31, 2005 and 2004 and for the
period from inception (January 1, 2003) to March 31,
2005 (Unaudited)...................................................6
Notes to Unaudited Condensed Consolidated Financial Statements.......7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................13
Item 3. Controls and Procedures.............................................18
PART II. OTHER INFORMATION...................................................18
Item 1. Legal Proceedings...................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........19
Item 3. Defaults upon Senior Securities.....................................19
Item 4. Submission of matters to a Vote of Security Holders.................19
Item 5. Other information...................................................19
Item 6. Exhibits............................................................19
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETFABRIC HOLDINGS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005
(UNAUDITED) DECEMBER 31, 2004
--------------- ------------------
ASSETS
CURRENT ASSETS:
Cash $ 295,701 $ 67,719
Inventory 97,303 72,025
Prepaid expenses and other current assets 123,076 88,910
--------------- ----------------
Total current assets 516,080 228,654
Property and equipment, net 173,766 171,931
Deferred offering costs 368,683
Other assets 37,897 43,053
--------------- ----------------
TOTAL $ 727,743 $ 812,321
=============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bridge loans, net of unamortized discount $ 471,532 $ 749,659
Loans payable to stockholder 32,639 32,639
Accounts payable and accrued liabilities 325,561 273,707
Deferred revenues and advances 25,966 25,966
--------------- ----------------
Total current liabilities 855,698 1,081,971
--------------- ----------------
STOCKHOLDERS' DEFICIT:
Common Stock, $.001 par value, 100,000,000 shares authorized, 37,652 34,652
37,652,204 and 34,652,204 shares issued and outstanding,
respectively
Additional paid-in capital 2,412,340 1,216,523
Deferred employee compensation (49,192) -
Deficit accumulated during the development stage (2,528,755) (1,520,825)
--------------- ----------------
Total stockholders' deficit (127,955) (269,650)
--------------- ----------------
TOTAL $ 727,743 $ $812,321
=============== ================
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
NETFABRIC HOLDINGS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
FROM INCEPTION
THREE MONTHS THREE MONTHS (JANUARY 1, 2003)
ENDED MARCH 31, ENDED MARCH 31, TO MARCH 31, 2005
2005 (UNAUDITED) 2004 (UNAUDITED) (UNAUDITED)
----------------- ------------------ ------------------
REVENUES $ - $ - $ 612
COST OF GOODS SOLD 2,733 7,675 5,859
----------------- ------------------ ------------------
GROSS LOSS (2,733) (7,675) (5,247)
----------------- ------------------ ------------------
EXPENSES:
Research and development 134,475 - 529,927
Selling expenses 158,960 7,543 351,610
General and administrative expenses 279,358 66,644 926,408
Legal and professional expenses 184,290 416 283,625
Interest and bank charges 232,824 408,437
Depreciation and amortization 15,290 23,501
----------------- ------------------ ------------------
Total expenses 1,005,197 74,603 2,523,508
----------------- ------------------ ------------------
Loss before provision for income taxes (1,007,930) (82,278) (2,528,755)
Provision for income taxes - - -
----------------- ------------------ ------------------
NET LOSS $ (1,007,930) $ (82,278) $ (2,528,755)
================= ================== ==================
Net loss per common share, basic and diluted $ (0.03) $ (0.00)
================= ==================
Weighted average number of shares
outstanding, basic and diluted 36,429,982 29,829,758
================= ==================
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NETFABRIC HOLDINGS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Deferred
------------------------- Additional Employee
Shares Par Value Paid-in-Capital Compensation
----------- ------------- --------------- ------------
BALANCES AT JANUARY 1, 2003 (INCEPTION) - $ - $ - $ -
Sale of common stock to founders 29,664,953 29,665 (29,575) -
Sale of common stock to investor 164,805 165 24,835 -
Issuance of options to purchase common stock
to non-employees for services - - 9,389 -
Net loss - - - -
----------- ------------- --------------- ------------
BALANCES AT DECEMBER 31, 2003 29,829,758 29,830 4,649 -
Sale of common stock to investors 1,648,053 1,648 248,352 -
Issuance of common stock to landlord in lieu of rent 659,221 659 99,341 -
Common stock issued in connection with share exchange 1,765,172 1,765 (30,874) -
Allocation of proceeds from bridge loans to common 500,000 500 410,903 -
stock
Value of shares and warrants issued in
connection with financing commitment 250,000 250 368,433 -
Issuance of options to purchase common stock
to non-employees for services - 115,719 -
Net loss - - - -
----------- ------------- --------------- ------------
BALANCES AT DECEMBER 31, 2004 34,652,204 34,652 1,216,523 -
Sale of common stock to investors, net of offering
costs of $368,683 2,000,000 2,000 629,317
Settlement of bridge loan with common stock 1,000,000 1,000 499,000
Deferred employee stock option compensation - - 67,500 (67,500)
Amortization of deferred employee stock option
compensation - - - 18,308
Net loss - - - -
----------- ------------- --------------- ------------
BALANCES AT MARCH 31, 2005 (UNAUDITED) 37,652,204 $ 37,652 $ 2,412,340 $ (49,192)
=========== ============= =============== ============
(table continued)
Deficit Accumulated Total
During the Stockholder Equity
Development Stage (Deficit)
--------------------- -------------------
BALANCES AT JANUARY 1, 2003 (INCEPTION) $ - $ -
Sale of common stock to founders - 90
Sale of common stock to investor - 25,000
Issuance of options to purchase common stock
to non-employees for services - 9,389
Net loss (18,565) (18,565)
--------------------- -------------------
BALANCES AT DECEMBER 31, 2003 (18,565) 15,914
Sale of common stock to investors - 250,000
Issuance of common stock to landlord in lieu of rent 100,000
Common stock issued in connection with share exchange - (29,109)
Allocation of proceeds from bridge loans to common 411,403
stock
Value of shares and warrants issued in
connection with financing commitment 368,683
Issuance of options to purchase common stock
to non-employees for services 115,719
Net loss (1,502,260) (1,502,260)
--------------------- -------------------
BALANCES AT DECEMBER 31, 2004 (1,520,825) (269,650)
Sale of common stock to investors, net of offering
costs of $368,683 - 631,317
Settlement of bridge loan with common stock - 500,000
Deferred employee stock option compensation -
Amortization of deferred employee stock option
compensation - 18,308
Net loss (1,007,930) (1,007,930)
--------------------- -------------------
BALANCES AT MARCH 31, 2005 (UNAUDITED) $ (2,528,755) $ (127,955)
===================== ===================
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
NETFABRIC HOLDINGS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended For the period from
--------------------------------------- inception (January
March 31, 2005 March 31, 2004 to March 31, 2005
(Unaudited) (Unaudited) (Unaudited)
----------------- ---------------- ---------------------
OPERATING ACTIVITIES
Net loss $ (1,007,930) $ (82,278) $ (2,528,755)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash charge for issuance of common stock for rent 12,500 12,500 62,500
Non-cash charge for options issued to non-employees 5,156 15,013 66,596
Non-cash charge for amortization of employee deferred
compensation 18,308 - 18,308
Amortization of debt discount 221,873 - 382,935
Depreciation and amortization 15,290 - 23,501
Changes in operating assets and liabilities:
Inventory (25,278) - (97,303)
Prepaid expenses and other current assets (6,888) (5,665) (25,172)
Other assets - 5,665 -
Accounts payable and accrued liabilities 12,076 826 311,738
----------------- ---------------- ---------------------
Net cash used in operating activities (754,893) (53,939) (1,785,652)
----------------- ---------------- ---------------------
INVESTING ACTIVITIES
Purchases of property and equipment (17,125) - (197,267)
----------------- ---------------- ---------------------
Net cash used in investing activities (17,125) - (197,267)
----------------- ---------------- ---------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,000,000 50,000 1,275,090
Loan from stockholder - - 3,530
