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NETFABRIC HOLDINGS, INC.

 

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Interim Condensed Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Controls and Procedures	19
PART II.	OTHER INFORMATION	19
Item 1.	Legal Proceedings	19
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	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
	Signatures	21

 

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		MARCH 31, 2007			DECEMBER 31, 2006
ASSETS		(UNAUDITED)			(NOTE 2)
CURRENT ASSETS:
Cash		$	14,223		$	13,437
Trade accounts receivable, net			2,349,300			2,149,680
Prepaid expenses and other current assets			43,962			5,110
Total current assets			2,407,485			2,168,227
Property and equipment, net			188,000			197,215
Goodwill			13,982,451			13,982,451
Other intangibles, net			824,698			879,702
Other assets			74,712			55,028
TOTAL ASSETS		$	17,477,346		$	17,282,623
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible debentures, net of unamortized discounts		$	200,000		$	685,168
Notes payable to officer, net of unamortized discounts			150,000			150,000
Accounts payable and accrued liabilities			3,397,970			3,747,809
Accrued compensation			414,978			338,283
Deferred revenues and customer advances			1,640,459			-
Revolving note, net of unamortized discount			1,015,285			1,014,249
Total current liabilities			6,818,692			5,935,509
Convertible note, net of unamortized discount			566,605			443,430
Total liabilities			7,385,297			6,378,939
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Common Stock, $.001 par value, authorized shares 200,000,000, 75,663,883 and 75,023,883 shares issued and outstanding, respectively			75,664			75,024
Additional paid-in capital			36,382,838			36,201,479
Accumulated deficit			(26,366,453	)		(25,372,819	)
Total stockholders' equity			10,092,049			10,903,684
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	17,477,346		$	17,282,623

 

The accompanying notes should be read in conjunction with the condensed consolidated financial statements.

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

		THREE MONTHS			THREE MONTHS
		ENDED			ENDED
		March 31, 2007			March 31, 2006
Revenues		$	4,270,188		$	4,098,446
OPERATING EXPENSES:
Direct employee compensation and
consultant expenses (includes share based compensation
of $11,396 and $0)			3,359,681			2,997,103
Selling, general and administrative expenses (includes
share based compensation of $170,603 and $94,776)			1,560,230			1,510,677
Non-cash charge for dispute settlements						9,492,070
Depreciation and amortization			89,234			70,168
Total operating expenses			5,009,145			14,070,018
Loss from operations			(738,957	)		(9,971,572	)
OTHER INCOME / (EXPENSE):
Amortization of debt discounts and debt
issuance costs			(175,795	)		(1,452,647	)
Interest and bank charges			(78,882	)		(77,232	)
Gain/(charge) on derivative financial instruments						336,352
Debt extinguishment costs						(621,077	)
Total other income / (expense)			(254,677	)		(1,814,604	)
Loss before provision for income taxes			(993,634	)		(11,786,176	)
Provision for income taxes			-			-
LOSS FROM CONTINUING OPERATIONS			(993,634	)		(11,786,176	)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued operations						(240,142	)
NET LOSS		$	(993,634	)	$	(12,026,318	)
Net loss from continuing operations
per common share, basic and diluted		$	(0.01	)	$	(0.19	)
Net loss from discontinued operations
per common share, basic and diluted		$	-		$	(0.00	)
Net loss per common share, basic and
diluted		$	(0.01	)	$	(0.19	)
Weighted average number of shares
outstanding, basic and diluted			75,302,994			62,491,398

 

The accompanying notes should be read in conjunction with the condensed consolidated financial statements.

 

