SCHEDULE
14C
(Rule
14c-101)
INFORMATION
REQUIRED IN INFORMATION STATEMENT
SCHEDULE
14C INFORMATION
Information
Statement Pursuant to Section 14(c) of the Securities
Exchange
Act of 1934
(Amendment No. 1)
Check the appropriate box:
þ
|
Preliminary
information statement
|
¨
|
Confidential, for
use of the Commission Only (as permitted by Rule
14c-5(d)(2))
|
¨
|
Definitive
information statement
|
NETFABRIC
HOLDINGS, INC.
___________________________________________
(Name of
Registrant as Specified in Its Charter)
Payment
of Filing Fee (Check the appropriate box):
|
Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
|
|
(1)
|
Title
of each class of securities to which transaction applies:
N/A
|
|
(2)
|
Aggregate
number of securities to which transaction applies:
N/A
|
|
(3)
|
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):
|
|
(4)
|
Proposed
maximum aggregate value of
transaction:
|
|
Fee
paid previously with preliminary
materials.
|
¨
|
Check
box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its
filing.
|
|
(1)
|
Amount
Previously Paid:
|
|
(2)
|
Form,
Schedule or Registration Statement
No.:
|
299
Cherry Hill Road
Parsippany,
NJ 07054
INFORMATION
STATEMENT
WE ARE
NOT ASKING YOU FOR A PROXY
AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
TO ALL
STOCKHOLDERS:
This
Information Statement is first being mailed on or about July __, 2009 to
the holders of record of the common stock, par value $.001 (the “Common Stock”)
of NetFabric Holdings, Inc. (“we”, “us” or the “Company”) as of the close of
business on April 29, 2009 (the “Record Date”). This Information Statement
relates to certain actions taken by the written consent of the holders of a
majority of the Company's outstanding Common Stock, dated March 12, 2009 and
April 27, 2009 (the “Written Consent”).
The
Written Consent authorized, effective upon the 21st day
following the mailing of this Information Statement to the Stockholders of the
Company, the following:
(1) The
acquisition of all of the outstanding shares of capital stock of NetFabric
Technologies, Inc., d/b/a UCA Services, Inc., a New Jersey corporation and
wholly-owned subsidiary of the Company (“UCA”), by Fortify Infrastructure
Services, Inc., a Delaware corporation (“Fortify”), pursuant to an Option and
Purchase Agreement, dated March 12, 2009 (the “Option Agreement”), by and among
the Company, UCA and Fortify, for an aggregate purchase price of Five Hundred
Thousand Dollars ($500,000) (the “Stock Acquisition”);
(2) The
amendment of the Company's Certificate of Incorporation, at any time on or
before April 27, 2010 to effect a reverse stock split of the Company's issued
Common Stock, on the basis of issuing one (1) share of Common Stock in exchange
for each ten 10 shares of Common Stock (the “Reverse Stock Split”);
and
(3) The
amendment of the Company’s Certificate of Incorporation, at any time on or
before April 27, 2010 to increase the authorized shares of Common Stock from
200,000,000 shares to 300,000,000 shares of Common Stock (the “Share Increase”)
(the Stock Acquisition together with the Reverse Stock Split and the Share
Increase, collectively referred to as the “Transactions”).
The
Written Consent constitutes the consent of a majority of the total number of
shares of outstanding Common Stock and is sufficient under the General
Corporation Law of the State of Delaware (the “DGCL”) and the Company's Bylaws
to approve the Transactions. Accordingly, the Transactions shall not
be submitted to the Company's other stockholders for a vote.
This
Information Statement is being furnished to you to provide you with material
information concerning the actions taken in connection with the Written Consent
in accordance with the requirements of the Securities Exchange Act of 1934 and
the regulations promulgated there under, including Regulation 14C. This
Information Statement also constitutes notice under Section 228 of the DGCL of
the actions taken in connection with the Written Consent.
Only one
Information Statement is being delivered to two or more security holders who
share an address, unless the Company has received contrary instructions from one
or more of the security holders. The Company will promptly deliver, upon written
or oral request, a separate copy of the Information Statement to a security
holder at a shared address to which a single copy of the document was
delivered. If you would like to request additional copies of the
Information Statement, or if in the future you would like to receive multiple
copies of information or proxy statements, or annual reports, or, if you are
currently receiving multiple copies of these documents and would, in the future,
like to receive only a single copy, please so instruct the Company, by calling
the Company at (973) 537-0077, or by writing to us at 299 Cherry Hill Road,
Parsippany, NJ 07054, Attn: Vasan Thatham.
THIS IS
NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS MEETING WILL BE
HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN.
Date: June
25, 2009
|
Fahad
Syed,
Chairman
of the Board of
Directors
and Chief Executive Officer
|
SUMMARY
TERM SHEET
The
following summary highlights important information about the Stock Acquisition,
discussed in greater detail elsewhere in this Information
Statement. The following may not contain all of the information
concerning the Stock Acquisition. To more fully understand the Stock
Acquisition, you should carefully read this entire Information Statement.
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.
|
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.
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 July [___],
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.
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.
The
following table sets forth information regarding the beneficial ownership of our
common stock as of April 14, 2009, for each person known by the Company to be
the beneficial owner of more than 5% of our outstanding shares of common
stock. Unless otherwise indicated, we believe that all persons named
in the table have sole voting and investment power with respect to all shares of
Company common stock beneficially owned by them.
Title of
Class
|
Name and Address of Beneficial
Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of
Class
|
Common Stock
|
Fred Nazem
44
East 73rd Street
New
York, New York 10021
|
23,279,527(1)
|
24.0%
|
Common
Stock
|
Faisal Syed
12 Kings Brook
Court
Mendham, NJ
07945
|
13,238,462
|
13.6%
|
Common
Stock
|
Mohamed Asif
53 Burnet Hill
Road
Livingston, NJ
07039
|
13,238,462
|
13.6%
|
Common
Stock
|
Laurus Master
Fund
c/o Laurus Capital
Management
335 Madison
Avenue
New York, NY
10017
|
5,221,393(2)
|
5.3%
|
Common
Stock
|
Jeffrey
Robinson
Five Tomaselli
Court
Ballston Spa, NY
12020
|
4,832,476
|
5.0%
|
(1)
Includes 6,592,212 shares held by the Fred F. Nazem Children’s Trust, whose
trustees are Alexander Nazem, Farhad Nazem and Sohelya Gharib. Fred
Nazem disclaims beneficial ownership of these securities.
(2)
Includes 554,282 shares issuable upon exercise of warrants. Laurus Capital
Management, LLC manages Laurus Master Fund Ltd. Eugene Grin and David Grin,
through other entities, are the controlling principals of Laurus Capital
Management, LLC and share sole voting and investment power over the securities
owned by Laurus Master Fund Ltd.
The
following table sets forth information regarding the beneficial ownership of
Company common stock of each of our officers and directors and all our officers
and directors as a group as of April 14, 2009. Unless otherwise
indicated, we believe that all persons named in the table have sole voting and
investment power with respect to all shares of Company common stock beneficially
owned by them.
Title of
Class
|
Name of Beneficial
Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of
Class
|
Common
Stock
|
Fahad Syed
|
6,731,731
|
6.9%
|
Common
Stock
|
Vasan Thatham
|
225,000(1)
|
*
|
Common
Stock
|
Charlotte G.
Denenberg
|
125,000(2)
|
*
|
Common
Stock
|
Joseph Perno
|
125,000(2)
|
*
|
|
(Directors and Officers as a
group, 4 Persons)
|
7,206,731(3)
|
7.4%
|
(1)
Includes 225,000 shares issuable upon exercise of options.
(2)
Includes 125,000 shares issuable upon exercise of options.
(3)
Includes 475,000 shares issuable upon exercise of options.
*
less than 1%.
There are
no arrangements, known to the Company, including any pledge by any person, of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
PROPOSAL
1
THE
STOCK ACQUISITION
The Board
has determined that it would be in the best interests of UCA and the Company to
enter into the Stock Acquisition.
PURPOSE
OF THE STOCK ACQUISITION
The Board
considered the following material positive factors during its deliberations
concerning the Stock Acquisition:
|
·
|
our
efforts to maximize stockholder value, which included our board of
directors’ evaluation of a range of alternatives other than the
Transaction;
|
|
·
|
the
fact that UCA and the Company have certain outstanding debts and
liabilities, and the entry into the Stock Acquisition will enable the
satisfaction of such debts and
liabilities
|
|
·
|
the
fact that approval by holders of a majority of our outstanding shares of
Common Stock is a requirement for the consummation of the Stock
Acquisition.
|
The Company had a considerable working capital
deficiency in its recent past, in part due
to the operating losses in its Voice over Internet (“VoIP”) operations.
In 2007, the Company made several attempts to raise additional capital to cure
its working capital situation and to support its growth. However the efforts to
raise additional capital were not successful. Based on discussions management
had with several financiers, it was clear that the Company’s inability to
raise additional financing was not due to short term market factors but was due
to certain structural issues that the Company had. This resulted in
the Company reviewing its strategy and long term operating
plan.
In early 2008, the Company’s Board of
Directors and management reviewed the Company’s financial
situation and explored various alternatives. The Company’s core Information
Technology Services (IT Services) operations, conducted through its subsidiary
UCA Services, Inc (“UCA”), had been turned around and was profitable. Although
UCA had a strong track record and extensive customer list, its lack of working
capital was impeding its growth. The Board of Directors decided that absent a
quick capital infusion, additional cost reductions, including elimination of
public company related costs, needed to be implemented. In addition, the Board
of Directors concluded that the Company needed to evaluate
other strategic options including the sale of its IT Services
business. The Company’s financing needs,
overall strategy and strategic options were discussed with the majority
shareholders of the Company, as listed below.
In 2006, the Company borrowed approximately $3 million from a senior
lender. The debt was set to mature in February of 2009. The senior lender had
informally advised the Company of their hesitancy in renewing the facility and
also suggested that the Company pursue
other options to pay its debt, including a sale of its
assets.
Thereafter, the Company had discussion and retained
three investment bankers/ financial intermediaries on a non exclusive basis. The
first entity retained was an Investment
Banker based in India, Agent A. The second was a financial intermediary
hereinafter referred to as Agent B. Agent B in turn introduced the Company to
another investment banker, Agent C, pursuant to a sub agency agreement amongst
the Company, Agent B and Agent C. All of the agents were unaffiliated
third parties. The Company had several discussions with the agents. The agents
updated the Company on the market conditions and realistic valuation
expectations for UCA’s business after evaluating the operations
and financial characteristics, including the working capital deficiency. At this
stage it was clear to the Company that the sale of UCA was the
Company’s only viable strategic option.
In addition, the Company met with two IT services
companies based in the USA. However, there
was no serious interest from either of the companies to enter into a transaction
with the Company.
Agent A introduced an India based IT services company to
the Company, hereinafter referred to as Company 1. Company 1, a publicly held company in India, wanted a presence in the
USA. After initial discussion, the Company’s CEO visited
India and met with senior management of Company 1. This was followed by
execution of a non binding letter of intent between the Company and
Company 1 whereby Company 1 was interested in buying all of
the issued and outstanding shares of UCA from the Company. However, after the
financial crisis, Company 1 was not willing to commit for a quick closing of the
transaction. Accordingly both parties terminated the
negotiations.
The Company was contacted by Company 2. Company 2 was a
recently formed private company promoted by a serial entrepreneur with no prior
affiliation with the Company. Company 2 wanted to build an IT services company
with a focus on infrastructure work and it
believed that UCA would be good platform for its growth plans. Company 2 was
interested in acquiring UCA. The Company and Company 2 negotiated and
agreed on the broad terms of a transaction. However, no documents were
executed.
About the same time, Agent C introduced Company 3 to the
Company. Company 3, an unaffiliated entity, was a U.S based IT services company
with revenues in excess of $150 million. After several negotiations, Company 3
wanted to enter into a purchase agreement
for UCA with the Company. However, based on market conditions, as perceived by
Company 3, they wanted a reduction in the valuation of UCA that both parties had
initially agreed to. This reduction was not acceptable to the Company and
accordingly, the negotiations were terminated.
At this stage, the Company approached Company 2 and
revived the negotiations. Company 2 was interested in a transaction for UCA. In
order to repay the senior lenders and other debt of the Company, Company 2 was
willing to lend $5 million as a bridge loan
and enter into an option to acquire UCA after completion of required
formalities. Accordingly, the Company and Company 2 entered into a Convertible
Note Purchase Agreement, a Credit Agreement and an Option and Purchase
Agreement on March 12, 2009.
In addition, Agent B introduced Company 4 to the
Company. Company 4 was a hardware distributor looking for an acquisition in the
IT Services area. Since Company 4’s valuation of
UCA’s
business was substantially less than what other companies were willing to pay for UCA, the negotiations
were terminated.
The Company was advised by its agents that the
expectation of proceeds from a sale of UCA’s assets should be
between $4,000,000 and $5,000,000 in initial payment, with another
$500,000 to $1,000,000 in deferred
payments. The agents further advised that being a service business, there could
be additional payments to management and key/ transition employees based on
performance. This was corroborated by internal analysis that the
Company undertook based on comparable public companies.
The offers received from the three unaffiliated
companies the Company was in serous negotiations with contemplated initial
payments that ranged between $4,735,000 and $5,000,000. In addition,
contemplated deferred payments ranged
between $425,000 and $1,000,000. These were very much in line with the valuation
expectation advised by the Company’s
agents.
The Board of Directors considered the monetary terms and
non monetary terms, including the experience of the prospective buyer and their ability to conclude a
transaction in a timely basis. For monetary terms, the Board of Directors
evaluated the feedback from the agents retained by the Company, as well as the
internal analysis prepared by the Company. More importantly
the Company considered the range of terms presented by the three non affiliated
companies.
The Company periodically updated its majority
shareholders concerning the various negotiations and generally obtained their
acceptance at the time of negotiations with
different companies. After many
deliberations, as well as the Board’s diligence
regarding the Company’s operating performance, the Board and the majority
shareholders agreed that the Bridge Financing and subsequent Stock Acquisition
would maximize value to the shareholders.
EFFECTS
OF THE STOCK ACQUISITION
On March 12, 2009, the Company and UCA
closed a $5.0 million Note and Credit Facility with Fortify. The closing of the
Note and the Credit Facility completed the first of a two tranche closing with
Fortify. The Stock Acquisition represents the second tranche of the closing,
whereby Fortify will purchase all of the outstanding shares of capital stock of
UCA.
At the time of the closing of the
Bridge Financing, the Company owed approximately $3,000,000 (Three Million
Dollars) to its senior secured lender, Laurus Master Fund, Ltd. (“Laurus”). The
debt was originally due in February 2009, but was extended until the Company
could obtain financing in order to repay the Laurus debt. The acquisition
structure allowed the Company to use the proceeds of the Note to pay all debts
and outstanding liabilities to its secured creditor, Laurus Master Fund,
Ltd.
Upon the closing of the Stock
Acquisition, Fortify will pay a purchase price of $500,000 (Five Hundred
Thousand Dollars) to the Company payable twelve (12) months following
the closing of the Option Agreement, less the amount of accrued
and unpaid interest, if any, on the Note. Additionally, Fortify will release the
Company from its guarantees and obligations under the Bridge
Financing.
