UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB/A
Amendment
No. 2
(Mark
One)
x
|
Annual
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
for
the fiscal year ended December 31,
2007
|
o
|
Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
for
the transition period from ______ to
______
|
Commission
file number 0-16206
NEW
WORLD BRANDS, INC.
(Name
of
small business issuer in its charter)
Delaware
|
|
02-0401674
|
State or other jurisdiction of
incorporation or organization
|
|
(I.R.S. Employer
Identification No.)
|
340 W. 5
th
Avenue,
Eugene, OR 97401
|
(Address, including zip code, of principal executive offices)
|
(541)
868-2900
(Issuer’s
telephone number)
Securities registered
under Section 12(b) of the Exchange Act: None.
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$0.01 per share.
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
Yes
o
No
x
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
x
No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of the Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Yes
o
No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
Issuer’s
revenues for its most recent fiscal year: $17,101,203.
The
aggregate market value of the voting and non-voting Common Stock held by
non-affiliates (42,450,484 shares as of March 26, 2008) computed by reference
to
the closing price of the Common Stock as of March 26, 2008 ($0.07): $2,971,534.
The
number of shares outstanding of each of the issuer’s classes of common equity,
as of the last practicable date: 414,979,673 shares of Common Stock, $0.01
par
value per share, as of March 26, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Transitional
Small Business Disclosure Format (Check one): Yes
o
No
x
EXPLANATORY
NOTE
New
World
Brands, Inc. (the “Company”) is filing this Amendment No. 2 on Form 10-KSB/A
(the “Amendment No. 2”) to its Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2007, originally filed with the Securities and Exchange
Commission on April 16, 2008 (the “Original Report”) and amended on May 13, 2008
(the “Amendment No. 1”), to amend Item 8A regarding the Company’s controls and
procedures.
The
Amendment No. 2 does not otherwise amend, update, or change any other items
or
disclosures contained in the Original Report or the Amendment No.
1.
TABLE
OF CONTENTS
Part
I
|
|
|
|
Item
1. Description of Business
|
6
|
Item
2. Description of Property
|
30
|
Item
3. Legal Proceedings
|
30
|
Item
4. Submission of Matters to a Vote of Security Holders
|
31
|
|
|
Part
II
|
|
|
|
Item
5. Market for Common Equity and Related Stockholder Matters and
Small
Business Issuer Purchases of Equity Securities
|
32
|
Item
6. Management’s Discussion and Analysis or Plan of Operation
|
35
|
Item
7. Financial Statements
|
49
|
Item
8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
|
49
|
Item
8A(T). Controls and Procedures
|
49
|
Item
8B. Other Information
|
50
|
|
|
Part
III
|
|
|
|
Item
9. Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the Exchange
Act
|
51
|
Item
10. Executive Compensation
|
54
|
Item
11. Security Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
|
57
|
Item
12. Certain Relationships and Related Transactions, and Director
Independence
|
60
|
Item
13. Exhibits
|
61
|
Item
14. Principal Accountant Fees and Services
|
61
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Signatures
|
63
|
PART
I
General
References
in this Annual Report on Form 10-KSB/A (the “
Report
”)
to the
“
Company
,”
“we,”
“us,” “our” and similar words are to New World Brands, Inc., commencing with the
acquisition of Qualmax, Inc., a Delaware corporation (“
Qualmax
”),
and,
with
respect to prior historical financial information, to Qualmax.
The
results of operations of the company’s former subsidiary, IP Gear, Ltd.
(“
IP
Gear, Ltd
.”)
are
reported as discontinued operations, as a result of our sale of IP Gear, Ltd.
effective July 1, 2007.
The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our results of operations
and
financial operations. This discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto appearing
elsewhere herein, and with our prior filings with the Securities Exchange
Commission (the “SEC”).
We
entered into a transaction with Qualmax on September 15, 2006, discussed in
more
detail below, that constituted a substantial change in our business, from wine
and spirits distribution to telecommunications technology development, sales
and
services. We therefore recommend that you review with particular attention
our
filings with the Securities Exchange Commission from June 2006 forward, to
the
extent they describe the change in our business and related recent
activities.
Disclosure
Regarding Forward-Looking Statements
We
caution readers that this Report contains “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements, written, oral or otherwise, are based on the
Company’s current expectations or beliefs rather than historical facts
concerning future events, and they are indicated by words or phrases such as
(but not limited to) “anticipate,” “could,” “may,” “might,” “potential,”
“predict,” “should,” “estimate,” “expect,” “project,” “believe,” “think,”
“intend,” “plan,” “envision,” “continue,” “intend,” “target,” “contemplate,” or
“will” and similar words or phrases or comparable terminology. Forward-looking
statements involve risks and uncertainties. The Company cautions that these
statements are further qualified by important economic, competitive,
governmental and technological factors that could cause the Company’s business,
strategy, or actual results or events to differ materially, or otherwise, from
those in the forward-looking statements. We have based such forward-looking
statements on our current expectations, assumptions, estimates and projections,
and therefore there can be no assurance that any forward-looking statement
contained herein, or otherwise made by the Company, will prove to be accurate.
The Company assumes no obligation to update the forward-looking statements.
The
Company has a short operating history and is operating in a rapidly changing
industry environment, and its ability to predict results or the actual effect
of
future plans or strategies, based on historical results or trends or otherwise,
is inherently uncertain.
While
we
believe that these forward-looking statements are reasonable, they are merely
predictions or illustrations of potential outcomes, and they involve known
and
unknown risks and uncertainties, many beyond our control, that are likely to
cause actual results, performance, or achievements to be materially different
from those expressed or implied by such forward-looking statements.