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

			THREE MONTHS			THREE MONTHS
			ENDED			ENDED
OPERATING ACTIVITIES			March 31, 2007			March 31, 2006
Net loss			(993,634	)		(12,026,318	)
Loss from discontinued operations						240,142
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Non-cash charge for interest expense						22,500
Non-cash charge for settlement of disputes						9,492,070
Non-cash charge for reissuance of warrants in connection with
debt extinguishment						372,353
Common stock issued for services			77,600
Non-cash charge for employee share based compensation			104,399			94,775
Non-cash gain on debt extinguishment
Non-cash gain on derivative financial instrument						(336,352	)
Amortization of debt discounts			175,795			1,452,647
Depreciation and amortization			89,234			70,168
Changes in operating assets and liabilities:
Trade accounts receivable			(199,620	)		521,712
Prepaid expenses and other current assets			(38,852	)		(40,818	)
Other assets			(19,985	)
Accounts payable and accrued liabilities			(349,838	)		(808,542	)
Accrued compensation			76,695			14,640
Deferred revenues and advances			1,640,459			1,071,724
Net cash provided by continuing operations			562,253			140,701
Net cash used in discontinued operations						(220,075	)
Net cash provided by (used in) operating activities			562,253			(79,374	)
INVESTING ACTIVITIES
Purchases of property and equipment			(24,716	)		(29,448	)
Net cash used in investing activities			(24,716	)		(29,448	)
FINANCING ACTIVITIES
Proceeds from issuance of common stock			-
Repayment of loans from officer and director			-			(170,000	)
Repayment of note to officer						(200,000	)
Proceeds (repayment) of convertible debentures						(1,658,160	)
Proceeds from issuance (repayment) of revolving note, net			(36,751	)		958,500
Proceeds from issuance of convertible note, net						1,430,500
Debt issuance costs						(20,697	)
Repayment of convertible debenture			(500,000	)
Net cash (used in ) provided by financing activities			(536,751	)		340,143
Net increase in cash			786			231,321
Cash at beginning of period			13,437			9,540
Cash at end of period		$	14,223		$	240,861
Supplemental cash flow information:
Cash paid for interest expense		$	82,000		$	32,860
Cash paid for income taxes		$	-		$	-
The accompanying notes should be read in conjunction with the condensed consolidated financial statements.

 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS

 

NetFabric Holdings, Inc. ("Holdings" or the "Company") (formerly known as Houston Operating Company) was incorporated under the laws of the State of Delaware on August 31, 1989. On December 9, 2004, Holdings entered into an exchange agreement (the "Acquisition Agreement" or "Share Exchange") with all of the stockholders of NetFabric Corporation, a Delaware corporation ("NetFabric") whereby Holdings acquired all of the issued and outstanding capital stock of NetFabric and NetFabric became a wholly-owned subsidiary of Holdings. Upon completion of the merger, the NetFabric stockholders controlled approximately 95% of the then issued and outstanding stock. NetFabric's business activities were the activities of the merged company and Holdings was a shell corporation without any operations. As a result of these factors, this transaction was treated as a reverse merger for financial reporting purposes

 

NetFabric was incorporated on December 17, 2002 and began operations in July 2003. NetFabric developed and marketed Voice Over Internet Protocol ("VoIP") appliances that simplified the integration of standard telephone systems with an IP infrastructure. On May 5, 2006, the Company announced its decision to exit from the hardware-based VoIP communications product line (including resale of transport services) that is targeted at small to mid-sized businesses ("SMB's"). In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the Company has presented the results of operations from its VoIP business segment as discontinued operations in the accompanying consolidated balance sheets, statements of operations and statements of cash flows (Note 3).

 

On May 20, 2005, Holdings entered into and closed on a share exchange agreement ("Exchange Agreement"), whereby Holdings acquired all of the issued and outstanding shares of UCA Services, Inc., a New Jersey company("UCA Services") , from its shareholders in exchange for the issuance of 24,096,154 shares of common stock of Holdings (see Note 7). Holdings emerged from the development stage upon the acquisition of UCA Services.

 

UCA Services is an information technology ("IT") services company that serves the information and communications needs of a wide range of Fortune 500 and SMB clients in the financial markets industry as well as the pharmaceutical, health care and hospitality sectors. UCA Services delivers a broad range of IT services in the practice areas of infrastructure builds and maintenance, application development and maintenance, managed services and professional services.

 

Management's plans

 

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis. As shown in the accompanying unaudited condensed consolidated financial statements, the Company has incurred accumulated losses totaling $26,366,453 and has a working capital deficit of $4,411,207 at March 31, 2007. These factors, among others, indicate that the Company may be unable to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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NETFABRIC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Management recognizes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its current and long-term obligations on a timely basis. The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout fiscal year 2007 and continue its business development efforts.

 

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 the necessary working capital. There is no assurance that the Company will be successful in completing the financing. To fund the Company's operations for fiscal year 2007, the Company needs to raise additional financing and generate cash flows from its operations. Should additional cash flows not be available, the Company believes that it will have the ability to restructure its operations, and if necessary, initiate significant expense reductions. In addition, the Company will have to negotiate with its lenders to extend the repayment dates of its indebtedness. There can be no assurance, however, that the Company will be able to successfully restructure its operations or debt obligations in the event it fails to obtain additional financing.