Proceeds from bridge loans - - 1,000,000
----------------- ---------------- ---------------------
New cash provided by financing activities 1,000,000 50,000 2,278,620
----------------- ---------------- ---------------------
NET INCREASE (DECREASE) IN CASH 227,982 (3,939) 295,701
CASH AT BEGINNING OF PERIOD 67,719 18,053 -
----------------- ---------------- ---------------------
CASH AT END OF PERIOD $ 295,701 $ 14,114 $ 295,701
================= ================ =====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense $ 12,500 $ - $ 12,500
================= ================ =====================
Cash paid for income taxes $ - $ - $ -
================= ================ =====================
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
NETFABRIC HOLDINGS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
NetFabric Holdings, Inc. ("Parent") (formerly known as Houston Operating
Company, Inc.) 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") (see Note 4) whereby
Holdings acquired all of the issued and outstanding capital stock of
NetFabric and NetFabric became a wholly-owned subsidiary of Holdings
(Holdings and NetFabric are collectively referred to as "Holdings"). Upon
the completion of merger the NetFabric stockholders controlled
approximately 95% of the then issued and outstanding common 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 has been treated as a reverse merger, and a
capital transaction, equivalent to the issuance of stock by NetFabric for
Holdings' net assets and accordingly the historical financial statements
prior to December 9, 2004 are those of NetFabric. All shares and per share
data prior to the merger have been restated to reflect the stock issuances
and related recapitalization.
NetFabric, a Delaware corporation incorporated on December 17, 2002, began
operations in July 2003. As no activities occurred for the period from
December 17, 2002 through December 31, 2002, the presentation of the
accompanying consolidated financial statements commences on January 1,
2003. NetFabric develops and markets a family of Internet Protocol ("IP")
appliances that simplifies the integration of standard telephone systems
with an IP infrastructure. NetFabric's products deliver productivity gains
and significant cost reductions, while maintaining Public Switched
Telephone Network ("PSTN") class reliability and ease of use. NetFabric is
in the process of obtaining patents for the underlying technology.
NetFabric provides progressive upgrades in both the PSTN and Voice Over
Internet Protocol ("VoIP")" solutions principally used in the large
residential marketplace and small and medium sized businesses. NetFabric
develops and sells IP Telephony Service Adaptors ("IP TSA"), products that
connect to the trunk side of existing standard phone systems and provide
the functionality of an IP phone system, at a fraction of the cost with
virtually no risk of system failure. FUSION, NetFabric's principal product
line, uses an external VoIP gateway to facilitate its use with any service
provider utilizing any protocol.
In March 2005, the Company's board of directors approved several actions,
including i) a change of the Company's name to NetFabric Holdings, Inc.,
ii) new bylaws for the Company, which among other things increased the
Company's authorized common stock to 100 million shares, and iii) approved
the adoption of the Holdings stock option plan. Such actions became
effective upon approval of stockholders in April 2005.
The Company has not generated significant revenue and is considered to be a
development stage company and as such the condensed consolidated financial
statements presented herein are presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
BASIS OF PRESENTATION / INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been omitted pursuant to such rules and regulations. However the
Company believes that the disclosures are adequate to make the information
presented not misleading. The financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that are, in the opinion
of management, necessary for a fair presentation of the Company's financial
7
position and results of operations. The operating results for the three
months ended March 31, 2005 and 2004 are not necessarily indicative of the
results to be expected for any other interim period of any future year. The
accompanying unaudited condensed consolidated financial statements should
be read in conjunction with the Company's December 31, 2004 consolidated
financial statements, including the notes thereto, which are included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004.
As shown in the accompanying condensed consolidated financial statements,
the Company has incurred losses in the development stage totaling
$2,528,755 and has a working capital deficit of $339,618 at March 31, 2005.
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 plan and satisfy its
obligations on a timely basis. Management believes that such cash flows
will be funded by additional equity and/or debt financings through the time
in which the Company evolves from the development stage and generates
sufficient positive cash flows from its operations. However there can be no
assurance that management's plans will be able to be achieved.
CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Holdings and its wholly-owned subsidiary. All significant intercompany
transactions and balances have been eliminated.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period consolidated
financial statements to conform to the current period presentation.
ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") 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 provisions for bad debts,
depreciable/amortizable lives, impairment of long-lived assets, the fair
value of common stock, the fair value of options issued for services, the
allocation of proceeds from the bridge loans to equity instruments and
other reserves. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates.
REVENUE RECOGNITION
The Company derives revenue from the sale of its communication equipment
products. In accordance with SEC Staff Accounting Bulletin No. 104,
"Revenue Recognition," revenue is recognized when persuasive evidence of an
arrangement exists, delivery 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.
8
To date the Company's products have been sold only through a network of
distributors and value-added resellers ("VAR"). In the VAR channel,
NetFabric recognizes revenue at the time of shipment if all other
contractual obligations to the VAR have been satisfied. In the distributor
channel, NetFabric recognizes revenue when the distributor sells and ships
NetFabric products to its own VARs, resellers or end-user customers,
provided the Company has satisfied all other the terms and conditions with
the distributor. Accordingly, NetFabric receives distribution sales and
inventory information regarding its products from its distributors for the
purpose of determining the appropriate timing of revenue recognition.
Both VARs and distributors have limited rights to return products to the
Company but must obtain prior approval from NetFabric before returning
products. This policy is a common practice within the industry. NetFabric
has no obligation to accept the return of any unsold products. If required,
the Company accrues a provision for estimated sales returns and other
allowances and deferrals as a reduction of revenue at the time of revenue
recognition. To date no provisions for estimated sales returns and other
allowances have been recognized. The Company has no obligation to provide
service, repair, counseling or other assistance to any customers of the
VARs or distributors unless NetFabric has a specific agreement directly
with such customer.
INVENTORY
Inventory consist primarily of finished goods and purchased electronic
components, and are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out method.
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 amounts presented in the
consolidated balance sheets at March 31, 2005 and 2004.
STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), and related interpretations.
As such, compensation expense to be recognized over the related vesting
period is generally determined on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income (loss) disclosures for employee stock
option grants as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosures required by
SFAS No. 123.