Additional payments are, or may be,
payable to the Company and UCA employees based on UCA operating performance
following the closing of the Stock Acquisition. Cash payments of up to
$2,500,000 (Two Million Five Hundred Thousand) shall be payable to the Company,
UCA employees and Fahad Syed, the Company’s Chief Executive Officer and
Director, if UCA achieves certain financial thresholds for a two year period
following the closings of the Stock Acquisition. The disclosure below details
the earn-out payments payable to the Company, UCA employees and Fahad Syed
pursuant to certain financial thresholds under the Option
Agreement.
EARN-OUT
PAYMENTS
Cash payments of up to $2,500,000.00 in
the aggregate (“Earn-Out Payments”)
shall be payable to the Company and employees of UCA (the “Employees”) if UCA
achieves the financial thresholds specified below for the 12-month period
beginning April 1, 2009 and ending March 31, 2010 (“Year 1”) and the
subsequent 12-month period beginning April 1, 2010 and ending March 31, 2011
(“Year
2”). As used herein, “Revenues” shall mean
UCA revenues from customers as determined in accordance with generally accepted
accounting principles less returns, discounts and allowances, including without
limitation allowances for any uncollectible amounts; and “EBITDA” shall mean
UCA earnings before interest, depreciation and taxes.
Year
1 Earn-Out Payment
The maximum Earn-Out Payment that may
be earned for Year 1 is $1,250,000.00 (the “Maximum Threshold”),
which shall be allocated (a) $250,000.00 to the Company, and (b) $1,000,000.00
to the Bonus Pool (up to $500,000 of which shall be payable to Fahad Syed). No
Earn-Out Payments for Year 1 will be payable unless UCA achieves both of the following
“Year 1 Minimum
Thresholds”: (a) Revenues equal to at least $14.4 million (the
“Revenue Minimum
Threshold”) and (b) EBITDA of at least $1 million (the “EBITDA Minimum
Threshold”). “Year 1 Maximum
Thresholds” are as follows: (a) Revenues equal to at least $18
million (the “Revenue
Maximum Threshold”, and (b) EBITDA of at least $1.3 million (“EBITDA Maximum
Threshold”).
If UCA
meets both of
the Year 1 Maximum Thresholds, Fortify shall pay the amounts set forth below
within three and one-half (3½) months following the end of Year 1:
Year 1
Revenues
|
|
Year 1
EBITDA
|
|
Maximum
Earn-out Payment to Company
|
|
$ |
125,000 |
|
Maximum
Earn-out Payment to Company
|
|
$ |
125,000 |
|
Maximum
Earn-out to Bonus Pool
|
|
$ |
500,000 |
|
Maximum
Earn-out to Bonus Pool
|
|
$ |
500,000 |
|
Maximum
Revenue
Threshold
Triggering Payment
|
|
$ |
18,000,000 |
|
Maximum
EBITDA Threshold Triggering Payment
|
|
$ |
1,300,000 |
|
If UCA
achieves both
of the Year 1 Minimum Thresholds but does not achieve either or both of the Year
1 Maximum Thresholds, then the Year 1 Earn-Out Payment shall be reduced
according to the following schedule:
Year
1 Revenues
|
|
|
Year
1 EBITDA
|
|
Percentage
Of
Maximum Threshold
|
|
|
Percentage
of Earn-Out Payment
|
|
|
Amount
Payable to Seller
|
|
|
Amount
Payable to Bonus Pool
|
|
|
Percentage
Of
Maximum Threshold
|
|
|
Percentage
of Earn-Out Payment
|
|
|
Amount
Payable to Seller
|
|
|
Amount
Payable
to
Bonus
Pool
|
|
|
79 |
% |
|
|
0.00 |
% |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
79 |
% |
|
|
0.00 |
% |
|
$ |
0 |
|
|
$ |
0 |
|
80%
to 89
|
% |
|
|
70.00 |
% |
|
$ |
87,500 |
|
|
$ |
350,000 |
|
|
80%
to 89
|
% |
|
|
70.00 |
% |
|
$ |
87,500 |
|
|
$ |
350,000 |
|
90%
to 99
|
% |
|
|
85.00 |
% |
|
$ |
106,250 |
|
|
$ |
425,000 |
|
|
90%
to 99
|
% |
|
|
85.00 |
% |
|
$ |
106,250 |
|
|
$ |
425,000 |
|
100%
or more
|
|
|
|
100.00 |
% |
|
$ |
125,000 |
|
|
$ |
500,000 |
|
|
100%
or more
|
|
|
|
100.00 |
% |
|
$ |
125,000 |
|
|
$ |
500,000 |
|
For the avoidance of doubt, if UCA
achieves the Revenue Threshold at one level and the EBITDA Threshold at a
different level, the Year 1 Earn-Out Payment will be the sum of the amounts
payable based on the two different thresholds achieved. For example,
if Revenues for Year 1 exceed $18 million but UCA’s EBITDA for Year 1 is only
$1.04 million (or 80%), then the Year 1 Earn-Out Payment will be equal
$1,062,500 (or the sum of $625,000 based on achievement of the Revenue Threshold
and $437,500 based on achievement of the EBITDA Threshold).
Year
2 Earn-Out Payment
The maximum Earn-Out Payment that may
be earned for Year 2 is $1,250,000.00, which shall be allocated (a) $250,000.00
to the Company, and (b) 1,000,000.00 to the Bonus Pool (up to $500,000 of which
shall be payable to Fahad Syed). No Earn-Out Payments for Year 2 will be payable
unless UCA achieves both of the Revenue
Minimum Threshold and the EBITDA Minimum Threshold (“Year 2 Minimum
Thresholds”). “Year 2 Maximum
Thresholds” are as follows: (a) Revenues equal to at least $18
million (the “Year 2
Revenue Maximum Threshold,” and (b) EBITDA of at least $1.5 million
(“Year 2 EBITDA
Maximum Threshold”).
If UCA
meets both of
the Year 2 Maximum Thresholds, Fortify shall pay the amounts set forth below
within three and one-half (3½) months following the end of Year 2:
Year
2 Revenues
|
|
Year 2
EBITDA
|
|
Maximum
Earn-out Payment to Company
|
|
$ |
125,000 |
|
Maximum
Earn-out Payment to Company
|
|
$ |
125,000 |
|
Maximum
Earn-out to Bonus Pool
|
|
$ |
500,000 |
|
Maximum
Earn-out to Bonus Pool
|
|
$ |
500,000 |
|
Maximum
Revenue
Threshold
Triggering Payment
|
|
$ |
18,000,000 |
|
Maximum
EBITDA Threshold Triggering Payment
|
|
$ |
1,500,000 |
|
If UCA
achieves both
of the Year 2 Minimum Thresholds but does not achieve either or both of the Year
2 Maximum Thresholds, then the Year 2 Earn-Out Payment shall be reduced
according to the following schedule:
Year
2 Revenues
|
|
|
Year
2 EBITDA
|
|
Percentage
Of
Maximum Threshold
|
|
|
Percentage
of Earn-Out Payment
|
|
|
Amount
Payable to Seller
|
|
|
Amount
Payable to Bonus Pool
|
|
|
Percentage
Of
Maximum Threshold
|
|
|
Percentage
of Earn-Out Payment
|
|
|
Amount
Payable to Seller
|
|
|
Amount
Payable
to
Bonus
Pool
|
|
|
79 |
% |
|
|
0.00 |
% |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
79 |
% |
|
|
0.00 |
% |
|
$ |
0 |
|
|
$ |
0 |
|
80%
to 89
|
% |
|
|
70.00 |
% |
|
$ |
87,500 |
|
|
$ |
350,000 |
|
|
80%
to 89
|
% |
|
|
70.00 |
% |
|
$ |
87,500 |
|
|
$ |
350,000 |
|
90%
to 99
|
%
|
|
|
85.00 |
% |
|
$ |
106,250 |
|
|
$ |
425,000 |
|
|
90%
to 99
|
%
|
|
|
85.00 |
% |
|
$ |
106,250 |
|
|
$ |
425,000 |
|
100%
or more
|
|
|
|
100.00 |
% |
|
$ |
125,000 |
|
|
$ |
500,000 |
|
|
100%
or more
|
|
|
|
100.00 |
% |
|
$ |
125,000 |
|
|
$ |
500,000 |
|
For the avoidance of doubt, if UCA
achieves the Revenue Threshold at one level and the EBITDA Threshold at a
different level, the Year 2 Earn-Out Payment will be the sum of the amounts
payable based on the two different thresholds achieved. For example,
if Revenues for Year 2 exceed $18 million but UCA’s EBITDA for Year 2 is only
$1.35 million (or 90%), then the Year 2 Earn-Out Payment will be equal
$1,156,250 (or the sum of $625,000 based on achievement of the Revenue Threshold
and $531,250 based on achievement of the EBITDA Threshold).
Payment
of Earn-Out Amounts
Provided UCA has furnished satisfactory
proof to Fortify of its achievement of the Revenue Thresholds and EBIDTA
Thresholds for Year 1 and Year 2, respectively, Fortify shall make the
applicable Year 1 Earn-Out Payment within three and one-half (3½) months after
the end of Year 1, and the applicable Year 2 Earn-Out Payment within three and
one-half (3½) months after the end of Year 2.
As a result of the Stock Acquisition,
Fortify will control the operations of UCA, and the Company will not have any
operations, and shall begin reporting as a shell company.
PROPOSAL
2
THE
REVERSE STOCK SPLIT
The Board
has determined that it would be in the best interests of the Company to approve
the Reverse Stock Split.
A
majority of the Company’s shareholders were asked to grant the Board the
authority, in its sole discretion, to amend the Certificate of Incorporation for
the purpose of effecting the Reverse Stock Split. By voting in favor of this
proposal, the majority shareholders granted the Board authority to effectuate
the Reverse Stock Split, in its sole discretion, for a period of one (1) year,
up until April 27, 2010.
Reasons
for the Reverse Stock Split
The
current number of outstanding shares of Common Stock is atypical for a company
of the Company’s size. The Board believes that the Reverse Stock
Split is in the best interests of the Company and may provide the Company with
additional financing alternatives in the future.
Management
of the Company is not aware of any present efforts of any persons to accumulate
Common Stock or to change control of the Company, and the proposed Reverse Stock
Split is not intended to be an anti-takeover device.
Furthermore,
by effectuating the Reverse Stock Split of the existing shares of the Company on
a one (1) for ten (10) basis, the Company also hopes to increase its price per
share. There can be no guarantee that the Reverse Stock Split will
result in a higher price per share. Our Board has discretion not to
carry out the Reverse Stock Split if it determines that these actions will not
be beneficial.
Exchange
of Stock Certificates
If the
Board effects the Reverse Stock Split, the Company will file an amendment to its
Certificate of Incorporation with the Secretary of State of the State of
Delaware. The Reverse Stock Split will become effective on the date
of the filing of the amended Certificate of Incorporation with the Secretary of
State of the State of New Delaware (the "Effective Date") and the shareholders
will be notified on or after the Effective Date that the Reverse Stock Split has
been effected. The Company's transfer agent, Securities Transfer
Corporation, will act as its exchange agent (the "Exchange Agent") for holders
of Common Stock in implementing the exchange of their certificates.
As soon
as practicable after the Effective Date, shareholders shall be notified and
requested to surrender their old certificates to the Exchange Agent in exchange
for the proper number of new certificates. Beginning on the Effective
Date, each old certificate will be deemed for all corporate purposes to evidence
ownership of the reduced number of shares of Common Stock as a result of the
Reverse Stock Split.
Fractional
Shares
Shareholders
who would be entitled to receive fractional shares because they hold a number of
shares of Common Stock not evenly divisible will, in the Company’s sole
discretion as of the Effective Date, will either (i) upon surrender to the
Exchange Agent of certificates representing such shares, receive a cash payment
in lieu thereof at a price equal to the closing price of the Company's Common
Stock on the Effective Date for each such share of Common Stock held prior to
the Effective Date; or (ii) have any fractional shares of Common Stock rounded
up to the nearest whole number.
Federal
Income Tax Consequences of the Reverse Stock Split
The
following is a summary of the material federal income tax consequences of the
Reverse Stock Split. This discussion is based on the Internal Revenue
Code, the Treasury Regulations promulgated thereunder, judicial opinions,
published positions of the Internal Revenue Service, and all other applicable
authorities as of the date of this document, all of which are subject to change
(possibly with retroactive effect). This discussion does not describe all
of the tax consequences that may be relevant to a holder in light of his
particular circumstances or to holders subject to special rules (such as dealers
in securities, financial institutions, insurance companies, tax-exempt
organizations, foreign individuals and entities, and persons who acquired their
Common Stock as compensation). In addition, this summary is limited to
stockholders that hold their Common Stock as capital assets. This
discussion also does not address any tax consequences arising under the laws of
any state, local or foreign jurisdiction.
ACCORDINGLY,
EACH STOCKHOLDER IS STRONGLY URGED TO CONSULT WITH A TAX ADVISOR TO DETERMINE
THE PARTICULAR FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES
TO SUCH STOCKHOLDER OF THE REVERSE STOCK SPLIT.
No gain
or loss should be recognized by a stockholder upon such stockholder’s exchange
of pre-reverse stock split shares for post-reverse stock split shares pursuant
to the Reverse Stock Split. The aggregate tax basis of the post-reverse
stock split shares received in the Reverse Stock Split will be the same as the
stockholder’s aggregate tax basis in the pre-reverse stock split shares
exchanged therefore. The stockholder’s holding period for the post-reverse
stock split shares will include the period during which the stockholder held the
pre-reverse stock split shares surrendered in the Reverse Stock
Split.
The tax
treatment of each stockholder may vary depending upon the particular facts and
circumstances of such stockholder. Each stockholder is urged to consult
with such stockholder’s own tax advisor with respect to all of the potential tax
consequences of the Reverse Stock Split.
PROPOSAL
3
THE
SHARE INCREASE
The Board
has determined that it would be in the best interests of the Company to approve
the Share Increase.
A
majority of the Company’s shareholders were asked to grant the Board the
authority, in its sole discretion, to amend the Certificate of Incorporation for
the purpose of effecting the Share Increase. By voting in favor of this
proposal, the majority shareholders granted the Board authority to effectuate
the Share Increase, in its sole discretion, for a period of one (1) year, up
until April 27, 2010.
Reasons
for the Share Increase
We intend to inquire into business
acquisition opportunities. Our goal is to increase stockholder value by changing
our operations to a business that has the potential to generate greater returns
to our stockholders and potential investors than the business we are currently
in. The authorized shares of Common Stock will need to be increased in order for
the Company to have the necessary flexibility and ability to act quickly in
connection with any business acquisition opportunities.
Current
Capitalization
As of April 14, 2009, there are
10,000,000 shares of $.001 par value preferred stock authorized, of which none
are outstanding. There are 200,000,000 shares of Common Stock authorized. Of
such authorized Common Stock, there are 97,053,044 shares
outstanding.
Effectiveness
of the Share Increase
The Share Increase will be effective
upon the filing of the amendment to the Company’s Certificate of Incorporation
with the Secretary of State of the State of Delaware, the Company's state of
incorporation. Our Board has discretion not to carry out the Share Increase if
it determines that these actions will not be beneficial.
