UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM
10-Q
x
QUARTERLY REPORT UNDER
SECTION 13 OR 15 (D) OF THE SECURITES
EXCHANGE
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED March 31, 2009
COMMISSION
FILE NUMBER: 0-21419
NETFABRIC
HOLDINGS, INC.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
|
Delaware
|
76-0307819
|
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S
Employer Identification No.)
|
(Address
of Principal Executive Offices)
299
Cherry Hill Road,
Parsippany,
New Jersey 07054
(973)-537-0077
(Issuer's
Telephone Number, Including Area Code)
(Former
address, if changed since last report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15 (d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
¨ No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during
the preceding 12 months ( or for such shorter period that the registrant was
required to submit and post such files) Yes ¨ No x .
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company.
|
Large
accelerated filer o
|
Accelerated
filer o
|
|
Non-
accelerated filer o
|
Small
reporting company x
|
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes x No o
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of August 2, 2010, 97,053,044 shares of
common stock, $.001 par value per share, of the issuer were
outstanding.
Transitional
Small Business Disclosure Format (check one): Yes o No x
NETFABRIC
HOLDINGS, INC.
INDEX
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Page
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements (Unaudited)
|
|
|
Condensed
Consolidated Balance Sheet
|
1
|
|
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Condensed
Consolidated Statements of Operations
|
2
|
|
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Condensed
Consolidated Statements of Cash Flows
|
3
|
|
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Notes
to Interim Condensed Consolidated Financial Statements
|
4
|
|
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
10
|
|
Item
4.
|
Controls
and Procedures
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14
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|
PART
II.
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OTHER
INFORMATION
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14
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|
Item
1.
|
Legal
Proceedings
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14
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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14
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|
Item
3.
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Defaults
Upon Senior Securities
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14
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|
Item
4.
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Submission
of Matters to a Vote of Security Holders
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14
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Item
5.
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Other
Information
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14
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Item
6.
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Exhibits
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15
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Signatures
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16
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NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
|
March 31,
2009
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December 31,
2008
|
|||||||
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(Unaudited)
|
(Audited)
|
|||||||
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ASSETS
|
||||||||
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CURRENT
ASSETS:
|
||||||||
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Cash
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$ | 419,036 | $ | 74 | ||||
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Trade
accounts receivable, net
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- | 18,584 | ||||||
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Current
assets of discontinued operations
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2,927,199 | 4,478,242 | ||||||
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Total
current assets
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3,346,235 | 4,496,900 | ||||||
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Property
and equipment, net
|
17,346 | 17,346 | ||||||
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Non
current assets of discontinued operations
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6,243,809 | 6,298,476 | ||||||
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TOTAL
ASSETS
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$ | 9,607,390 | $ | 10,812,722 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
||||||||
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CURRENT
LIABILITIES:
|
||||||||
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Secured
Convertible Promissory Note
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$ | 5,000,000 | $ | - | ||||
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Short
term borrowings
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- | 950,000 | ||||||
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Accounts
payable and accrued liabilities
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617,344 | 982,502 | ||||||
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Accrued
compensation
|
- | 198,000 | ||||||
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Current
liabilities of discontinued operations
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4,239,214 | 5,751,325 | ||||||
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Convertible
note, net of unamortized discount
|
- | 1,443,144 | ||||||
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Revolving
note, net of unamortized discount
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- | 1,384,257 | ||||||
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Total
current liabilities
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9,856,558 | 10,709,228 | ||||||
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Total
liabilities
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9,856,558 | 10,709,228 | ||||||
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COMMITMENTS
AND CONTINGENCIES
|
||||||||
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STOCKHOLDERS'
EQUITY (DEFICIENCY):
|
||||||||
|
Common
Stock, $.001 par value, authorized shares 200,000,000, 97,053,044 shares
issued and outstanding
|
97,053 | 97,053 | ||||||
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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 | |||||
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
$ | 9,607,390 | $ | 10,812,722 | ||||
See
accompanying notes to interim condensed consolidated financial
statements.