 

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"), except for the condensed consolidated balance sheet as of December 31, 2006, which was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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 position and results of operations. The operating results for the three months ended March 31, 2007 and 2006 are not necessarily indicative of the results to be expected for any other interim period or any future year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's December 31, 2006 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, 2006 filed on April 16, 2007.

 

RECLASSIFICATIONS

 

Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current period presentation.

 

As a result of the Company's decision to exit the VoIP hardware business, previously reported financial statements have been reclassified as discontinued operations to conform to the current period presentation.

 

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NETFABRIC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

ESTIMATES

 

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed 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, accounting for goodwill and other intangible assets, the fair value of the Company's common stock, the fair value of options and warrants issued for services, the allocation of proceeds from certain financings to equity instruments and the computation of other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, such amounts may exceed Federally insured limits. The Company reduces credit risk related to accounts receivable by routinely assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts.

 

The Company's services have been provided primarily to a limited number of clients located in a variety of industries. The Company had revenues from 2 clients representing 46.5% (36.5% and 10%, respectively) of revenues during the three months ended March 31, 2007.

 

The Company generally does not require its clients to provide collateral. Additionally, the Company is subject to a concentration of credit risk with respect to its accounts receivable. The Company had two clients accounting for 43% (30% and 13%, respectively) of total gross accounts receivable as of March 31, 2007.

 

Income Taxes

Effective January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

 

 

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NETFABRIC HOLDINGS INC. AND SUBSIDIARIES

 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. DEBT FINANCINGS

  Debt Financings consist of the following as March 31, 2007 and December 31, 2006:

 

		2007
					Unamortized
					debt
		Principal			Discount			Net
2006 Convertible Debentures, due in April 2007		$	200,000					$	200,000
Convertible Debenture payable to stockholder duein April 2007			150,000						150,000
Laurus Revolving Note Due in February 2009			1,450,601			(435,316	)		1,015,285
Laurus Convertible Note Due in February 2009			1,500,000			(933,395	)		566,605
		$	3,300,601			($1,368,711	)	$	1,931,890
			2006
						Unamortized
						debt
			Principal			Discount			Net
2006 Convertible Debentures, due at various dates
between December 2006 and April 2007		$	700,000			($14,832	)	$	685,168
Convertible Debenture payable to stockholder due in April 2007			150,000						150,000
Laurus Revolving Note Due in February 2009			1,487,353			(473,104	)		1,014,249
Laurus Convertible Note Due in February 2009			1,500,000			(1,056,570	)		443,430
		$	3,837,353			($1,544,506	)	$	2,292,847

 

In January and February of 2007, the Company repaid five of the seven 2006 Convertible Debentures in the aggregate face amount of $500,000. In December 2006, the Company and the officer and director and the stockholder agreed to extend the term of two of 2006 Convertible Debentures in the face amount of $200,000 to April 30, 2007. The Company is in the process of negotiating further extension of the maturities.

 

NOTE 5. STOCKHOLDERS' EQUITY

 

COMMON STOCK

 

During the three months ended March 31, 2007, the Company entered into a placement agency agreement with an unaffiliated entity and consulting agreement with an unaffiliated individual. Pursuant to the agreements, the Company issued an aggregate of 640,000 shares of its common stock. The fair value of the shares $77,600 was charged to operations as consulting expense during the three months ended March 31, 2007.

 

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NETFABRIC HOLDINGS INC. AND SUBSIDIARIES

 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Warrants

 

Outstanding warrant securities consist of the following at March 31, 2007:

					Exercise
		Warrants			Price			Expiration
Laurus			4,256,550		$	0.001			See note (1	)
Macrocom			1,000,000		$	1.50			July 2008
Cornell Warrants			560,000		$	0.40			October 2008
2006Convertible Debenture Financing			1,350,000		$	0.01			April to November 2009
Others including officer,
director and stockholder			1,966,137			$0.15 to $0.82			December 2008 to June 2011
			9,132,687

 

(1) No expiration.

 

NOTE 6 STOCK-BASED COMPENSATION

 

Share-based compensation expense recognized under SFAS 123(R) for the three months ended March 31, 2007 and 2006 were $104,399 and $89,619, respectively. Share-based compensation expense recognized in the Company's condensed consolidated statements of operations includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123.

 

NOTE 7 RELATED PARTY TRANSACTIONS

 

As of March 31, 2007, the Company had Convertible debentures payable to a stockholder and an officer and director in the aggregate face amount of $350,000.