Currently, we do not plan to file the
amendment to the Company’s Certificate of Incorporation until the Company has
identified a possible business to acquire or a possible merger candidate. Once
identified, the amendment to the Company’s Certificate of Incorporation would
most likely be filed based on the requirements of that particular transaction,
if needed at all. Currently, there are no agreements that the Company has
entered into or plans to enter into in connection with a future stock issuance.
There can be no assurance that the Company will enter into such
agreements.
Effects
of the Share Increase
The overall effect will be an increase
in the authorized shares of the Company’s common stock. The unissued shares may
be issued by our Board in its discretion. Any future issuance will have the
effect of diluting the percentage of stock ownership and voting rights of the
present holders of Common Stock.
The Board believes it advisable to
increase in the number of authorized shares for the reasons set forth above.
However, this action is not being recommended by the Board as part of an
anti-takeover strategy although the Board is aware that the increase in the
number of authorized but unissued shares of Common Stock may have a potential
anti-takeover effect. Our ability to issue additional shares could be used to
thwart persons, or otherwise dilute the stock ownership of stockholders seeking
to control us.
RISK
FACTORS
You
should carefully consider the risks described below. The risks and uncertainties
described below are the material risks and uncertainties that are evident at the
time this Information Statement is mailed. However, we may face additional
unforeseen risks following the sale of UCA’s business via the Stock Acquisition.
If any of the following risks occur, the financial condition of the Company
could be materially harmed. In that case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
WHILE
ATTEMPTING TO IDENTIFY A SUITABLE CANDIDATE, WE WILL INCUR FURTHER EXPENSES THAT
CURRENTLY CANNOT BE SPECIFIED.
Our Board
assumes that we will be able to identify as merger candidates privately held
companies with attractive business prospects that have the potential to increase
stockholder value to a greater extent than our current business. At this time,
the Board has not identified a definitive candidate. Following the sale of UCA,
the Company will no longer have any full-time employees. However, the Board of
Directors will continue to serve and, along with the present Chief Executive
Officer, is charged with identifying a target company to acquire. Without
full-time employees, it may take a significant amount of time to identify a
suitable candidate for a business combination with us. During such time, we will
have further expenses such as general legal and accounting/auditing fees, none
of which can be specified at this time, but will deplete our financial resources
and thereby make it more difficult for the Company to identify a suitable
candidate for a business combination on satisfactory terms, if at
all.
WE
MAY NOT BE ABLE TO ACQUIRE A COMPANY WITH ONGOING BUSINESS
OPERATIONS.
Our Board
believes that privately held companies will be interested in a merger our
Company that, after the sale of UCA, would allow the private company to "go
public," i.e., have publicly traded securities without an initial public
offering. However, many private companies seeking to "go public" may prefer an
initial public offering to a merger with a public shell (a public traded company
with no operating business). Moreover, the Securities and Exchange Commission
typically evaluates the merger of a public shell with a private company. This
can be a time-consuming and cost-intensive review process for the parties
involved in the merger that could discourage privately held companies from any
transaction with a public shell. If, subsequent to the sale of UCA, we are not
able to merge with an operating company, whether a privately held company or a
company subject to the reporting obligations of the Securities Exchange Act from
1934, our financial reserves will most likely not be sufficient for us to start
any kind of operating business on our own. Therefore, there
can be no guarantee that we will operate any business after the sale of
UCA.
WE
DO NOT KNOW WHICH BUSINESS WE WILL OPERATE IN THE FUTURE, IF ANY.
As
described above, we do not know which business, if any, we will be operating in
the future, subsequent to a sale of UCA. Even if we are able to commence new
business operations, there can be no guarantee that we will be
successful.
"GOING
CONCERN" QUALIFICATION IN AUDIT OPINION.
The
Company received a report from its independent registered public accounting firm
for the year ended December 31, 2008, containing an explanatory paragraph
stating that the Company's recurring losses from continuing operations and the
Company's intention to sell its sole operating business raise substantial doubt
about the Company's ability to continue as a going concern during the twelve
months ending December 31, 2009.
LIQUIDITY
RISK: THERE MAY NOT BE ADEQUATE RESOURCES TO FUND THE OPERATIONS OF THE
COMPANY.
IF WE DO NOT MAKE FUTURE FILINGS WITH THE SEC IN A
TIMELY MANNER, OUR STOCKHOLDERS MAY BE NEGATIVELY AFFECTED.
As of April 1, 2008,
we have not filed any annual,
quarterly or periodic reports with the SEC and received notice from the OTC that
we were not in compliance with its rules, which require timely filing of
periodic reports in order to maintain our continued quotation on the bulletin
board.
As a result, the Company’s common stock is currently quoted on the Pink Sheets.
Future delays in the filing of timely periodic reports may negatively affect the
quotation of our common stock. As a consequence, an investor could find it more
difficult to dispose of, or to obtain quotations as to the price of,
our common stock, and the liquidity of the Company’s common stock
will be greatly reduced. In addition, the lack of regular current filings
may affect the value of the share price since it may be difficult for a
shareholder to evaluate properly the Company’s performance and
future prospects.
DESCRIPTION
OF NETFABRIC’S BUSINESS
We were
incorporated in Delaware in August 1989 as Houston Operating Company. On
December 9, 2004 we acquired NetFabric Corporation (“NetFabric Corp.”) and on
April 19, 2005 we changed our name to NetFabric Holdings, Inc. On May 20, 2005,
we acquired UCA.
We are
now organized into two distinct divisions. NetFabric Holdings, Inc. is the
holding company that houses the finance and administrative functions and is
responsible for financing transactions and regulatory compliance activities. UCA
provides IT services and solutions to a wide range of clients in the financial
industry as well as the pharmaceutical, healthcare and hospitality
sectors.
On
December 9, 2004, we entered into an Asset Purchase Agreement (the “APA”) with
all of the stockholders of NetFabric Corp. At the closing, which occurred at the
same time as the execution of the APA, we acquired all of the issued and
outstanding capital stock of NetFabric Corp. from the stockholders in exchange
for an aggregate of 32,137,032 newly-issued shares of our common
stock. The acquisition was accounted for as a reverse merger whereby
NetFabric Corp. was treated as the acquirer. NetFabric Corp. was incorporated in
the State of Delaware on December 17, 2002, as a new corporation and not as a
result of a material re classification, merger, consolidation, purchase or
divesture.
Prior to
our acquisition of NetFabric Corp., we did not have any operations, and we were
a shell company whose primary business objective was to merge and become public.
Immediately prior to the NetFabric Corp. acquisition, our directors were Wesley
F. Whiting and Redgie Green. Our officers were, Wesley F. Whiting –
President and Redgie Green – Secretary. The directors of NetFabric
Corp were Jeff Robinson (Chairman), Richard Howard and Charlotte
Denenberg. The officers of NetFabric Corp were, Jeff Robinson – Chief
Executive Officer, Walter Carozza – Chief Financial Officer, Philip Barak – Vice
President of Finance, Victoria Desidero – Vice President of
Marketing.
On May
20, 2005, we entered into and closed on a share exchange agreement, whereby we
purchased all of the issued and outstanding shares of UCA from its shareholders
in exchange for the issuance of 24,096,154 shares of our common stock. In May
2007, UCA Services changed its legal name to NetFabric Technologies, Inc. On
February 13, 2006, we entered into an agreement with UCA to amend the terms of
the share exchange agreement between the Company and the UCA shareholders, dated
May 20, 2005. Pursuant to the amendment, we issued an aggregate of 9,000,000
shares of our common stock to the former shareholders of UCA. In return, the
former shareholders of UCA released the Company from the capital raising
covenant of the share exchange agreement. To facilitate the transaction, Mr.
Jeff Robinson, our Chief Executive Officer, surrendered nine million shares of
our common stock owned by him.
Discontinued
Operations
NetFabric
Corp. provided hardware and services to small to mid-sized businesses ("SMBs")
that utilized the Internet for telephone communications or Voice over Internet
Protocol ("VoIP"). NetFabric Corp. developed and marketed appliances, or
Customer Premises Equipment ("CPE") that simplified the integration of standard
telephone systems with an IP infrastructure. With minimal revenues from VoIP
operations, we concluded that we could not implement our original business for
VoIP operations within our resources or with the additional capital we could
raise in the near term. On May 5, 2006, our Board of Directors decided that the
Company should exit from the hardware-based VoIP communications product line
(including resale of transport services) targeted at SMBs. In accordance with
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the results of
operations from the VoIP business segment have been reclassified as discontinued
operations for all periods presented. After the discontinuation of VoIP
operations, our only operations are that of UCA.
Information
Technology (IT) Services
We serve
the information and communications needs of a wide range of Fortune 500 and SMB
clients in the financial markets industry as well as the pharmaceutical, health
care and hospitality sectors. Our broad range of services include (i) Managed
Services (ii) Professional Services (iii) IT Infrastructure & Communications
Services and Maintenance and (iv) Application Development and
Maintenance.
Managed
Services
In Managed Services, a client outsources
the management of some or all of their applications so that their internal
management and staff can focus on projects that will help them in creating and
fostering initiatives that will aid in delivering a competitive advantage to
their company. Our services in this area include data center services, help desk
and facilities management. We also provide a fully managed suite for storage
management, information protection (backup and recovery) and information
optimization (archival services) from the data center to the
desktop.
Professional
Services
We provide a wide range of IT staffing
services to companies in diversified vertical markets, including financial
services, telecommunications, manufacturing, information technology,
pharmaceutical, transportation and health care to augment client resource
demands. Consultative and staffing resources may be used to undertake a role on
a long-term strategic project or fill a short-term need for a technology skill
set. We deliver qualified consultants and project managers for contract
assignments and full-time employment across many technology disciplines. Areas
of expertise include project management, business analysis, systems architecture
and design, database architecture and design, application code development,
network engineering, quality assurance and testing.
IT
Infrastructure & Communications Services
We
provide customers with IT infrastructure (such as personal computers, printers,
phone systems, networks, servers and switches) design, development, deployment
services from project planning and implementation to full-scale network, server
and workstation installations. We
also provide an end-to-end solution for automating the deployment/version
upgrades of desktop and server operating systems, including the associated
packaging required to migrate a client’s enterprise applications to computers
across an organization quickly and reliably.
Application
Development and Maintenance
We help
organizations plan, develop, integrate and manage custom applications software,
packaged software and industry-specific software solutions. We offer
applications development and maintenance-support solutions for our customers,
including shared risk engagements and fully outsourced projects, managed quality
assurance and testing services, including functional testing, compatibility
tests, performance testing, regression testing and
benchmarking. Benefits to clients for these services can include
reduced costs, extended value of technology investments, information sharing and
enhanced ability to adapt to market changes.
Sales
and Marketing
We sell
our IT through a direct sales force located principally in the New York area.
These sales associates, also known as client executives, are supported by sales
support personnel. Currently, we have approximately 10 direct sales force and
sales support personnel for selling our IT services. In addition, we have
independent sales agents (non-employees), who sell our services on a commission
basis. Our marketing strategy is to develop long-term partnership relationships
with existing and new clients that will lead to us becoming a preferred provider
of information technology services. We seek to employ a cross-selling approach,
where appropriate, to expand the number of services utilized by a single
client.
Competition
The
information technology services industry is highly competitive and served by
numerous international, national, regional and local firms, all of which are our
existing or potential competitors. Our primary competitors are software
consulting and implementation firms, applications software firms, service groups
of computer equipment companies, general management consulting firms,
programming companies, offshore firms and temporary staffing firms as well as
the internal information technology staff of our clients. We believe that the
principal competitive factors in the information technology services industry
include the range of services offered, cost, technical expertise, responsiveness
to client needs, speed in delivering information technology solutions, quality
of service and perceived value. A
critical component of our ability to compete in the marketplace is our ability
to attract, develop, motivate and retain skilled professionals. We believe we
can compete favorably in hiring such personnel by offering competitive
compensation packages and attractive assignment opportunities. Many of
our competitors have stronger brand recognition and significantly greater
financial, technical, marketing and other resources than we do. Our share of the market compared
to our competitors is too small to quantify.
Seasonality
Our business can be affected by the
seasonal fluctuations in corporate IT expenditures. Generally, expenditures are
lowest during the first quarter of the year when our clients are finalizing
their IT budgets. In addition, our quarterly results may fluctuate depending on,
among other things, the number of billing days in a quarter and the seasonality
of our clients’ businesses. Our business is also affected by the timing of
holidays and seasonal vacation patterns, generally resulting in lower revenues
and gross margins in the fourth quarter of each year. In addition, we experience
an increase in our cost of sales and a corresponding decrease in gross profit
and gross margin in the first fiscal quarter of each year as a result of
resetting certain state and federal employment tax salary
limitations.
Employees
As of
April 14, 2009, we have 128 employees including 26 employees and 102 billable
consultants. We have 10 employees were in sales, 10 in service/products delivery
management, and 6 in executive and administrative positions. In
addition to the 102 billable consultants who are employees, we use the services
of 70 billable independent contractors.
DESCRIPTION
OF PROPERTY
We do not
own any real property. We lease our office space. The office space is located at
299 Cherry Hill Road, Parsippany, New Jersey. The total office space
is 6,500 square feet for a 64 month term through September of 2012, with an
annual rent of approximately $130,000.
We also
have another leased office space in St. Louis, Missouri through March 2010. This
office space is for approximately 1,000 square feet with an annual rent of
approximately $16,000. The Company believes that the leased office spaces are
adequate and in good condition.
LEGAL
PROCEEDINGS
We are
not a party to any pending legal proceedings other than the ordinary course of
business.
Market
For Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases
of Equity Securities.
The
Company’s Common Stock has been quoted on the Pink Sheets under the ticker
symbol “NFBH” since May 7, 2008. Prior to that, the Company’s Common
Stock was quoted on the Over the Counter Bulletin Board, under the ticker symbol
“NFBH”. The following table sets forth the quarterly average high and low sales
prices per share for our Common Stock during the fiscal years ended December 31,
2007 and December 31, 2008:
Fiscal
Year Ended
|
|
Common
Stock
|
|
|
|
High
|
|
|
Low
|
|
December
31, 2007
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
Second
Quarter
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
Third
Quarter
|
|
$ |
0.11 |
|
|
$ |
0.11 |
|
Fourth
Quarter
|
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Second
Quarter
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
Third
Quarter
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Fourth
Quarter
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
The
source of this data is Bloomberg Profession Services. The data does
not reflect inter-dealer prices and the quotations are without retail mark-ups,
mark-downs or commissions, may not represent actual transactions, and have not
been adjusted for stock dividends or splits.
Holders.
As of
April 13, 2009, we had approximately 466 stockholders of our common stock of
record, and our common stock had a closing price of $.001 per
share.
Other
than the Reverse Stock Split, the Transactions described herein will not impact
the amount and percentage of present holders ownership of our Common
Stock.
Dividends and Related
Policy.
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future and the Company intends to retain future earnings, if any, to
finance the expansion of our business. The decision whether to pay
cash dividends on our common stock will be made at the discretion of our Board
of Directors and will depend on our financial condition, operating results,
capital requirements and other factors that the Board considers
significant.
Securities Authorized for Issuance
Under Equity Compensation Plans.