Factors
that could have a material adverse affect on the operations and future prospects
of the Company on a condensed basis
include
those factors discussed under Item 1, “
Description
of Business—Certain Risk Factors
”
and
Item 6, “Management’s Discussion and Analysis or Plan of Operation” in this
report
,
and
include, but are not limited to
,
the
following:
·
|
A
downturn in the market for, or supply of, our core products and services,
could reduce our revenue and gross profit margin by placing downward
pressure on prices and sales volume, and we may not accurately anticipate
changing supply and demand
conditions;
|
·
|
We
have a limited backlog, or “pipeline,” of product and services sales, and
we do not control the manufacturing of the core products we distribute
and
sell, exposing our future revenues and profits to fluctuations and
risks
of supply interruptions or rapid declines in
demand;
|
·
|
We
have recurring quarterly and annual losses and continuing negative
cash
flow, which may continue, potentially requiring us to either raise
additional capital or reduce costs relative to gross
margins;
|
·
|
We
may not be able to raise necessary additional capital, and may not
be able
to reduce costs sufficiently to reverse our negative cash flow, absent
additional capital;
|
·
|
If
we are successful in raising additional capital, it will likely dilute
current shareholders’ ownership;
|
·
|
We
may not be able to effectively contain corporate overhead and other
costs,
including the costs of operating a public company, relative to our
profits
and cash; and
|
·
|
Changes
in laws or regulations, or regulatory practices, in the United States
and
internationally, may increase our costs or may prohibit continued
operations or entry into some areas of
business.
|
You
are
cautioned not to rely on these forward-looking statements as facts or as events
likely to occur. Forward-looking statements are made and are valid only as
of
the date they were made.
Actual
results may differ materially from those included in the forward-looking
statements.
We
undertake no obligation to update or revise any forward looking statements
to
reflect new information or the occurrence of unanticipated events or
otherwise.
ITEM
1.
DESCRIPTION
OF BUSINESS
Overview
of Business
We
are a
telecommunications sales and service company, focusing on products and services
utilizing Voice over Internet Protocol (“
VoIP
”)
technology. As a result of the sale of our former subsidiary, IP Gear, Ltd.,
we
are no longer in the VoIP equipment research and development (“
R&D
”)
and
manufacturing business, and instead currently focus on two principal lines
of
business: (i) resale and distribution of VoIP and other telephony equipment,
and
related professional services, particularly as the exclusive North American
distributor of products manufactured by TELES AG Informationstechnologien
(“
TELES
”)
and IP
Gear, Ltd.; and (ii) telephony service resale, direct call routing and carrier
support. Our VoIP-related telecommunications equipment distribution and resale
business, formerly operated under the divisional name “IP Gear,” is now operated
under the divisional name “
NWB
Networks
.”
Our
wholesale international VoIP service business, formerly operated under the
name
“
IP
Gear
Connect,
”
is
now
operated under the name “
NWB
Telecom
.”
Both
NWB Networks and NWB Telecom are based in Eugene, Oregon.
The
following are certain key industry or technical terms used throughout this
Report in describing the Company’s current business and in discussing its
prospects in the VoIP equipment and services market:
“
VoIP
,”
or
Voice over Internet Protocol, also called IP Telephony, Internet telephony,
Broadband telephony, Broadband Phone, Voice over Broadband or voice over packet
networks, is the
routing
of
voice
conversations over the
Internet
or
through any other internet protocol (“
IP
”)
based
network. “
GSM
”
is
short for Global System for Mobile Communications, a leading digital
cellular
system
using
narrowband
TDMA
(time
division multiple access) that has become a cellular standard in Europe and
Asia.
“IP
networks”
are
telecommunication systems (consisting of transmission lines or devices, and
components including gateways, routers, switches, and servers) by which a number
of computers are connected together for the purpose of communicating and sharing
data and/or software applications. The fundamental equipment components of
IP
networks, and the products we sell, include:
gateways
,
enabling access to IP networks as a translation unit between disparate
telecommunications networks;
routers
and
switches
,
to
direct data traffic on, to and from IP networks; and
servers
,
computers that operate IP communications software applications, process and
store data traversing IP networks, and provide computing functions to other
computers.
“
IP
Telephony
”
uses
an
IP
network to perform voice communications that have traditionally been conducted
by conventional private branch exchange (
PBX
)
telephone systems, or “key systems” primarily used in smaller telephone systems,
used by enterprises and by the public switched telephone network (the
PSTN
).
IP telephony uses IP network infrastructure, such as a local area network
(
LAN
)
or a
wide area network (
WAN
),
to
replace the telephony functions performed by an organization’s PBX telephone
system. “
IP
communications
”
is
a
term generally used to describe data, voice, and video communications using
an
IP network. “
Convergence
”
is
a
term generally used to describe the manner in which voice and video
communications technology is converging with data communications technology
onto
the IP network.
Overview
of the NWB Networks division (TELES product sales, VoIP equipment resale,
refurbishing and distribution).
The
Company’s NWB Networks division was historically operated under the names
“Qualmax” and “Qualmax Professional Services,” as well as “IP Gear,” as a
distributor and value added reseller (“
VAR
”)
of
new, used, and refurbished IP communications equipment made by manufacturers
such as Cisco, Quintum, Adtran, and other telephony industry leaders. Resale
of
third-party IP communications equipment was Qualmax’s core legacy business, and
the Company’s VAR business continues to be a core revenue component. However, we
have refocused our distribution and sales efforts on equipment manufactured
by
TELES. We continue to sell other manufacturers’ equipment, but primarily in
support of or complimentary to sales of TELES equipment.
The
Company is the exclusive distributor of TELES products in certain north American
markets (the United States, Canada, Mexico, all Caribbean nations, Guatemala,
and Honduras), and currently promotes and distributes TELES products in those
markets, sells directly to large end-user customers, and provides support and
training services, under the assumed business name “
TELES
USA
.”
The
distribution agreement includes those products previously manufactured by the
Company under the IP Gear name (including the Claro and Quasar brands). TELES
USA is part of the NWB Networks division, but because TELES sales represent
a
substantial and growing part of our equipment reseller business we report TELES
revenues and gross profits separate from resale of other products below in
Item
6, “Management’s Discussion and Analysis or Plan of Operation—Results of
Operations.”
Overview
of the NWB Telecom division (VoIP Telephony service provider).
The
NWB
Telecom division is a wholesale provider of VoIP termination service, connecting
carrier-level buyers and sellers of VoIP service, currently focused on
international call routing. We receive VoIP traffic from customers (originating
carriers) who are interconnected to our network, and we route the VoIP traffic
via IP networks to local service providers and terminating carriers in the
destination countries from whom we purchase completion or termination services.