If compensation expense for stock options awarded to employees had been
determined in accordance with SFAS No. 123, the Company's pro forma net
loss would have been as follows:
9
Three months ended, March 31,
2005 2004
----------------- ---------------
Net loss, as reported $ (1,007,930) (82,278)
Stock based employee compensation recorded 18,308 -
----------------- ---------------
Sub-total (989,622) (82,278)
----------------- ---------------
Stock-based employee compensation expense
determined under fair value method (291,037) (908)
----------------- ---------------
Pro forma net loss, as adjusted $ (1,280,659) $ (83,186)
================= ===============
Loss per share:
Basic and diluted-as reported $ (0.03) $ (0.00)
Basic and diluted-pro forma $ (0.04) $ (0.00)
The estimated value of the options is amortized over their vesting periods
of one to four years for pro forma disclosure only.
EARNINGS PER SHARE
The Company calculates earnings 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 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 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 earnings per share for the three months ended March 31, 2005 and
2004 exclude potential common shares of 8,987,526 and 3,625,716,
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.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
requiring all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense in the
consolidated financial statements based on their fair values. As amended by
the SEC on April 14, 2005, this standard is effective for annual periods
beginning after December 15, 2005, and includes two transition methods.
Upon adoption, the Company will be required to use either the modified
prospective or the modified retrospective transition method. Under the
modified retrospective approach, the previously reported amounts are
restated for all periods presented to reflect the FASB Statement No. 123
amounts in the income statement. Under the modified prospective method,
awards that are granted, modified, or settled after the date of adoption
should be measured and accounted for in accordance with SFAS 123R. Unvested
equity-classified awards that were granted prior to the effective date
should continue to be accounted for in accordance with SFAS 123 except that
amounts must be recognized in the income statement. The Company is
currently evaluating the impact of this standard and its transitional
alternatives.
3. BRIDGE LOANS
Bridge loans consist of the following as of March 31, 2005:
Loan II, due April 12, 2005 $ 500,000
Less: Unamortized debt discount (28,468)
--------------
$ 471,532
==============
On July 22, 2004, NetFabric entered into a Financing Agreement which was
amended on December 2, 2004 (the "Financing Agreement") with Macrocom
Investors, LLC, ("Macrocom") whereby Macrocom provided a loan to NetFabric
in the amount of $500,000 ("Loan I") for a period of 180 days from the
original date of the Financing Agreement ("Due Date") at an annual simple
interest rate of 5%. On the Due Date, the Company had the option to repay
10
the principal in cash or in kind by issuing 1,000,000 shares of common. In
either event, the interest on Loan I is payable in cash on the Due Date. In
January 2005, in accordance with the terms of the Financing Agreement, the
Company elected to repay the principal of Loan I in kind by issuing
1,000,000 shares of common stock. Additionally, in connection with the
Financing Agreement the Company issued to Macrocom 250,000 shares of common
stock as additional consideration for Loan I in December 2004.
On October 14, 2004, NetFabric and Macrocom entered into a loan agreement
which was amended on December 2, 2004 (the "Loan Agreement"), whereby
Macrocom agreed to loan an additional $500,000 to NetFabric ("Loan II" or
the "Second Loan"), due 180 days from the original date of the Loan
Agreement ("Second Due Date") at an annual simple interest rate of 5%. On
the Second Due Date, at the option of Macrocom, Macrocom can convert the
principal of the Second Loan into 1,000,000 shares of common stock or
demand repayment of the principal in cash. In either event, the interest on
the Second Loan is payable in cash on the Second Due Date. In addition, in
December 2004 the Company issued to Macrocom 250,000 shares of common stock
as additional consideration for the Second Loan. On the Second Due Date in
April 2005 Macrocom did not request repayment or conversion to common stock
of Loan II. The Company and Macrocom are engaged in negotiations regarding
the settlement or restructuring of Loan II.
As a result of these transactions, total debt discounts on Loan I and Loan
II (the "Bridge Loans"), including the value of the beneficial conversion
feature, of $411,403 were recorded in 2004. During the three months ended
March 31, 2005 $221,873 of the discounts was amortized into interest
expense on the accompanying statement of operations.
4. STOCKHOLDERS' EQUITY
In December 2003, the Company sold 164,805 shares of the Company's common
stock along with a warrant to purchase 164,805 shares of common stock, at
an exercise purchase price of approximately $0.1517 per share, resulting in
aggregate proceeds of $25,000 or $0.1517 per share. The warrants are
immediately exercisable and terminate on the earlier of (i) the fifth
anniversary of the issue date or (ii) the consummation of a Qualified
Public Offering, as defined.
The Company sold an additional 1,648,053 shares of common stock at various
dates through April 20, 2004 resulting in proceeds of $250,000 or $0.1517
per share. In connection with the sale of certain of these shares to other
investors the Company issued 988,832 warrants on the same terms and
conditions as described in the preceding paragraph. In 2004, the Company
also issued 659,221 shares of common stock (valued at $100,000) as payment
for certain expenses. On December 9, 2004, (the "Closing Date") Holdings
completed the Share Exchange with all of the stockholders (the
"Stockholders") of NetFabric (Note 1). At the closing, which occurred at
the same time as the execution of the Acquisition Agreement, Holdings
acquired all of the issued and outstanding capital stock of NetFabric from
the Stockholders in exchange for an aggregate of 32,137,032 newly-issued
shares of the Holdings' common stock. For accounting purposes the
acquisition was treated as a recapitalization of NetFabric with NetFabric
as the acquirer, a reverse acquisition. Since Holdings prior to the merger
was a public shell corporation with no significant operations, pro-forma
information giving effect to the merger is not presented.
In addition to the Bridge Loan transactions (Note 3), during 2004 Macrocom
entered into a commitment with NetFabric to purchase common stock of
Holdings subsequent to the Closing Date, under certain terms. Pursuant to
this financing commitment, in two separate closings in January and March
2005 the Company sold an aggregate of 2,000,000 shares of common stock to
Macrocom resulting in aggregate proceeds of $1,000,000 or $0.50 per share.
Additionally, under this arrangement, Macrocom received 250,000 shares of
common stock and a six-month warrant to purchase 2,000,000 shares of common
stock at a purchase price of $1,500,000 (the "Macrocom Warrant"), provided
that the closing price of the merged entity's common stock on the day
immediately preceding the exercise of the warrant is less than $2.00 per
share. The value of this additional consideration paid to Macrocom as part
of this financing commitment, totaling $368,683, has been recorded as
offering costs and offset against the proceeds of the additional purchases
of common stock during the three months ended March 31, 2005. The Macrocom
Warrant was not exercised and expired on May 9, 2005. The Company and
11
Macrocom are engaged in discussions regarding extension of the term and
amendment to the other features of the Macrocom Warrant.
5. STOCK-BASED COMPENSATION
On the Closing Date of the Share Exchange all NetFabric outstanding stock
options were exchanged for options in Holdings. Prior to the Share
Exchange, Holdings did not maintain a stock option plan. On March 3, 2005,
the Board of Directors adopted the 2005 Stock Option and Grant Plan (the
"Plan"). 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.
During the three months ended March 31, 2005 and 2004 NetFabric recognized
nonemployee compensation expense of $5,157 and $15,013, respectively, as a
result of the vesting of options, which is included in general and
administrative expenses on the accompanying consolidated statements of
operations.