-1-
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(UNAUDITED)
|
Three Months
|
Three Months
|
|||||||
|
Ended
|
Ended
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|||||||
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March 31, 2009
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March 31, 2008
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|||||||
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REVENUE
|
$ | - | $ | - | ||||
|
OPERATING
EXPENSES:
|
||||||||
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Selling, general and
administrative expenses
|
441,184 | 131,367 | ||||||
|
Depreciation
and amortization
|
- | 8,977 | ||||||
|
Total
operating expenses
|
441,184 | 140,344 | ||||||
|
Loss
from operations
|
(441,184 | ) | (140,344 | ) | ||||
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OTHER
INCOME / (EXPENSE):
|
||||||||
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Amortization
of debt discounts
|
(91,862 | ) | (181,366 | ) | ||||
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Amortization
of debt issuance costs
|
(47,630 | ) | (132,373 | ) | ||||
|
Interest
and bank charges
|
(36,271 | ) | (103,063 | ) | ||||
|
Total
other expense
|
(175,763 | ) | (416,802 | ) | ||||
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Loss
before provision for income taxes
|
(616,947 | ) | (557,146 | ) | ||||
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Provision
for income taxes
|
- | |||||||
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LOSS
FROM CONTINUING OPERATIONS
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(616,947 | ) | (557,146 | ) | ||||
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DISCONTINUED
OPERATIONS:
|
||||||||
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Income
from discontinued operations
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198,246 | 223,535 | ||||||
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NET
LOSS
|
$ | (418,701 | ) | $ | (333,611 | ) | ||
|
Net
loss from continuing operations per common share, basic and
diluted
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$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Net
income from discontinued operations per common share, basic and
diluted
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$ | 0.00 | $ | 0.00 | ||||
|
Net
loss per common share, basic and diluted
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$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Weighted
average number of shares outstanding, basic and diluted
|
97,053,044 | 96,184,912 | ||||||
See
accompanying notes to interim condensed consolidated financial
statements.
-2-
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF
CASH FLOWS
(UNAUDITED)
|
Three Months
|
Three Months
|
|||||||
|
Ended
|
Ended
|
|||||||
|
March 31, 2009
|
March 31, 2008
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|||||||
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OPERATING ACTIVITIES
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||||||||
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Net
loss
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$ | (418,701 | ) | $ | (333,611 | ) | ||
|
Income
from discontinued operations
|
(198,246 | ) | (223,535 | ) | ||||
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Adjustments
to reconcile net loss to net cash provided by (used
in) operating activities:
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||||||||
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Share
based compensation
|
66,039 | 73,074 | ||||||
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Non-cash
financing fees
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- | 40,000 | ||||||
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Amortization
of debt discounts
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91,862 | 181,366 | ||||||
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Amortization
of debt issuance costs
|
47,630 | 132,373 | ||||||
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Depreciation
and amortization
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- | 8,977 | ||||||
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Loss
on disposal of property and equipment
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- | 6,249 | ||||||
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Changes
in operating assets and liabilities:
|
||||||||
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Trade
accounts receivable
|
23,975 | 2,189 | ||||||
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Prepaid
expenses and other current assets
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- | 27,124 | ||||||
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Accounts
payable and accrued liabilities
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(370,539 | ) | (255,684 | ) | ||||
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Accrued
compensation
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(198,000 | ) | (176,278 | ) | ||||
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Net
cash used by continuing operations
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(955,980 | ) | (517,756 | ) | ||||
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Net
cash provided by discontinued operations
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298,233 | 989,270 | ||||||
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Net
cash provided by (used in) operating activities
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(657,747 | ) | 471,514 | |||||
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INVESTING
ACTIVITIES
|
||||||||
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Proceeds
from disposal of property and equipment
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- | 5,981 | ||||||
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Net
cash provided by investing activities by continuing
operations
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- | 5,981 | ||||||
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Net
cash used in discontinued operations
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(6,398 | ) | (2,616 | ) | ||||
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Net
cash (used in ) provided by investing activities
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(6,398 | ) | 3,365 | |||||
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FINANCING
ACTIVITIES
|
||||||||
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Proceeds
from issuance of Secured Convertible Promissory Note
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5,000,000 | - | ||||||
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Repayment
of short term borrowings
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(950,000 | ) | (570,000 | ) | ||||
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Repayment
of convertible debenture
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(1,500,000 | ) | - | |||||
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Proceeds
from issuance (repayment) of revolving note, net
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(1,419,263 | ) | 216,063 | |||||
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Debt
issuance costs
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(47,630 | ) | (132,373 | ) | ||||
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Net
cash (used in) provided by financing activities
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1,083,107 | (486,310 | ) | |||||
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Net
increase (decrease) in cash
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418,962 | (11,431 | ) | |||||
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Cash
at beginning of period
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74 | 15,270 | ||||||
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Cash
at end of period
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$ | 419,036 | $ | 3,839 | ||||
|
Supplemental
cash flow information:
|
||||||||
|
Cash
paid for interest
|
||||||||
|
Continuing
operations
|
$ | 57,000 | $ | 65,000 | ||||
|
Discontinued
operations
|
$ | 23,000 | $ | 9,000 | ||||
See
accompanying notes to interim condensed consolidated financial
statements.