As of the
fiscal year ended December 31, 2008,
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected at
left)
|
|
Equity
compensation plans approved by security holders
|
|
|
6,050,085 |
|
|
$ |
0.42 |
|
|
|
2,949,915 |
|
Equity
compensation plans not approved by security holders
|
|
|
3,106,782 |
|
|
$ |
.09 |
|
|
|
|
|
Total
|
|
|
9,156,867 |
|
|
|
|
|
|
|
2,949,915 |
|
DESCRIPTION
OF SECURITIES
General
Our
Certificate of Incorporation authorizes the issuance of 200,000,000 shares of
common stock, $0.001 par value per share. As of April 24, 2009, there were
97,053,044 outstanding shares of common stock. We are authorized to issue
10,000,000 shares of preferred stock, par value $0.001, but to date we have not
issued any shares of preferred stock. Set forth below is a description of
certain provisions relating to our capital stock. For additional information,
regarding our stock please refer to our Certificate of Incorporation and
By-Laws.
Common
Stock
Each
outstanding share of common stock has one vote on all matters requiring a vote
of the stockholders. There is no right to cumulative voting; thus, the holder of
fifty percent or more of the shares outstanding can, if they choose to do so,
elect all of the directors. In the event of a voluntary of involuntary
liquidation, all stockholders are entitled to a pro rata distribution after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the common stock. The holders of the
common stock have no preemptive rights with respect to future offerings of
shares of common stock. Holders of common stock are entitled to dividends if, as
and when declared by the Board out of the funds legally available therefore. It
is our present intention to retain earnings, if any, for use in its business.
The payment of dividends on the common stock are, therefore, unlikely in the
foreseeable future.
Preferred
Stock
We have
10,000,000 shares of preferred stock authorized. The preferred stock may be
issued from time to time in one or more series. The Board of Directors shall
have the full authority to determine and state the designations and the relative
rights (including, if any, par value, conversion rights, participation rights,
voting rights, dividend rights, and stated, redemption and liquidation values),
ranking preferences, limitations and restrictions of each such series by the
adoption of resolutions prior to the issuance of each such series authorizing
the issuance of such series. All shares of preferred stock of the same series
shall be identical with each other in all respects, except with respect to the
right to receive dividends which may vary depending on the date of
purchase.
Authorized
And Unissued Stock
The
authorized but unissued shares of our common stock are available for future
issuance without our stockholders' approval. These additional shares may be
utilized for a variety of corporate purposes including but not limited to future
public or direct offerings to raise additional capital, corporate acquisitions
and employee incentive plans. The issuance of such shares may also be used to
deter a potential takeover of the Company that may otherwise be beneficial to
stockholders by diluting the shares held by a potential suitor or issuing shares
to a stockholder that will vote in accordance with the Company’s Board of
Directors' desires. A takeover may be beneficial to stockholders because, among
other reasons, a potential suitor may offer stockholders a premium for their
shares of stock compared to the then-existing market price.
The
existence of authorized but unissued and unreserved shares of preferred stock
may enable the Board of Directors to issue shares to persons friendly to current
management which would render more difficult or discourage an attempt to obtain
control of the Company by means of a proxy contest, tender offer, merger or
otherwise, and thereby protect the continuity of our management.
EXECUTIVE
COMPENSATION
Executive
Compensation
Name
and Principal Position
|
|
Year
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock Awards ($)
|
|
|
Option
Awards ($)(1)
|
|
|
Non-Equity Incentive Plan
Compensation
($)
|
|
|
Nonqualified Deferred Compensation Earnings
($)
|
|
|
All Other Compen-sation
($)
|
|
|
Total
($)
|
|
Fahad
Syed
|
|
2008
|
|
$ |
257,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$ |
257,000
|
|
CEO
and President
|
|
2007
|
|
$ |
335,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
$ |
335,000 |
|
Vasan
Thatham
|
|
2008
|
|
$ |
150,000
|
|
|
|
-0-
|
|
|
|
80,124
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$ |
230,124
|
|
CFO,
Secretary
|
|
2007
|
|
$ |
150,000 |
|
|
|
-0- |
|
|
|
80,124 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
$ |
230,124 |
|
(1) Value
of option awards is the dollar amount recognized for financial statements
reporting purposes with respect for fiscal year 2007 and 2008.
Outstanding
Equity Awards at December 31, 2008
|
|
Option
awards
|
Name
|
|
Number
of securities underlying unexercised options
(#)
exercisable
|
|
|
Number
of securities underlying unexercised options
(#)
unexercisable
|
|
|
Equity
incentive plan awards: Number of securities underlying unexercised
unearned options
(#)
|
|
|
Option
exercise price
($)
|
|
Option
expiration date
|
Vasan
Thatham
|
|
|
225,000 |
|
|
|
75,000 |
|
|
|
0 |
|
|
$ |
1.40 |
|
6/22/2015
|
As of
December 31, 2008, the Company did not have any “Grants of Plan-Based Awards”,
“Option Exercises and Stock Vested”, “Pension Benefits”, or “Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation Plans” to
report.
Potential
Payments Upon Termination or Change in Control
Pursuant
to Fahad Syed’s prior employment agreement with UCA, which was terminated on
March 12, 2009 (the “Old Employment Agreement”), Mr. Syed was to be paid in the
event of a change in control occurred during the employment period. Under the
employment contract a change in control meant (i) any person, entity or
affiliated group becoming the beneficial owner of more than 50% of the
outstanding equity securities of the Company or otherwise becoming the
beneficial owner of outstanding equity securities of the Company having more
than 50% of the voting power of the Company; (ii) a consolidation or merger (in
one transaction or a series of related transactions) of the Company pursuant to
which the holders of the Company’s equity securities immediately prior to such
transaction or series of related transactions would not be the holders
immediately after such transaction or series of related transactions of at least
50% of the voting power of the entity surviving such transaction or series of
related transactions; or (iii) the sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially all
of the assets of the Company.
If a
change in control occurred during the employment period, the Company was to pay
Mr. Syed the aggregate unpaid amount of $225,000, a portion of which Mr. Syed
was to begin receiving in January 2009, within thirty (30) calendar days from
the change in control, unless Mr. Syed, at his election, entered into a new
employment agreement with the Company or its successor within such thirty (30)
calendar day period from the change in control (the “Remaining Additional
Salary”). If Mr. Syed elected to receive the Remaining Additional Salary
as a result of the change in control, Mr. Syed would continue to receive the
Base Salary for the duration of the employment period.
As
described below, Mr. Syed entered into a new employment agreement with the
Company on March 12, 2009 in connection with the Bridge Financing (the “New
Employment Agreement), terminating the Old Employment Agreement effective the
same day, and therefore, Mr. Syed did not receive any payments in connection
with a change in control under his Old Employment Agreement.
Director
Compensation
Name
|
|
Fee earned or paid in cash
|
|
|
Stock Awards ($)
|
|
|
Option
Awards ($)(1)
|
|
|
Non-Equity Incentive Plan
Compensation
($)
|
|
|
Nonqualified Deferred Compensation Earnings
($)
|
|
|
All Other Compensation
($)
|
|
|
Total
($)
|
|
Charlotte
Denenberg
|
|
$ |
12,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
$ |
12,000 |
|
Joseph
Perno
|
|
$ |
12,000
|
|
|
|
-0-
|
|
|
$ |
13,953
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$ |
25,953
|
|
(1) Value
of option awards is the dollar amount recognized for financial statements
reporting purposes with respect for fiscal year 2008.
UCA and
Fahad Syed entered into the New Employment Agreement, which will expire on March
12, 2010, subject to earlier termination provisions. The agreement provides for
an annual base salary of $250,000, with a discretionary cash bonus of up to
$125,000 per year, which bonus shall be determined based upon achievement of
certain individual performance goals. In addition to Fahad Syed’s base salary
and discretionary bonus payment, he shall participate, subject to the closing of
the transactions contemplated in the Option Agreement, in the incentive plan to
be offered to senior executives of the Company pursuant to which he shall be
eligible to receive up to $500,000 per year.
Compensation
Discussion and Analysis
The
Company’s compensation program is designed to provide our executive officers
with competitive remuneration and to reward their efforts and contributions to
the Company. Elements of compensation for our executive officers
include base salary and cash bonuses.
Before we
set the base salary for our executive officers each year, we research the market
compensation for executives in similar positions with similar qualifications and
relevant experience. Company performance does not play a significant
role in the determination of base salary.
Cash
bonuses may also be awarded to our executives on a discretionary basis at any
time. Cash bonuses are also awarded to executive officers upon the
achievement of specified performance targets, including annual revenue targets
for the Company.
2005
Stock Option Plan
In March
2005, our Board of Directors and stockholders adopted our 2005 Stock Option
Plan, pursuant to which 9,000,000 shares of common stock were reserved for
issuance upon exercise of options. Our stock option plan is designed to serve as
an incentive for retaining qualified and competent employees, directors and
consultants. Our Board of Directors or a committee of our Board of Directors
administers our stock option plan and is authorized, in its discretion, to grant
options under our stock option plan to all eligible employees, including our
officers, directors (whether or not employees) and consultants. Our stock option
plan provides for the granting of both "incentive stock options" (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified
stock options. Options can be granted under our stock option plan on such terms
and at such prices as determined by the Board of Directors or its committee,
except that the per share exercise price of options will not be less than the
fair market value of the common stock on the date of grant. In the case of an
incentive stock option granted to a stockholder who owns stock possessing more
than 10% of the total combined voting power of all of our classes of stock, the
per share exercise price will not be less than 110% of the fair market value on
the date of grant. The aggregate fair market value (determined on the date of
grant) of the shares covered by incentive stock options granted under our stock
option plan that become exercisable by a grantee for the first time in any
calendar year is subject to a $100,000 limit. Options granted under our stock
option plan will be exercisable during the period or periods specified in each
option agreement. Options granted under our stock option plan are not
exercisable after the expiration of 10 years from the date of grant (five years
in the case of incentive stock options granted to a stockholder owning stock
possessing more than 10% of the total combined voting power of all of our
classes of stock) and are not transferable other than by will or by the laws of
descent and distribution.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The
Company has not had any change in or disagreements with its accountants on
accounting and financial disclosure.
MANAGEMENT’S DISCUSSION ANALYSIS
OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of
operations applies to NetFabric Holdings, Inc.
The
following discussion and analysis and results of operations should be read in
conjunction with the audited condensed consolidated financial statements and
accompanying notes and the other financial information appearing elsewhere in
this report and reports included herein by reference. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements.
Our
independent registered public accounting firm has indicated in their report,
dated May 11, 2009, on our December 31, 2008 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 Information Statement. The consolidated
financial statements do not include any adjustments that might result from this
uncertainty.
CORPORATE
HISTORY
We were
formerly known as Houston Operating Company and were incorporated in Delaware on
August 31, 1989. On December 9, 2004, we entered into an Acquisition Agreement
with all of the stockholders of NetFabric Corp., a Delaware corporation.
NetFabric Corp. was incorporated in Delaware on December 17, 2002 and began
operations in July 2003. At the closing, which occurred simultaneously with the
execution of the Acquisition Agreement, we acquired all of the issued and
outstanding capital stock of NetFabric Corp. from the stockholders in exchange
for an aggregate of 32,137,032 newly-issued shares of our common stock. The
acquisition was accounted for as a reverse merger whereby NetFabric Corp. was
treated as the acquirer. On April 19, 2005, our name was changed from Houston
Operating Company to NetFabric Holdings, Inc. and our stock symbol was changed
from "HOOC" to "NFBH."
UCA
SERVICES, INC. ACQUISITION
On May
20, 2005, we entered into and closed on a share exchange agreement, whereby we
purchased all of the issued and outstanding shares of UCA Services, Inc., a New
Jersey company (“UCA Services”) from its shareholders in exchange for the
issuance of 24,096,154 shares of our common stock. UCA Services is an IT
services and solutions company that serves the information needs of a wide range
of Fortune 500 clients in the financial markets industry and the pharmaceutical,
health care and hospitality sectors. UCA Services delivers a broad range of IT
services in the areas of managed services, professional services, infrastructure
building and maintenance, application development and maintenance. The
acquisition was accounted for using the purchase method of accounting with UCA
Service’s results of operations included in our consolidated financial
statements from the date of acquisition.
DISCONTINUED
OPERATIONS
Prior to
acquiring NetFabric Corp., Houston Operating Company did not have any
operations, and we were a shell company whose primary business objective was to
merge with an operating company and become public. NetFabric Corp. was a
provider of hardware and services to small to mid-sized businesses ("SMBs") that
utilized the Internet for telephone communications or Voice over Internet
Protocol ("VoIP"). It developed and marketed appliances or Customer Premises
Equipment ("CPE") that simplified the integration of standard telephone systems
with an IP infrastructure. In addition, NetFabric Corp resold transport services
of a third party VoIP transport provider.
Our
operations, prior to the UCA Services acquisition, consisted of developing VoIP
appliances, including research and product development activities. We also hired
additional personnel for sales and marketing and developed our sales and
marketing programs.
With
minimal revenues from VoIP operations, we concluded that we could not implement
our original business plan for VoIP operations within our resources or with the
additional capital we could raise in the near term. On May 5, 2006, our Board of
Directors decided that the Company should exit the hardware-based VoIP
communications product line (including resale of transport services) that is
targeted to SMBs. In accordance with Statement of Financial Accounting Standards
(‘SFAS’) No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", ("SFAS No. 144"), the results of operations from the VoIP business
segment has been reclassified as discontinued operations for all periods
presented. After the discontinuation of VoIP operations, our only operations are
that of UCA Services.
OVERVIEW
OF UCA SERVICES BUSINESS
UCA
Services derives revenues primarily from managed IT services, professional
services, application development services and business process management
services. Service arrangements with customers are generally on a time and
material basis or fixed-price, fixed-timeframe revenue basis. UCA Services
principal operating expenses are direct employee costs, consultant expenses and
selling, general and administrative expenses. The principal components of
selling, general and administrative expenses are salaries of sales and support
personnel, and office rent. Direct employee costs and consultant expenses are
comprised primarily of the costs of consultant labor, including employees,
subcontractors and independent contractors, and related employee benefits.
Approximately 50% of our consultants are employees and the remainder are
subcontractors and independent contractors.
We
compensate most of our consultants only for the hours that we bill to our
clients for projects undertaken, which allows us to better match our labor costs
with our revenue generation. With respect to our consultant employees, we are
responsible for employment-related taxes, medical and health care costs and
workers' compensation. Labor costs are sensitive to shifts in the supply and
demand of IT professionals, as well as increases in the costs of benefits and
taxes.
As
previously noted, the December 9, 2004 acquisition of NetFabric Corp. was
accounted for as a reverse merger whereby NetFabric Corp. was treated as the
acquirer. Accordingly, the historical financial statements of NetFabric Corp.
have been presented for all periods required. NetFabric Corp. began operations
in January 2003 and was a development stage company until the UCA acquisition.
The UCA acquisition was accounted for using the purchase method of accounting
with the results of the operations included in the Company's consolidated
financial statements from the date of acquisition.
Comparison of Three
Months Ended March 31, 2009 and 2008:
Revenues
Revenues for the three months ended March 31, 2009
decreased by $102,920, or 2.1%, compared to the same period of the prior year.
The decrease in revenues were due to non-renewal or termination of
certain projects undertaken in 2008. We
anticipate that our revenues will decrease for fiscal year 2009 due to
non-renewal or termination of certain projects undertaken in
2008.
