XCel Brands, Inc. - Quarter Report: 2010 September (Form 10-Q)
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 September 30, 2010
COMMISSION
FILE NUMBER: 0-21419
NETFABRIC
HOLDINGS, INC.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
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Delaware
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76-0307819
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|
|
(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 r5eporting
company.
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-
accelerated filer ¨
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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 ¨
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of October 25, 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 ¨ 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)
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|
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Condensed
Consolidated Balance Sheets
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1
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|
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Condensed
Consolidated Statements of Operations
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2
|
|
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Condensed
Consolidated Statements of Cash Flows
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3
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|
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Notes
to Interim Condensed Consolidated Financial Statements
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4
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|
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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8
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Item
4.
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Controls
and Procedures
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12
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PART
II.
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OTHER
INFORMATION
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12
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Item
1.
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Legal
Proceedings
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12
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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12
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Item
3.
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Defaults
Upon Senior Securities
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12
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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12
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Item
5.
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Other
Information
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12
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Item
6.
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Exhibits
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13
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Signatures
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14
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NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, 2010
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DECEMBER 31, 2009
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|||||||
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(UNAUDITED)
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(AUDITED)
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|||||||
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ASSETS
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||||||||
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CURRENT
ASSETS:
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||||||||
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Cash
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$ | 457,463 | $ | 55,509 | ||||
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Prepaid
expenses
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15,000 | - | ||||||
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Other
receivable
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- | 850,000 | ||||||
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Total
current assets
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472,463 | 905,509 | ||||||
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TOTAL
ASSETS
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$ | 472,463 | $ | 905,509 | ||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
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CURRENT
LIABILITIES:
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||||||||
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Accounts
payable and accrued liabilities
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$ | 171,020 | $ | 452,483 | ||||
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Total
current liabilities
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171,020 | 452,483 | ||||||
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Total
liabilities
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171,020 | 452,483 | ||||||
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COMMITMENTS
AND CONTINGENCIES
|
||||||||
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STOCKHOLDERS'
EQUITY :
|
||||||||
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Common
Stock, $.001 par value, authorized shares 200,000,000, 97,053,044 shares
issued and outstanding
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97,053 | 97,053 | ||||||
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Additional
paid-in capital
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38,243,128 | 38,243,128 | ||||||
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Accumulated
deficit
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(38,038,738 | ) | (37,887,155 | ) | ||||
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Total
stockholders' equity
|
301,443 | 453,026 | ||||||
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 472,463 | $ | 905,509 | ||||
See
accompanying notes to interim condensed consolidated financial
statements.
-1-
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
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Three Months
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Three Months
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Nine Months
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Nine Months
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|||||||||||||
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Ended
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Ended
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Ended
|
Ended
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|||||||||||||
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September 30, 2010
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September 30, 2009
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September 30, 2010
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September 30, 2010
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|||||||||||||
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REVENUES
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$ | - | $ | - | $ | - | $ | - | ||||||||
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OPERATING
EXPENSES:
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||||||||||||||||
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Selling,
general and administrative expenses (includes share based compensation of
$0, $888, $0 and $132,966)
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45,483 | 85,202 | 151,583 | 709,724 | ||||||||||||
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Total
operating expenses
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45,483 | 85,202 | 151,583 | 709,724 | ||||||||||||
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Loss
from operations
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(45,483 | ) | (85,202 | ) | (151,583 | ) | (709,724 | ) | ||||||||
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OTHER
INCOME / (EXPENSE):
|
||||||||||||||||
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Amortization
of debt discounts
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- | - | - | (91,862 | ) | |||||||||||
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Amortization
of debt issuance costs
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- | - | - | (47,630 | ) | |||||||||||
|
Other
income
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- | 160,000 | - | 160,000 | ||||||||||||
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Interest
and bank charges
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- | - | - | (36,270 | ) | |||||||||||
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Total
other income/ (expense)
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- | 160,000 | - | (15,762 | ) | |||||||||||
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Income
(loss) before provision for income taxes
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(45,483 | ) | 74,798 | (151,583 | ) | (725,486 | ) | |||||||||
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Provision
for income taxes
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- | 120,000 | - | 120,000 | ||||||||||||
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LOSS
FROM CONTINUING OPERATIONS
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(45,483 | ) | (45,202 | ) | (151,583 | ) | (845,486 | ) | ||||||||
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DISCONTINUED
OPERATIONS:
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||||||||||||||||
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Gain
from disposal of discontinued operations
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770,608 | 770,608 | ||||||||||||||
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Income
from discontinued operations
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- | 165,977 | - | 346,001 | ||||||||||||
| - | 936,585 | - | 1,116,609 | |||||||||||||
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NET
INCOME (LOSS)
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$ | (45,483 | ) | $ | 891,383 | $ | (151,583 | ) | $ | 271,123 | ||||||
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Net
loss from continuing operations per common share, basic and
diluted
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$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | ||||
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Net
income from discontinued operations per common share, basic and
diluted
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$ | 0.00 | $ | 0.01 | $ | 0.00 | $ | 0.01 | ||||||||
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Net
income (loss) per common share, basic and diluted
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$ | (0.00 | ) | $ | 0.01 | $ | (0.00 | ) | $ | 0.00 | ||||||
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Weighted
average number of shares outstanding, basic and diluted
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97,053,044 | 97,053,044 | 97,053,044 | 97,053,044 | ||||||||||||
See
accompanying notes to interim condensed consolidated financial
statements.