(Our vendors provide the communications service to complete the calls within
the
destination country.) We offer this service on a wholesale basis to carriers,
VoIP companies, and telephony resellers, and other telecommunication service
providers. We are party to a number of reciprocal carrier agreements, through
which we both buy from and sell to a carrier, and set-off, or net out, the
parties’ respective fees for termination services. To the extent we sell VoIP
equipment (under the NWB Networks division or its subdivision, TELES USA) to
our
VoIP termination service providers, we may set-off accounts receivable for
equipment against accounts payable for communication services. We have call
termination agreements with local lower-tier service providers in Latin America,
Europe, Asia, and Africa.
In
addition, although the Company’s VoIP service business is currently entirely
wholesale, management is identifying and evaluating “bundled” VoIP service
opportunities (“bundled” meaning the offering of both VoIP equipment and VoIP
connectivity service as a turnkey VoIP solution for small to medium size
business entities (“
SMEs
”)).
The
Company also evaluates a variety of other opportunities in the VoIP industry,
and in the past has evaluated opportunities in call shop and calling card
businesses, and the VoIP network technical support business, but to date has
remained focused on its existing core businesses. As of the date of filing
this
Report, we consider all such opportunities to be in the evaluation stage, and
their potential effect upon our revenues and gross and net profits is too
speculative to quantify.
Company
History
Company
history prior to 2006 acquisition of Qualmax, Inc.
New
World
Brands, Inc. was incorporated in Delaware in May 1986 under the name Oak Tree
Construction Computers, Inc. From 1986 through 1990, we were engaged
in the sale of computer systems for the construction industry. For a
number of years thereafter, we were inactive. In August 1994, the
Company changed its name to Oak Tree Medical Systems, Inc. From
January 1995 through May 2000, we were engaged in the business of operating
and
managing physical care centers and related medical practices. In
October 2001, the Company and its subsidiary, Oak Tree Spirits, Inc., entered
into a merger agreement with International Importers, Inc. (“
Importers
”)
and
its stockholders whereby Importers merged with and into the Company, and the
Company’s business changed direction to wine and spirits
distribution. In conjunction with this change in business direction,
in December 2001, we changed our name to New World Brands, Inc.
2006
reverse acquisition of Qualmax, Inc.
On
September 15, 2006, we sold our subsidiary, International Importers, Inc.,
and
acquired, by way of reverse acquisition, all of the assets and assumed all
of
the liabilities of Qualmax (the “
Reverse
Acquisition
”). The
Reverse Acquisition marked a change in direction for our business, away from
wine and spirits distribution, to the VoIP technology industry. The
Reverse Acquisition was accounted for as a reverse acquisition, with Qualmax
being the acquiring party for accounting purposes. The accounting
rules for reverse acquisitions require that beginning with the date of the
transaction, September 15, 2006, our balance sheet had to include the assets
and
liabilities of Qualmax, and our equity accounts had to be recapitalized to
reflect the net equity of New World Brands, Inc. Our historical
operating results will be the operating results of Qualmax. In conjunction
with
the Reverse Acquisition, in September 2006, we moved our headquarters from
Florida to Eugene, Oregon, which were previously the headquarters of
Qualmax.
Qualmax,
Inc. history.
As
Qualmax, we were founded in 2002 as a reseller of VoIP-related
telecommunications equipment from companies such as Cisco Systems, Quintum,
and
Adtran, and as a reseller of VoIP telephony service, primarily selling wholesale
international service to telecom service providers. In December,
2005, we expanded beyond our reseller business by acquiring a VoIP technology
research and development division based in Israel, which we reorganized as
a
wholly-owned subsidiary and rebranded under the name IP Gear, Ltd. From December
31, 2005 through July 1, 2007 we developed, manufactured, and sold our own
line
of VoIP technology products via our Israel-based IP Gear, Ltd. subsidiary,
while
continuing to resell additional VoIP products of a variety of other
manufacturers via our U.S.-based IP Gear VAR division.
2007
sale of IP Gear, Ltd. subsidiary.
Effective
July 1, 2007, we sold our wholly-owned subsidiary, IP Gear, Ltd., an Israeli
limited liability company based in Yokneam, Israel, to TELES, as reported in
more detail in the Company’s Current Reports on Form 8-K filed with the
Securities and Exchange Commission (the “SEC”) on July 20, August 1, and August
9, 2007, and as discussed in more detail below under “Recent Developments.” Sale
of our IP Gear, Ltd. subsidiary represented a refocusing of our business plan
away from research and development and direct manufacturing, and toward our
historical core strengths in sales and service. As a result of the sale, we
currently base all our operations at our headquarters in Eugene,
Oregon.
By
the
sale of IP Gear, Ltd. to TELES, we divested ourselves of our manufacturing,
research and development activities, and have now rededicated our efforts on
distribution, sale, service and support of VoIP-related telecommunications
equipment and service. As a part of the sale of IP Gear, Ltd., we became the
exclusive distributor for both TELES products and IP Gear, Ltd. products in
North America and have therefore focused our telecommunications equipment sales
and distribution plan on TELES and IP Gear, Ltd. products.
Recent
Developments
The
following important Company developments occurring in 2007, and 2008 to date,
are described below.
Authorization
of additional shares, conversion of Preferred Stock to Common
Stock.
Pursuant
to a written consent, dated January 31, 2007, of the Company’s board of
directors (the “
Board
”),
and a
written consent, dated January 31, 2007, of a requisite number of the Company’s
outstanding shares, the Company’s Amended and Restated Certificate of
Incorporation was filed with the Delaware Secretary of State on April 24, 2007,
at which time it became effective. The Amended and Restated Certificate of
Incorporation (i) increased the Company’s authorized number of shares of
common stock (the “
Common
Stock
”)
of the
Company by 550,000,000 shares, $0.01 par value per share; (ii) created
1,000 shares, $0.01 par value per share, of Series A Convertible Preferred
Stock
(the “
Preferred
Stock
”)
of the
Company; (iii) implemented a staggered Board with three classes, each
serving three years; and (iv) made such other changes to the certificate of
incorporation as were necessary and incidental to the foregoing.
As
a
result of the approval of our Amended and Restated Certificate of Incorporation,
effective April 24, 2007, all outstanding shares of Preferred Stock were
converted to shares of Common Stock, at a ratio of 2,986,736 shares of Common
Stock for each share of Preferred Stock (meaning approximately 116.67 shares
of
Preferred Stock, constituting all of the Company’s outstanding Preferred Stock,
were converted into approximately 348.4 million shares of Common Stock).