In February 2005 the Company recorded deferred employee stock option
compensation of $67,500 as a result of the difference between the quoted
market value of the Company's common stock on the date of grant and the
exercise price for an option issued to a certain employee. During the three
months ended March 31, 2005 and 2004, the Company recorded compensation
expense of $18,308 and $0, respectively, associated with deferred employee
stock option compensation which is included in selling expenses on the
accompanying consolidated statements of operations.
6. RELATED PARTY TRANSACTIONS
Loans payable to stockholders on the accompanying consolidated balance
sheet at March 31, 2005 represent amounts owed to shareholders of the
Company for expenses paid on behalf of the Company.
7. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
FOR THE PERIOD FROM
INCEPTION (JANUARY
THREE MONTHS ENDED THREE MONTHS ENDED 1, 2003) TO MARCH
MARCH 31, 2005 MARCH 31, 2004 31, 2005
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------ ------------------ -------------------
Conversion of bridge loan to common stock $ 500,000 $ - $ 500,000
================== ================== ===================
Net assets of NetFabric Holdings, Inc. acquired in
share exchange $ - $ - $ (29,109)
================== ================== ===================
Options issued to non employees for services $ - $ - $ 125,108
================== ================== ===================
Imputed discount on bridge loans relating to
warrants issued and beneficial conversion feature $ - $ - $ 411,403
================== ================== ===================
Value of shares and warrants issued in connection
with financing commitment $ - $ - $ 368,683
================== ================== ===================
Deferred employee stock option compensation $ 67,500 $ - $ 67,500
================== ================== ===================
8. LEGAL PROCEEDINGS
The Company received a notice on March 31, 2005 from certain of the
Macrocom investors alleging that the Company is in default in filing
registration statement. If the registration statement relating to the
Macrocom stock is not effective within 180 days of the Closing Date for
reasons not beyond NetFabric's control, NetFabric will pay Macrocom
liquidated damages of 45,000 shares of the common stock of the Company for
each month or any portion thereof, until such registration statement is
effective. The Company believes it is not in default based upon oral
extensions granted to it by Macrocom and believes the filing of the
registration statement, which occurred on April 5, 2005 cured any alleged
default. Management believes that it will not have any material effects in
subsequent periods on the Company's consolidated financial position,
results of operation or cash flow based on or as a result of the outcome
from this matter.
12
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements are based on
the selection of accounting policies and the application of significant
accounting estimates, some of which require management to make significant
assumptions. Actual results could differ materially from the estimated amounts.
We believe that some of the more critical estimates and related assumptions that
affect our financial condition and results of operations are in the areas of
revenue recognition, income taxes, contingencies, receivables, inventories, and
equity. Our critical accounting estimates were discussed with our Audit
Committee of the Board of Directors. For more information on critical accounting
estimates, refer to the MD&A included in our Form 10-KSB for the year ended
December 31, 2004.
There were no accounting policies that were adopted during the three
months ended March 31, 2005 that had a material effect on our financial
condition and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVIEW OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the 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 on our December 31, 2004 financial statements dated March 30, 2005
that because the Company is in the development stage, has had net losses from
inception and has working capital and net capital deficiencies, such report
indicates that these matters raise substantial doubt about the Company's 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
NetFabric Holdings, Inc., formerly Houston Operating Company,
("NetFabric Holdings" or the "Company") was incorporated in Delaware in August
of 1989, and has not had operations since before 2002. NetFabric Corporation
("NetFabric") was incorporated in the State of Delaware on December 17, 2002, as
a new corporation and not as a result of a material re-classification, merger,
consolidation, purchase or divestiture. On December 9, 2004, the Company entered
into an acquisition agreement ("Acquisition Agreement") with all of the
stockholders of NetFabric in a transaction that was accounted for as a reverse
merger whereby NetFabric was treated as the accounting acquirer ("Acquisition").
At the closing, which occurred at the same time as the execution of the
Acquisition Agreement, the Company acquired all of the issued and outstanding
capital stock of NetFabric from the stockholders in exchange for an aggregate of
32,137,032 newly-issued shares of the Company's common stock. On April 19, 2005,
the Company's name was changed from Houston Operating Company to NetFabric
Holdings, Inc. and its stock symbol was changed from OTC.BB: HOOC to OTC.BB:
NFBH.
BUSINESS AND PLAN OF OPERATION
The Company, headquartered in Brookfield, CT, is a provider of
hardware and services to the burgeoning sector of the telecom industry that
utilizes the Internet for telephone and data communications. Specifically, the
company offers distributed Voice over Internet Protocol ("VoIP") platforms, as
well as Services over IP ("SoIP") solutions, that provide small to mid-sized
Businesses ("SMB"s) and Enterprise Branch Offices ("EBO"s) with a flexible
migration path to an all-IP infrastructure. The large and very lucrative market
of more than 4.9 million SMBs and EBOs that the Company targets is sometimes
13
referred to collectively in this document as "Small Offices."
The Company develops and markets small office Customer Premises
Equipment ("CPE") in the form of integrated telephony services platforms that
provide businesses with a flexible VoIP migration path from a legacy PBX to IP
softswitch. The Company will build and deploy the server side of the advanced
Services over IP that enable its distributed edge devices to deliver to Small
Offices the improved business efficiencies, competitive advantages and
significant cost savings of IP that previously were only available to larger
enterprises.
The Company markets and sells its products to SMBs through Value Added
Resellers ("VAR"s), Service Providers and OEM relationships, and will sell to
Fortune 500 EBO customers, through a direct consultative sales organization.
Although VoIP deployment within large enterprise and residential
markets is moving forward rapidly, the adoption of VoIP for use in Small Offices
has, until now, been lagging. Given that this market could benefit significantly
from the inherent cost-savings, flexibility and productivity gains of VoIP,
offering a product that allows Small Offices to migrate to VoIP without the
risks of undertaking a large equipment upgrade is extremely attractive to the
Company's partners. The VAR channel that serves this market requires a solution
that is easy to sell, install and support. By definition, the Company designed
its products to be simple to explain, install, configure and support so as to
attract the largest number of partners selling to the Small Office market.
RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2005 COMPARED TO MARCH 31, 2004
As previously noted, the December 9, 2004 acquisition has been
accounted for as a reverse merger whereby NetFabric was treated as the
accounting acquirer. Accordingly, the historical financial statements of
NetFabric have been presented for all periods required. NetFabric began
operations in January 2003 and is still a development stage company. During the
quarter ended March 31, 2004 NetFabric had no revenue and minimal expenses.
During the quarter ended March 31, 2005 NetFabric had $0 of revenue and
$1,005,197 of expenses.
A summary of the results of operations for the quarters ended March
31, 2005 and 2004 is as follows:
MARCH 31, 2005 MARCH 31, 2004
--------------------- -------------------
Revenues $ - $ -
Cost of Goods Sold 2,733 7,675
Expenses 1,005,197 74,603
Net Loss $ (1,007,930) $ (82,278)
Net loss per share, basic and diluted $(0.03) $(0.00)
Weighted average number of shares
outstanding, basic and diluted 36,429,982 29,829,758
Our operating activities to date have consisted primarily of
developing our VoIP telephony products for the marketplace. This included the
acceleration of research and development activities, hiring of additional
Company personnel (primarily for research and development, but also sales and
marketing personnel), development of sales and marketing programs, and filing of
product patents.