Direct employee compensation and consultant
expenses.
Excluding non-cash share based compensation, for the three months ended March 31,
2009, our direct employee compensation and consultant expenses
decreased by $144,189, or 3.7% to $3,733,143. The decrease was due to
decreased revenues in 2008. Excluding non-cash share based compensation as a percentage
of revenues, our direct employee compensation and consultant expenses for
the three months ended March 31, 2009 were 76.0%, compared to 77.3% for the
three months ended March 31, 2008. The decrease in employee compensation
and consultant expenses as a percentage of revenues was due to the nature
of projects performed in 2009.
Selling, general and administrative
expenses
Excluding non-cash share based compensation, our
selling, general and administrative expenses increased for the three months
ended March 31, 2009 by $382,685 or 42.9%,
to $1,274,496. The increase in our selling, general and administrative expenses
in 2009 compared to 2008 was, in part, due to expenses incurred in
connection with the Fortify transaction and other transactions,
including certain bonus payments made.
Amortization of debt discount
Amortization of debt discount for the three months ended
March 31, 2009 decreased by $89,504, or 49.3%, from $181,366 to $91,862. The
decrease was due to maturity and repayment of debt that required discounts
of amortization during the
three months ended March 31, 2009.
Depreciation and amortization
For the three months ended March 31, 2009,
depreciation and amortization decreased by $21,818, or 26.3%, from $82,873 to
$61,055.
Debt issuance costs
We paid approximately in $48,000 fees in connection with the Company’s short term
borrowing during the three months ended March 31, 2009, which was charged to
operation. In 2008, we incurred approximately $132,000 in fees. The decrease was
due to repayment of borrowings in 2009.
Interest
expense
For the three months ended March 31, 2009, interest
expense decreased by $53,226, or 47.5%, to $58,798 from $112,024. The decrease
was due to reduction of interest payable to Laurus due to different terms
negotiated with Laurus.
Net loss
As a result of the
foregoing, for the three months ended March 31, 2009, net loss increased by $85,090, or 25.5%, to a loss of $418,701,
compared to a net loss of $333,611 during the three months ended March 31,
2008.
Comparison
of Years Ended December 31, 2008 and 2007:
Revenues
Revenues
for the year ended December 31, 2008 increased by $8,005,152 or 49.3% over the
prior year. The increases in revenues were due to new projects undertaken in
2008. We anticipate that our revenues will decrease for fiscal year 2009 due to
non-renewal or termination of certain projects undertaken in 2008.
Direct
employee compensation and consultant expenses.
Excluding
non-cash share based compensation, for the year ended December 31, 2008, our
direct employee compensation and consultant expenses increased by $6,553,861, or
52.5% to $19,036,780. The increase was due to increased revenues in 2008.
Excluding non-cash share based compensation as a percentage of revenues, our
direct employee compensation and consultant expenses were for the
year ended December 31 2008, 78.6%, compared to 76.9% for the year ended
December 31, 2007. The increase in employee compensation and consultant expenses
as a percentage of revenues was due to the nature of projects performed in
2008.
Selling,
general and administrative expenses
Excluding
non-cash share based compensation, our selling, general and administrative
expenses decreased for the year ended December 31, 2008 by $869,620, or 18.7%,
to $3,793,064. The decrease in our selling, general and administrative expenses
in 2008 compared to 2007 was, in part, due to expense reductions implemented in
the third quarter of 2007. During the year ended December 31 2007, we incurred
approximately $162,000 in expenses ($240,000 including the fair value of shares
of common stock issued) for an acquisition of an entity and the related
financing, which was terminated and the entire amount incurred was
charged to operations during the year ended December 31, 2007.
Amortization
of debt discount
Amortization
of debt discount for the year ended December 31, 2008 increased by $5,289, or
0.7%, from $758,011 to $763,300. At December 31, 2008, the aggregate unamortized
debt discount was $91,862, which will be amortized and charged to operations
over the term of the respective debt.
Depreciation
and amortization
For the
year ended December 31, 2008, depreciation and amortization decreased by
$29,516, or 9.3%, from $316,938 to $287,422.
Debt
issuance costs
We paid
approximately $628,000 fees in connection with the Company’s short term
borrowing during the year ended December 31, 2008, which was charged to
operation. In 2007, we incurred approximately $282,000 in fees. The increase was
due to increased duration of borrowings in 2008.
Interest
expense
For the
year ended December 31, 2008, interest expense increased by $57,519, or 18.3%,
to $372,654 from $315,135. The increase was due to additional interest payable
to Laurus due to different terms negotiated with Laurus.
Debt
inducement costs
In August
2007, we entered into an Agreement to Convert (the “Agreement”) with Fred Nazem,
a stockholder. Pursuant to this Agreement, Mr. Nazem agreed to convert $218,882
due to him in outstanding convertible debentures and accrued interest ($18,882)
into 5,472,050 shares of common stock, including 4,900,394 shares as an
inducement for conversion. The fair value of the inducement to convert
approximated $539,000 and was charged to operations during the year ended
December 31, 2007 as debt inducement costs.
Goodwill
impairment
Pursuant
to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the
Company performed its annual testing of goodwill impairment for the second
quarter ended June 30, 2007. As a part of goodwill impairment testing,
management reviewed various factors, such as the market price of the Company’s
common stock, discounted cash flows from projected earnings and values of
comparable companies to determine whether impairment exists. Based on this
evaluation it was determined that the goodwill was impaired. The
impairment was due to a continued decline in our market
capitalization during the year ended December 31, 2007 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 a carrying value of $10,585,000, indicating an impairment
of $4,881,000. The additional impairment loss was charged to operations during
the three months ended December 31, 2007. In total an impairment loss of
$8,278,451 was charged to operations during the year ended December 31,
2007.
Discontinued
Operations
On May 5,
2006, our Board decided to exit from the hardware-based VoIP communications
product line (including resale of transport services) that is targeted to SMBs.
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No.
144"), the results of operations from the VoIP business segment has been
reclassified as discontinued operations for all periods presented. For the year
ended December 31, 2008, loss from discontinued operations decreased to $0 from
$53,398 in the prior year. Revenues from VoIP operations have been nominal in
all periods presented and operating expenses are the losses
reported.
Net
loss
As a
result of the foregoing, for the year ended December 31, 2008, net loss
decreased by $10,890,318, or 92.2%, to a loss of $920,292, compared to a net
loss of $11,810,610 in the year ended December 31, 2007.
LIQUIDITY
AND CAPITAL RESOURCES
On March 31, 2009, our working capital deficiency was
$6,510,332, compared to a working capital deficiency of $6,212,328 on December
31, 2008. The increase in the working
capital deficiency was, in part, due to losses incurred during the months ended
March 31, 2009. During the three months ended March 31, 2009, our operating
activities used approximately $1,899,000 of cash, compared
to approximately $482,000 provided during the three months ended
March 31, 2008.
During the three months ended March 31, 2009, our
operating losses, after adjusting for non-cash items, used approximately
$152,000 of cash, and working capital items used approximately $1,746,000 of cash. The principal component of these
working capital changes was a decrease in our accounts payable, accrued
compensation and deferred revenue offset by a decrease in accounts receivable.
During the three months ended March 31, 2008, our operating losses,
after adjusting for non-cash items, provided approximately $182,000 of cash, and
working capital items provided approximately $300,000 of
cash.
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.
During
the year ended December 31, 2007, we borrowed an aggregate of $1,170,00 from
five individuals, including $50,000 from a officer and director and repaid
$200,000 of that prior to December 31, 2007. The amount outstanding as of
December 31, 2007 is $970,000 and is due at various dates between January and
February 2008. In January and February 2008, we repaid an aggregate amount of
$620,000. The borrowings are unsecured and bear nominal interest. The Company
paid financing costs of $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, we issued the lenders warrants to acquire an
aggregate of 890,000 shares of our common stock. The warrants expire in three
years from the date of issuance. The relative fair value of the warrants
approximated $68,668 and was recorded as additional discount and is being
amortized over the borrowings. For the year ended December 31, 2007, $68,668, of
debt discount was accreted and recorded as amortization of debt discounts. With
respect to the borrowings from the officer and director, the Company did not
issue any warrants.
During
the year ended December 31, 2008, we 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, we
did not pay any financing costs. The Company repaid all the amounts due at
December 31, 2008 subsequent to the year end.
In
February 2006, we along with our subsidiaries, entered into a Security
Agreement, dated February 10, 2006 ( the "Security Agreement") with Laurus
Master Fund, Ltd., a Cayman Islands company ("Laurus"). Under the Security
Agreement, Laurus purchased from the Company a Secured Convertible Note (the
"Laurus Convertible Note"), with a maturity date of February 10, 2009, in the
aggregate principal amount of $1,500,000, and a Secured Non-Convertible
Revolving Note (the "Laurus Revolving Note") in the aggregate principal amount
of $1,500,000. In 2009, the maturity date was extended to March 31, 2009.The
Laurus Convertible Note and Laurus Revolving Note are collectively referred to
as the "Laurus Notes". Availability under the Laurus Notes is based on an
advance rate equal to 90% of eligible accounts receivable, and Laurus has agreed
to provide us an over advance for a specified period. The Laurus Convertible
Note has a three-year term, and bears interest at 1% above the prime rate, with
a minimum interest rate of 8%. Laurus has the option, but not the obligation, at
any time until the maturity date, to convert all or any portion of the Laurus
Convertible Note and accrued interest thereon into shares of our common stock at
an exercise price of $0.91 per share. If converted in full, we would be
obligated to issue an aggregate of 1,648,352 shares of our common stock to
Laurus. We have the option to prepay the Laurus Convertible Note by paying
Laurus the applicable redemption premium. The Laurus Revolving Note has a
three-year term, and bears interest at 1% above the prime rate, with a minimum
interest rate of 8%.
In
connection with the borrowing, we issued to Laurus a common stock purchase
option (the "Option") to purchase up to 4,256,550 shares of our common stock for
nominal consideration. Additionally, we entered into a registration rights
agreement with Laurus (the "Registration Rights Agreement"), covering the
registration of common stock underlying the Laurus Convertible Note and the
Option. Our obligations under the Laurus Notes are secured by first liens on all
of our assets, and Laurus may accelerate all obligations under the Laurus Notes
upon an event of default.
Our
initial borrowing was approximately $2,300,000 and we utilized approximately
$1,900,000 of the initial borrowing to repay all amounts owed to Cornell
pursuant to the October Convertible Debenture, including a redemption premium.
At December 31, 2008, borrowing with Laurus was approximately $2,919,263 (face
amount).
In
October 2007, we entered into an extensions agreement with Laurus (the
“Extension Agreement’). The Extension Agreement provides for the extension of
the over advance feature until February 2009. However, the over advance amount
will reduce by $5,000 each month from November 2007 to February 2008 and by
$50,000 each month from March of 2008.
In 2008,
we and Laurus entered into two waiver/ amendment agreements, pursuant to which
Laurus waived our non compliance of certain terms of the Security Agreement
including our decision to stop periodic filing reports with the Securities and
Exchange Commission. In exchange for the waivers, we issued Laurus 1,000,000
shares of our common stock. In addition, we 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.
In 2006,
we sold eight Convertible Debentures (the " 2006 Convertible Debentures") in the
face amount of $800,000 to six individuals (the "Debenture Holders" or a
"Debenture Holder") including $150,000 face value to an officer and director,
and $50,000 face value to a stockholder of the Company. In 2006, we
repaid one 2006 Convertible Debenture in the face amount of $100,000. The
Company and the Debenture holders agreed to extension of the term of duration by
months on two occasions in 2006. In January and February 2007, we repaid five of
the seven 2006 Convertible Debentures in the aggregate face amount of $500,000.
In December 2006, we agreed with the officer and director and the stockholders
to extend the term of two of 2006 Convertible Debentures in the face amount of
$200,000 to April 30, 2007. The term of the Convertible Debenture due to the
officer and director was extended to December 31, 2007 was repaid in 2008. In
August 2007, we and the stockholder entered into an agreement to convert $50,000
face amount of 2006 Convertible Debentures into shares of the Company’s common
stock as described below.
On June
8, 2006, we sold a Convertible Debenture in the face amount of $150,000 to a
stockholder (the "Stockholder Convertible Debenture"). In August
2007, we entered into an Agreement to Convert (the “Agreement”) with Fred Nazem,
a stockholder. Pursuant to this Agreement, the stockholder agreed to convert
$218,882 due to him in outstanding convertible debentures and accrued interest
of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394
shares as an inducement for conversion. The principal amount of
$200,000 consisted of $150,000 of Stockholder Convertible Debenture and $50,000
of 2006 Convertible Debenture. The fair value of the inducement to convert
approximated $539,000 and was charged to operations during the year ended
December 31, 2007 as debt extinguishment costs.
We
evaluated several options for obtaining financing to fund our working capital
requirements and to retire our debt upon maturity. We had approximately $3.8
million debt that was due in the first quarter of 2009. After several
discussions and negotiations, we concluded that the most viable option would be
to sell the operations of UCA Services. This would not only provide us financing
but also enable UCA Services to grow to its optimal potential with appropriate
financial backing.
On March
12, 2009, we along with our wholly-owned subsidiary, NetFabric Technologies,
Inc., d/b/a UCA Services, Inc. (“UCA”) entered into a Convertible Note Purchase
Agreement with Fortify Infrastructure Services, Inc. (“Fortify). Pursuant to the
Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible
Promissory Note (the “Note”) from UCA in the principal amount of $5 million with
the Company being a guarantor for UCA’s borrowings.
The Note
has a six-month term, and bears interest at 8% per annum, compounded annually.
The Note is secured by (i) all of the assets of UCA
and the Company, and (ii) all of the equity securities of UCA currently owned or
hereafter acquired by the Company. At the exclusive option of Fortify, Fortify
may convert the entire principal amount of, and accrued and unpaid interest on,
the Note into shares of Series A Preferred Stock of UCA. The
conversion price shall be at a price equal to the price per share reflecting a
valuation of UCA equal to $5 million, on an as-converted basis.
Fortify,
UCA and the Company also entered into a Credit Agreement whereby Fortify agreed
to provide UCA a revolving line of credit of up to $1 million for working
capital purposes. Amounts borrowed under the line of credit are secured by (i) all of the assets of UCA
and the Company and (ii) all of the equity securities of UCA currently owned or
hereafter acquired by the Company.
Fortify,
UCA and the Company also entered into an Option and Purchase Agreement (“Option
Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire
all of the outstanding shares of common stock of UCA upon effectiveness of this
Information Statement. Upon exercise of the Option by Fortify, we
will (a) receive an aggregate purchase price of $500,000, less the amount of accrued
and unpaid interest, if any, on the Note, and (b) be released from the guaranty
obligations of the Note. The Company and certain employees of UCA will also be
eligible to receive earn-out payments in connection with the closing of the
Option based upon achievement of certain financial thresholds during a 24-month
period following the closing.
We used
approximately $3 million from the proceeds of the Note to repay all amounts owed
to Laurus Master Fund. The balance of the proceeds was used for repayment of
debt, other payables and for working capital purposes.
After the
eventual divesture of UCA, we will have no operations. However, the Company will
be debt free. We will explore strategic alternatives, including merging with
another entity. Currently, we do not have any agreement or understanding with
any entity and there is no assurance that such a transaction will ever be
consummated.