-3-
NETFABRIC
HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS
NetFabric
Holdings, Inc. ("Holdings" or the "Company") was incorporated under the laws of
the State of Delaware on August 31, 1989. The Company has two wholly-owned
subsidiaries, NetFabric Corporation (“NetFabric”) which is inactive and UCA
Services, Inc (“UCA”), which was sold in 2009.
On May
20, 2005 Holdings acquired UCA Services, Inc. UCA, 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 delivers a broad range
of IT services in the practice areas of infrastructure builds and maintenance,
managed services and professional services.
Effective
August 24, 2009, pursuant to a Memorandum of Understanding, the Company sold UCA
to Fortify Infrastructure Services, Inc. (“Fortify”) for $5,850,000 consisting
of $5,000,000 in cash, resulting from the cancellation of a $5,000,000 note
previously issued to Fortify by UCA on March 12, 2009, and a receivable of
$850,000, which was paid in May 2010. The Memorandum of Understanding
referred to above was signed on April 27, 2010 and amended the terms of previous
agreements dated March 12, 2009 and August 24, 2009 between UCA and
Fortify.
The
operations of UCA are reflected in the financial statements as discontinued
operations. The 2008 financial statements have been retrospectively adjusted to
reflect the operations of UCA as discontinued operations. Previously they were
reflected in the 2008 financial statements as part of continuing operations
(Note 4).
Management's
plans
As
discussed above, the Company sold UCA to Fortify for $5,850,000. Out of
proceeds from the transaction, the Company repaid all of its debt. After the
sale, the Company does not have any operations. However, the Company will be
debt free. The Company intends to 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. The Company believes that it will be able
to meet its cash requirements throughout fiscal 2010 and continue its business
development efforts.
NOTE
2. BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated interim 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.
-4-
The
operating results for the three months ended March 31, 2009 and, 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
interim financial statements should be read in conjunction with the Company's
December 31, 2008 consolidated financial statements and related notes contained
in the Company's Annual Report on Form 10-K for the year ended December 31,
2008.
Use
of Estimates
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statements of financial condition and revenues and expenses for the
period then ended. Actual results may differ significantly from those
estimates.
Fair
value of financial instruments
The
carrying amounts reported in the condensed consolidated balance sheet for cash,
accounts payable and accrued expenses, and short term borrowings approximate
their fair market value based on the short-term maturity of these
instruments.
Earnings
(Loss) Per Share
The
Company calculates earnings (loss) 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 14,468,856, 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
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (the “Codification”). This standard replaces SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles, and
establishes only two levels of U.S. generally accepted accounting principles
(“GAAP”), authoritative and nonauthoritative. The FASB ASC has become the source
of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the SEC, which are sources of authoritative GAAP for SEC
registrants. All other nongrandfathered, non-SEC accounting literature not
included in the Codification will become nonauthoritative. This standard is
effective for financial statements for interim or annual reporting periods
ending after September 15, 2009. The adoption of the Codification changed the
Company’s references to GAAP accounting standards but did not impact the
Company’s results of operations, financial position or liquidity.
In April
2009, the Company adopted a new accounting standard included in ASC 820,
(formerly FSP 107-1 and Accounting Principles Board (“APB”) 28-1, Interim
Disclosures about Fair Value of Financial Instruments). The new standard
requires disclosures of the fair value of financial instruments for interim
reporting periods of publicly traded companies in addition to the annual
disclosure required at year-end.
-5-
The
provisions of the new standard were effective for the interim periods ending
after June 15, 2009. The Company’s adoption of this new accounting standard did
not have a material effect on the Company’s consolidated financial
statements.