For
additional information regarding the authorization of additional shares and
the
conversion of Preferred Stock, reference is made to our Current Report on Form
8-K, filed with the SEC on April 30, 2007, and the Company’s Definitive Schedule
14C, filed with the SEC on March 20, 2007.
Repayment
of Bank of America loan.
Qualmax
entered into a loan agreement with Bank of America, N.A. (“
BoA
”)
on
April 20, 2005 in the original principal amount of $2,000,000 (the “
BoA
Loan
”). Effective
September 15, 2006, the BoA Loan agreement was modified for an adjusted
principal amount of $984,323 and an extended maturity date of March 31, 2007,
with interest on the principal amount at 3% over BoA’s Prime
Rate. The BoA Loan was in the name of Qualmax, guaranteed by the
Company and personally by M. David Kamrat, and was secured by a pledge of all
the Company’s stock owned by Qualmax. BoA declined to extend the BoA
Loan maturity date beyond March 31, 2007, and therefore, the Company secured
substitute financing in the form of the P&S Term Loan Agreement (defined and
discussed below under “P&S Spirit Term Loan”) and on March 30, 2007 repaid
all outstanding BoA Loan principal, interest, and fees. Reference is
made to the Company’s Current Report on Form 8-K, filed with the SEC on April 5,
2007, for additional information and documentation concerning repayment of
the
BoA Loan and the transactions entered into in connection therewith.
P&S
Spirit term loan.
On
and
effective March 30, 2007, the Company entered into a Term Loan and Security
Agreement (the “
P&S
Term
Loan
Agreement
”
and
the
debt obligation pursuant thereto, the “
P&S
Term
Loan
”)
with
P&S Spirit, LLC, a Nevada limited liability company (“
P&S
Spirit
”).
The
principal amount of the P&S Term Loan was $1,000,000; the interest rate was
2% over the Prime Rate (as reported in The Wall Street Journal); consecutive
monthly payments of interest only (payable in arrears) were required commencing
May 1, 2007; and all unpaid principal, interest and charges was due upon the
maturity date of January 2, 2009.
The
P&S Term Loan Agreement granted P&S Spirit a first position security
interest with respect to all of the Company’s assets, and was also backed by a
corporate Guaranty by Qualmax (which, pending completion of the contemplated
merger of Qualmax into the Company, holds a controlling interest in the
Company), a security interest in the assets of Qualmax (consisting solely
298,673,634 shares of the Company’s Common Stock, par value $0.01 per share),
and by the personal guaranty of M. David Kamrat, who is Chairman of the Board
of
Directors and President and Chief Executive Officer of the Company as well
as a
director and executive officer of Qualmax. M. David Kamrat’s personal Guaranty
was limited to the sum of $1,000,000, although the guaranteed obligations
include indemnification for certain claims against P&S Spirit relating to
the P&S Term Loan Agreement.
The
P&S Term Loan proceeds were used by the Company to repay all outstanding
principal, interest, and fees payable to BoA under the BoA Loan, and to pay
certain professional fees associated with preparation and negotiation of the
P&S Term Loan Agreement.
As
discussed below under “Repayment of P&S Term Loan,” the P&S Term Loan
was repaid in two payments, the first in the amount of $500,000 in August,
2007,
and the second in the amount of $500,000 in February, 2008.
The
principals of P&S Spirit include Dr. Selvin Passen, who is a director of the
Company as well as a shareholder of the Company and its former Chief Executive
Officer, and Dr. Jacob Schorr, who is a director of the Company.
P&S
Spirit credit line.
As
previously reported on the Company’s Current Report on Form 8-K, filed with the
SEC on June 6, 2007, on and effective May 31, 2007, the
Company
entered
into a Credit Line and Security Agreement (the “
P&S
Credit
Line Agreement
”
and
the
debt obligation pursuant thereto, the “
P&S
Credit
Line
”)
with
P&S Spirit. The maximum principal available under the Credit Line
is $1,050,000; the interest rate is 2% over the Prime Rate (as reported in
The
Wall Street Journal), payable in relation to the then-outstanding principal;
consecutive monthly payments of interest only (payable in arrears) are required
commencing July 1, 2007; and all unpaid principal, interest, and charges are
due
upon the maturity date of June 1, 2011. Upon default, the entire
P&S Credit Line amount (including accrued unpaid interest and any fees) will
be accelerated, and the Company would be required to pay any costs of
collection. The P&S Credit Line Agreement includes certain
affirmative covenants, including, without limitation, a financial reporting
requirement (quarterly - 45 days after the close of a calendar quarter), and
a
requirement that the Company maintain a ratio of current assets to current
liabilities of at least 1.2:1.0 and a total liabilities to tangible net worth
ratio not exceeding 2.5:1.0.
The
P&S Credit Line Agreement grants P&S Spirit a security interest with
respect to all of the Company’s assets, but was subordinated to the P&S Term
Loan. The P&S Credit Line Agreement is also backed by a corporate
Guaranty by Qualmax (which, pending completion of the contemplated merger of
Qualmax into the Company, holds a controlling interest in the Company), and
a
security interest in the assets of Qualmax (consisting solely of 298,673,634
shares of Common Stock). Copies of the P&S Credit Line Agreement, P&S
Credit Line Note, Guaranty of Qualmax, Collateral Pledge Agreement by Qualmax,
and the Collateral Pledge Agreement by the Company, were included as Exhibits
10.1, 10.2, 10.3, 10.4, and 10.5, respectively, to the Company’s Current Report
on Form 8-K, filed with the SEC on June 6, 2007.
On
February 21, 2008, the Company drew $500,000 in principal on the P&S Credit
Line in order to repay its obligations under the P&S Term Loan Agreement, as
discussed in more detail below under “Repayment of P&S Term
Loan.”
P&S
Spirit stock purchase.
As
previously reported on the Company’s Current Report on Form 8-K, filed with the
SEC on January 8, 2007, effective December 29, 2006, the Company entered into
an
Amended and Restated Stock Subscription and Share Transfer Agreement (the
“
P&S
Subscription
Agreement
”)
with
P&S Spirit and with M. David Kamrat and Noah Kamrat (together, the
“
Kamrats
”).