On March 28, 2005, the Company signed Belkin's Master Reseller
Agreement which entitles NetFabric to 4% revenue share for CallEverywhere sales
by NetFabric resellers. The Company also signed the following Reseller
Agreements: on March 11, 2005, with CommunityNet of Omak, WA; on March 10, 2005,
with Contineo Technologies of Spokane, WA; and , on March 5, 2005, Avatel
Technologies, Inc. of Brandon, FL.
Revenues. For the three months ended March 31, 2005, we generated $0
in revenue compared to $0 for the three months ended March 31, 2004. Although no
revenue was recognized during the three months ended March 31, 2005, we received
sales orders from Williams Telecommunication Corp. totaling $978, and received
14
orders and shipped products to Williams Telecommunication Corp. totaling $1,155
and to Teleconcepts totaling $2,008 which are expected to provide revenues in
future periods. The Company is still in the stages of early product development
and does not plan to generate significant revenue from its various product lines
until the fourth quarter of 2005.
Total Expenses. Total expenses for the three months ended March 31,
2005 were $1,005,197 compared to $74,603 for the three months ended March 31,
2004. The change is related to the increase in our business activities, further
described as follows:
Research and Development expenses for the three months ended March 31,
2005 were $134,475 compared to $0 for the same period in 2004. These expenses
mainly represented the product development costs for the FUSION 4x4 and the 12x8
voice routers, and the new SILK product line, including associated engineering
wages.
General and Administrative expenses for the three months ended March
31, 2005 were $279,358 compared to $66,644 for the same period in 2004. This is
primarily due to the Company hiring significant new personnel in management,
marketing, and sales among others. In addition, the Company began maintaining
office space only in early 2004, and has incurred additional costs associated
with this activity, such as telecom, office supplies and insurance.
Selling expenses for the three months ended March 31, 2005 were
$158,960 compared to $7,543 for the same period in 2004. This is related
primarily to the Company's personnel, participation in certain industry and
trade shows as well as the development and production of marketing materials and
FUSION evaluation units.
Legal and professional fees for the three months ended March 31, 2005
were $184,290 compared to $416 for the same period in 2004. These expenses
related to patent protection filings, legal and accounting costs associated with
the preparation of SEC filings and financial statements.
Interest and bank charges of $232,824 for the three months ended March
31, 2005 represented interest accrued on bridge loans as well as the
amortization of discounts on such loans arising from the allocation of a portion
of the proceeds to the value of equity issued in connection with the loan
agreements.
Depreciation and amortization expense of $15,290 for the three months
ended March 31, 2005 represents depreciation on equipment and purchased software
and amortization of software development costs.
Net Loss per share. Net loss per common share increased to $(0.03) per
share during the three months ended March 31, 2005 from $0.00for the same period
in 2004. The loss increased as we began continued full-fledged operations in
2005, and increased our employee headcount, operating expenses and legal and
professional fees.
LIQUIDITY AND CAPITAL RESOURCES.
As of March 31, 2005 we had cash of approximately $296,000. Our operating
activities used approximately $755,000 of cash for the quarter ended March 31,
2005 as compared to approximately $54,000 for the same period in 2004 due to the
increase in our development activities as described above. In addition, during
the quarter, the Company purchased approximately $17,000 of equipment and raised
approximately $1,000,000 from various equity financings. During the same period
in 2004, there were no fixed asset purchases and our financing activities were
insignificant. As a result of the above activities, the Company had an increase
in cash of approximately $228,000 for the quarter ended March 31, 2005.
During the first quarter of 2005, Macrocom Investors, LLC ("Macrocom") completed
its financing commitment to the Company, as required under the terms of the
financing agreement of July 22, 2004 between Macrocom and the Company
("Financing Agreement"), generating $1,000,000 of proceeds to the Company in
exchange for shares of the Company's common stock. In connection with the
financing commitment Macrocom received a six-month warrant to purchase 2,000,000
shares of our common stock at a purchase price of $1,500,000, provided that the
closing price of our common stock on the day immediately preceding the exercise
of the warrant is less than $2.00 per share. Macrocom did not exercise the
warrant and it expired on May 9, 2005. We are engaged in discussions with
15
Macrocom regarding the possible extension of the term and amendments to the
other features of the warrant. In addition, Macrocom had the right to request,
but as of April 30, 2005 has not requested, repayment in cash of the principal
from its second bridge loan to the Company of $500,000, due April 10, 2005. We
are engaged in negotiations with Macrocom regarding the settlement or
restructuring of the second bridge loan. If Macrocom were to request payment in
cash, the Company would not have the cash on hand to make such payment.
LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS
Through March 31, 2005, we incurred development stage losses totaling
approximately $2,525,755 and at that date, were in a working capital deficit
position of $339,618. At March 31, 2005, we had approximately $295,701 of cash
to fund short-term working capital requirements. Since March 31, 2005 and
through the date of this filing, we have continued to expend cash to fund
operations and continue to incur additional liabilities, however we have not
secured any additional financing to date. We will require additional funding in
the very near term in order to meet our immediate obligations and continue
operations.
Our business strategy calls for growth internally as well as through
acquisitions. To this end, we intend to invest substantial funds to increase its
sales and marketing resources in order to grow revenues. In order to implement
this strategy, we will require additional funding for personnel, capital
expenditures and other expenses, as well as for working capital purposes. If
adequate funds are not available on acceptable terms, then we may not be able to
meet our business objectives for expansion. No commitments to provide additional
funds have been made by management or other stockholders. Accordingly, there can
be no assurance that any additional funds will be available to the Company to
allow it to cover its expenses as they may be incurred.
Our ability to continue as a going concern and future success are dependent upon
our ability to raise capital in the near term to: (1) satisfy our current
obligations, (2) continue our research and development efforts, and (3) the
successful wide scale development, approval, deployment and marketing of our
products.
Management's plans in this regard include, but are not limited to current
discussions and negotiations with a number of additional financing alternatives,
one or more of which it believes will be able to successfully close to provide
necessary working capital, while maintaining sensitivity to shareholder dilution
issues. However, there can be no assurance that NetFabric will generate
sufficient revenues to provide positive cash flows from operations or that
sufficient capital will be available, when required or at terms favorable to us,
to permit NetFabric to realize its plans. The accompanying unaudited condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Our current planned cash requirements for the remainder of fiscal 2005 are based
upon certain assumptions, including our ability to raise additional financing
and significant sales of our products commencing in the fourth quarter of 2005.
Should these cash flows not be available, we believe we would have the ability
to revise our operating plan and if necessary initiate significant reductions in
expenses, including marketing and research and development expenses.
Additionally, irrespective of whether our cash assets prove to be inadequate to
meet our operational needs, we might seek to compensate providers of services by
issuances of stock in lieu of cash.
OTHER MATTERS.