In May
2009, the FASB issued new guidance for subsequent events. The new guidance,
which is part of ASC 855, Subsequent Events (formerly SFAS No. 165, Subsequent
Events) is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this guidance sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The new guidance is effective for fiscal
years and interim periods ended after June 15, 2009 and will be applied
prospectively. The Company’s adoption of the new guidance did not have a
material effect on the Company’s consolidated financial statements. The Company
evaluated subsequent events through the date the accompanying financial
statements were issued.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
NOTE
4. DISCONTINUED OPERATIONS
On March
12, 2009, the Company, along with its wholly owned subsidiary, 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
had a six-month term, and with interest at 8% per annum, compounded annually.
The Note was secured by (i) all of the assets of UCA and the Company and (ii)
all of the equity securities of UCA then owned or thereafter 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 (“Fixed Payment”) one year from the date the option is exercised. In
addition, Fortify will pay additional amounts to the Company (up to a maximum of
$500,000) and certain employees of UCA based on UCA’s performance during the
periods specified in the Option Agreement (“Performance Payment”).
The holders of a majority
of the Company’s outstanding common stock had previously approved the terms of
the Option Agreement by a written consent as detailed in the Company’s
Definitive Schedule 14 C Information Statement filed with SEC on July 9,
2009.
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 was be used for
repayment of debt, other payables and for working capital
purposes.
-6-
On August
24, 2009, the Company along with its wholly-owned subsidiary, UCA and Fortify
entered into Amendment No. 1 (“Amendment”) to the Option and Purchase Agreement
(“Option Agreement”) in connection with the closing of Fortify’s purchase of all
of the outstanding capital stock of UCA upon exercise of its option granted
under the Option Agreement. Pursuant to the Amendment, among other things, the Secured Convertible
Promissory Note in the principal amount of $5 million (including the related
accrued interest) issued by UCA to Fortify was cancelled, releases of certain
obligations of the parties were granted as specified in the Amendment, and the
commencement date and measurement period for the earn-out and bonuses provided
for in the Option Agreement were modified. Effective August 24, 2009, the
Company transferred its ownership interest in UCA to Fortify.
On April
27, 2010, the Company entered into a Memorandum of Understanding (“MOU”) with
Fortify and amended the Fixed Payment and Performance Payment previously agreed
by them. Pursuant to Fortify agreeing to pay the amounts on accelerated basis
unconditionally, the Company agreed to accept $850,000 in
aggregate as the full settlement of Fixed Payment and Performance payments. This
amount was received by the Company in May 2010.
In
accordance with FASB ASC 205-20-45-1 “Presentation of Financial
Statements-Discontinued Operations-Other Presentation Matters” the Company has
presented the results of UCA operations as discontinued operations in the
accompanying consolidated balance sheets, statement of operations and statement
of cash flows.
The
following table sets forth the carrying amounts of the major classes of assets
and liabilities aggregated in discontinued operations in the consolidated
balance sheet were as follows:
|
|
March
31,
|
December
31,
|
||||||
|
2009
|
2008
|
|||||||
|
Cash
|
$ | 76,578 | $ | 1,317,436 | ||||
|
Trade
Receivable, net
|
2,709,548 | 3,008,934 | ||||||
|
Prepaid
expenses and other current assets
|
141,073 | 151,872 | ||||||
|
Current
assets of discontinued operations
|
$ | 2,927,199 | $ | 4,478,242 | ||||
|
Property
and equipment, net
|
$ | 108,383 | $ | 114,991 | ||||
|
Goodwill
|
5,704,000 | 5,704,000 | ||||||
|
Other
intangibles, net
|
408,505 | 456,564 | ||||||
|
Other
assets
|
22,921 | 22,921 | ||||||
|
Non
current assets of discontinued operations
|
$ | 6,243,809 | $ | 6,298,476 | ||||
|
Accounts
payable and accrued expenses
|
$ | 2,748,269 | $ | 3,714,572 | ||||
|
Accrued
compensation
|
256,774 | 414,526 | ||||||
|
Deferred
revenues and customer advances
|
1,234,171 | 1,622,227 | ||||||
|
Current
liabilities of discontinued operations
|
$ | 4,239,214 | $ | 5,751,325 | ||||
-7-
|
Discontinued Operations was as follows:
|
Three Months
|
Three Months
|
||||||
|
Ended
|
Ended
|
|||||||
|
March 31, 2009
|
March 31, 2008
|
|||||||
|
Revenues
|
$ | 4,914,322 | $ | 5,013,562 | ||||
|
Direct
employee compensation and consultant expenses
|
3,733,143 | 3,877,332 | ||||||
|
Selling,
general and administrative expenses
|
899,351 | 829,838 | ||||||
|
Depreciation
and amortization
|
61,055 | 73,896 | ||||||
|
Interest
expenses
|
22,527 | 8,961 | ||||||
|
Income
from discontinued operations
|
$ | 198,246 | $ | 223,535 | ||||
The
Company did not allocate interest on its borrowings to discontinued operations
and the interest expenses of discontinued operations represent interest expenses
incurred by UCA directly.