-2-
NETFABRIC
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months
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Nine Months
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|||||||
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Ended
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Ended
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|||||||
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September 30, 2010
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September 30, 2009
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|||||||
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OPERATING ACTIVITIES
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||||||||
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Net
income (loss)
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$ | (151,583 | ) | $ | 271,123 | |||
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Income
from discontinued operations
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- | (1,116,609 | ) | |||||
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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
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- | 132,966 | ||||||
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Amortization
of debt discounts
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- | 91,862 | ||||||
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Amortization
of debt issuance costs
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- | 47,630 | ||||||
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Loss
on disposal of property and equipment
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- | 17,346 | ||||||
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Changes
in operating assets and liabilities:
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||||||||
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Trade
accounts receivable
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18,584 | |||||||
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Other
receivables
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850,000 | - | ||||||
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Prepaid
expenses and other current assets
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(15,000 | ) | (109,300 | ) | ||||
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Accounts
payable and accrued liabilities
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(281,463 | ) | (525,947 | ) | ||||
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Accrued
compensation
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- | (198,000 | ) | |||||
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Net
cash provided by (used in) continuing operations
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401,954 | (1,370,345 | ) | |||||
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Net
cash provided by discontinued operations
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- | 292,002 | ||||||
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Net
cash provided by (used in) operating activities
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401,954 | (1,078,343 | ) | |||||
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INVESTING
ACTIVITIES
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||||||||
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Net
cash used by discontinued operations
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- | - | ||||||
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Net
cash used in investing activities
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- | - | ||||||
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FINANCING
ACTIVITIES
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||||||||
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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 | ) | |||||
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Repayment
of convertible debenture
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- | (1,500,000 | ) | |||||
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Repayment
of revolving note, net
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- | (1,419,263 | ) | |||||
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Debt
issuance costs
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- | (47,630 | ) | |||||
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Net
cash provided by financing activities
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- | 1,083,107 | ||||||
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Net
increase in cash
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401,954 | 4,764 | ||||||
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Cash
at beginning of period
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55,509 | 74 | ||||||
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Cash
at end of period
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$ | 457,463 | $ | 4,838 | ||||
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Supplemental
cash flow information:
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||||||||
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Cash
paid for interest
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||||||||
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Continuing
operations
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$ | - | $ | 57,000 | ||||
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Discontinued
operations
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$ | - | $ | 13,000 | ||||
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Income
taxes paid
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$ | 131,000 | $ | - | ||||
See
accompanying notes to interim condensed consolidated financial
statements.
-3-
NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. As of December 31, 2009 the
Company had one wholly-owned subsidiary, NetFabric Corporation (“NetFabric”)
which is not active. At December 31, 2008, the Company had another active
subsidiary UCA Services, Inc (“UCA”), which was sold in 2009.
On May
20, 2005 Holdings acquired UCA. 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, and is reflected as a receivable on the
2009 balance sheet. 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 (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 interim 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, 2009, 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 nine and three months ended September 30, 2010
and, 2009 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, 2009 consolidated financial statements, including the
notes thereto, which are included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2009 filed on August 10,
2010.
-4-
Use
of Estimates
The
condensed consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States. 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 balance sheet for cash and accounts payable and
accrued expenses 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 or exercise of
warrants.
Diluted
loss per share for the nine months ended September 30, 2010 and 2009
exclude potentially issuable common shares of approximately 6,456,867
and 7,856,867, respectively, primarily related to the Company's outstanding
stock options and warrants, because the assumed issuance of such potential
common shares is antidilutive.
NOTE
3: RECENT ACCOUNTING PRONOUNCEMENTS
In
January 2010, the FASB issued amended standards that require additional
fair value disclosures. These amended standards require disclosures about inputs
and valuation techniques used to measure fair value as well as disclosures about
significant transfers, beginning in the first quarter of 2010. The Company
adopted these amended standards on January 1, 2010, and there was no impact
to the financial statements upon adoption. Additionally, these amended standards
require presentation of disaggregated activity within the reconciliation for
fair value measurements using significant unobservable inputs (Level 3),
beginning in the first quarter of 2011. The Company does not expect these new
standards to significantly impact the financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s financial position, results of operations or cash flows.
-5-
NOTE
4. DISCONTINUED OPERATIONS
As
discussed in Note 1, the Company sold its subsidiary, UCA, in August 2009, and
does not presently have any operations.