On and effective as of January 21, 2005, the Board of Directors of the
Company, pursuant to Section 6.10 of the Bylaws amended Section 2.12, entitled
Informal Action by Shareholders. Section 2.12 had previously allowed action by
written consent of shareholders in lieu of a shareholders meeting only if all
shareholders entitled to vote on a matter had signed the consent. The amendment
eliminates the all shareholders requirement and allows action by written consent
of shareholders in lieu of a shareholders meeting as long as the consent is
signed by a majority of the shareholders entitled to vote on such action.
16
On March 8, 2005, the Board of Directors adopted a stock option plan
(the "Plan"), subject to the receipt of stockholder approval of the Plan. The
Company was also obligated to adopt the Plan in connection with the acquisition
of NetFabric Corporation. The Plan is necessary in order to cover the options
previously granted by NetFabric and subsequently assumed by the Company. The
written consent of the Company stockholders provided the necessary stockholder
approval of the Plan. The Plan became effective on April 19, 2005.
As a consequence of the change in management of the Company, resulting
from the acquisition of NetFabric, on March 28, 2005 Michael Johnson & Co. LLC
("MJC") was dismissed as the independent registered public accounting firm for
the Company by the Audit Committee of its Board of Directors. MJC's reports on
the Company's financial statements for the past two fiscal years did not contain
an adverse opinion, disclaimer of opinion, nor were they qualified or modified
as to audit scope or accounting principles. The report was qualified as to
uncertainty about the Company's ability to continue as a going concern unless it
was able to generate sufficient cash flow to meet its obligations and sustain
its operations.
During the Company's two most recent fiscal years and through March
28, 2005, there were no disagreements with MJC 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 MJC,
would have caused it to make reference to the subject matter of the
disagreements in connection with this report. No reportable events of the type
described in item 304(a)(1)(iv)(B) of Regulation S-B occurred during the two
most recent fiscal years. The Company has provided MJC with a copy of this
disclosure and requested that they furnish the Company with a letter addressed
to the Commission stating whether it agrees or disagrees with the statements by
the Company in this report and, if not, stating the respects in which it does
not agree. A letter from MJC to such effect was provided the Company.
Also effective March 28, 2005, J.H. Cohn LLP ("JHC") was appointed as
the new independent registered public accounting firm for the Company. During
its two most recent fiscal years and through March 28, 2005, the Company has not
consulted with JHC 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. JHC is the independent registered public accounting firm for
NetFabric immediately prior to its acquisition by the Company and currently.
The Company received a notice on March 31, 2005 from certain of the
Macrocom investors alleging that the Company is in default in filing
registration statement. If the registration statement relating to the Macrocom
stock is not effective within 180 days of the Closing Date for reasons not
beyond NetFabric's control, NetFabric will pay Macrocom liquidated damages of
45,000 shares of the common stock of the Company for each month or any portion
thereof, until such registration statement is effective. The Company believes it
is not in default based upon oral extensions granted to it by Macrocom and
believes the filing of the registration statement, which occurred on April 8,
2005, cured any alleged default. Management believes that it will not have any
material effects in subsequent periods on the Company's consolidated financial
position, results of operation or cash flow based on or as a result of the
outcome from this matter.
On April 4, 2005, the Company announced the appointment of Madelyn M.
DeMatteo as a Director of the Company. Ms. DeMatteo has also been designated as
the financial expert of the audit committee, and will serve as Chairman of the
committee. Prior to joining the Company, from 1978 through 2000, Ms. DeMatteo
was employed by Southern England Telecommunications. During her employment, she
held the positions of Senior Vice President, General Counsel and Corporate
Secretary and Vice President, General Counsel & Corporate Secretary from
1992-2000, Associate General Counsel and Corporate Secretary from 1990-1991,
General Attorney from 1983-1990, and Senior Attorney-Labor from 1978-1983. From
1973-1978, Ms. DeMatteo was employed by AT&T as Senior Counsel-Labor. Ms.
DeMatteo received her B.A. from Connecticut College in 1970 and her J.D. from
the University of Connecticut in 1973.
17
On April 8, 2005, the Company filed a Registration Statement with the
SEC on Form SB-2 to register 7,750,000 common shares of its stock held by
Littlehampton Investments, LLC, Macrocom and Michael Millon, the Managing Member
of both of these entities, as required under the terms of the Financing
Agreement.
The Board of Directors determined that it would be in the best
interests of the Company to change the name of the Company from Houston
Operating Company to NetFabric Holdings, Inc. to reflect its new business of
developing and selling a family of IP appliances, and related software and
services, that simplify the incorporation of any telephone system into a
company's IP infrastructure while reducing the cost of telephone calls. The
Board of Directors also determined that it would be in the best interests of the
Company to increase the number of authorized shares of common stock from 50
million to 100 million shares of common stock, par value, $0.001. Both proposed
changes became effective April 19, 2005 following approval by written consent of
the shareholders.
Also, effective April 19, 2005, the trading symbol for the Company
changed from HOOC to NFBH.
ITEM 3. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures:
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
period specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports filed under the
Exchange Act is accumulated and communicated to management, including
the President and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. As of the end of the period covered by
this report, we carried out an evaluation, under the supervision and with
participation of our management, including our President and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon and as of the date of that evaluation, the
President and Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports we file and submit under the Exchange Act are recorded, processed,
summarized and reported as and when required.
B. Changes in Internal Control over Financial Reporting:
There were no changes in our internal controls over financial
reporting identified in connection with our evaluation of these controls as of
the end of the period covered by this report that could have significantly
affected those controls subsequent to the date of the evaluation referred to in
the previous paragraph, including any correction action with regard to
significant deficiencies and material weakness.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company received a notice on March 31, 2005 from certain of the
Macrocom investors alleging that the Company is in default in filing
registration statement. If the registration statement relating to the Macrocom
stock is not effective within 180 days of the Closing Date for reasons not
beyond NetFabric's control, NetFabric will pay Macrocom liquidated damages of
45,000 shares of the common stock of the Company for each month or any portion
thereof, until such registration statement is effective. The Company believes it
is not in default based upon oral extensions granted to it by Macrocom and
believes the filing of the registration statement, which occurred on April 5,
2005 cured any alleged default. Management believes that it will not have any
material effects in subsequent periods on the Company's consolidated financial
position, results of operation or cash flow based on or as a result of the
outcome from this matter.
18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In the first quarter of 2005, Macrocom completed its financing of the
Company as required under the terms of the Financing Agreement. The Company
received $1,000,000 of equity financing and issued 2,000,000 shares of its
common stock to Macrocom. On April 8, 2005, the Company filed a Registration
Statement with the SEC on Form SB-2 to register 7,750,000 common shares of its
stock, which include the 2,000,000 shares issued to Macrocom together with other
shares held by Littlehampton Investments, LLC, Macrocom and Michael Millon, the
Managing Member of both Littlehampton Investments, LLC and Macrocom, or
transferred by those entities to other investors, as required under the terms of
the Financing Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On and effective as of January 21, 2005, the Board of Directors of the
Company, pursuant to Section 6.10 of the Bylaws amended Section 2.12, entitled
Informal Action by Shareholders. Section 2.12 had previously allowed action by
written consent of shareholders in lieu of a shareholders meeting only if all
shareholders entitled to vote on a matter had signed the consent. The amendment
eliminates the all shareholders requirement and allows action by written consent
of shareholders in lieu of a shareholders meeting as long as the consent is
signed by a majority of the shareholders entitled to vote on such action.