 

The Company subleases certain office space and incurs occupancy related costs under an agreement with UCA Global, Inc. ("Global"), an entity affiliated with a shareholder of the Company, whereby the Company pays rent and other occupancy costs based on the proportion of square footage occupied by the Company in Global's office facility. Rent and occupancy expenses incurred by the Company under this agreement, which commenced on May 20, 2005, during the three months ended March 31, 2007 and 2006 was, $31,875, and is included in selling, general and administrative expense on the accompanying statements of operations.

 

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NETFABRIC HOLDINGS INC. AND SUBSIDIARIES

 

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 8. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

		For the Three Months
		ended March 31,
		2007			2006
Contribution from officer, director and shareholder in connection with settlement of disputes					$	9,492,070
Discount on revolving note relating to warrants					$	513,820
Discount on convertible note relating to warrants					$	918,923
Discount on convertible debt relating to beneficial conversion feature					$	511,577
Non-cash interest expense paid					$	47,500
Reissuance of warrants in connection with debt extinguishment					$	372,353
Amortization of debt discounts		$	175,795		$	1,452,647

 

NOTE 9. SUBSEQUENT EVENTS

 

In April 2007, the Company sold Debentures (the "Debentures") in the face amount of $200,000 to an individual. The Debentures bear interest at 8% and is due on July 12, 2007. In connection with the sale, the Company issued warrants to acquire an aggregate of 500,000 shares of its common stock with a nominal exercise price. The warrants expire in three years from the date of issuance.

 

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ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis and results of operation should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes and the other financial information appearing elsewhere in this report and reports included herein by reference. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Our independent registered public accounting firm has indicated in their report, dated April 13, 2007, on our December 31, 2006 financial statements since we have experienced net losses since inception and have a working capital deficiency their report indicates that these matters raise substantial doubt about our ability to continue as a going concern. Our plan with regard to this matter is discussed elsewhere in this document. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

CORPORATE HISTORY

 

We were formerly known as Houston Operating Company and were incorporated in Delaware on August 31, 1989. On December 9, 2004, we entered into an Acquisition Agreement with all of the stockholders of NetFabric Corp., a Delaware corporation. NetFabric Corp. was incorporated in the on December 17, 2002 and began operations in July 2003. At the closing, which occurred simultaneously with the execution of the Acquisition Agreement, we acquired all of the issued and outstanding capital stock of NetFabric Corp. from the stockholders in exchange for an aggregate of 32,137,032 newly-issued shares of our common stock. The acquisition was accounted for as a reverse merger whereby NetFabric Corp. was treated as the acquirer. On April 19, 2005, our name was changed from Houston Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed from "HOOC" to "NFBH."

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

On March 31, 2007, our working capital deficiency was $4,411,207, compared to a working capital deficiency of $3,767,282 on December 31, 2006. The increase in the working capital deficiency was principally due to operating losses. During the three months ended March 31, 2007, our operating activities from continuing operations provided approximately $562,000 of cash, compared to approximately $141,000 provided during the three months ended March 31, 2006.

 

During the three months ended March 31, 2007, our operating losses, after adjusting for non-cash items, utilized approximately $547,000 of cash, and working capital items provided approximately $1,109,000 of cash. The principal component of these working capital changes was an increase in our deferred revenues. During the three months ended March 31, 2006, our operating losses, after adjusting for non-cash items, utilized approximately $618,000 of cash, and working capital items provided approximately $759,000 of cash.

 

In February 2006, we repaid $70,000 owed to Fred Nazem, a stockholder of the Company, and $200,000 owed to Fahad Syed, an officer and director of the Company. Additionally, we repaid $100,000 plus accrued interest to Faisal Syed, a stockholder of the Company, in full satisfaction of a promissory note issued to him by UCA Services, prior to our acquisition of UCA Services. The promissory note bore interest at the rate of 6% and was due, together with accrued but unpaid interest in June 2005.