FINANCIAL
INFORMATION
FINANCIAL
STATEMENTS
To
facilitate understanding of the financial effect of the Stock Acquisition and
for clarity of presentation, the following financial statements of NetFabric
Holdings, Inc. are detailed below:
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
NetFabric
Holdings, Inc. nd Subsidiaries
Index
to Financial Statements
|
|
Page
|
NetFabric
Holdings Consolidated Financial Statements |
|
|
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
|
NetFabric
Holdings Unaudited Condensed Consolidated Financial
Statements
|
|
|
Balance
Sheet at March 31, 2009 (Unaudited)
|
|
F-26
|
Statement
of Operations (Unaudited) for the three months ended March 31, 2009 and
2008
|
|
F-27
|
Statement
of Cash Flows (Unaudited) for the three months ended March 31, 2009 and
2008
|
|
F-28
|
Noted
to Condensed Consolidated Financials Statements
|
|
F-29
– F-33
|
|
|
|
UCA
Services, Inc. Unaudited Financial Statements
|
|
|
Balance
Sheet at March 31, 2009 and December 31, 2008 and 2007
(Unaudited)
|
|
F-34
|
Statement
of Operations (Unaudited) for the years ended December 31, 2008 and 2007
and for the three months ended March 31, 2009 and 2008
|
|
F-35
|
Statement
of Stockholders’ Equity
(Unaudited)
|
|
F-36
|
Statement
of Cash Flows (Unaudited) for the years ended December 31, 2008 and 2007
and for the three months ended March 31, 2009 and 2008
|
|
F-37
|
Notes
to Financial Statements
|
|
F-38
– F-46
|
|
|
|
NetFabric
Holdings, Inc. Unaudited Pro Forma Financial
Information
|
|
|
Introduction
to Pro Forma
|
|
|
Unaudited
Balance Sheet at March 31, 2009
|
|
|
Unaudited
Pro Forma Statement of Operations for the year ended December 31,
2008
|
|
P-2
|
Unaudited
Pro Forma Statement of Operations for the three months ended March 31,
2009
|
|
P-3
|
Notes
to Unaudited Pro Forma Financial Information
|
|
P-4
|
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
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.
|
|
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.
|
|
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.
|
|
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.
|
|
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.
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.
Cash
and Cash Equivalents
The
Company considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.
Property
and Equipment
Property
and equipment, consisting principally of computer equipment and furniture and
fixtures, are recorded at cost. Depreciation and amortization are provided for
on a straight line basis over the following useful lives:
Equipment
|
3
years
|
Furniture
and fixtures
|
7
years
|
Leasehold
improvements
|
Lesser
of life of lease or useful life
|
Repairs
and maintenance are charged to operations as incurred. When assets are retired
or otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the accounts and any resulting gain or loss is reported in the
period realized.
Long-Lived
Assets
Long-lived
assets, including property and equipment and intangible assets with finite
lives, are monitored and reviewed for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. The determination of recoverability is based on an estimate
of undiscounted cash flows expected to result from the use of an asset and its
eventual disposition. The estimated cash flows are based upon, among other
things, certain assumptions about expected future operating performance, growth
rates and other factors. Estimates of undiscounted cash flows may differ from
actual cash flows due to factors such as technological changes, economic
conditions, and changes in the Company's business model or operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
below the carrying value, an impairment loss is recognized, measured as the
amount by which the carrying value exceeds the fair value of the
asset.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company reduces credit risk by placing its cash and cash equivalents with major
financial institutions with high credit ratings. At times, such amounts may
exceed Federally insured limits. The Company reduces credit risk related to
accounts receivable by routinely assessing the financial strength of its
customers and maintaining an appropriate allowance for doubtful
accounts.
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.
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.
Income
Taxes
Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Deferred tax assets are reduced by a valuation allowance if it is more
likely than not that the tax benefits will not be realized. The ultimate
realization of deferred tax assets depends upon the generation of future taxable
income during the periods in which those temporary differences become
deductible.
Effective
January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes. FIN48 prescribes a more-likely-than-not threshold
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.
As a
result of the implementation of FIN 48, the Company performed a review of its
portfolio of uncertain tax positions in accordance with recognition standards
established by FIN 48. In this regard, an uncertain tax position represents
the Company’s expected treatment of a tax position taken in a filed tax return,
or planned to be taken in a future tax return, that has not been reflected in
measuring income tax expense for financial reporting purposes. Based on its
review, the Company concluded that there are no significant unrecognized tax
positions requiring recognition in the Company’s financial statements. The
Company does not believe there will be any material changes in our unrecognized
tax positions over the next 12 months.
The
Company files federal income tax returns, as well as multiple state, local and
foreign jurisdiction tax returns. The income tax returns are subject to
examinations by tax authorities.
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.
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
On May 5,
2006, the Company announced its decision to exit from the hardware-based VoIP
communications product line (including resale of transport services) that is
targeted at SMB's. In accordance with Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", ("SFAS No. 144"), the Company recorded loss from discontinued
operations of $53,398 for the year ended December 31, 2007. Revenues from VoIP
operations have been nominal in all periods presented and operating expenses are
the losses reported.
NOTE
4. PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consists of the following at December 31:
|
|
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 |
|
Depreciation
and amortization expense was $84,290 and $96,910 for the years ended December
31, 2008 and 2007, respectively.
NOTE
5. INTANGIBLE ASSETS
The
Company's intangible assets consisting of customer contacts and restricted
covenants related to employment agreements were acquired and accounted for using
the purchase method of accounting. The following table summarizes the net asset
value for each intangible asset category as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
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.
Estimated
amortization expense related to intangible assets subject to amortization at
December 31, 2008 for each of the years ending December 31, 2011:
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.
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%.
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.
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.
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.
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.
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.
The
following is a summary of the Company's stock option activity for 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 |
|
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Average
Number of Options
|
|
|
|
|
|
Remaining
Contractual Life
|
|
|
Average
Number of Options
|
|
|
|
|
|
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
|
|
Nonvested
share activity under the Plans was as follows:
|
|
|
|
|
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 |
|
As of
December 31, 2008, the unvested portion of share-based compensation expense
attributable to employees and directors stock options and the period in which
such expense is expected to vest and be recognized is as follows:
Year
ending December 31, 2009
|
|
|
132,966 |
|
|
|
$ |
132,966 |
|
As of
December 31, 2008 options outstanding and vested did not have any intrinsic
value.
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.
NOTE
13. INCOME TAXES
A
reconciliation of the statutory U.S. federal income tax rate to the Company's
effective tax was as follows:
|
|
|
|
|
|
|
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 |
% |
Significant
components of the Company's future tax assets at December 31, 2008 and 2007 are
as follows:
|
|
|
|
|
|
|
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.
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.
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
2009
|
|
|
DECEMBER
31,
2008
|
|
|
|
(Unaudited)
|
|
|
(See
Note)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$ |
495,614 |
|
|
$ |
1,317,510 |
|
Trade
accounts receivable, net
|
|
|
2,704,434 |
|
|
|
3,027,795 |
|
Prepaid
expenses and other current assets
|
|
|
140,796 |
|
|
|
151,595 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,340,844 |
|
|
|
4,496,900 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
125,738 |
|
|
|
132,337 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,704,000 |
|
|
|
5,704,000 |
|
|
|
|
|
|
|
|
|
|
Other
intangibles, net
|
|
|
408,505 |
|
|
|
456,564 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
22,921 |
|
|
|
22,921 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
9,602,008 |
|
|
$ |
10,812,722 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Secured
Convertible Promissory Note
|
|
$ |
5,000,000 |
|
|
|
|
|
Short
term borrowings
|
|
|
|
|
|
|
950,000 |
|
Accounts
payable and accrued liabilities
|
|
|
3,360,231 |
|
|
|
4,697,074 |
|
Accrued
compensation
|
|
|
256,774 |
|
|
|
612,526 |
|
Deferred
revenues and customer advances
|
|
|
1,234,171 |
|
|
|
1,622,227 |
|
Convertible
note, net of unamortized discount
|
|
|
|
|
|
|
1,443,144 |
|
Revolving
note, net of unamortized discount
|
|
|
|
|
|
|
1,384,257 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,851,176 |
|
|
|
10,709,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,851,176 |
|
|
|
10,709,228 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY :
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 par value, authorized shares 200,000,000,
97,053,044 shares issued and outstanding,
respectively
|
|
|
97,053 |
|
|
|
97,053 |
|
Additional
paid-in capital
|
|
|
38,176,201 |
|
|
|
38,110,162 |
|
Accumulated
deficit
|
|
|
(38,522,422 |
) |
|
|
(38,103,721 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficiency)
|
|
|
(249,168 |
) |
|
|
103,494 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
$ |
9,602,008 |
|
|
$ |
10,812,722 |
|
The
accompanying notes should be read in conjunction with the condensed consolidated
financial statements.
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
4,914,322 |
|
|
$ |
5,017,242 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Direct
employee compensation and consultant expenses (includes share based
compensation of $12,415 and $13,738)
|
|
|
3,745,558 |
|
|
|
3,891,070 |
|
Selling,
general and administrative expenses (includes share based compensation of
$53,624 and $59,336)
|
|
|
1,328,120 |
|
|
|
951,147 |
|
Depreciation
and amortization
|
|
|
61,055 |
|
|
|
82,873 |
|
Total
operating expenses
|
|
|
5,134,733 |
|
|
|
4,925,090 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(220,411 |
) |
|
|
92,152 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME / (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of debt discounts
|
|
|
(91,862 |
) |
|
|
(181,366 |
) |
Amortization
of debt issuance costs
|
|
|
(47,630 |
) |
|
|
(132,373 |
) |
Interest
and bank charges
|
|
|
(58,798 |
) |
|
|
(112,024 |
) |
|
|
|
|
|
|
|
|
|
Total
other income / (expense)
|
|
|
(198,290 |
) |
|
|
(425,763 |
) |
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(418,701 |
) |
|
|
(333,611 |
) |
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(418,701 |
) |
|
$ |
(333,611 |
) |
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic and
diluted
|
|
|
97,053,044 |
|
|
|
96,184,912 |
|
The
accompanying notes should be read in conjunction with the condensed consolidated
financial statements.
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(418,701 |
) |
|
|
(333,611 |
) |
Adjustments
to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
Non-cash
charge for employee share based compensation
|
|
|
66,039 |
|
|
|
73,074 |
|
Non-cash
financing fees
|
|
|
|
|
|
|
40,000 |
|
Amortization
of debt discounts
|
|
|
91,862 |
|
|
|
181,366 |
|
Amortization
of debt issuance costs
|
|
|
47,630 |
|
|
|
132,373 |
|
Depreciation
and amortization
|
|
|
61,055 |
|
|
|
82,873 |
|
Loss
on disposal of property and equipment
|
|
|
|
|
|
|
6,249 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
323,361 |
|
|
|
(876,596 |
) |
Prepaid
expenses and other current assets
|
|
|
10,799 |
|
|
|
(7,595 |
) |
Accounts
payable and accrued liabilities
|
|
|
(1,336,842 |
) |
|
|
10,125 |
|
Accrued
compensation
|
|
|
(355,752 |
) |
|
|
(138,124 |
) |
Deferred
revenues and advances
|
|
|
(388,056 |
) |
|
|
1,311,765 |
|
Net
cash provided by (used in) operating activities
|
|
|
(1,898,605 |
) |
|
|
481,899 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from disposal of property and equipment
|
|
|
|
|
|
|
5,981 |
|
Purchases
of property and equipment
|
|
|
(6,398 |
) |
|
|
(2,616 |
) |
Net
cash (used in) provided by investing activities
|
|
|
(6,398 |
) |
|
|
3,365 |
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of Secured Convertible Promissory Note
|
|
|
5,000,000 |
|
|
|
|
|
Repayment
of short term borrowings
|
|
|
(950,000 |
) |
|
|
(570,000 |
) |
Repayment
of convertible note
|
|
|
(1,500,000 |
) |
|
|
|
|
Proceeds
from issuance (repayment) of revolving note, net
|
|
|
(1,419,263 |
) |
|
|
216,063 |
|
Debt
issuance costs
|
|
|
(47,630 |
) |
|
|
(132,373 |
) |
Net
cash (used in) provided by financing activities
|
|
|
1,083,107 |
|
|
|
(486,310 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(821,896 |
) |
|
|
(1,046 |
) |
Cash
at beginning of period
|
|
|
1,317,510 |
|
|
|
15,224 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
495,614 |
|
|
$ |
14,178 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
140,000 |
|
|
$ |
74,000 |
|
The
accompanying notes should be read in conjunction with the condensed consolidated
financial statements.
NETFABRIC
HOLDINGS INC. AND SUBSIDIARIES
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 ("SMBs").
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No.
144"), the 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 8). 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 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 $38,522,422 and has a working capital deficit of
$6,510,332 at March 31, 2009. 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.
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 2009 and continue its business development efforts.
In
March 2009, the company entered into a transaction with Fortify Infrastructure
Services, Inc. See Note 2. 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.
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, 2008, 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, 2009 and March 31, 2008 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, 2008
consolidated financial statements, including the notes thereto, which are
included in the this filing.
RECLASSIFICATIONS
Certain
reclassifications have been made in the prior periods consolidated financial
statements to conform to the current period’s presentation.
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 as of 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.
NETFABRIC
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 its 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 its 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 three clients
representing a total of 68% (39%, 19% and 10%, respectively) of revenues during
the three months ended March 31, 2009.
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 76%
(33%, 31% and 12%, respectively) of total gross accounts receivable as of March
31, 2009.
Earnings
(Loss) Per Share
The
Company calculates earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share" (“SFAS No. 128”). 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 three months ended March 31, 2009 and 2008 exclude
potentially issuable common shares of approximately 9,106,867 and 14,353,856,
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.
NOTE
2. DEBT FINANCINGS
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.
NETFABRIC
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Note has a six-month term, and bears interest at 8% per annum, compounded
annually. The Note is secured by (i) all of the assets of
UCA and the Company and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by the Company. At the exclusive option of Fortify,
Fortify may convert the entire principal amount of, and accrued and unpaid
interest on, the Note into shares of Series A Preferred Stock of
UCA. The conversion price shall be at a price equal to the price per
share reflecting a valuation of UCA equal to $5 million, on an as-converted
basis.
Fortify,
UCA and the Company also entered into a Credit Agreement whereby Fortify agreed
to provide UCA a revolving line of credit of up to $1 million for working
capital purposes. Amounts borrowed under the line of credit are secured by (i) all of the assets of
UCA and the Company and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by the Company.
Fortify,
UCA and the Company also entered into an Option and Purchase Agreement (“Option
Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire
all of the outstanding shares of common stock of UCA upon on effectiveness of
the Company’s Definitive Schedule 14 C Information Statement to be filed with
the Securities and Exchange Commission (the “SEC”) in connection with certain
actions taken by the written consent of holders of a majority of the Company’s
outstanding common stock approving the terms of the Option Agreement, Fortify
will exercise the option. Upon exercise of the Option by Fortify, the Company
will (a) receive an aggregate purchase price of $500,000, less the amount of accrued
and unpaid interest, if any, on the Note, and (b) be released from the guaranty
obligations of the Note. The Company and certain employees of UCA will also be
eligible to receive earn-out payments in connection with the closing of the
Option based upon achievement of certain financial thresholds during a 24-month
period.