On March 3, 2005, the Board of Directors adopted a stock option plan
(the "Plan"), subject to the receipt of stockholder approval of the Plan. The
Company was also obligated to adopt the Plan in connection with the acquisition
of NetFabric Corporation. The Plan is necessary in order to cover the options
previously granted by NetFabric and subsequently assumed by the Company. The
written consent of the Company stockholders provided the necessary stockholder
approval of the Plan. The Plan became effective on April 19, 2005.
The Board of Directors determined that it would be in the best
interests of the Company to change the name of the Company from Houston
Operating Company to NetFabric Holdings, Inc. to reflect its new business of
developing and selling a family of IP appliances, and related software and
services, that simplify the incorporation of any telephone system into a
company's IP infrastructure while reducing the cost of telephone calls.
The Board of Directors also determined that it would be in the best
interests of the Company to increase the number of authorized shares of common
stock from 50 million to 100 million shares of common stock, par value, $0.001.
Both proposed changes became effective April 19, 2005 following approval by
written consent of the shareholders.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits.
Exhibit Number Description of Document
-------------- -----------------------
3.1(a) Certificate of Incorporation, as amended
3.2 By-Laws of the Company, as amended
4.1 Finance Agreement dated July 22, 2004
19
4.2 Exchange Agreement of December 9, 2004 between
the Company and NetFabric Corporation
10.1 2005 Stock Option Plan
10.3 Agreement between the Company and Belkin
Corporation, dated April , 2005**
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)**
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)**
32.1 Section 1350 Certification (CEO)**
32.2 Section 1350 Certification (CFO)**
----------
(1) Incorporated herein in its entirety by reference to the
Company's Registration Statement on Form SB-2, Registration
No. 333-123938, as filed with the Securities and Exchange
Commission on April 11, 2005.
(2) Incorporated herein in its entirety by reference to the
Company's 2004 Annual Report on Form 10-KSB.
(3) Incorporated herein in its entirety by reference to the
Company's Form 8-K filed on March 31, 2005.
(4) Incorporated herein in its entirety by reference to the
Company's Form 8-K/A filed on February 24, 2005.
** Filed herewith.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 13, 2005 /s/ JEFF ROBINSON
---------------------------
Jeff Robinson Chairman and Chief
Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
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: May 13, 2005 /s/ JEFF ROBINSON
---------------------------
Jeff Robinson Chairman and Chief
Executive Officer (principal executive
officer)
Date: May 13, 2005 /s/ WALTER CAROZZA
---------------------------
Walter Carozza, Chief Financial
Officer
(principal accounting officer)
Date: May 13, 2005 /s/ MADELYN DEMATTEO
---------------------------
Madelyn DeMatteo, Director
Date: May 13, 2005 /s/ CHARLOTTE G. DENENBERG
---------------------------
Charlotte G. Denenberg, Director
Date: May 13, 2005 /s/ RICHARD HOWARD
---------------------------
Richard Howard, Director
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CALLEVERYWHERE MASTER RESELLER AGREEMENT
THIS CALLEVERYWHERE MASTER RESELLER AGREEMENT ("Agreement") is made 2/28/2005,
the ("Effective Date") by and between Belkin Logistics, Inc., a Delaware
corporation with its principal place of business at 501 West Walnut Street,
Compton CA 90220 ("Belkin") and Net Fabric Corporation, a Delaware corporation
with its principal place of business at 67 Federal Road, Building A, Suite 300,
Brookfield, CT ("Buyer").
WHEREAS, Belkin is in the business of selling VoIP Services (hereinafter
"CallEverywhere") for the computer and consumer electronics user to
distributors, and retailers, as well as directly to consumers.
WHEREAS, Belkin desires to market via Master Reseller, and Master Reseller
desires to market Belkin's reseller program to Buyers to offer for sale, the
CallEverywhere service; Master Reseller's buyers will be recruited by Master
Reseller but will have a direct reseller agreement with Belkin and all terms and
conditions will be the sole responsibility of the buyer.
NOW, THEREFORE, in consideration of the mutual promises and other good and
valuable consideration contained herein, the parties hereby agree as follows:
1. Term and Termination. The initial term of this Agreement shall commence on
the Effective Date and shall continue for a period of one (1) year. This
Agreement shall automatically renew for additional successive one-year
terms unless and until either party shall give ten (10) days prior written
notice to the other party of its intent to let the Agreement expire at the
end of its then-current term. For any reason or no reason at all, either
party may terminate this Agreement for convenience upon thirty (30) days
prior written notice to the other party. Further, this Agreement may be
immediately terminated as follows: (a) subject to Title 11, United State
Code, upon the dissolution or liquidation of the other party, the
insolvency or bankruptcy of the other party, the institution of any
proceeding by or against the other party under the provisions of any
insolvency or bankruptcy law; the appointment of a receiver of all or
substantially all of the assets or property of the other party, or the
issuance of an order for an execution on a material portion of the property
of the other party pursuant to a judgment; or (b) upon a party's material
default in the performance of any of its obligations hereunder, which
default is not cured within thirty (30) days after notice is given to the
defaulting party specifying the default. For the avoidance of doubt,
Buyer's failure to pay on time shall be considered a material default.
2. Revenue Share: Belkin will remit Master Reseller a one-time revenue share
payment for each CallEverywhere unit activated by a Master Reseller's Buyer
customer. This revenue share payment shall be equal to the total
CallEverywhere monthly service fees incurred by such Buyer customer within
the first 60 days after activation, rounded up to the whole dollar.
o Belkin will remit all revenue share payments within thirty (30) days after
the end of the first two (2 months) of service for each CallEverywhere unit
activated by a Buyer customer during the Term of this Agreement.
In addition to the one-time revenue share payment set forth above, Belkin will
pay to Master Reseller a monthly revenue share payment consisting of 4% of all
CallEverywhere service revenues received by Belkin CallEverywhere subscribers
who have purchased a CallEverywhere unit from Master Reseller's Buyer. Master
Reseller shall only be entitled to such monthly revenue share payments for
Active Master Reseller's Buyer CallEverywhere Subscribers. For the avoidance of
doubt, an Active Buyer CallEverywhere Subscriber is defined as an end-user with
a current, active account for the Belkin CallEverywhere VoIP service and has
purchased their CallEverywhere unit from Master Reseller's Buyer.
o Under no circumstances shall Belkin be liable to Master Reseller for any
revenue sharing payments relating to accounts, including but not limited to
Active Master Reseller Buyer CallEverywhere Subscriber accounts, which are
delinquent or are in default.
o All revenue sharing payments shall be based solely on fees paid for base
monthly service plans. No taxes, overage charges, long distance charges or
other fees shall be used in the calculation of revenue sharing payments.
o If Master Reseller decides to discontinue marketing Belkin' CallEverywhere
product, Belkin will continue to pay the 4% monthly revenue share for two
years or until the customer terminates service.
o If customer discontinues the CallEverywhere service, Belkin will no longer
be required to pay the 4% monthly revenue share to Buyer.
o If Belkin cancels a customer's CallEverywhere service, Belkin will no
longer be required to pay the 4% monthly revenue share to Master Reseller
3. Payment Terms. Net 60 days from Buyer's receipt of invoice.
4. Freight. Prepaid ground freight to all Buyer fulfillment centers, minimum
order value $50.00.
