Summary

 

Pursuant to the terms of an Option Agreement by and among UCA, the Company and Fortify:

 

·

Within two (2) business days after receipt of written notification from the Company certifying the effectiveness of this Information Statement, Fortify will acquire all of the outstanding shares of UCA, for an aggregate purchase price of Five Hundred Thousand Dollars ($500,000) payable twelve (12) months following the closing of the Option Agreement, less the amount of accrued and unpaid interest, if any, on that certain Convertible Promissory Note (the “Note”) by and among the Company, UCA and Fortify, dated March 12, 2009 (the “Purchase Price”).

 

·

The Purchase Price to be paid to the Company will be applied towards the Company’s working capital. In addition, simultaneous with the closing of the Stock Acquisition, Fortify will release the Company from its guarantees and obligations under that certain Convertible Note Purchase Agreement, the Note, Credit Agreement, Security Agreement and Stock Pledge Agreement by and among the Company, UCA and Fortify, dated March 12, 2009. The Company and certain employees of UCA will also be eligible to receive earn-out payments in connection with the closing of the Option Agreement based upon achievement of certain financial thresholds during a 24-month period following the closing.

 

The Parties to the Stock Acquisition

 

	UCA SERVICES, INC.
	299 Cherry Hill Road
	Parsippany, NJ 07054
	(973) 537-0077

UCA is headquartered in Parsippany, New Jersey. UCA provides IT Solutions and Services to a prestigious list of Fortune 500 companies with a specialty in mission critical applications and services for the financial services industry. UCA’s wide range of services and solutions includes designing and developing software applications, taking ownership of outsourced business processes, managed services and building integrated infrastructure systems. Enterprise clients rely on UCA to pull together the right products and services required as solutions to meet their technology.

 

3

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	NETFABRIC HOLDINGS, INC.
	299 Cherry Hill Road
	Parsippany, NJ 07054
	(973) 537-0077

The Company is organized into two distinct divisions. NetFabric Holdings, Inc. is the holding company that houses the finance and administrative functions and is responsible for financing transactions and regulatory compliance activities. UCA provides IT services and solutions to a wide range of clients in the financial industry as well as the pharmaceutical, healthcare and hospitality sectors.

 

	FORTIFY INFRASTRUCTURE SERVICES, INC.
	2340A Walsh Avenue
	Santa Clara, CA 95051
	(408) 416-3237

Fortify is a leading global provider of comprehensive end-to-end IT infrastructure services and solutions. Fortify offers a unique global delivery model of innovative, high-quality, value-added services that enable organizations to attain sustainable competitive advantage.

 

On March 12, 2009, the Company and UCA closed a $5.0 million Note and a Credit Facility in the amount of $1.0 million ("Credit Facility") with Fortify. The closing of the Note and the Credit Facility completed the first of a two tranche closing with Fortify (the “Bridge Financing”). The Stock Acquisition represents the second tranche of the closing, whereby Fortify will purchase all of the outstanding shares of capital stock of UCA. Upon the closing of the Stock Acquisition, Fortify will control the operations of UCA and the Company will begin reporting as a shell company. The Company believes that UCA should enter into the Stock Acquisition in order for the Company to be relieved of its guarantees and obligations under the Bridge Financing.

 

The Stock Acquisition requires the approval of a majority of the outstanding shares of the Company’s Common Stock.

 

Regulatory Approvals

 

No federal or state regulatory approvals are required for the Transactions.

 

Reports, Opinions or Appraisals

 

No reports, opinions or appraisals have been received from any outside party with respect to the Transactions.

 

Past Contracts or Negotiations

 

There have been no contracts or negotiations by parties to the Transactions or their affiliates, during the period for which financial statements are presented.

 

4

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INFORMATION STATEMENT

 

INTRODUCTION

 

This Information Statement is being mailed or otherwise furnished to stockholders of the Company in connection with the prior receipt by the Board of Directors (the “Board”) of approval by Written Consent of the holders of a majority of the Company's Common Stock to approve the Transactions.

 

The Board believes it is in the best interests of the Company to approve the Transactions in order for (a) UCA to eliminate all of its outstanding debt and liabilities, (b) the Company to obtain adequate capital for its business operations, and (c) the Company to be released from its current guarantees and obligations under the Bridge Financing; and (d) the Company to have additional financing alternatives in the future; and (e) to maximize the value of the Company for its shareholders.

 

This Information Statement is being first sent to stockholders on or about May [___], 2009.  The Transactions will become effective following the twentieth (20) day after the mailing.

 

MEETING NOT REQUIRED

 

The Transactions were approved by the Written Consent. No further vote is required to approve the Transactions.  The Transactions will become effective following the twentieth (20) day after the mailing of this Information Statement to the stockholders of the Company.

 

FURNISHING INFORMATION

 

This Information Statement is being furnished to all holders of Common Stock of the Company.

 

PROPOSALS BY SECURITY HOLDERS

 

No security holders entitled to vote have transmitted any proposals to be acted upon by the Company.

 

DISSENTERS’ RIGHTS OF APPRAISAL

Under Delaware law, the Company’s stockholders are not entitled to appraisal rights with respect to any of the Transactions, and the Company will not independently provide stockholders with any such right.

 

5

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WE ARE NOT ASKING YOU FOR A PROXY

AND YOU ARE REQUESTED NOT TO SEND US A PROXY

 

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

 

The Transactions require the approval of a majority of the outstanding shares of Common Stock. Each holder of Common Stock is entitled to one (1) vote for each share held. The record date for the purpose of determining the number of shares outstanding and for determining stockholders entitled to vote, is the close of business on the Record Date, the day in which the Board of Directors of the Company adopted the resolution setting forth and recommending the Transactions. As of the Record Date, the Company had 97,053,044 shares of Common Stock issued and outstanding.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

On December 31, 2008, our working capital deficiency was $6,212,328, compared to a working capital deficiency of $4,937,149 on December 31, 2007. The increase in the working capital deficiency was, in part, due to reclassification of convertible note due in February 2009 as a current liability. During the year ended December 31, 2008, our operating activities from continuing operations provided  approximately $1,973,000  of cash, compared to approximately $266,000 used during the year ended December 31, 2007.

 

During the year ended December 31, 2008, our operating losses, after adjusting for non-cash items, provided approximately $1,072,000 of cash, and working capital items provided approximately $901,000 of cash. The principal component of these working capital changes was an increase in our deferred revenue offset by an increase in accounts receivable. During the year ended December 31, 2007, our operating losses, after adjusting for non-cash items, utilized approximately $1,237,000 of cash, and working capital items provided approximately $971,000 of cash.

 

33

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Financial Statements of NetFabric Holdings, Inc.: audited Balance Sheet as of December 31, 2008 and the Statements of Expenses, Cash Flows and Changes in Stockholders' Deficit for the years ended December 31, 2008 and 2007.

 

Pro Forma Financial Statements

 

38

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NetFabric Holdings, Inc. And Subsidiaries

 

Index to Financial Statements

 

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statement of Operations		F-4
Consolidated Statement of Stockholders’ Equity		F-5
Consolidated Statement of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7 – F-25

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

 

NetFabric Holdings, Inc.

 

 

We have audited the accompanying consolidated balance sheets of NetFabric Holdings, Inc. and Subsidiaries (hereafter referred to as “NetFabric”) as of December 31, 2008 and 2007, and the related statements of operations, stockholders' equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NetFabric as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has had net losses from inception and has a working capital deficiency. These matters raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As disclosed in note 14 to the consolidated financial statements, subsequent to December 31, 2008 the Company was involved in a financing transaction.