NOTE
5. DEBT FINANCINGS
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.
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
|
||||||
-8-
NOTE
6. STOCKHOLDERS' EQUITY
Warrants
Outstanding
warrant securities consist of the following at March 31, 2009:
|
Exercise
|
|||||||||
|
Price
|
Expiration
|
||||||||
|
Laurus
Warrants
|
554,282
|
$
|
0.001
|
None
|
|||||
|
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
|
|||||||||
NOTE
7. STOCK-BASED COMPENSATION
Share-based
compensation expense recognized 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 ASC Topic 718: Compensation-Stock Compensation.
-9-
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis and results of operations should be read in
conjunction with the unaudited condensed consolidated financial statements and
accompanying notes and the other financial information appearing elsewhere in
this report and reports included herein by reference. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements.
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."
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 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.
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.
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”) from its shareholders in exchange for the issuance of
24,096,154 shares of our common stock. UCA 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 delivers a broad range of IT services in managed
services, professional services, infrastructure building and maintenance,
application development and maintenance areas. The acquisition was accounted for
using the purchase method of accounting with UCA’s results of operations
included in our consolidated financial statements from the date of
acquisition.
-10-
DISCONTINUED
OPERATIONS
On August
24, 2009, the Company along with its wholly-owned subsidiary, UCA and Fortify
entered into Amendment No. 1 (“Amendment”) to the Option and Purchase Agreement
(“Option Agreement”) in connection with the closing of Fortify’s purchase of all
of the outstanding capital stock of UCA upon exercise of its option granted
under the Option Agreement. Pursuant to the Amendment, among other things, the
Secured Convertible Promissory Note in the principal amount of $5 million
(including the related accrued interest) issued by UCA to Fortify was cancelled,
releases of certain obligations of the parties were granted as specified in the
Amendment, and the commencement date and measurement period for the earn-out and
bonuses provided for in the Option Agreement were modified. Effective August 24,
2009, the Company transferred its ownership interest in UCA to
Fortify.
In
accordance with FASB ASC 205-20-45-1 “Presentation of Financial
Statements-Discontinued Operations-Other Presentation Matters” the Company has
presented the results of UCA operations as discontinued operations in the
accompanying consolidated balance sheet, statement of operations and statement
of cash flows.
UCA
derived revenues primarily from managed IT services, professional services,
application development services and business process management services.
Service arrangements with customers were generally on a time and material basis
or fixed-price, fixed-timeframe revenue basis. UCA’s principal operating
expenses were direct employee costs, consultant expenses and selling, general
and administrative expenses. The principal components of selling, general and
administrative expenses were salaries of sales and support personnel, and office
rent. Direct employee costs and consultant expenses were comprised primarily of
the costs of consultant labor, including employees, subcontractors and
independent contractors, and related employee benefits. Approximately 50% of our
consultants were employees and the remainder are subcontractors and independent
contractors.
We
compensated most of our consultants only for the hours that we bill to our
clients for projects undertaken, which allowed us to better match our labor
costs with our revenue generation. With respect to our consultant employees, we
were responsible for employment-related taxes, medical and health care costs and
workers' compensation. Labor costs were sensitive to shifts in the supply and
demand of IT professionals, as well as increases in the costs of benefits and
taxes.
After the
divesture of UCA, the Company does not have any operations. In the past, our
operations was that of a holding company that housed the finance and
administrative functions and was responsible for financing transactions and
regulatory compliance activities.
Comparison
of Three Months Ended March 31, 2009 and 2008:
Selling,
general and administrative expenses
Our
selling, general and administrative expenses increased for the three months
ended March 31, 2009 by $309,817, or 235.8%, to $441,184. The increase was due
to bonus/ one-time payment to an officer and additional professions fees
incurred in connection with UCA transaction.