On
and effective May 31, 2007, the parties to the P&S Subscription Agreement
entered into a First Amendment to Amended and Restated Stock Subscription and
Share Transfer Agreement (the “
Amended
P&S Subscription Agreement
”),
amending the P&S Subscription Agreement as described herein.
Pursuant
to the Subscription Agreement, the Company agreed to sell to P&S Spirit, and
P&S Spirit agreed to purchase: (i) on the date of closing: (A) 11.160454
shares of Preferred Stock of the Company, par value $0.01 per share, which
shares of Preferred Stock are convertible into 33,333,333 shares of the
Company’s Common Stock, par value $0.01 per share, at a price of $268,806.27 per
share of Preferred Stock (equivalent to $0.09 per share of Common Stock), for
an
aggregate purchase price of $3,000,000; and (B) a warrant (the “
Warrants
”)
to
purchase an additional 9.300378 shares of Preferred Stock at an exercise price
of $268.806.27 per share (equivalent to $0.09 per share of Common Stock); (ii)
upon the satisfaction of certain conditions set forth in the Subscription
Agreement, an additional 3.720151 shares of Preferred Stock, convertible into
11,111,111 shares of Common Stock (the “
Tranche
B-1 Shares
”),
at a
price of $268,806.27 per share of Preferred Stock (equivalent to $0.09 per
share
of Common Stock), for an aggregate purchase price of $1,000,000; and (iii)
upon
the satisfaction of certain conditions set forth in the Subscription Agreement,
an additional 3.720151 shares of Preferred Stock, convertible into 11,111,111
shares of Common Stock (the “
Tranche
B-2 Shares
”),
at a
price of $268,806.27 per share of Preferred Stock (equivalent to $0.09 per
share
of Common Stock), or an aggregate purchase price of $1,000,000. As part of
the
Amended
P&S Subscription Agreement the Kamrats transferred certain shares of the
common stock of Qualmax to P&S Spirit, and the Kamrats were issued a warrant
to
purchase 9.300378 shares of Preferred Stock at an exercise price of $268.806.27
per share (equivalent to $0.09 per share of Common Stock).
As
discussed above, on April 24, 2007, when the Company filed its Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State,
all
outstanding shares of Preferred Stock were automatically converted to shares
of
Common Stock at a ratio of 2,986,736 shares of Common Stock for each share
of
Preferred Stock. As a result, the Tranche B-1 Shares and Tranche B-2
Shares were each converted into 11,111,111 shares of Common Stock.
Pursuant
to the Amended P&S Subscription Agreement, P&S Spirit agreed to buy, and
the Company agreed to sell, all of the Tranche B-1 Shares and Tranche B-2
Shares, as converted into a total of 22,222,222 shares of Common Stock, for
an
aggregate purchase price of $1,000,000, and P&S Spirit agreed to waive
certain of the conditions precedent to the purchase of the Tranche B-1 Shares
and Tranche B-2 Shares as set forth in the P&S Subscription
Agreement. The provisions of the Warrants have not been
amended. Such shares of Common Stock are, or will be, issued without
registration under the Securities Act of 1933, as amended (the “
Securities
Act
”),
in
reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder. A copy of the Amended P&S Subscription
Agreement was included as Exhibit 10.6 to the Company’s Current Report on Form
8-K, filed with the SEC on June 6, 2007.
In
connection with the transactions contemplated by the Amended P&S
Subscription Agreement, the Company, Qualmax, the Kamrats, P&S Spirit and
certain affiliates of the Kamrats and P&S Spirit entered into a First
Amendment to Amended and Restated Lock-Up Agreement, a copy of which was filed
with the SEC on June 6, 2007 as Exhibit 10.7 to the Company’s Current Report on
Form 8-K.
Also
in
connection with the transaction contemplated by the Amended P&S Subscription
Agreement, the Company, Qualmax, the Kamrats, P&S Spirit and certain
affiliates of the Kamrats and P&S Spirit entered into a First Amendment to
Amended and Restated Voting Agreement, a copy of which was filed with the SEC
on
June 6, 2007 as Exhibit 10.8 to the Company’s Current Report on Form
8-K.
Sale
of IP Gear, Ltd. subsidiary.
As
previously reported on the Company’s Current Reports on Form 8-K filed with the
SEC on July 20 and August 9, 2007, effective July 1, 2007 the Company sold
its
IP Gear, Ltd. subsidiary to TELES pursuant to a Share Sale and Purchase
Agreement (the “
Final
Agreement
”),
following the execution of a preliminary share sale and purchase agreement
(the
“
Preliminary
Agreement
”),
both
of which agreements are governed by the laws of Germany. The
Preliminary Agreement was executed on July 18, 2007, and the Final Agreement
was
approved by the Board and by TELES’ supervisory board on July 25,
2007. The closing of the purchase and sale took place on July 26,
2007, immediately upon the execution of the Final Agreement. The
share sale and purchase has an effective date, for accounting purposes, of
July
1, 2007.
Pursuant
to the Final Agreement, the Company agreed to sell all of the outstanding
capital stock of its wholly-owned subsidiary, IP Gear, Ltd., to TELES for a
purchase price consisting of: (i) a payment at closing of $1.5 million, and
(ii) an earn out equal to 10% of TELES’ worldwide revenues (including
revenues of TELES’ affiliates) within TELES’ CPE Product Line (as defined in the
Final Agreement) for a period of four years after closing. The total
earn out payments shall not be less than $750,000 (the “
Minimum
Earn Out
”),
and
shall not be subject to a cap. The Minimum Earn Out shall be paid in
quarterly amounts of $46,875, each quarterly payment due within 90 days of
the
close of the quarter, commencing with the quarter ended September 30,
2007. In the event the Minimum Earn Out is exceeded, the differential
amount is due within 90 days after June 30, 2008, 2009, 2010, and 2011. For
the
six months ended December 31, 2007, the Minimum Earn Out was exceeded by
$28,681.