 

 

McGLADREY & PULLEN, LLP

 

New York, New York

 

May 11, 2009

 

F-2

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		DECEMBER 31, 2008				DECEMBER 31, 2007
ASSETS
CURRENT ASSETS:
Cash		$	1,317,510			$	15,224
Trade accounts receivable, net			3,027,795				1,758,821
Prepaid expenses and other current assets			151,595				34,012
Total current assets			4,496,900				1,808,057
Property and equipment, net			132,337				206,329
Goodwill			5,704,000				5,704,000
Other intangibles, net			456,564				659,687
Other assets			22,921				22,929
TOTAL ASSETS		$	10,812,722			$	8,401,002
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible debentures						$	150,000
Short term borrowings		$	950,000				970,000
Accounts payable and accrued liabilities			4,697,074				3,976,771
Accrued compensation			612,526				554,880
Deferred revenues and customer advances			1,622,227				112,000
Convertible note, net of unamortized discount			1,443,144
Revolving note, net of unamortized discount			1,384,257				981,555
Total current liabilities			10,709,228				6,745,206
Convertible note, net of unamortized discount							940,232
Total liabilities			10,709,228				7,685,438
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value, authorized shares 200,000,000, 97,053,044 and 96,053,044 shares issued and outstanding, respectively			97,053				96,053
Additional paid-in capital			38,110,162				37,802,940
Accumulated deficit			(38,103,721	)			(37,183,429	)
Total stockholders' equity			103,494				715,564
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	10,812,722			$	8,401,002
See accompanying notes to consolidated financial statements.

 

F-3

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

 

		Year Ended				Year Ended
		December 31, 2008				December 31, 2007
Revenues		$	24,229,023			$	16,223,871
OPERATING EXPENSES:
Direct employee compensation and consultant expenses (includes share based compensation of $34,598 and $45,584)			19,071,378				12,528,503
Selling, general and administrative expenses (includes share based compensation of $233,624 and $300,313)			4,026,688				4,962,997
Impairment of goodwill							8,278,451
Depreciation and amortization			287,422				316,938
Total operating expenses			23,385,488				26,086,889
Income (loss) from operations			843,535				(9,863,018	)
OTHER INCOME / (EXPENSE):
Amortization of debt discounts			(763,300	)			(758,011	)
Amortization of debt issuance costs			(627,873	)			(282,005	)
Interest and bank charges			(372,654	)			(315,135	)
Debt inducement costs - related party							(539,043	)
Total other income / (expense)			(1,763,827	)			(1,894,194	)
Loss before provision for income taxes			(920,292	)			(11,757,212	)
Provision for income taxes			-				-
LOSS FROM CONTINUING OPERATIONS			(920,292	)			(11,757,212	)
DISCONTINUED OPERATIONS:
Loss from discontinued operations			-				(53,398	)
NET LOSS		$	(920,292	)		$	(11,810,610	)
Net loss from continuing operations per common share, basic and diluted		$	(0.01	)		$	(0.14	)
Net loss from discontinued operations per common share, basic and diluted			-				-
Net loss per common share, basic and diluted		$	(0.01	)		$	(0.14	)
Weighted average number of shares outstanding, basic and diluted			96,837,197				81,617,063
See accompanying notes to consolidated financial statements.

 

F-4

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 

		COMMON STOCK
		SHARES				PAR VALUE				ADDITIONAL PAID-IN CAPITAL				ACCUMULATED DEFICIT				TOTAL STOCKHOLDERS' EQUITY
Balances at December 31, 2006			75,023,883			$	75,024			$	36,201,479			$	(25,372,819	)		$	10,903,684
Issuance of common shares for services			640,000				640				76,960								77,600
Sale of common shares in private placement			11,250,000				11,250				438,750								450,000
Employee share-based compensation											268,297								268,297
Conversion of warrants to common shares			3,667,111				3,667				(3,667	)
Allocation of value for warrants issued in connection with short term borrowings											68,668								68,668
Conversion of convertible debenture issued to shareholder with common stock			5,472,050				5,472				752,453								757,925
Net loss															(11,810,610	)			(11,810,610	)
Balances at December 31, 2007			96,053,044				96,053				37,802,940				(37,183,429	)			715,564
Issuance of common shares for finance charges			1,000,000				1,000				39,000								40,000
Employee share-based compensation											268,222								268,222
Net loss															(920,292	)			(920,292	)
Balances at December 31, 2008			97,053,044			$	97,053			$	38,110,162			$	(38,103,721	)		$	103,494
See accompanying notes to consolidated financial statements.

 

F-5

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

 

OPERATING ACTIVITIES		Year ended December 31, 2008				Year ended December 31, 2007
Net loss		$	(920,292	)		$	(11,810,610	)
Loss from discontinued operations							53,398
Adjustments to reconcile net loss to net cash  provided by (used in) operating activities:
Common stock, options and warrants issued for services							77,600
Share based compensation			268,222				268,297
Debt inducement charge							539,043
Non-cash financing fees			40,000
Amortization of debt discounts			763,300				758,011
Amortization of debt issuance costs			627,873				282,005
Impairment of goodwill							8,278,451
Depreciation and amortization			287,422				316,938
Loss on disposal of property and equipment			5,287
Changes in operating assets and liabilities:
Trade accounts receivable			(1,268,974	)			390,859
Prepaid expenses and other current assets			(117,583	)			(28,902	)
Other assets							31,502
Accounts payable and accrued liabilities			719,498				248,428
Accrued compensation			57,646				216,597
Deferred revenues and advances			1,510,227				112,000
Net cash provided by continuing operations			1,972,626				(266,383	)
Net cash used in discontinued operations							(53,398	)
Net cash provided by (used in) operating activities			1,972,626				(319,781	)
INVESTING ACTIVITIES
Proceeds from disposal of property and equipment			5,981
Purchases of property and equipment			(20,762	)			(106,024	)
Net cash used in investing activities			(14,781	)			(106,024	)
FINANCING ACTIVITIES
Proceed from a private sale of common stock							450,000
Repayment of debentures			(150,000	)			(500,000	)
Short term borrowings			1,110,000				1,170,000
Repayment of short term borrowings			(1,130,000	)			(200,000	)
Repayment of convertible debentures
Proceeds from issuance (repayment) of revolving note, net			142,314				(210,403	)
Debt issuance costs			(627,873	)			(282,005	)
Net cash (used in) provided by financing activities			(655,559	)			427,592
Net increase in cash			1,302,286				1,787
Cash at beginning of period			15,224				13,437
Cash at end of period year		$	1,317,510			$	15,224
Supplemental cash flow information:
Cash paid for interest		$	347,000			$	322,000
Supplemental non-cash financing information Conversion of convertible debenture issued to stockholder and officer with common stock						$	757,925
Warrants issued with debt arrangements						$	68,668
See accompanying notes to consolidated financial statements.

 

F-6

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NetFabric Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

 

NOTE 1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS

 

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

 

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

 

On May 20, 2005, Holdings entered into and closed on a share exchange agreement ("Exchange Agreement"), whereby Holdings acquired all of the issued and outstanding shares of UCA Services, Inc. ("UCA Services"), a New Jersey company, from its shareholders in exchange for the issuance of 24,096,154 shares of common stock of Holdings. Holdings emerged from the development stage upon the acquisition of UCA Services.  In May 2007, UCA Services changed its legal name to NetFabric Technologies, Inc.