Amortization
of debt discount
Amortization
of debt discount for the three months March 31, 2009 decreased by $89,504 or
49.3%, from $181,366 to $91,862. The reduction was due to the maturity of Laurus
debt and by the maturity all discount was amortized. The debt was repaid at the
maturity in March 2009 from the Fortify transaction, and there were no
additional borrowings incurred after the repayment.
-11-
Debt
issuance costs
We paid
approximately $48,000 fees in connection with our 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 during the three months ended
March 31, 2008. The decrease was due to the repayment of short term borrowings
from the Fortify transaction.
Interest
expense
For the
three months ended March 31, 2009, interest expense decreased by $66,792, or
64.8%, to $36,271 from $103,063. The decrease due to the repayment of Laurus and
other debt from the proceeds of the Fortify transaction in March
2009.
Discontinued
Operations
On August
24, 2009, we transferred our ownership interest in UCA to Fortify. In accordance
with FASB ASC 205-20-45-1 “Presentation of Financial Statements-Discontinued
Operations-Other Presentation Matters” we have presented the results of UCA
operations as discontinued operations in the accompanying consolidated balance
sheets, statement of operations and statement of cash flows.
During
the three months ended March 31, 2009, our income from discontinued operations
was $198,246 compared to $223,535 in the comparable period of 2008.
Decreased revenues in UCA due to non- renewal or termination of certain projects
undertaken in 2008 resulted in decreased profits in 2009 compared to
2008.
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.
LIQUIDITY
AND CAPITAL RESOURCES
On March
31, 2009, our working capital deficiency was $6,510,323, compared to a working
capital deficiency of $6,212,328 on December 31, 2008. The increase was due to
the net loss incurred during the three months ended March 31, 2009. During the
three months ended March 31, 2009, our operating activities from continuing
operations used approximately $956,000 of cash, compared to
approximately $518,000 used during the three months ended March 31,
2008.
During
the three months ended March 31, 2009, our continuing operating losses, after
adjusting for non-cash items, used approximately $411,000 of cash, and working
capital items used approximately $545,000 of cash. The principal component of
these working capital changes was a decrease in our accounts payable and accrued
compensation. During the three months ended March 31, 2008, our continuing
operating losses, after adjusting for non-cash items, utilized approximately
$115,000 of cash, and working capital items used approximately $403,000 of
cash.
On March
12, 2009, we, along with our wholly owned subsidiary, 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 us Company being a
guarantor for UCA’s borrowings.
-12-
The
Note had a six-month term, and with interest at 8% per annum, compounded
annually. The Note was secured by (i) all of the assets of UCA and our Company
and (ii) all of the equity securities of UCA then owned or thereafter acquired
by us. 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
our 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 our outstanding
common stock approving the terms of the Option Agreement, Fortify will exercise
the option. Upon exercise of the Option, will be released from the guaranty
obligations of the Note. Fortify will pay us $500,000 (“Fixed Payment”) one year
from the date the option is exercised. In addition, Fortify will pay additional
amounts to us (up to a maximum of $500,000) and certain employees of UCA based
on UCA’s performance during the periods specified in the Option Agreement
(“Performance Payment”).
The holders of a majority
of our outstanding common stock had previously approved the terms of the Option
Agreement by a written consent as detailed in our Definitive Schedule 14 C
Information Statement filed with the SEC on July 9, 2009.
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 be used for repayment of
debt, other payables and for working capital purposes.
On August
24, 2009,we along with its wholly-owned subsidiary, UCA and Fortify entered into
Amendment No. 1 (“Amendment”) to the Option and Purchase Agreement (“Option
Agreement”) in connection with the closing of Fortify’s purchase of all of the
outstanding capital stock of UCA upon exercise of its option granted under the
Option Agreement. Pursuant to the Amendment, among other things, the Secured Convertible
Promissory Note in the principal amount of $5 million (including the related
accrued interest) issued by UCA to Fortify was cancelled, releases of certain
obligations of the parties were granted as specified in the Amendment, and the
commencement date and measurement period for the earn-out and bonuses provided
for in the Option Agreement were modified. Effective August 24, 2009, we
transferred our ownership interest in UCA to Fortify.
On April
27, 2010,we entered into a Memorandum of Understanding (“MOU”) with Fortify and
amended the Fixed Payment and Performance Payment previously agreed by them.
Pursuant to Fortify agreeing to pay the amounts on accelerated basis
unconditionally, we agreed to accept $850,000 in aggregate as the full
settlement of Fixed Payment and Performance payments. This amount was received
us in May 2010
After the
divesture of UCA, we do not have any operations. However, we are debt free. We
will explore strategic alternatives including merger 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.