With
certain exceptions, commencing on the date of the closing and for a certain
period of time (as specified in the Final Agreement), the Company agreed not
to,
or cause any of its affiliates to, engage in any research and development or
manufacturing activities competitive with those conducted by IP Gear, Ltd.,
and
not to, or cause any of its affiliates to, engage in the sale,
distribution, marketing, and services of products that may compete with certain
products of TELES. In addition, with certain exceptions, commencing
one year after the date of closing, and effective for a period of time and
within certain geographic regions relative to the grant of exclusive
distribution and sale rights to the Company pursuant to the partner contract
described below, the Company agreed not to, or cause any of its affiliates
to,
engage in the sale, distribution, marketing, and services of products that
may
compete with products of IP Gear, Ltd.
TELES
distributorship.
In
accordance with the Final Agreement, the Company and TELES entered into a
partner contract (the “
Partner
Contract
”),
relating to the promotion, marketing, sale, and support of certain products
of
TELES and IP Gear, Ltd., pursuant to which the Company became the exclusive
distributor of products of TELES and IP Gear, Ltd. in North America (including
the United States, Canada, Mexico, all Caribbean nations, Guatemala, and
Honduras). In connection therewith, TELES granted the Company a
marketing subsidy in the amount of $200,000 per year for a period of two years
(and for a third year, based on revenues, if agreed by the parties), and TELES
granted the Company an inventory credit line in the amount of $200,000 (the
“
Inventory
Credit Line
”),
which
has been increased based upon subsequent sales performance by the Company.
As of March 17, 2008, the Company had received $100,000 as a marketing subsidy
from TELES, in the form of a credit memo offset against accounts payable to
TELES for inventory purchases.
In
addition, TELES agreed to grant the Company a line of credit in the amount
of
$1,000,000 pursuant to a separate loan agreement to be finalized by the parties.
For more details regarding the TELES loan, see “
TELES
loan
agreement” below.
The
Preliminary Agreement was included as Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed with the SEC on July 20, 2007. The Final
Agreement and the Partner Contract were included as Exhibit 10.1 and Annex
2 to
Exhibit 10.1, respectively, to the Company’s Current Report on Form 8-K, filed
with the SEC on August 1, 2007.
TELES
loan agreement.
On
February 21, 2008, the Company and TELES entered into a Term Loan and Security
Agreement, effective February 15, 2008 (the “
TELES
Loan Agreement
,”
and
the loan thereunder, the “
TELES
Loan
”),
providing the Company a loan of up to the principal amount of $1,000,000 (the
“
Commitment
”)
pursuant to which,
from
time
to time prior to February 1, 2009 or the earlier termination in full of the
Commitment, the Company may obtain advances from TELES up to the amount of
the
outstanding Commitment. Amounts borrowed may not be reborrowed, notwithstanding
any payments thereunder. The outstanding balance of the TELES Loan will be
due
and payable on or before February 1, 2012.
The
outstanding principal amount of the TELES Loan will be payable in 12
approximately equal quarterly installments commencing May 1, 2009.
Interest
on the outstanding principal amount of the TELES Loan shall be paid quarterly
commencing May 1, 2008, at an interest rate equal to
7%
per
annum, compounded quarterly
(subject
to certain adjustments provided therein)
.
The
description of the TELES Loan Agreement herein is qualified in its entirety
by
reference to the full text of such agreement, which is attached as Exhibit
10.1
to the Company’s Current Report on Form 8-K filed with the SEC on February 27,
2008.
Without
the prior written consent of TELES, the TELES Loan may not be used, in whole
or
in part, to make any payment to P&S Spirit with respect to any obligations
of the Company owed to P&S Spirit pursuant to the P&S Credit Line
Agreement.
The
obligation of TELES to make advances to the Company pursuant to the TELES Loan
Agreement is subject to the satisfaction of certain conditions, including
without limitation, the following:
·
|
The
merger of Qualmax with and into the Company shall have been consummated
in
all respects;
|
·
|
On
the closing date and on the date of each advance, no default or event
of
default under the P&S Credit Line Agreement and all related documents
thereto shall have occurred and remain outstanding or uncured;
and
|
·
|
All
obligations of the Company owed to P&S Spirit under the P&S Term
Loan Agreement shall have been irrevocably repaid in full, and the
obligations under any related guarantees, stock pledges, and other
loan
documents securing the obligations of the Company under the P&S Term
Loan Agreement shall have been released (on February 21, 2008, effective
February 15, 2008, the Company repaid all outstanding obligations
under
the P&S Term Loan Agreement, in the amount of
$500,000).
|
Pursuant
to the TELES Loan Agreement, the Company agreed to comply with certain
affirmative covenants, including without limitation, the following:
·
|
maintaining
on a consolidated basis a ratio of current assets to current liabilities
of not less than 1.2:1; and
|
·
|
maintaining
on a consolidated basis a ratio of total indebtedness (with certain
exclusions) to tangible net worth of not greater than
2.5:1.
|
Pursuant
to the TELES Loan Agreement, the Company also agreed to comply with certain
negative covenants, including without limitation, the following:
·
|
issuing
or distributing any capital stock or other securities of the Company
without giving TELES at least 15 days prior written notice
;
and
|
·
|
amending,
modifying or waiving any provisions of the P&S Credit Line
Agreement.
|
The
TELES
Loan Agreement grants TELES a security interest with respect to all of the
Company’s assets, subject to the terms of the Intercreditor Agreement (as
defined below).
On
February 21, 2008, the Company drew $500,000 in principal on the P&S Credit
Line in order to repay in full its obligations under the P&S Term Loan
Agreement.
TELES –
P&S Spirit intercreditor agreement.
Also
on
February 21, 2008, as contemplated by the TELES Loan Agreement, the Company,
TELES and P&S Spirit entered into an Intercreditor Agreement (the
“
Intercreditor
Agreement
”),
effective February 15, 2008.
The
description of the Intercreditor Agreement herein is qualified in its entirety
by reference to the full text of the agreement, which is set forth in the
Company’s Current Report on Form 8-K filed with the SEC on February 27,
2008.
Pursuant
to the Intercreditor Agreement, P&S Spirit and TELES have agreed to hold
equal rights in and to substantially all of the Company’s assets, with the
exception of inventory consisting of TELES products purchased by the Company
from TELES (during the time that obligations are owed to TELES for such
purchases under the Inventory Credit Line).
Repayment
of P&S Spirit Term Loan.