 

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In February 2006, we along with our subsidiaries, entered into a Security Agreement, dated February 10, 2006 ( the "Security Agreement") with Laurus Master Fund, Ltd., a Cayman Islands company ("Laurus"). Under the Security Agreement, Laurus purchased a Secured Convertible Note (the "Laurus Convertible Note"), from the Company with a maturity date of February 10, 2009, in the aggregate principal amount of $1,500,000, and a Secured Non-Convertible Revolving Note (the "Laurus Revolving Note") in the aggregate principal amount of $1,500,000. The Laurus Convertible Note and Laurus Revolving Note are collectively referred to as the "Laurus Notes". Availability under the Laurus Notes is based on an advance rate equal to 90% of eligible accounts receivable, and Laurus has agreed to provide us an over advance for a specified period. The Laurus Convertible Note has a three-year term, and bears interest at 1% above the prime rate, with a minimum interest rate of 8%. Laurus has the option, but not the obligation, at any time until the maturity date, to convert all or any portion of the Laurus Convertible Note and accrued interest thereon into shares of our common stock at an exercise price of $0.91 per share. If converted in full, we would be obligated to issue an aggregate of 1,648,352 shares of our common stock to Laurus. We have the option to prepay the Laurus Convertible Note by paying Laurus the applicable redemption premium. The Laurus Revolving Note has a three-year term, and bears interest at 1% above the prime rate, with a minimum interest rate of 8%.

 

In connection with the borrowing, we issued a common stock purchase option (the "Option") to Laurus to purchase up to 4,256,550 shares of our common stock for nominal consideration. Additionally, we entered into a registration rights agreement with Laurus (the "Registration Rights Agreement"), covering the registration of common stock underlying the Laurus Convertible Note and the Option. Our obligations under the Laurus Notes are secured by first liens on all of our assets, and Laurus may accelerate all obligations under the Laurus Notes upon an event of default.

 

Our initial borrowing was approximately $2,300,000 and we utilized approximately $1,900,000 of the initial borrowing to repay all amounts owed to Cornell pursuant to the October Convertible Debenture, including a redemption premium. At March 31, 2007, our availability and borrowing with Laurus was approximately $2,950,601 (face amount).

 

At various dates between April and December of 2006, we sold seven convertible debentures in aggregate face amount of $700,000. In January and February of 2007, we Company repaid five of the seven 2006 Convertible Debentures in the aggregate face amount of $500,000. In December 2006, the Company and the officer and director and the stockholder agreed to extend the term of two of 2006 Convertible Debentures in the face amount of $200,000 to April 30, 2007. The Company is in the process of negotiating further extension of the maturity date.

 

In order to execute our business plan and achieve our objectives for the near future, management believes it will require approximately $2,000,000 over the next 12 months for working capital. A significant amount of this will be used to satisfy our obligations, both from borrowing and vendor accounts payable, as they become due. Our ability to continue as a going concern and our future success are dependent upon our ability to raise capital in the near term to satisfy our current obligations. 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 management believes will be able to successfully close to provide the necessary working capital. There is no assurance that we will be successful in completing the financing. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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To fund our operations for fiscal year 2007, we need to raise additional financing and generate cash flows from our operations. Should additional cash flows not be available, we believe that we will have the ability to restructure our operations, and if necessary, initiate significant expense reductions. In addition, we will have to negotiate with our lenders to extend the repayment dates f our indebtedness. There can be no assurance, however, that we will be able to successfully restructure our operations or debt obligations in the event we fail to obtain additional financing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The discussion and analysis and plan of operation is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the judgment and estimates used in preparation of our condensed consolidated financial statements:

 

Income Taxes and Uncertain Income Tax Positions

 

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs.

 

Effective January 1, 2007, we adopted FIN No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

 

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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 Securities Exchange Act of 1934 (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 are accumulated and communicated to management, including the Chief Executive Officer ("CEO"") and Chief Financial Officer ("CFO") , 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 CEO and CFO, 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 CEO and CFO 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:

 

 

 

ITEM 1 LEGAL PROCEEDINGS

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

During the three months ended March 31, 2007:

 

The Company issued 340,000 shares of common stock to Stoneggate Securities, Inc. pursuant a placement agent agreement.

 

The Company issued 300,000 shares of common stock to an unaffiliated individual pursuant to a consulting agreement.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

ITEM 5. OTHER INFORMATION

 

 

ITEM 6. EXHIBITS

 

(a) Exhibits:

 

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)

 

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SIGNATURES

 

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act , the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 14, 2007	By:	/s/ Fahad Syed
		Fahad Syed
		Chairman and Chief Executive Officer

	By:	/s/ Vasan Thatham
		Vasan Thatham
		Principal Financial Officer and Vice President

 

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		/s/ Vasan Thatham
		Name: Vasan Thatham
		Title: Chief Financial Officer

 

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		/s/ Vasan Thatham
		Name: Vasan Thatham
		Title: Chief Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to NetFabric Holdings, Inc. and will be retained by NetFabric Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

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