The
Company 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.
Debt
Financings consist of the following as of December 31, 2008:
|
|
2008
|
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
Principal
|
|
|
debt
discount
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Laurus
Revolving Note Due in March 2009
|
|
$ |
1,419,263 |
|
|
$ |
(35,006 |
) |
|
$ |
1,384,257 |
|
Laurus
Convertible Note Due in February 2009
|
|
|
1,500,000 |
|
|
|
(56,856 |
) |
|
|
1,443,144 |
|
Short
term borrowings
|
|
|
950,000 |
|
|
|
|
|
|
|
950,000 |
|
|
|
$ |
3,869,263 |
|
|
$ |
(91,862 |
) |
|
$ |
3,777,401 |
|
During
the three months ended March 31, 2009, the Company repaid all of the borrowings
that were outstanding at December 31, 2008.The Company paid financing costs of
$47,630 to third parties and lenders with respect to short term borrowing during
the three months ended March 31, 2009 and this amount was amortized over the
term of the borrowings. During the three months ended March 31, 2009, $47,630
was charged to operations as amortization of debt issuance
costs.
NETFABRIC
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3. STOCKHOLDERS' EQUITY
Warrants
Outstanding
warrant securities consist of the following at March 31, 2009
|
|
|
|
|
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 |
|
December
2008 to June 2011
|
|
|
|
3,106,782 |
|
|
|
|
|
|
(1) No
expiration.
NOTE
4. STOCK-BASED COMPENSATION
Share-based
compensation expense recognized under SFAS 123(R) for the three months ended
March 31, 2009 and 2008 was $66,039 and $73,074, 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.
UCA
Services, Inc.
UNAUDITED
BALANCE SHEETS
|
|
MARCH
31, 2009
|
|
|
DECEMBER
31, 2008
|
|
|
DECEMBER
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
76,578 |
|
|
$ |
1,317,436 |
|
|
$ |
12,393 |
|
Trade
accounts receivable, net
|
|
|
2,709,548 |
|
|
|
3,008,295 |
|
|
|
1,745,838 |
|
Prepaid
expenses and other current assets
|
|
|
141,073 |
|
|
|
151,872 |
|
|
|
7,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,927,199 |
|
|
|
4,477,603 |
|
|
|
1,765,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter
Company balances receivable
|
|
|
|
|
|
|
1,211,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
from NetFabric Holdings, Inc.
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
108,393 |
|
|
|
114,991 |
|
|
|
164,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,704,000 |
|
|
|
5,704,000 |
|
|
|
5,704,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangibles, net
|
|
|
408,505 |
|
|
|
456,564 |
|
|
|
659,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
22,921 |
|
|
|
22,921 |
|
|
|
22,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
14,171,018 |
|
|
$ |
11,987,631 |
|
|
$ |
8,316,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
Convertible Promissory Note
|
|
$ |
5,000,000 |
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
2,755,072 |
|
|
|
3,780,251 |
|
|
|
3,096,868 |
|
Accrued
compensation
|
|
|
256,774 |
|
|
|
414,526 |
|
|
|
373,765 |
|
Deferred
revenues and customer advances
|
|
|
1,234,171 |
|
|
|
1,622,227 |
|
|
|
112,000 |
|
Inter
Company balances payable
|
|
|
|
|
|
|
|
|
|
|
129,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,246,017 |
|
|
|
5,817,004 |
|
|
|
3,711,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,246,017 |
|
|
|
5,817,004 |
|
|
|
3,711,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY :
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, no par value, authorized shares 5,000,000, 3,000,000 shares issued
and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
12,209,073 |
|
|
|
13,652,945 |
|
|
|
13,652,945 |
|
Accumulated
deficit
|
|
|
(7,284,072 |
) |
|
|
(7,482,318 |
) |
|
|
(9,048,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
4,925,001 |
|
|
|
6,170,627 |
|
|
|
4,604,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
14,171,018 |
|
|
$ |
11,987,631 |
|
|
$ |
8,316,242 |
|
See
accompanying notes to consolidated financial statements.
UCA
Services, Inc.
UNAUDITED
STATEMENT OF OPERATIONS
|
|
Year
|
|
|
Year
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
24,225,342 |
|
|
$ |
16,222,688 |
|
|
$ |
4,914,322 |
|
|
$ |
5,013,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
employee compensation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consultant
expenses
|
|
|
19,036,780 |
|
|
|
12,482,919 |
|
|
|
3,733,143 |
|
|
|
3,877,332 |
|
Selling,
general and administrative expenses
|
|
|
3,324,314 |
|
|
|
3,686,609 |
|
|
|
899,351 |
|
|
|
829,838 |
|
Impairment
of goodwill
|
|
|
|
|
|
|
8,278,451 |
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
273,134 |
|
|
|
290,580 |
|
|
|
61,055 |
|
|
|
73,896 |
|
Interest
and bank charges
|
|
|
24,813 |
|
|
|
20,258 |
|
|
|
22,527 |
|
|
|
8,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
1,566,301 |
|
|
|
(8,536,129 |
) |
|
|
198,246 |
|
|
|
223,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
1,566,301 |
|
|
$ |
(8,536,129 |
) |
|
$ |
198,246 |
|
|
$ |
223,532 |
|
See
accompanying notes to consolidated financial statements.
UCA
Services, Inc.
UNAUDITED
STATEMENT OF STOCKHOLDERS EQUITY
|
|
COMMON STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
|
ACCUMULATED
|
|
|
TOTAL
|
|
|
|
SHARES
|
|
|
PAR VALUE
|
|
|
PAID-IN CAPITAL
|
|
|
DEFICIT
|
|
|
STOCKHOLDERS' EQUITY
|
|
Balances
at December 31, 2006
|
|
|
3,000,000 |
|
|
$ |
0 |
|
|
$ |
13,652,945 |
|
|
$ |
(512,490 |
) |
|
$ |
13,140,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,536,129 |
) |
|
|
(8,536,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
|
3,000,000 |
|
|
|
0 |
|
|
|
13,652,945 |
|
|
|
(9,048,619 |
) |
|
|
4,604,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,566,301 |
|
|
|
1,566,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2008
|
|
|
3,000,000 |
|
|
$ |
0 |
|
|
$ |
13,652,945 |
|
|
$ |
(7,482,318 |
) |
|
$ |
6,170,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter
Company balances receivable written off
|
|
|
|
|
|
|
|
|
|
|
(1,443,872 |
) |
|
|
|
|
|
|
(1,443,872 |
) |
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,246 |
|
|
|
198,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at March 31, 2009
|
|
|
3,000,000 |
|
|
$ |
0 |
|
|
$ |
12,209,073 |
|
|
$ |
(7,284,072 |
) |
|
$ |
4,925,001 |
|
See
accompanying notes to consolidated financial statements.
UCA
Services, Inc.
UNAUDITED
STATEMENT OF CASH FLOWS
|
|
Year ended
|
|
|
Year ended
|
|
|
Three Months ended
|
|
|
Three Months ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
1,566,301 |
|
|
$ |
(8,536,129 |
) |
|
$ |
198,246 |
|
|
$ |
223,535 |
|
Impairment
of goodwill
|
|
|
|
|
|
|
8,278,451 |
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
273,134 |
|
|
|
290,580 |
|
|
|
61,055 |
|
|
|
73,896 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
(1,262,457 |
) |
|
|
397,869 |
|
|
|
298,747 |
|
|
|
(878,785 |
) |
Prepaid
expenses and other current assets
|
|
|
(144,708 |
) |
|
|
(2,246 |
) |
|
|
10,799 |
|
|
|
(34,719 |
) |
Other
assets
|
|
|
|
|
|
|
5,953 |
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
683,383 |
|
|
|
84,551 |
|
|
|
(1,025,179 |
) |
|
|
(14,195 |
) |
Accrued
compensation
|
|
|
40,761 |
|
|
|
77,337 |
|
|
|
(157,752 |
) |
|
|
38,154 |
|
Deferred
revenues and advances
|
|
|
1,510,227 |
|
|
|
112,000 |
|
|
|
(388,056 |
) |
|
|
1,311,765 |
|
Net
cash provided by (used in) operating activities
|
|
|
2,666,641 |
|
|
|
708,366 |
|
|
|
(1,002,140 |
) |
|
|
719,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(20,763 |
) |
|
|
(90,550 |
) |
|
|
(6,398 |
) |
|
|
(2,617 |
) |
Net
cash used in investing activities
|
|
|
(20,763 |
) |
|
|
(90,550 |
) |
|
|
(6,398 |
) |
|
|
(2,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Secured Convertible Promissory Note
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
|
|
|
Due
from Netfabric Holdings, Inc- for use of proceeds of Secured Convertible
Promissory Note
|
|
|
|
|
|
|
|
|
|
|
(5,000,000 |
) |
|
|
|
|
(Increase)
decrease in net inter company amounts due
|
|
|
(1,340,835 |
) |
|
|
(612,844 |
) |
|
|
(232,320 |
) |
|
|
(719,088 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(1,340,835 |
) |
|
|
(612,844 |
) |
|
|
(232,320 |
) |
|
|
(719,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
1,305,043 |
|
|
|
4,972 |
|
|
|
(1,240,858 |
) |
|
|
(2,054 |
) |
Cash
at beginning of period
|
|
|
12,393 |
|
|
|
7,421 |
|
|
|
1,317,436 |
|
|
|
12,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
1,317,436 |
|
|
$ |
12,393 |
|
|
$ |
76,578 |
|
|
$ |
10,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
25,000 |
|
|
$ |
20,000 |
|
|
$ |
4,000 |
|
|
$ |
9,000 |
|
See
accompanying notes to consolidated financial statements.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
NOTE
1. NATURE OF BUSINESS
NetFabric
Technologies, Inc., d/b/a UCA Services, Inc.”(UCA) is a New Jersey corporation
and a wholly-owned subsidiary of NetFabric Holdings, Inc. (“NetFabric”). UCA 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.
On May
20, 2005, NetFabric entered into and closed on a share exchange agreement
("Exchange Agreement"), whereby NetFabric acquired all of the issued and
outstanding shares of UCA from its shareholders in exchange for the issuance of
24,096,154 shares of common stock of NetFabric.
In
March 2009, NetFabric and UCA entered into a transaction with Fortify
Infrastructure Services, Inc. See Note. Pursuant the transaction, NetFabric will
transfer its ownership interest in UCA Services.
NOTE
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
Basis
of Presentation of Consolidated Financial Statements and
Estimates
The
financial statements include the accounts of UCA. All 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.
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 rules and regulations of
the Securities and Exchange Commission (“SEC). However UCA 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 UCA's financial position and results of operations. The
operating results for the three months ended March 31, 2009 and March 31, 2008
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
Netfabric's December 31, 2008 consolidated financial statements, including the
notes thereto, which are included in the this filing.
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.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
UCA
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.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
Allowance
for Doubtful Accounts
The
UCA 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. UCA 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 $292,832, respectively. The doubtful
allowance balance at March 31, 2009 was $43,300.
Cash
and Cash Equivalents
UCA
considers all investments with an original maturity of three months or less when
purchased to be cash equivalents.
Property
and Equipment
Property
and equipment, consisting principally of computer equipment and furniture and
fixtures, are recorded at cost. Depreciation and amortization are provided for
on a straight line basis over the following useful lives:
Equipment
|
3
years
|
Furniture
and fixtures
|
7
years
|
Leasehold
improvements
|
Lesser
of life of lease or useful
life
|
Repairs
and maintenance are charged to operations as incurred. When assets are retired
or otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the accounts and any resulting gain or loss is reported in the
period realized.
Long-Lived
Assets
Long-lived
assets, including property and equipment and intangible assets with finite
lives, are monitored and reviewed for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. The determination of recoverability is based on an estimate
of undiscounted cash flows expected to result from the use of an asset and its
eventual disposition. The estimated cash flows are based upon, among other
things, certain assumptions about expected future operating performance, growth
rates and other factors. Estimates of undiscounted cash flows may differ from
actual cash flows due to factors such as technological changes, economic
conditions, and changes in UCA’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 UCA 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. UCA reduces credit risk related to accounts
receivable by routinely assessing the financial strength of its customers and
maintaining an appropriate allowance for doubtful accounts.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
The
UCA'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. UCA had revenues from three clients representing a total of
68% (39%, 19% and 10%, respectively) of revenues during the three months ended
March 31, 2009.
UCA
generally does not require its clients to provide collateral. Additionally, UCA
is subject to a concentration of credit risk with respect to its accounts
receivable. UCA 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, UCA had 3 clients accounting for 68.3% (41%, 14.7% and 12.6%,
respectively) of total gross accounts receivable. UCA had 3 clients accounting
for 76% (33%, 31% and 12%, respectively) of total gross accounts receivable as
of March 31, 2009.
Goodwill
Goodwill
represents the allocation of the cost to acquire UCA by NetFabric in excess of
the fair value of net assets acquired by NetFabric. 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. UCA 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 and March
31, 2009 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. UCA 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. At March 31, 2009, intangible assets were
$408,505.
Fair
Value of Financial Instruments
The
fair values of the UCA’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 2007and March 31, 2009.
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.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
Effective
January 1, 2007, UCA adopted FIN No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes. FIN48 prescribes a more-likely-than-not threshold
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.
As a
result of the implementation of FIN 48, UCA 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 UCA’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, UCA concluded
that there are no significant unrecognized tax positions requiring recognition
in UCA’s financial statements. UCA does not believe there will be any material
changes in our unrecognized tax positions over the next 12
months.
UCA
files federal income tax returns as a part of consolidated returns of NetFabric.
However, UCA files state tax returns. The income tax returns are
subject to examinations by tax authorities.
UCA’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, UCA 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 2007and during
the three months ended March 31, 2009.
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. UCA
adopted SFAS No. 157 effective January 1, 2008 and determined that
it did not have a material effect on our consolidated financial
statements.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. (“FAS 159”) is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in FAS 159. Therefore, calendar-year companies
may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
FAS
159 allows entities to choose, at specified election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required
to be measured at fair value. If a company elects the fair value option for an
eligible item, changes in that item's fair value in subsequent reporting periods
must be recognized in current earnings. FAS 159 also establishes presentation
and disclosure requirements designed to draw comparisons between entities that
elect different measurement attributes for similar assets and liabilities.
Management is currently evaluating the effect of this pronouncement on financial
statements.
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. UCA 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.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
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). UCA 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.
UCA
does not believe that any other recently issued, but not effective, accounting
standards, if currently adopted will have material effect on UCA’s consolidated
financial position, results of operations and cash flows.
NOTE
3. PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consists of the following at :
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$ |
419,698 |
|
|
$ |
415,995 |
|
|
$ |
400,204 |
|
Lease
improvements
|
|
|
106,907 |
|
|
|
106,907 |
|
|
|
106,907 |
|
Furniture
and fixtures
|
|
|
125,018 |
|
|
|
122,324 |
|
|
|
117,352 |
|
|
|
|
651,623 |
|
|
|
645,226 |
|
|
|
624,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(543,231 |
) |
|
|
(530,235 |
) |
|
|
(460,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108,393 |
|
|
$ |
114,991 |
|
|
$ |
164,239 |
|
Depreciation
and amortization expense was $70,011 and $70,565 for the years ended December
31, 2008 and 2007, respectively. For the three months ended March 31,
2009 and 2008, depreciation and amortization was $12,966 and $18,892,
respectively.