-13-
ITEM
4. CONTROLS AND PROCEDURES
A.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported, within the time period specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the
reports filed under the Exchange Act are accumulated and communicated to
management, including the Chief Executive Officer ("CEO"") and Chief Financial
Officer ("CFO") , as appropriate, to allow timely decisions regarding required
disclosure. As of the end of the period covered by this report, we carried out
an evaluation, under the supervision and with participation of our management,
including our CEO and CFO, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon and as of the date of that
evaluation, the CEO and CFO concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports we file and submit under the Exchange Act are recorded, processed,
summarized and reported as and when required.
B.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
There
were no changes in our internal controls over financial reporting during the
most recent fiscal quarter that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company from time to time is involved in routine legal matters incidental to
business. In the opinion of management, the ultimate resolution of such matters
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5. OTHER INFORMATION
None
-14-
ITEM
6. EXHIBITS
(a)
Exhibits:
31.1 Rule
13a-14(a)/15d-14(a) Certification (CEO)
31.2 Rule
13a-14(a)/15d-14(a) Certification (CFO)
32.1
Section 1350 Certification (CEO)
32.2
Section 1350 Certification (CFO)
-15-
SIGNATURES
In
accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act , the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
Date: August
13, 2010
|
By:
|
/s/ Fahad Syed
|
|
Name:
Fahad Syed
|
||
|
Title:
Chairman and Chief Executive Officer
|
||
|
By:
|
/s/ Vasan Thatham
|
|
|
Name:
Vasan Thatham
|
||
|
Title:
Principal Financial Officer and Vice
President
|
-16-
EXHIBIT
31.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES OXLEY ACT OF 2002
I, Fahad
Syed certify that:
1. I have
reviewed this Quarterly Report on Form 10-Q of NetFabric Holdings, Inc. (the “
Company”).
2. Based
on my knowledge, this quarterly report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this quarterly report;
4. The
Company's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the Company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the Company's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)
Disclosed in this report any change in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting;
and
5. The
Company's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the Company's
auditors and the audit committee of the Company's board of directors (or persons
performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the Company's ability to record, process, summarize and report
financial information; and
b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the Company's internal control over financial
reporting.
|
August
13, 2010
|
By:
|
/s/ Fahad Syed
|
|
Name:
Fahad Syed
|
||
|
Title:
Chairman and Chief Executive
Officer
|
EXHIBIT
31.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES OXLEY ACT OF 2002
I, Vasan
Thatham certify that:
1. I have
reviewed this Quarterly Report on Form 10-Q of NetFabric Holdings, Inc. (the “
Company”).
2. Based
on my knowledge, this quarterly report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this quarterly report;
4. The
Company's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the Company and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
Evaluated the effectiveness of the Company's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)
Disclosed in this report any change in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting;
and
5. The
Company's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the Company's
auditors and the audit committee of the Company's board of directors (or persons
performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the Company's ability to record, process, summarize and report
financial information; and
b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the Company's internal control over financial
reporting.
|
August 13,
2010
|
By:
|
/s/ Vasan Thatham
|
|
Name:
Vasan Thatham
|
||
|
Title:
Chief Financial Officer
|
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of NetFabric Holdings, Inc. (the “
Company”) on Form 10-Q for the period ended March 31, 2009 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Fahad
Syed certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and result of operations of the Company.
|
August
13, 2010
|
By:
|
/s/ Fahad Syed
|
|
Name:
Fahad Syed
|
||
|
Title:
Chairman and Chief Executive
Officer
|
A signed
original of this written statement required by Section 906 has been provided to
NetFabric Holdings, Inc. and will be retained by NetFabric Holdings, Inc. and
furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of NetFabric Holdings, Inc. (the “Company”)
on Form 10-Q for the period ended March 31, 2009 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Vasan Thatham,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and result of operations of the Company.
|
August
13, 2010
|
By:
|
/s/ Vasan Thatham
|
|
Name:
Vasan Thatham
|
||
|
Title:
Chief Financial Officer
|
A signed
original of this written statement required by Section 906 has been provided to
NetFabric Holdings, Inc. and will be retained by NetFabric Holdings, Inc. and
furnished to the Securities and Exchange Commission or its staff upon
request.