 

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

 

Management's plans

 

The accompanying consolidated financial statements have been prepared on a going concern basis. As shown in the accompanying consolidated financial statements, the Company has incurred accumulated losses totaling $38,103,721 and has a working capital deficit of $6,212,328 at December 31, 2008. These factors, among others, indicate that the Company may be unable to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Management recognizes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its current and long-term obligations on a timely basis. The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout fiscal 2009 and continue its business development efforts.

 

F-7

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In March 2009, the company entered into a transaction with Fortify Infrastructure Services, Inc. See Note 15. Pursuant the transaction, the Company will transfer its ownership interest in UCA Services. Out of proceeds from the transaction, the Company repaid all of its debt.  After the eventual divesture of UCA, the Company will not have any operations. However, the Company will be debt free. The Company will explore strategic alternatives including merger with another entity. Currently, the Company does not have any agreement or understanding with any entity and there is no assurance that such a transaction will ever be consummated.

 

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

 

Basis of Presentation of Consolidated Financial Statements and Estimates

 

The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting estimates that require management's most difficult and subjective judgments include the value and allocation of purchase price in business combinations, provisions for bad debts, depreciable/amortizable lives, impairment of goodwill and other long-lived assets, the fair value of common stock and options issued for services as well as the allocation of proceeds from the bridge loan to and financial instruments and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

 

Revenue Recognition

 

In accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition," revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or services has occurred, the fee is fixed and determinable, collectability is reasonably assured, contractual obligations have been satisfied, and title and risk of loss have been transferred to the customer.

 

The Company derives revenue primarily from professional services, managed IT services, application development services and from business process management services. Arrangements with customers for services are generally on a time and material basis or fixed-price, fixed-timeframe. Revenue on time-and-material contracts is recognized as the related services are performed. Revenue from fixed-price, fixed-timeframe service contracts is recognized ratably over the term of the contract. When the Company receives cash advances from customers in advance of the service period, amounts are reported as advances from customers until the commencement of the service period.

 

Billings and collections in excess of revenue recognized are classified as deferred revenue.

 

Allowance for Doubtful Accounts

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. These estimated losses are based upon historical bad debts, specific customer creditworthiness and current economic trends. If the financial condition of a customer deteriorates, resulting in the customer's inability to make payments within approved credit terms, additional allowances may be required. The Company performs credit evaluations of its customers' financial condition on a regular basis, and has not experienced any material bad debt losses to date. The Company recorded allowances for bad debts of $32,609 and $24,623 during years ended December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007, the doubtful allowance balances were $43,300 and $297,946, respectively.

 

F-8

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Cash and Cash Equivalents

 

 

Property and Equipment

 

Property and equipment, consisting principally of computer equipment and furniture and fixtures, are recorded at cost. Depreciation and amortization are provided for on a straight line basis over the following useful lives:

 

Equipment	3 years
Furniture and fixtures	7 years
Leasehold improvements	Lesser of life of lease or useful life

Repairs and maintenance are charged to operations as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reported in the period realized.

 

Long-Lived Assets

 

Long-lived assets, including property and equipment and intangible assets with finite lives, are monitored and reviewed for impairment in value whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimated cash flows are based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to factors such as technological changes, economic conditions, and changes in the Company's business model or operating performance. If the sum of the undiscounted cash flows (excluding interest) is below the carrying value, an impairment loss is recognized, measured as the amount by which the carrying value exceeds the fair value of the asset.

 

Concentrations of Credit Risk

 

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

 

The Company's services have been provided primarily to a limited number of clients located in a variety of industries. During the year ended December 31, 2008, the Company had revenues from 2 clients representing 63% (49% and 14%, respectively) of the revenues during the year. The Company had revenues from 2 clients representing 49% (39% and 10%, respectively) of revenues during the year ended December 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 3 clients accounting for 74% (41%, 23% and 10%, respectively) of total gross accounts receivable as of December 31, 2008. At December 31, 2007, the Company had 3 clients accounting for 68.3% (41%, 14.7% and 12.6%, respectively) of total gross accounts receivable.

 

F-9

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Goodwill

 

Goodwill represents the Company's allocation of the cost to acquire UCA Services in excess of the fair value of net assets acquired. The purchase price and its allocation, to reflect the fair values of assets acquired and liabilities assumed, have been based upon management's evaluation using accepted valuation methodologies.

 

Under SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill is not amortized but is reviewed for impairment annually. The Company performs its annual goodwill impairment testing, by reporting units, in the second quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for UCA Services, period over which cash flows will occur, and determination of UCA Services cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for UCA Services. Goodwill at December 31, 2008 and 2007 was $5,704,000.

 

Intangibles

 

Intangible assets are accounted for under the provisions of SFAS No. 142. Intangible assets arise from business combinations and consist of customer relationships and restricted covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to six years. The Company follows the impairment provisions and disclosure requirements of SFAS No. 142. Accordingly intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets at December 31, 2008 and 2007 were $456,564 and  $659,687, respectively.

 

Fair Value of Financial Instruments

 

The fair values of the Company's assets and liabilities that qualify as financial instruments under statement of financial accounting standards ("SFAS") No. 107 approximate their carrying or principal amounts presented in the balance sheets at December 31, 2008 and 2007.

 

Share-Based Compensation Expense

 

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

 

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statements of operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic value method, stock-based compensation expense was recognized in the Company's consolidated statement of operations based on the difference between the exercise price of the Company's stock options granted to employees and directors, and the fair market value of the underlying stock at the date of grant.

 

F-10

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Income Taxes

 

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible.

 

Effective January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

 

F-11

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As a result of the implementation of FIN 48, the Company performed a review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Based on its review, the Company concluded that there are no significant unrecognized tax positions requiring recognition in the Company’s financial statements. The Company does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

 

The Company files federal income tax returns, as well as multiple state, local and foreign jurisdiction tax returns. The income tax returns are subject to examinations by tax authorities.

 

The Company’s policy is to recognize interest and penalties accrued as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any penalties or tax-related interest, and there was no tax- related interest or penalties recognized during the years ended December 31, 2008 and 2007.

 

Earnings (Loss) Per Share

 

The Company calculates earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share." SFAS No. 128 computes basic earnings (loss) per share by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period plus the effects of any dilutive securities. Diluted earnings (loss) per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. The Company's potentially dilutive securities include common shares which may be issued upon exercise of its stock options, exercise of warrants or conversion of convertible debt.

 

Diluted loss per share for the years ended December 31, 2008 and 2007 exclude potentially issuable common shares of approximately 10,855,219 and 14,493,856 , respectively, primarily related to the Company's outstanding stock options, warrants and convertible debt, because the assumed issuance of such potential common shares is antidilutive.

 

Segment Reporting

 

The Company determines and discloses its segments in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which uses a "management" approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of a company's reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas and major customers. In 2006, we discontinued VoIP segment and operate in one segment.

 

Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," (“SFAS No. 157”), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 157 effective January 1, 2008 and determined that it did not have a material effect on our consolidated financial statements.

 

F-12

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In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. (“FAS 159”) is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in FAS 159. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.

 

FAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparisons between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired, and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 141(R) on its consolidated financial position, results of operations, and cash flows.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51,” which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.  The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No.160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008 (our Fiscal 2010). The Company has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 160 on our consolidated financial position, results of operations, and cash flows.