NOTE
4. INTANGIBLE ASSETS
UCA'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 March 31, 2009:
|
Amortization
Period
|
|
Gross Asset
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Asset
Value
|
|
Customer
relationship
|
6
years
|
|
$
|
1,153,424
|
|
|
$
|
(744919
|
)
|
|
$
|
408,505
|
|
Covenants
not to compete
|
3
years
|
|
|
83,333
|
|
|
|
(83,333
|
)
|
|
|
-
|
|
|
|
|
$
|
1,236,757
|
|
|
$
|
(780,193
|
)
|
|
$
|
408,505
|
|
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
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. For the three months ended March 31, 2009 and 2008,
amortization expense was $48,059 and $55,004, respectively.
NOTE
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities consist of the following;
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$ |
2,464,978 |
|
|
$ |
3,541,157 |
|
|
$ |
3,007,809 |
|
Accrued
professional fees
|
|
|
290,094 |
|
|
|
239,094 |
|
|
|
89,059 |
|
|
|
$ |
2,755,072 |
|
|
$ |
3,780,251 |
|
|
$ |
3,096,868 |
|
NOTE
6. IMPAIRMENT OF GOODWILL
Goodwill
represents the NetFabric’s investments 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.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
Pursuant
to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), UCA
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 NetFabric’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.
UCA
evaluated its business conditions and future strategic direction including the
delisting of NetFabric’s common shares from trading on the Bulletin Board
(“OTCBB”) and concluded that an interim testing of goodwill is warranted at
December 31, 2007. As a part of the interim goodwill impairment testing,
management reviewed various factors and used a market approach (comparison of
financial data for publicly traded companies engaged in similar lines of
business) to determine whether impairment exists. Based on this evaluation, it
was determined that the goodwill was impaired. The impairment was, in part, due
to decreased values of comparable companies. The implied value of goodwill was
$5,704,000 compared to carrying value of $10,585,000, indicating an impairment
of $4,881,000. The additional impairment loss was charged to operations during
the three months ended December 31, 2007. In total an impairment loss of
$8,278,451 was charged to operations during the year ended December 31,
2007.
NOTE
7. DEBT FINANCINGS
On
March 12, 2009, NetFabric and 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
NetFabric 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 NetFabric and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by NetFabric. 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 NetFabric 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 NetFabric and (ii) all of the equity securities of UCA currently owned
or hereafter acquired by Netfabric.
Fortify,
UCA and Netfabric 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 NetFabric’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 NetFabric’s
outstanding common stock approving the terms of the Option Agreement, Fortify
will exercise the option. Upon exercise of the Option by Fortify, NetFabric 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.
All
proceeds of the borrowing were retained by NetFabric and it 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. The proceeds utilized by
NetFabric at March 31, 2009 have been disclosed as due from NetFabric Holdings,
Inc. in the accompanying balance sheet. Pursuant to the Option Agreement, this
amount will be written off by UCA upon Fortify exercising the
Option.
UCA
Services, Inc.
Notes
to Unaudited Financial Statements
NOTE
8. COMMITMENTS AND CONTINGENCIES
Leases
UCA
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 9, UCA subleased certain office space under an agreement with
UCA Global, Inc. ("Global"), whereby UCA paid rent based on the proportion of
square footage occupied by UCA in the Global office facility. Pursuant to
entering into a lease for a new office premises, UCA 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. For the three months ended March 31, 2009 and 2008, the rent
expense was $37,000.
In
March 2009, UCA entered into an employment agreement with an officer for a term
of two years. The new agreement provides for an annual base salary of $250,000
with additional bonus based on the UCA’s financial performance. Pursuant to the
new employment agreement, if UCA terminates the officer's employment without
cause or good reason, as defined in the employment agreement, UCA will be
obligated to pay a termination benefit as defined in the new employment
agreement
NOTE
9. RELATED PARTY TRANSACTIONS
UCA
subleased certain office space and incurred occupancy related costs under an
agreement with UCA Global, Inc. ("Global"), an entity affiliated with a
shareholder of NetFabric, whereby UCA paid rent and other occupancy costs based
on the proportion of square footage occupied by UCA the Global's office
facility. Rent and occupancy expenses incurred by UCA 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.
NOTE
10. INTER COMPANY BALANCES
For
working capital purposes, UCA borrowed and repaid monies to Netfabric. In
addition, UCA paid for expenses on behalf on of Netfabric and other subsidiaries
of Netfabric and such payments were treated as intercompany loans and advances.
The Intercompany balance represents the net balance due by or due to UCA at the
dates reported on. No interest or financing costs were factored for
intercompany loans and advances. In March 2009, UCA wrote off $1,443,872 of net
intercompany balance due to it and this amount was adjusted to additional
paid-in capital.
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
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.
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
pro forma does not give effect for any additional consideration and excludes
payments related to potential earn outs or other purchase price
adjustment.
Subsequent
to the disposition of UCA, on a pro forma basis, the Company will have total
assets of $436,381 and total liabilities of $611,962. The principal assets will
be cash from the disposition. The liabilities consist 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 March 31, 2009.
For
the purposes of pro forma information, the Company’s statement of operations for
the year ended December 31, 2008 and three months ended March 31, 2009 have 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.
PRO
FORMA CONSOLIDATED BALANCE SHEET
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
March
31, 2009
|
|
Historical
|
|
|
UCA Disposition
Adjustments
|
|
|
Pro
forma
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
495,614 |
|
|
$(76,578
|
)
(1) |
|
$ |
419,036 |
|
Trade
accounts receivable, net
|
|
|
2,704,434 |
|
|
|
(2,704,434 |
)
(1) |
|
|
- |
|
Prepaid
expenses and other current assets
|
|
|
140,796 |
|
|
|
(140,796 |
)
(1) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,340,844 |
|
|
|
(2,921,808 |
) |
|
|
419,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
125,738 |
|
|
|
(108,393 |
)
(1) |
|
|
17,345 |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Goodwill
|
|
|
5,704,000 |
|
|
|
(5,704,000 |
)
(1) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Other
intangibles, net
|
|
|
408,505 |
|
|
|
(408,505 |
)
(1) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Other
assets
|
|
|
22,921 |
|
|
|
(22,921 |
)
(1) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
9,602,008 |
|
|
$ |
(9,165,627 |
) |
|
$ |
436,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
Convertible Promissory Note
|
|
$ |
5,000,000 |
|
|
$ |
(5,000,000 |
)
(2) |
|
|
- |
|
Accounts
payable and accrued liabilities
|
|
|
3,360,231 |
|
|
|
(2,748,269 |
)
(1) |
|
|
611,962 |
|
Accrued
compensation
|
|
|
256,774 |
|
|
(256,774
|
)
(1) |
|
|
- |
|
Deferred
revenues and customer advances
|
|
|
1,234,171 |
|
|
|
(1,234,171 |
)
(1) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,851,176 |
|
|
|
(9,239,214 |
) |
|
|
611,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,851,176 |
|
|
|
(9,239,214 |
) |
|
|
611,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY :
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 par value, authorized shares 200,000,000, 97,053,044 shares
issued and outstanding, respectively
|
|
|
97,053 |
|
|
|
|
|
|
|
97,053 |
|
Additional
paid-in capital
|
|
|
38,176,201 |
|
|
|
|
|
|
|
38,176,201 |
|
Accumulated
deficit
|
|
|
(38,522,422 |
) |
|
|
73,587 |
(3) |
|
|
(38,448,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
- |
|
Total
stockholders' equity (deficit)
|
|
|
(249,168 |
) |
|
|
73,587 |
|
|
|
(175,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$ |
9,602,008 |
|
|
$ |
(9,165,627 |
) |
|
$ |
436,381 |
|
See
accompanying notes to pro forma financial statements.
PRO
FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
UNAUDITED
|
For the year ended December 31,
2008
|
|
Historical
|
|
|
UCA
Disposition Adjustments
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
24,229,023 |
|
|
$ |
(24,229,023 |
) |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED
For
the Three Months Ended March 31, 2009
|
|
Historical
|
|
|
UCA
Disposition
Adjustments
|
|
|
Pro
forma
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
4,914,322 |
|
|
$ |
(4,914,322 |
)
(4) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
employee compensation and consultant expenses (includes share based
compensation of $34,598)
|
|
|
3,745,558 |
|
|
|
(3,733,143 |
)
(4) |
|
|
12,415 |
|
Selling,
general and administrative expenses (includes
|
|
|
1,328,120 |
|
|
|
(899,351 |
) |
|
|
428,769 |
|
Depreciation
and amortization
|
|
|
61,055 |
|
|
|
(61,055 |
)
(4) |
|
|
0 |
|
Total
operating expenses
|
|
|
5,134,733 |
|
|
|
(4,693,549 |
) |
|
|
441,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(220,411 |
) |
|
|
(220,773 |
) |
|
|
(441,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME / (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of debt discounts
|
|
|
(91,862 |
) |
|
|
91,862 |
(5) |
|
|
|
|
Amortization
of debt issuance costs
|
|
|
(47,630 |
) |
|
|
47,630 |
(5) |
|
|
|
|
Interest
and bank charges
|
|
|
(58,798 |
) |
|
|
58,798 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income / (expense)
|
|
|
(198,290 |
) |
|
|
198,290 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(418,701 |
) |
|
|
(22,483 |
) |
|
|
(441,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(418,701 |
) |
|
$ |
(22,483 |
) |
|
$ |
(441,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$ |
(0.01 |
) |
|
|
|
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding, basic and
diluted
|
|
|
97,053,044 |
|
|
|
|
|
|
|
96,837,197 |
|
Note to
Unaudited Pro Forma Condensed Financial Information
|
(1)
|
To
eliminate UCA’s assets and
liabilities.
|
|
(2)
|
To
adjust as sale proceeds of $5,000,000 from the Secured Promissory Note due
to Fortify.
|
|
(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
|
|
$
|
3,053,122
|
|
Operating liabilities
of UCA disposed
|
|
|
(4,239,214
|
)
|
Goodwill
and intangibles disposed
|
|
|
6,112,505
|
|
Net
assets disposed
|
|
|
4,926,413
|
|
|
|
|
|
|
Sale
proceeds
|
|
|
5,000,000
|
|
Gain
on disposal
|
|
$
|
73,587
|
|
|
(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.
|
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
|
June 25,
2009
Barbara
C. Jacobs
Assistant
Director
Division
of Corporate Finance
100 F
Street, N.E.
Washington,
D.C. 20549
|
Re:
|
NetFabric
Holdings, Inc.
Preliminary
Information Statement on Schedule 14C
Filed
May 12, 2009
File
No. 000-31553
|
Dear Ms.
Jacobs:
On behalf
of NetFabric Holdings, Inc., (“NetFabric” or the “Company”), we hereby submit
NetFabric’s response to the comments of the staff (the “Staff”) of the
Securities and Exchange Commission (the “Commission”) set forth in the Staff’s
letter, dated May 20, 2009, regarding the above referenced Preliminary
Information Statement on Schedule 14C.
For the
convenience of the Staff, the Staff’s comments are included herein and are
followed by the corresponding responses of the Company.
General
1.
|
We
note that you have not filed Form 10-Ks for the fiscal years ended
December 31, 2007 and December 31, 2008 or Form 10-Qs for the quarterly
periods ended March 31, 2008, June 30, 2008, September 30, 2008 or March
31, 2009. We remind you of your reporting obligations under Section 13 of
the Securities Exchange Act of 1934 and the filing deadlines of Form 10-K
and Form 10-Q. Please also note that a Form 12b-25 is required to be filed
when a periodic filing will be filed late. Please tell us when you plan to
file all of your delinquent periodic reports. Otherwise, please consider
whether you are eligible to terminate your registration under the
Securities Exchange Act of
1934.
|
On April
1, 2008, the Company filed a Form 8-K with the Commission stating that the
Company could no longer expend its
limited financial resources on meeting its reporting obligations under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). From the date
of that filing, the Company has not filed any annual, quarterly or periodic
reports with the Commission, and it does not plan on filing any subsequent
reports until it has solved its financial resources
needs.
The Company also considered terminating
its registration under the Exchange Act, however, the Company has more
than 300 shareholders of record, and its total assets have exceeded $10 million
on the last day of at least one of its three most recent fiscal
years.
Purpose of Stock
Acquisition, page 8
2.
|
We
note your statement that your board of directors and majority shareholders
chose to engage in the bridge financing and subsequent stock acquisition
“after many deliberations, as well as the Board's diligence regarding the
Company's operating performance.” Please revise your disclosure to provide
a reasonably detailed discussion of all material events that led to and
culminated with the Board's decision to undertake the transactions with
Fortify Infrastructure Services. All material contacts, negotiations and
agreements must be described. See Item 14(b)(7) of Schedule 14A
(applicable to Schedule 14C pursuant to Item 1 thereof) and Item 1005(b)
of regulation M-A. Identify the person(s) who initiated and participated
in the process, and describe the context and nature of each material
event. Also, provide background information on how the purchase price was
determined.
|
Please
see page 8 of the Preliminary Information Statement for the Company’s
response.
Risk Factors, page
16
3.
|
Please
tell us what consideration you gave to including a risk factor discussing
your failure to file periodic reports and the risks this may impose on
investors.
|
The
Company has included a risk factor discussing our failure to file periodic
reports and the risks this may impose on investors in its revised Preliminary
Information Statement on page 19.
Financial Statements, page
38
4.
|
Revise
to provide updated financial statements and relayed disclosures as
required by Rule 3-12 of Regulation S-X. Please also provide financial
statements for UCA, which may be unaudited. For additional guidance,
please see Interpretation 1.H.6 of the Third Supplement to the Division of
Corporation Finance's Manual of Publicly Available Telephone
Interpretations, dated July 2001, available on our website at
www.sec.gov.
|
The
Company has revised its financial statements as requested. Please see page F26
and F34 of the Preliminary Information Statement.
Required Votes, page
39
5.
|
We
note the list of shareholders that have approved the proposals included in
the information statement. Please describe each shareholder's relationship
with the Company. Also, please describe the sequence of events through
which the consents of these shareholders were obtained and provide your
analysis as to whether such activities constitute a solicitation, as
defined in Rule 14a-1(l).
|
Unaudited Pro Forma
Condensed Financial Information, page F-26
6.
|
Pro
forma information for all periods is required for discontinued operations
that are not yet reflected in historical statements. Refer to Rule
11-01(a)(4) of Regulation S-X. Revise to present unaudited pro forma
financial statements for each period presented in the information
statement in order to reflect the discontinuance of UCA’s business on
NetFabric Holding’s historical financial
statements.
|
The
Company has revised its financial statements as requested. Please see page P1 of
the Preliminary Information Statement.
If you
have any questions with regard to the foregoing or require any further
information, please contact me at (212) 536-4802. Because the Company
hopes to complete its offering as soon as practicable, if there is anything that
we can do to expedite your review, please let me know as soon as
possible.
|
Sincerely,
/s/ Uche D.
Ndumele
Uche
D. Ndumele
|
|
Facsimile:
(973) 263-4746
|