On
July
26, 2007, P&S Spirit executed a consent to the sale of IP Gear, Ltd. by the
Company (the “
Lender
Consent
”),
which
was filed with the SEC on August 1, 2007 as Exhibit 10.2 to the Company’s
Current Report on Form 8-K. Pursuant to the P&S Term Loan
Agreement and the P&S Credit Line Agreement (together, the “
P&S
Loans
”
or
“
P&S
Loan
Agreements
,”
as
applicable) P&S Spirit had a security interest in all of the Company’s
shares of IP Gear, Ltd., and, the sale of the Company’s IP Gear, Ltd. shares
without P&S Spirit’s consent would have triggered a repayment by the Company
of all outstanding principal under the P&S Loans.
In
accordance with the Lender Consent, the Company agreed to pay to P&S Spirit
from the proceeds of the closing, as a partial repayment of principal of the
P&S Term Loan, the sum of $500,000. In addition, the Company
agreed to pay P&S Spirit the additional sum of $500,000, as a repayment of
principal of the P&S Term Loan, which amount is to be provided by P&S
Spirit to the Company as a credit line advance to be used by the Company solely
to repay the outstanding principal under the P&S Term Loan upon execution of
the TELES Loan Agreement. In the Lender Consent, subject to certain
terms and conditions, P&S Spirit consented to the sale of IP Gear, Ltd. to
TELES in accordance with the Final Agreement, released and terminated P&S
Spirit’s security interest in the IP Gear, Ltd. shares, and agreed that the
consummation of the sale of IP Gear, Ltd. to TELES shall not be deemed or give
rise to an event of default, penalty, or increase under, or termination of,
the
Loan Agreements and shall not, except as otherwise provided in the Lender
Consent, accelerate any amounts owing under the Loan Agreements or trigger
any
prepayment or give rise to any payment not otherwise required under the Loan
Agreements; and shall not require the Company to provide any additional
security, collateral, reserve, or payment under the Loan
Agreements.
Execution
of merger agreement.
On
February 18, 2008, the Company and Qualmax entered into an agreement by which
Qualmax will be merged with and into the Company (the “
Merger
Agreement
”
and
the
merger contemplated thereby, the “
Merger
”).
As of
the date of this filing, the Merger had not been completed. Reference is made
to
the Company’s Current Report on Form 8-K, filed with the SEC on February 22,
2008, for additional information and documentation concerning the Merger and
the
Merger Agreement entered into in connection therewith.
Management
and Board changes.
A
number
of changes were made to the Company’s Board and officers from January 1, 2007 to
the date of this Annual Report, as described below under Item 9, “Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(A) of the Exchange Act.”
Employees
As
of
March 17, 2008, we had 35 full-time employees and 2 part-time employees, all
based in our Eugene, Oregon headquarters (including 1 outside sales and 2 remote
technical support staff reporting to management in Eugene). We consider our
employee relationships to be good. None of our employees are members
of a labor union, and we have never experienced a work stoppage.
Competition
The
markets for IP telephony products and services are extremely competitive and
subject to rapid change. We are a small company in an industry dominated by
very
large companies that are better capitalized and, in comparison to us, have
greater sales, marketing, customer support, and technical resources, have access
to more experienced management, can take advantage of larger economies of scale,
and have much greater name recognition and reputation. We have been able to
compete in this market due to our adaptability, the depth of industry experience
among our key managers, and the relatively low barriers to entry in the VAR
and
VoIP service provider businesses. We expect that the conditions that have
facilitated our entry into the VoIP industry will allow additional competitors,
including large companies as well as niche operators, to enter the market.
The
fundamental technology and computer hardware component of the IP telephony
service solution is readily available. Accordingly, relatively few barriers
to
entry exist in our business for companies with computer and network sales,
and
distribution and service provider experience. An increase in the number or
size
of our competitors could negatively affect the amount of business that we obtain
and the prices that we can charge.
Competition
among resellers
.
Our
NWB
Networks distribution and sales business competes not only with small boutique
IT firms that have entered the market due to reduced costs of entry resulting
from various technological advances, but also with large, global companies,
including manufacturers who now compete against us to sell directly to end
users. Although we offer our clients a range of services and support in
conjunction with a select product line at competitive prices, increased
competition may require us to further reduce prices, potentially reducing profit
margins. We believe the current market trend favors larger, well-capitalized
specialty distributors and resellers who can afford to take advantage of cost
savings in bulk purchases, foreclosure sales, and other large opportunities,
who
can afford to warehouse substantial amounts of inventory until profitable
opportunities arise, and who can afford large and skilled product service and
support staffs. Nonetheless, new opportunities continue to arise in this
business, and we believe that our ability to quickly identify currently popular
products to sell, and our experience with a diverse market of equipment buyers
and sellers, including resellers and end users, gives us a continued competitive
edge over new competitors in the market.
We
believe that our new exclusive distribution relationship with TELES may also
give us a competitive edge over other distributors and resellers. We believe
that TELES has well developed R&D and manufacturing capabilities, and we
believe that TELES has demonstrated its willingness and ability to adapt its
products to changing market needs and specific opportunities, particularly
in
emerging VoIP markets in the Americas. We hope that, as our sales and support
teams continue to work closely with TELES product development teams, we will
be
able to provide products meeting the niche opportunities and new technology
opportunities that our sales staff and management team identify in emerging
markets. However, TELES products face stiff competition from a variety of other
manufacturers, and while we consider TELES a well capitalized and well managed
technology company, TELES remains a relatively small player in the industry
compared to organizations such as Cisco and Siemens. In addition, larger telecom
service providers, particularly “tier 1” providers and government-sponsored
foreign providers, continue to develop their own internal products, potentially
competing with products they would otherwise buy from companies like TELES,
thus
competing with sales opportunities for products such as those manufactured
by
TELES.
Competition
among wholesale telecom service providers
.