 

The Company does not believe that any other recently issued, but not effective, accounting standards, if currently adopted will have material effect on the Company’s consolidated financial position, results of operations and cash flows.

 

 

NOTE 3. DISCONTINUED OPERATIONS

 

 

 

F-13

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NOTE 4. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net, consists of the following at December 31:

 

		2008				2007
Equipment		$	480,837			$	476,712
Lease improvements			106,907				106,907
Furniture and fixtures			127,955				123,554
			715,699				707,173
Less: Accumulated depreciation and amortization			(583,362	)			(500,844	)
		$	132,337			$	206,329

 

 

 

 

 

 

NOTE 5. INTANGIBLE ASSETS

 

 

The Company's intangible assets consisting of customer contacts and restricted covenants related to employment agreements were acquired and accounted for using the purchase method of accounting. The following table summarizes the net asset value for each intangible asset category as of December 31, 2008:

 

	Amortization Period		Gross Asset Value				Accumulated Amortization				Net Asset Value
Customer relationship	6 years		$	1,153,424			$	(696,860	)		$	456,564
Covenants not to compete	3 years			83,333				(83,333	)			-
			$	1,236,757			$	(780,193	)		$	456,564

 

 

The following table summarizes the net asset value for each intangible asset category as of December 31, 2007:

 

	Amortization Period		Gross Asset Value				Accumulated Amortization				Net Asset Value
Customer relationship	6 years		$	1,153,424			$	(504,623	)		$	648,801
Covenants not to compete	3 years			83,333				(72,447	)			10,886
			$	1,236,757			$	(577,070	)		$	659,687

 

Amortization expense was $203,123 and  $220,015 for the years ended December 31, 2008 and 2007, respectively.

 

The Company did not have any intangible assets prior to the acquisition of UCA Services in May 2005.

 

F-14

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2009			192,237
2010			192,237
2011			72,090
		$	456,564

 

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consist of the following at December 31:

 

		2008				2007
Trade accounts payable		$	4,264,547			$	3,592,213
Accrued professional fees			245,000				316,592
Accrued interest and fees payable			187,527				67,966
		$	4,697,074			$	3,976,771

 

Accounts payable and accrued expenses related to discontinued operations approximate $132,000 and $153,000 at December 31, 2008 and 2007, respectively.

 

NOTE 7. IMPAIRMENT OF GOODWILL

 

Goodwill represents the Company’s allocation of the cost to acquire UCA Services in excess of the fair value of net assets acquired. The purchase price and its allocation, to reflect the fair values of identifiable assets acquired and liabilities assumed, have been based on management’s evaluation using accepted valuation methodologies.

 

Pursuant to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the Company performed its annual testing of goodwill impairment in the second quarter of 2007. As a part of goodwill impairment testing, management reviewed various factors, such as the market price of the Company’s common stock, discounted cash flows from projected earnings and values of comparable companies to determine whether impairment exists. Based on this evaluation it was determined that the goodwill was impaired.   The impairment was due to a continued decline in the Company’s market capitalization during the past year, and due to lower future cash flows expected to be generated by the business due to working capital constraints. The implied value of the goodwill was $10,585,000 compared to a carrying value of $13,982,451, indicating an impairment of $3,397,451. The impairment loss was charged to operations during the three months ended June 30, 2007.

 

The Company evaluated its business conditions and future strategic direction including the delisting of its common shares from trading on the Bulletin Board (“OTCBB”) and concluded that an interim testing of goodwill is warranted at December 31, 2007. As a part of the interim goodwill impairment testing, management reviewed various factors and used a market approach (comparison of financial data for publicly traded companies engaged in similar lines of business) to determine whether impairment exists. Based on this evaluation, it was determined that the goodwill was impaired. The impairment was, in part, due to decreased values of comparable companies. The implied value of goodwill was $5,704,000 compared to carrying value of $10,585,000, indicating an impairment of $4,881,000. The additional impairment loss was charged to operations during the three months ended December 31, 2007. In total an impairment loss of $8,278,451 was charged to operations during the year ended December 31, 2007.

 

F-15

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NOTE 8. DEBT FINANCINGS

 

Debt financings consist of the following as of December 31, 2008

 

		Principal				Unamortized debt discount				Net
Laurus Revolving Note Due in March 2009		$	1,419,263			$	(35,006	)		$	1,384,257
Laurus Convertible Note Due in March 2009			1,500,000				(56,856	)			1,443,144
Short term borrowings			950,000								950,000
		$	3,869,263			$	(91,862	)		$	3,777,401

 

Debt financings consist of the following as of December 31, 2007

 

		Principal				Unamortized debt discount				Net
Laurus Revolving Note Due in March 2009		$	1,276,949			$	(295,394	)		$	981,555
Laurus Convertible Note Due in March 2009			1,500,000				(559,768	)			940,232
2006 Convertible Debentures, due in December 2007			150,000								150,000
Short Term Borrowings including $50,000 from an officer
and director			970,000								970,000
		$	3,896,949			$	(855,162	)		$	3,041,787

 

Laurus Convertible and Non Convertible Financings

 

On February 14, 2006, the Company entered into a Security Agreement, dated February 10, 2006 with Laurus Master Fund, Ltd ("Laurus"). Under the Security Agreement, Laurus purchased from the Company a Secured Convertible Note from the Company with a maturity date of February 10, 2009 (the "Laurus Convertible Note") in the aggregate principal amount of $1,500,000 and a Secured Non-Convertible Revolving Note ("Laurus Revolving Note"), in the aggregate principal amount of $1,500,000. The Laurus Convertible Note and the Laurus Revolving Note are collectively the "Laurus Notes". In 2009, the maturity date was extended to march 31, 2009. See Note 15.The Company's ability to receive financing under the Laurus Notes is based on an advance rate equal to 90% of eligible accounts receivable, as defined.

 

However, Laurus has agreed to provide the Company an over advance until July 30, 2007 and the over advance feature was extended in 2007. Through December 31, 2007 $1,500,000 was advanced for the Laurus Convertible Note and $1,276,949 was outstanding for the Laurus Revolving Note. The Laurus Convertible Note has a three-year term, and bears interest at 1% above the prime rate, with a minimum interest rate of 8%. Laurus has the option, at any time until February 9, 2009 to convert all or any portion of the Laurus Convertible Note and accrued interest into shares of the Company's common stock at a conversion price of $0.91 per share. The Company has the option, to repay the Laurus Convertible Note by paying Laurus the principal amount, accrued interest and a certain redemption premium, as defined.

 

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%.

 

F-16

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In connection with the Laurus Notes, the Company issued to Laurus an option (the "Laurus Option") to purchase up to 4,256,550 shares of the Company's common stock at an exercise price of $0.001 per share. Additionally, the Company and Laurus entered into a registration rights agreement (the " Laurus Registration Rights Agreement") covering the registration of common stock underlying the Laurus Convertible Note and the Laurus Option.

 

 

The Company's obligations under the Laurus Notes are secured by first liens on all assets of the Company, and Laurus may accelerate all obligations under the Laurus Notes upon an event of default.