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.
|
Discontinued
operations were as follows:
|
Three
Months
|
Nine
Months
|
||||||
|
Ended
|
Ended
|
|||||||
|
September
30,
2009
|
September
30,
2009
|
|||||||
|
Revenues
|
$
|
2,468,394
|
$
|
11,482,220
|
||||
|
Direct
employee compensation and consultant expenses
|
1,854,743
|
8,709,186
|
||||||
|
Selling,
general and administrative expenses
|
519,295
|
2,253,452
|
||||||
|
Depreciation
and amortization
|
38,976
|
160,323
|
||||||
|
Interest
expenses
|
(110,597
|
)
|
13,258
|
|||||
|
(Loss)
income from discontinued operations
|
$
|
165,977
|
$
|
346,001
|
||||
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. UCA had accrued interest expense due on Fortify Note
and Fortify waived payment of this interest. Accordingly, previously accrued
interest was reversed during the three months ended September 30,
2009.
NOTE
5. DEBT FINANCINGS
During
the nine months ended September 30, 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 nine months ended September 30, 2009 and this
amount was amortized over the term of the borrowings. During the nine months
ended September 30, 2009, $47,630 was charged to operations as amortization of
debt issuance costs.
NOTE
6. STOCKHOLDERS' EQUITY
Warrants
Outstanding
warrant securities consist of the following at September 30, 2010:
|
Exercise
|
|||||||||
|
Price
|
Expiration
|
||||||||
|
Laurus
Warrants
|
554,282
|
$
|
0.001
|
None
|
|||||
|
2007
Short Term Financing
|
390,000
|
$
|
0.01
|
November
2010
|
|||||
|
Investment
advisor’s services
|
312,500
|
$
|
0.82
|
June
2011
|
|||||
|
1,256,782
|
|||||||||
-6-
NOTE
7. STOCK-BASED COMPENSATION
Share-based
compensation expense recognized for the three and nine months ended September
30, 2009 was $888, and $132,966, respectively. No compensation expense was
recognized in the three and nine months ended September 30,
2010. 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 .
NOTE
8. OTHER INCOME
During
the three and nine months ended September 30, 2009, the Company entered into
legal settlements with certain vendors applicable to old accounts payable, and
evaluated estimates of certain accruals, mad in prior years. Based on the
settlements and evaluation, the Company wrote off approximately $160,000 of old
accounts payable and accruals, which was recorded as other income.
-7-
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.
-8-
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 sheets, 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 remainders 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 and Nine Months Ended September 30, 2010 and 2009:
Selling,
general and administrative expenses
Our
selling, general and administrative expenses for the three months ended
September 30, 2010 decreased by $39,719, or 46.6%, to $45,483. For the nine
months ended September 30, 2010, our selling, general and
administrative expenses decreased by $558,141 or 78.6% compared to the
comparable period in 2009. Our selling, general and administrative expense
levels decreased due to reduced level of operations after the divesture of UCA
in August of 2009.
Amortization
of debt discount
We repaid
Laurus debt in March 2009 from the proceeds of Fortify transaction, and there
were no additional borrowings incurred after the repayment. Therefore, we did
not incur any debt discount during the three and nine months ended September 30,
2010 compared to $0, and $91,862, respectively, incurred during the comparable
period in 2009.
-9-
Debt
issuance costs
Due to
the repayment of short term borrowings from the proceeds of Fortify transaction
in March 2009, we incurred no debt issuance costs in 2010 compared to $47,630
incurred during the nine months ended September 30, 2009.
Interest
expense
Pursuant
to repayment of all debt in March 2009, we are debt free. Accordingly, we do not
have any interest expense during the three and nine months ended
September 30, 2010 compared to $0 and $36,270 interest expense during
the three months and nine months ended September 30, 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.
We
recorded a gain of $770,608 from the disposal of UCA during the three and nine
months ended September 30, 2009. this was based on the sale price of UCA and net
assets of UCA transferred.
During
the three months ended September 30, 2009, our income from discontinued
operations was $165,977. For the nine months ended
September 30, 2009 our income from discontinued operations was
$346,001.
Net
loss
As a
result of the foregoing, for the three months ended September 30, 2010, net
income decreased by $936,866, or 105.1%, to a loss of $45,483, compared to a net
income of $891,383 during the three months ended September 30, 2009. For the
nine months ended September 30, 2010, our net income decreased by $422,706 or
155.9% to a loss of $151,583 compared to a net income of $271,123 during the
nine months ended September 30, 2009.
LIQUIDITY
AND CAPITAL RESOURCES
On
September 30, 2010, our working capital was $301,443, compared to a working
capital of $453,026 on December 31, 2009. The decrease was due to the net loss
incurred during the nine months ended September 30, 2010. During the nine months
ended September 30, 2010, our operating activities from continuing operations
provided approximately $402,000 of cash, compared to approximately
$1,370,000 used during the nine months ended September 30, 2009. We
received $850,000 of other receivable from Fortify during the nine months ended
September 30, 2010.
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 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 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.
-10-
Fortify,
UCA and we 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, the Company 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 Securities and
Exchange Commission (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 and $850,000 is classified as other receivable at December 31,
2009.
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.
-11-
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
-12-
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)
-13-
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:
November 4, 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
|
-14-