5. Defective Product Returns. Belkin will accept requests for returns on all
defective CallEverywhere units, once a month, on or before the 15th day of
each month.
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6. Termination for Breach. Either party may terminate this Agreement at any
time in the event of a breach by the other party that remains uncured after
(i) fifteen (15) days following written notice thereof in the event of a
non-monetary breach, or (ii) five (5) days following written notice thereof
in the event of a monetary breach. Such termination shall be effective
immediately and automatically upon the expiration of the applicable notice
period, without further notice or action by either party
7. Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER OR TO
ANY THIRD PARTY FOR SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL
DAMAGES, WHETHER ARISING IN TORT, CONTRACT, OR NEGLIGENCE, SUCH AS, BUT NOT
LIMITED TO, DAMAGES RESULTING FROM EQUIPMENT DOWNTIME OR LOSS OF DATA, LOST
PROFITS, OR REVENUE OR EXEMPLARY OR PUNITIVE DAMAGES ARISING OUT OF ANY
CLAIM, WHETHER OR NOT FORESEEABLE AND EVEN IF THE PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED IN THIS AGREEMENT, AND WITHOUT LIMITING ANY OTHER RIGHTS,
REMEDIES, LIMITATIONS, OR RESTRICTIONS IN THIS AGREEMENT OR UNDER LAW,
BELKIN WILL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS
AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER
THEORY, AT LAW OR IN EQUITY, FOR ANY AMOUNTS AGGREGATING IN EXCESS OF
AMOUNTS PAID TO IT UNDER THIS AGREEMENT IN THE TWELVE (12) MONTH PERIOD
BEFORE THE CAUSE OF ACTION.
8. Force Majeure. The parties shall be excused for the failures and delays in
the performance of their respective obligations caused by catastrophes
beyond their control provided they give prompt written notice to the other
party of such catastrophe, and provided further that they promptly
undertake commercially reasonable efforts to remedy such failure or delay.
In no event shall any delay in payment of monies owed by either party to
the other party under this Agreement exceed more than thirty (30) days as a
result of any such catastrophe.
9. Intellectual Property. Master Reseller acknowledges and agrees that (i)
Belkin has the exclusive right to use the brands, trademarks, logos,
taglines, phrases and other intellectual property on, in or associated with
the Products or literature or materials provided by Belkin (collectively
"Intellectual Property"), and (ii) Master Reseller shall comply with any
Intellectual Property usage, Product display and advertising requirements
and/or restrictions provided by Belkin in writing from time to time, (iii)
Buyer shall not, during or after this Agreement, develop or use any
Intellectual Property with similar appearance, content or (if proprietary
to Belkin) function, (iv) this Agreement is not an intellectual property
license, and (v) Master Reseller shall discontinue use of the Intellectual
Property upon termination of this Agreement, except as required for the
sale of its inventory of Products and in strict conformance with this
Agreement.
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10. Assignment. This Agreement and all or any part of Belkin's rights and
obligations hereunder may be assigned by Belkin at any time to any direct
or indirect subsidiary of Belkin or any other entity controlled by,
controlling or under common control with Belkin. Belkin shall cause any
such affiliate to perform any of Belkin's obligations hereunder which may
be assigned to such affiliate. Neither this Agreement nor any of the rights
or obligations hereunder of Buyer may be assigned by Buyer without Belkin's
prior written consent. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and to their respective successors and
permitted assigns.
11. General Provisions. Master Reseller shall not assign its rights or delegate
its duties hereunder or any interest therein or any rights hereunder
without the prior written consent of Belkin, and any such assignment,
without such consent, shall be void. This Agreement is freely assignable by
Belkin. The validity, performance, and all other matters relating to the
interpretation and effect of this Agreement shall be governed by the laws
of the State of California, without giving effect to its conflict of laws
rules. Master Reseller and Belkin agree that the proper venue for all
actions arising in connection herewith shall be only in the State of
California, and the parties agree to submit to such jurisdiction. This
Agreement constitutes the entire agreement between the parties, and
supersedes all other communications, negotiations and prior oral or written
statements regarding the subject matter hereof. No change, modification,
rescission, discharge, abandonment, or waiver of this Agreement shall be
binding upon Belkin unless made in writing and signed on its behalf by a
duly authorized officer of Belkin. No conditions, usage of trade, course of
dealing or performance, understanding or agreement purporting to modify,
vary, explain, reject, or supplement these terms and conditions shall be
binding unless hereafter made in writing and signed by the party to be
bound, and no modification shall be affected by Belkin's receipt,
acknowledgment, or acceptance of purchase orders, shipping instruction
forms, or other documentation containing terms at variance with or in
addition to those set forth herein. No waiver by either party with respect
to any breach or default or of any right or remedy and no course of
dealing, shall be deemed to constitute a continuing waiver or waiver of any
other breach or default or of any other right or remedy, unless such waiver
be expressed in writing and signed by the party to be bound. All
typographical or clerical errors made by Belkin in any quotation,
acknowledgment or publication are subject to correction.
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IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
BELKIN LOGISTICS, INC. NetFabric Corporation
By: By:
--------------------------------- -----------------------------------
Name: Name:
------------------------------- ---------------------------------
Title: Title:
------------------------------ --------------------------------
Address: Belkin Logistics, Inc. Address: NetFabric Corporation
501 West Walnut Street, Compton CA 90220 67 Federal Road, Building A, Suite 300
Brookfield, CT 06804
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EXHIBIT 31.1
CERTIFICATION
I, Jeff Robinson, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Netfabric
Holdings, Inc.
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this report.
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d 15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of the Company's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
control over financial reporting.
May 13, 2005
/s/ Jeff Robinson
-----------------------------------------
Name: Jeff Robinson
Title: Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Walter Carozza, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Netfabric
Holdings, Inc.
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this report.
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d 15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Company and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of the Company's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
control over financial reporting.
May 13, 2005
/s/ Walter Carozza
-------------------------------
Name: Walter Carozza
Title: Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Netfabric Holdings, Inc. (the
"Company") on Form 10-QSB for the period ended March 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Jeff
Robinson, Chairman and Chief Executive Officer, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act, that:
(1) The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
May 13, 2005
/s/ Jeff Robinson
--------------------------------
Name: Jeff Robinson
Title: Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906 has
been provided to Netfabric, Inc. and will be retained by Netfabric Holdings,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Netfabric Holdings, Inc. (the
"Company") on Form 10-QSB for the period ended March 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Walter
Carozza, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss.1350, as
adopted pursuant to ss.906 of the Sarbanes-Oxley Act, that:
(1) The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
May 13, 2005
/s/ Walter Carozza
---------------------------------
Name: Walter Carozza
Title: Chief Financial Officer
A signed original of this written statement required by Section 906 has
been provided to Netfabric, Inc. and will be retained by Netfabric Holdings,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.