 

The Company allocated the $1,500,000 of proceeds from the Laurus Convertible Note based on the computed relative fair values of the debt and stock instruments issued. The Laurus Options were valued using a Black-Scholes option-pricing model with the following assumptions: (1) common stock fair value of $0.95 per share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of 10 years and (5) no dividend, which resulted in a fair value of $2,569,546 for the Laurus Options. The resulting relative fair value of the Laurus Options was $918,923. Accordingly, the resulting relative fair value allocated to the debt component of $511,577 was used to measure the intrinsic value of the embedded conversion option of $1,054,357 which resulted in a beneficial conversion feature of $511,577 recorded to additional paid-in capital. The aggregate amounts allocated to the Laurus Options and beneficial conversion feature, of $1,430,500 were recorded as a debt discount at the date of issuance of the Laurus Convertible Notes and are being amortized to interest expense using the interest method over the three-year term. For the years ended December 31, 2008 and 2007, $502,912 and $499,544, respectively, of debt discount was accreted and recorded as amortization of debt discounts.

 

 

The Company allocated the $1,028,000 of proceeds from the Laurus Revolving Note based on the computed relative fair values of the debt and Laurus Options. The Laurus Options were valued using a Black-Scholes option-pricing model with the following assumptions: (1) common stock fair value of $0.95 per share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of 10 years and (5) no dividend, which resulted in a fair value of $1,471,494 for the options. The resulting relative fair value of the Laurus Options was $513,820. Accordingly, the resulting relative fair value allocated to the debt component was $275,680. The aggregate amount allocated to the options of $513,820 was recorded as a debt discount at the date of issuance of the Laurus Notes and are being amortized to interest expense using the interest method three-year term. For the year ended December 31, 2008 and 2007, $260,388 and $177,709, respectively, of debt discount was accreted and recorded as amortization of debt discounts.

 

Transaction fees of $139,000 paid to Laurus and its affiliates in connection with the Laurus Notes were netted against the proceeds and considered in the calculation of the beneficial conversion feature and accreted over the term of notes. Financing costs of $20,696 paid to third parties associated with the Laurus Notes are included as debt issuance costs in other assets and amortized over the term of the debt.

 

The Company utilized approximately $1.9 million of the initial borrowing from Laurus to repay all amounts owed under all amounts owed pursuant a debenture.

 

In October 2007, the Company and Laurus entered into an extensions agreement (the “Extension Agreement’). The Extension Agreement provides for the extension of the over advance feature until February 2009. However, the over advance amount will reduce by $5,000 each month from November 2007 to February 2008 and by $50,000 each month starting March of 2008.  The Company paid $15,000 fees to Laurus for the extension and the amount was charged to operations as amortization of debt issuance cost during the year ended December 31, 2007.

 

In 2008, the Company and Laurus entered into two waiver/ amendment agreements, pursuant to which Laurus waived the Company’s non compliance of certain terms of the Security Agreement including the Company’s decision to stop periodic filing reports with the Securities and Exchange Commission. In exchange for the waivers the Company issued Laurus 1,000,000 shares of its common stock. In addition, the Company agreed to pay Laurus additional interest of 3.5% on the outstanding loan balance from June 1, 2008. The additional interest will be payable to Laurus upon maturity of the credit facility in March 2009.

 

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2006 Convertible Debentures

 

In 2006, the Company sold eight Convertible Debentures (the " 2006 Convertible Debentures") in the face amount of $800,000 to six individuals (the "Debenture Holders" or a "Debenture Holder") including $150,000 face value to an officer and director, and $50,000 face value to a stockholder of the Company. The 2006 Convertible Debentures bear interest at 8% and were for a term of three months. At the option of the Debenture Holders, the 2006 Convertible Debentures can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, the Company issued warrants to three Debenture Holders to acquire an aggregate of 750,000 shares of its common stock with a nominal exercise price. The warrants expire in three years from the date of issuance. The remaining three Debenture Holders received an aggregate of 225,000 shares of the Company's common stock as additional consideration.

 

The Company used part of the proceeds from the sale of the 2006 Debentures to repay $500,000 due to the Macrocom Investors, LLC ("Macrocom") pursuant to a debenture issued in July of 2005.

 

The Company allocated the $800,000 of proceeds received from the 2006 Convertible Debentures to debt, warrants and stock instruments issued based on the then computed relative fair values. The fair value of the shares issued was $168,750 which resulted in a relative fair value of $103,271. The warrants issued were valued using a Black-Scholes option-pricing model with the following assumptions: (1) common stock fair value of $0.75 per share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.86%, (4) life of 3 years and (5) no dividend, which resulted in a fair value of $198,901 and a relative fair value of $133,969. Additionally, the resulting relative fair value allocated to the debt component was used to measure the intrinsic value of the embedded conversion option of the 2006 Convertible Debentures which resulted in a beneficial conversion feature with a fair value of $444,010. The relative fair value of $305,990 was recorded to additional paid-in capital. The value of the beneficial conversion feature was limited to the amount of the proceeds allocated to the debt component of the 2006 Convertible Debentures. The aggregate amounts allocated to the warrants, stock instruments and beneficial conversion feature, of $543,220 were recorded as a debt discount at the date of issuance of the 2006 Convertible Debentures and were amortized to interest expense using the interest method over the originally stated term of the 2006 Convertible Debentures. During the year ended December 31, 2007, $14,823 of discount was accreted and recorded as amortization of debt discounts and debt issuance costs included in the accompanying consolidated statements of operations.

 

The Company repaid one 2006 Convertible Debenture in the face amount of $100,000. The Company and the Debenture holders agreed to extension of the term of duration by months on two occasions in 2006.

 

In January and February of 2007, the Company repaid five of the seven 2006 Convertible Debentures in the aggregate face amount of $500,000. In December 2006, the Company and the officer and director and the stockholders agreed to extend the term of two of 2006 Convertible Debentures in the face amount of $200,000 to April 30, 2007. The term of the Convertible Debenture due to the officer and director was extended to December 31, 2007 and was repaid in 2008. In August 2007, the Company and the stockholder entered into an agreement to convert $50,000 face amount of 2006 Convertible Debentures into shares of the Company’s common stock as described below.

 

Stockholder Convertible Debenture

 

On June 8, 2006, the Company sold a Convertible Debenture in the face amount of $150,000 to a stockholder (the "Stockholder Convertible Debenture"). The Stockholder Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the option of the holder, the Stockholder Convertible Debenture can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, the Company issued 300,000 shares of its common stock as additional consideration.

 

F-18

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The Company allocated the $150,000 of proceeds received from the Stockholder Convertible Debenture based on the computed relative fair values of the debt and stock instruments issued. The fair value of the common stock issued was $105,000 which resulted in a relative fair value of $61,764. Additionally, the resulting relative fair value allocated to the debt component was used to measure the intrinsic value of the embedded conversion option of the Stockholder Convertible Debenture which resulted in a beneficial conversion feature of $16,765 recorded to additional paid-in capital. The aggregate amounts allocated to the stock instruments and beneficial conversion feature, of $78,529 were recorded as a debt discount at the date of issuance of the Stockholder Convertible Debenture and are being amortized to interest expense using the interest method over the stated term of the Stockholder Convertible Debenture. During the year s ended December 31, 2006, $78,529, of debt discount was accreted and recorded as amortization of debt discounts. In August 2006, the Company and the stockholder agreed to extend the maturity of the Stockholder Convertible Debenture to December 15, 2006 without any additional consideration. In December 2006, the Company and the stockholder agreed to further extend the maturity of the Stockholder Convertible Debenture to April 30, 2007 without any additional consideration.

 

In August 2007, the Company entered into an Agreement to Convert (the “Agreement”) with Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to convert $218,882 due to him in outstanding convertible debentures and accrued interest of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394 shares as an inducement for conversion. The principal amount of $200,000 consisted of $150,000 of Stockholder Convertible Debenture and $50,000 of 2006 Convertible Debenture. The fair value of the inducement to convert approximated $539,000 and was charged to operations during the year ended December 31, 2007 as debt inducement costs.

 

Short Term Borrowings

 

During the year ended December 31, 2007, the Company borrowed an aggregate of $1,170,000 from five individuals, including $50,000 from an officer and director and repaid $200,000 of that prior to December 31, 2007. The amount outstanding as of December 31, 2007 is $970,000 and is due at various dates between January and February 2008. In January and February 2008, the Company repaid an aggregate amount of $620,000. The borrowings are unsecured and bear nominal interest. The Company paid financing costs of $267,005 to third parties and lenders and this amount is being amortized over the term of the borrowings. In 2007, $267,005 was charged to operations as amortization of debt issuance costs. With respect to the borrowings from the officer and director the Company did not pay any financing costs.

 

In connection with the borrowings, the Company issued the lenders warrants to acquire an aggregate of 890,000 shares of the Company’s common stock. The warrants expire in three years from the date of issuance. The relative fair value of the warrants approximated $68,668 and was recorded as additional discount and is being amortized over the borrowings. For the year ended December 31, 2007, $68,668, of debt discount was accreted and recorded as amortization of debt discounts. With respect to the borrowings from the officer and director, the Company did not issue any warrants.

 

During the nine months ended September 30, 2008 the Company borrowed an aggregate of $1,110,000 from four individuals and repaid $510,000 of that prior to December 31, 2008. The borrowings included $150,000 from an officer and director and the amount was repaid prior to December 31, 2008. The aggregate amount of 2007 and 2008 short term borrowings outstanding as of December 31, 2008 is $950,000. The borrowings outstanding at December 31, 2008 are due at various dates between January and February 2009. The borrowings are unsecured and bear nominal interest. The Company paid financing costs of $627,873 to third parties and lenders and this amount is being amortized over the term of the borrowings. During the year ended December 31, 2008, $627,873 was charged to operations as amortization of debt issuance costs. With respect to the borrowings from the officer and director the Company did not pay any financing costs. The Company repaid all the amounts due at December 31, 2008 subsequent to the year end.

 

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NOTE 9. STOCKHOLDERS' EQUITY

 

In October 2006, the Company's board of directors approved an amendment to the Certificate of Incorporation to increase the number authorized common stock to 200 million shares. The change became effective on November 16, 2006 following a written consent of the shareholders.

 

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

 

In July 2007, the Company sold an aggregate of 11,250,000 shares of the Company’s common stock, par value $0.01 (the “Common Stock”) to four investors, for an aggregate purchase price of $450,000, including $100,000 from Fred Nazem, a stockholder of the Company.

 

In July and August 2007, Laurus Master Fund, Ltd. (“Laurus”) exercised 3,702,268 of its warrants on a cashless basis, and Laurus was issued 3,667,111 shares of the Company’s common stock.

 

Warrants

 

Outstanding warrant securities consist of the following at December 31, 2008

 

						Exercise
						Price			Expiration
Laurus Warrants			554,282			$	0.001		See (1)
2006 Private Placement			1,350,000			$	0.01		April to November 2009
2007 Short Term Financing			890,000			$	0.01		April to November 2010
Others			312,500			$	0.82		June 2011
			3,106,782

 

Outstanding warrant securities consist of the following at December 31, 2007

 

						Exercise
						Price			Expiration
Laurus Warrants			554,282			$	0.001		See (1)
Macrocom			1,000,000			$	1.50		July 2008
Cornell			560,000			$	0.40		July 2008
2006 Private Placement			1,350,000			$	0.01		April to November 2009
2007 Short Term Financing			890,000			$	0.01		April to November 2010
Legacy Warrants			1,966,137			$	0.15 to $1.50		December 2008 to June 2011
			6,320,419

 

(1) No expiration.

 

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NOTE 10. STOCK-BASED COMPENSATION

 

As a result of the Share Exchange, on March 3, 2005, the Board of Directors adopted the 2005 Stock Option and Grant Plan (the "Plan") pursuant to which 9,000,000 shares of common stock were reserved for issuance upon exercise of options. The purpose of the Plan is to encourage and enable the employees, directors and consultants of the Company upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. The Plan became effective on April 19, 2005.

 

 

From time to time, the Company issues stock-based compensation to its officers, directors, employees and consultants. The maximum term of options granted is generally 10 years and generally options vest over a period of one to four years. However, the Board of Directors of the Company may approve other vesting schedules. The Company has issued options to employees and non-employees under stock option agreements. Options may be exercised in whole or in part.

 

 

The exercise price of stock options granted is generally the fair market value of the Company's common stock as determined by the Board of Directors on the date of grant, considering factors such as the sale of stock, results of operations, and consideration of the fair value of comparable private companies in the industry.

 

 

The fair value of each stock option award is estimated using a Black-Scholes option pricing model based on the assumptions in the table below. The assumption for expected term is based on evaluations of expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The historical volatility of comparables companies' stock is used as the basis for the volatility assumption. The Company has never paid cash dividends, and does not currently intend to pay cash dividends, and thus assumed a 0% dividend yield. The Company did not grant any stock options during the years ended December 31, 2008 and 2007.

 

 

 

						Weighted Average				Weighted Average
		Options				Exercise Price				Fair Value
Outstanding, December 31, 2006			7,100,085			$	0.41			$	0.27
Options granted
Options exercised
Options cancelled			(875,000	)			0.35				0.22
Outstanding, December 31, 2007			6,225,085				0.41				0.29
Options granted
Options exercised
Options cancelled			(175,000	)			0.35				0.22
Outstanding, December 31, 2007			6,050,085			$	0.42			$	0.28
Exercisable, December 31,2008			5,067,793			$	0.41			$	0.27

 

F-21

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The following table summarizes information about stock options outstanding and exercisable at December 31, 2008

 

				Outstanding												Exercisable
Range of Exercise Price				Average Number of Options				Weighted Exercise Price				Remaining Contractual Life				Average Number of Options				Weighted Exercise Price				Remaining Contractual Life
$	0.15 to $0.34				2,575,085			$	0.15				5.0				2,575,085			$	0.15				5.0
$	0.35 to $0.50				2,675,000			$	0.35				7.6				1,783,333			$	0.35				7.6
$	0.51and above				800,000			$	1.51				6.4				709,375			$	1.51				6.4
					6,050,085			$	0.42				6.3				5,067,793			$	0.41				6.1

 

		Options				Average Grant Date Fair Value
Nonvested at December 31, 2007			2,065,625			$	0.26
Granted
Vested			(891,667	)		$	0.22
Cancelled			(191,666	)		$	0.22
Nonvested at December 31, 2008			982,292			$	0.30

 

 

Year ending December 31, 2009			132,966
		$	132,966

 

As of December 31, 2008 options outstanding and vested did not have any intrinsic value.

 

F-22

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11. COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases two office spaces under operating leases. The future minimum cash commitments as of December 31, 2008 under such operating leases are as follows:

 

2009			150,125
2010			142,058
2011			138,997
2012			92,665
		$	523,845

 

As discussed in Note 13, the Company subleased certain office space under an agreement with UCA Global, Inc. ("Global"), whereby the Company paid rent based on the proportion of square footage occupied by the Company in the Global office facility. Pursuant to entering into a lease for a new office premises, the Company has terminated the sublease arrangement effective June 2007.

 

Rent expense incurred with Global during the year ended December 31, 2007 was $63,750 and is included in selling, general and administrative expense on the accompanying statements of operations. Rent expense inclusive of rent paid to Global was $147,000 and $157,000 for the years ended December 31, 2008 and 2007, respectively

 

The Company has an employment agreement with an officer which expired in May 2008, subject to automatic successive one year renewals unless either the Company or the employee gives notice of intention not to renew the agreement. The agreement provides for an annual base salary of $150,000, with specified annual increases to the base salary. Pursuant to the employment agreement, if the Company terminates the officer's employment without cause or good reason, as defined in the employment agreement, the Company will be obligated to pay a termination benefit equal to the remaining annual base salary during the initial term of the employment agreement. In June of 2008, the Company entered into a new employment agreement with the officer for a term of three years. The new agreement provided for an annual base salary of $250,000 with specified increases and bonus based on the Company’s financial performance. .. Pursuant to the new employment agreement, if the Company terminates the officer's employment without cause or good reason, as defined in the new employment agreement, the Company will be obligated to pay a termination benefit equal to the remaining annual base salary during term of the new employment agreement

 

NOTE 12. RELATED PARTY TRANSACTIONS

 

Loans and advances payable to stockholders, officer and director on the accompanying consolidated balance sheet at December 31, 2007 represent amounts owed to stockholders and directors of the Company for advances of cash provided to the Company. Convertible debentures payable to stockholders, officers and director represent amounts received by the Company pursuant to a financing arrangement (see Note 8).

 

The Company subleased certain office space and incurs occupancy related costs under an agreement with UCA Global, Inc. ("Global"), an entity affiliated with a shareholder of the Company, whereby the Company paid rent and other occupancy costs based on the proportion of square footage occupied by the Company in the Global's office facility. Rent and occupancy expenses incurred by the Company under this agreement, which commenced on May 20, 2005, during the years ended December 31, 2007 was $63,750 and is included in selling, general and administrative expense on the accompanying statements of operations.

 

F-23

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NOTE 13. INCOME TAXES

 

A reconciliation of the statutory U.S. federal income tax rate to the Company's effective tax was as follows:

 

		2008				2007
Statutory U.S. rate			34.0	%			34.0	%
Non deductible expenses			(49.9	%)			(31.7	%)
Effect of valuation allowance			15.9	%			(2.3	%)
Total income tax expense (benefit)			0.0	%			0.0	%

 

 

		2008				2007
Operating loss carryforwards		$	2,735,000			$	2,881,000
Reserves and allowances			104,000				167,000
Valuation allowance			(2,839,000	)			(3,048,000	)
Net deferred tax assets		$	--			$	--

 

The Company had net operating loss carryforwards of approximately $8,043,000 at December 31, 2008, which expire through 2027. The tax benefit of these losses has been completely offset by a valuation allowance due to the uncertainty of its realization. Internal Revenue Code Section 382 provides for limitations on the use of net operating loss carryforwards in years subsequent to a more than 50% change in ownership (as defined by Section 382), which limitations can significantly impact the Company's ability to utilize its net operating loss carryforwards. As a result of the sale of the shares in private offering and issuance of shares for acquisition and other transactions, and changes in ownership may have occurred which might result in limitations on the utilization of the net operating loss carryforwards. The extent of any limitations as a result of changes in ownership has not been determined by the Company.

 

NOTE 14. SUBSEQUENT EVENTS (unaudited)

 

On March 12, 2009, NetFabric Holdings, Inc. (the “Company”), along with its wholly owned subsidiary, NetFabric Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”) entered into a Convertible Note Purchase Agreement with Fortify Infrastructure Services, Inc. (“Fortify). Pursuant to the Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible Promissory Note (the “Note”) from UCA in the principal amount of $5 million with the Company being a guarantor for UCA’s borrowings.

 

F-24

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The Note has a six-month term, and bears interest at 8% per annum, compounded annually. The Note is secured by (i) all of the assets of UCA and the Company and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company. At the exclusive option of Fortify, Fortify may convert the entire principal amount of, and accrued and unpaid interest on, the Note into shares of Series A Preferred Stock of UCA.  The conversion price shall be at a price equal to the price per share reflecting a valuation of UCA equal to $5 million, on an as-converted basis.

 

Fortify, UCA and the Company also entered into a Credit Agreement whereby Fortify agreed to provide UCA a revolving line of credit of up to $1 million for working capital purposes. Amounts borrowed under the line of credit are secured by (i) all of the assets of UCA and the Company and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company.

 

Fortify, UCA and the Company also entered into an Option and Purchase Agreement (“Option Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire all of the outstanding shares of common stock of UCA upon on effectiveness of the Company’s Definitive Schedule 14 C Information Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with certain actions taken by the written consent of holders of a majority of the Company’s outstanding common stock approving the terms of the Option Agreement, Fortify will exercise the option. Upon exercise of the Option by Fortify, the Company will (a) receive an aggregate purchase price of $500,000, less the amount of accrued and unpaid interest, if any, on the Note, and (b) be released from the guaranty obligations of the Note. The Company and certain employees of UCA will also be eligible to receive earn-out payments in connection with the closing of the Option based upon achievement of certain financial thresholds during a 24-month period.

 

The Company plans to file a Schedule 14C Information Statement with the SEC shortly after completion of its audit for the years ended December 31, 2007 and 2008.

 

The Company used approximately $3 million from the proceeds of the Note to repay all amounts owed to Laurus Master Fund. The balance of the proceeds will be used for repayment of debt, other payables and for working capital purposes.

 

F-25

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Unaudited Pro Forma Condensed Financial Information

 

On March 13, 2009, NetFabric Holdings, Inc. (the “Company”), along with its wholly-owned subsidiary, NetFabric Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”) entered into a Convertible Note Purchase Agreement dated March 12, 2009 with Fortify Infrastructure Services, Inc. (“Fortify). Pursuant to the Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible Promissory Note (the “Note”) from UCA in the principal amount of $5 million with the Company being a guarantor for UCA’s borrowings.

 

The Note has a six-month term, and bears interest at 8% per annum, compounded annually. The Note is secured by (i) all of the assets of UCA and the Company and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company. At the exclusive option of Fortify, Fortify may convert the entire principal amount of and accrued and unpaid interest on the Note into shares of Series A Preferred Stock of UCA.  The conversion price shall be at a price equal to the price per share reflecting a valuation of UCA equal to $5 million, on an as-converted basis.

 

 

Fortify, UCA and the Company also entered into an Option and Purchase Agreement (“Option Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire all of the outstanding shares of common stock of UCA. Upon effectiveness of the Company’s Definitive Schedule 14 C Information Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with certain actions taken by the written consent of holders of a majority of the Company’s outstanding common stock approving the terms of the Option Agreement, Fortify will exercise the option. Upon exercise of the Option, the Company will be released from the guaranty obligations of the Note. Fortify will pay the Company $500,000 one year from the date the option is exercised. In addition, Fortify will pay additional amounts to the Company and certain employees of UCA based on UCA’s performance during the periods specified in the Option Agreement.

 

 

The following unaudited pro forma condensed financial information sets forth certain historical financial information of the Company on an unaudited pro forma basis after giving effect to the disposition of UCA. It also gives effect on a pro forma the use of sale proceeds by the Company to repay its debt.

 

The proforma does not give effect for any additional consideration and excludes payments related to potential earnouts or other purchase price adjustment.

 

Subsequent to the disposition of UCA, on a pro forma basis, the Company will have total assets of $879,018 and total liabilities of $905,502. The principal assets will be cash from the disposition. The liabilities consists of accruals and payable from recurring operations and $132,000 accruals and payables from the Company’s discontinued VoIP operations.

 

The accompanying pro forma balance sheet gives effect to the Company’s disposition of UCA as if such disposition occurred on December 31, 2008.

 

 

For the purposes of pro forma information, the Company’s statement of operations for the year ended December 31, 2008 has been adjusted on a pro forma basis as if the UCA disposition occurred on January 1, 2008.

 

 

The unaudited pro forma combined condensed financial information has been included as required and allowed by the rules the SEC and is presented for illustrative purposes only and not necessarily indicative of the financial position or operating results that would have occurred had the disposition of UCA been completed at the beginning of the period or on the date indicated, nor is it necessarily indicative of future financial position or operating results.

 

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PRO FORMA CONSOLIDATED BALANCE SHEET

NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED

December 31, 2008

 

		Historical				UCA Disposition Adjustments					Pro forma
ASSETS
CURRENT ASSETS:
Cash		$	1,317,510			$	(474,699	)	(1,2 and 3)		$	842,811
Trade accounts receivable, net			3,027,795				(3,008,934	)	(1)			18,861
Prepaid expenses and other current assets			151,595				(151,595	)	(1)			-
Total current assets			4,496,900				(3,635,228	)				861,672
Property and equipment, net			132,337				(114,991	)	(1)			17,346
												-
Goodwill			5,704,000				(5,704,000	)	(1)			-
												-
Other intangibles, net			456,564				(456,564	)	(1)			-
												-
Other assets			22,921				(22,921	)	(1)			-
TOTAL ASSETS		$	10,812,722			$	(9,933,704	)			$	879,018
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term borrowings		$	950,000			$	(950,000	)	(2)			-
Accounts payable and accrued liabilities			4,697,074				(3,791,572	)	(1)			905,502
Accrued compensation			612,526				(612,526	)	(1 and 2)			-
Deferred revenues and customer advances			1,622,227				(1,622,227	)	(1)			-
Convertible note, net of unamortized discount			1,443,144				(1,443,144	)	(2)			-
Revolving note, net of unamortized discount			1,384,257				(1,384,257	)	(2)			-
Total current liabilities			10,709,228				(9,803,726	)				905,502
Total liabilities			10,709,228				(9,803,726	)				905,502
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Common Stock, $.001 par value, authorized shares 200,000,000, 97,053,044 and 96,053,044 shares issued and outstanding, respectively			97,053									97,053
Additional paid-in capital			38,110,162									38,110,162
Accumulated deficit			(38,103,721	)			(129,978	)	(3)			(38,233,699	)
												-
Total stockholders' equity (deficit)			103,494				(129,978	)				(26,484	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	10,812,722			$	(9,933,704	)			$	879,018

 

See accompanying notes to pro forma financial statements.

 

 

P-1

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PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED

 

For the year ended December 31, 2008		Historical				UCA Disposition Adjustments					Pro forma
Revenues		$	24,229,023			$	(24,229,023	)	(4)		$	-
OPERATING EXPENSES:
Direct employee compensation and
consultant expenses (includes share based compensation
of $34,598)			19,071,378				(19,036,780	)	(4)			34,598
Selling, general and administrative expenses (includes
share based compensation of $233,624)			4,026,688				(3,324,314	)	(4)			702,374
Depreciation and amortization			287,422				(273,143	)	(4)			14,279
Total operating expenses			23,385,488				(22,634,237	)				751,251
Income (loss) from operations			843,535				(1,594,786	)				(751,251	)
OTHER INCOME / (EXPENSE):
Amortization of debt discounts			(763,300	)			763,300		(5)
Amortization of debt issuance costs			(627,873	)			627,873		(5)
Interest and bank charges			(372,654	)			372,654		(5)
Total other income / (expense)			(1,763,827	)			1,763,827					-
Loss before provision for income taxes			(920,292	)			169,041					(751,251	)
Provision for income taxes			-				-
NET LOSS		$	(920,292	)		$	169,041				$	(751,251	)
Net loss per common share, basic and diluted		$	(0.01	)							$	(0.01	)
Weighted average number of shares outstanding, basic and diluted			96,837,197									96,837,197

 

P-2

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Note to Unaudited Pro Forma Condensed Financial Information

 

(1)

To eliminate UCA’s assets and liabilities.

(2)

To adjust receipt of sales proceeds of $5,000,000 and related payments of expenses, debt and accrued expenses. Out of the proceeds the Company repaid $2,919,623 (including unamortized discount of $91,862) due under Convertible note and Revolving note due. The Company also repaid $950,000 of its Short term borrowing. Transaction with Fortify resulted in expenses of $90,000 for the transaction and in addition the Company paid $198,000 of accrued expenses.

(3)

To eliminate UCA’s equity, record transaction related expenses and the gain of $51,884 from the disposition of UCA.

 

Operating assets of UCA disposed		$	4,615,877
Operating liabilities of UCA disposed			(5,828,325	)
Goodwill and intangibles disposed			6,160,564
Net assets disposed			4,948,116
Sale proceeds			5,000,000
Gain on disposal		$	51,884

 

(4)

To eliminate UCA’s revenues and operating costs.

(5)

To eliminate debt discount, interest and amortization of debt issuance costs pursuant to repayment of debt from the proceeds.

 

P-3

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REQUIRED VOTES

 

The Transactions were approved pursuant to the Written Consent. No further vote is required to approve the Transactions.  The Information Statement will become effective following the twentieth (20) day after the mailing to the stockholders of the Company.  The Stock Acquisition will be consummated no later than three business days following exercise of the Option by Fortify, which will occur within two business days following receipt of written notification from the Company certifying the effectiveness of the Information Statement.

 

VOTES OBTAINED

 

The following individuals own the number of shares and percentages set forth opposite their names and executed the Written Consent:

 

Name of Beneficial Owner		Amount of Beneficial Ownership				Percentage of Class
Jeffrey Robinson			4,832,476				5.0	%
Fred Nazem			16,687,315				17.2	%
Fred F. Nazem Children’s Trust			6,592,212				6.8	%
Fahad Syed			6,731,731				6.9	%
Laurus Master Fund			4,667,111				4.8	%
Mohamed Asif			13,238,462				13.6	%
Macrocom Investors LLC			1,601,000				1.6	%
Michael Millon			320,000				0.3	%
Total			54,670,307				56.3%	%

 

INTEREST OF CERTAIN PERSONS IN FAVOR OF OR IN OPPOSITION TO THE TRANSACTION

 

Certain directors and officers of the Company may accept terms of employment with UCA promptly following the Stock Acquisition. In addition, Fahad Syed, the Company’s Chief Executive Officer may receive cash compensation in connection with earn-out payments under the Option Agreement. Other than the aforementioned, no officer or director will receive any direct or indirect benefit from the Company’s proposed Transactions.

 

	By Order of the Board of Directors
	Fahad Syed, Chairman of the Board of Directors and Chief Executive Officer

 

39

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