Competition
in the wholesale VoIP service industry is intense and diverse, including “tier
1” telecom companies in the U.S. and abroad, as well as smaller “tier 2”
carriers, and very small niche service providers. The NWB Telecom division
does
business with very large entities, including foreign tier 1 incumbent
providers, as well as a number of small niche providers in certain foreign
markets. As a result of deregulation, growth of the Internet and IP network
infrastructure generally, and development of more powerful, lower cost VoIP
equipment, the price of entry into the VoIP service business has dramatically
decreased. Lower cost of entry has drawn a growing number of entrepreneurs
to
the industry and has driven down the cost of telecom services at both the
wholesale and retail levels. As a result, both supply and demand have
skyrocketed, and although we see a growing number of customer and vendor
opportunities, we also see a growing number of aggressive competitors, declining
prices, and declining technological barriers to entry.
NWB
Telecom competes principally on price and quality of service. The communications
industry, including VoIP, is highly competitive, rapidly evolving, and subject
to constant technological change and intense marketing by providers with similar
products and services. We expect that new competitors, including the growth
of
“gray market” operators (potentially including operators who arrange call
termination in a manner that bypasses the local telephone company), are likely
to enter the communications industry, including the market for VoIP, Internet,
and data services. Also, a number of large VoIP service providers appear to
be
aggressively seeking market share via acquisitions and competitive pricing.
We
believe the trend in this area is for increased competition to continue to
drive
down market prices and profit margins. Our ability to continue to compete in
this market will depend upon our ability to secure more stable vendor
relationships, to implement a more stable network infrastructure capable of
handling higher call volume and to continue to build long-term customer
relationships.
CERTAIN
RISK FACTORS
There
are
a number of important factors that could cause our business, financial
condition, cash flows, and results of operations to differ materially from
historical results or those indicated by any forward-looking statements,
including the risk factors identified below and other factors about which we
may
or may not yet be aware.
Prospective
and existing investors are strongly urged to carefully consider the various
cautionary statements and risks set forth in this Report and our other public
filings.
Risks
Associated with the Business in General
Our
results of operations may fluctuate.
Our
revenue and results of operations have fluctuated and will continue to fluctuate
significantly from quarter to quarter in the future due to a number of factors,
including but not limited to, those discussed below, some of which are not
in
our control.
Because
of these factors and others, we cannot not rely on quarter-to-quarter or
year-to-year comparisons of our results of operations as an indication of our
future performance. It is possible that, in future periods, our results of
operations will be significantly lower than the estimates of public market
analysts, investors, or our own estimates. Such a discrepancy could cause the
price of our Common Stock to decline significantly and adversely affect
profitability.
We
finished fiscal year 2007 with a net loss, and are likely to incur losses during
the 2008 fiscal year, and our future sales levels and ability to achieve
profitability are unpredictable.
For
the
one year period ending December 31, 2007, we experienced a net loss before
income taxes of $6,220,155. We may experience a net operating loss for fiscal
year 2008. Our operating history is limited, our business has changed rapidly
over the past three years, and we are competing in an emerging technology
industry. W
e
cannot
be assured that profitability will be achieved, or if it is achieved that it
will continue, in upcoming quarters or years, nor can we be assured that we
will
be able to improve operating margins or increase revenues, or adequately control
our operating expenses.
We
may need additional near-term capital.
We
may
need additional capital to continue to pursue our current business model, and
there can be no assurance that adequate capital will be available to us on
acceptable terms as needed. Our business plan calls for the expansion of sales
and support of the IP telephony products and services we sell, including
expansion through acquisitions, to enterprises in geographical markets where
we
currently do not operate. If we are not able to secure adequate capital, we
may
have to delay the implementation of our business plan, and potentially
discontinue non-profitable business operations. Our ability to obtain additional
financing is subject to a number of factors, including general market
conditions, our operating performance, our financial condition, and investor
acceptance of our business plan. We can provide no assurance that we will be
able to obtain necessary financing, or if financing is available that the terms
will be favorable to existing stockholders or acceptable to our Board. If future
capital investment is made available, existing shareholders will experience
dilution of their stock ownership positions in order for us to secure that
additional investment.
We
face changing market conditions for products and services.
The
market for VoIP service is still in the relatively early stages of development
and market acceptance, and is characterized by rapid technological change,
evolving industry standards and strong customer demand for new products,
applications, and services. As is typical of a new and rapidly evolving
industry, the demand for, and market acceptance of, recently introduced
IP telephony products and services are highly uncertain. We cannot be sure
that the delivery of telephone and other communications services over IP
networks rather than over traditional telephone networks will expand. We cannot
be sure that packet-based voice networks will become widespread or that
connections between packet networks and telephone networks will become
commonplace. The inability to deliver traffic over the Internet with significant
cost advantages could slow or stop the growth of VoIP technology. The adaptation
process of connecting packet networks and telephone networks can be time
consuming and costly. In addition, limitations of VoIP technology, such as
the
inability to make a call during a power outage and difficulty in accessing
911
services, could adversely affect the market for VoIP services. If this market
does not develop, or develops more slowly than we expect, we may not be able
to
sell our products or offer our services in sufficient volume to meet our
financial goals.
Changes
in governmental regulations could slow the growth of the VoIP
market.
In
the
United States, changes in governmental regulation are being considered that
may
negatively impact the VoIP telephony market. The Federal Communications
Commission (the “
FCC
”)
is
examining the enactment of new regulations governing Internet telephony and
the
question of whether certain forms of telephone services over the Internet should
be subject to the same FCC regulations as telecommunications services. VoIP
equipment can be used as a way to provide telecommunication services while
bypassing the local service operator, in what is sometimes referred to as “toll
bypass,” whereby telecommunications traffic is diverted from traditional phone
lines to the Internet, avoiding long distance call charges. Phone companies
in
the U.S. and abroad are seeking the adoption of regulations to require VoIP
providers or users to pay a charge to local service providers. The cost of
providing Internet phone service could increase as a result of these actions
or
more aggressive regulation or taxation of VoIP services by the FCC or foreign
governments, which could result in slower growth and decreased profitability
for
the industry and potentially for the Company.
We
may be unable to manage our growth and multiple business lines effectively.
We
have actively expanded our operations in the past and seek to continue to expand
them in the future.
In
2006
and 2007, we undertook a series of restructurings of our operations involving,
among other things, the expansion of our workforce and corporate headquarters,
the consolidation of our equipment reseller operations and change of focus
to
TELES products, and the sale of our Israel-based manufacturing subsidiary,
IP
Gear, Ltd. The implementation of these restructurings in 2006 and 2007 has
placed, and in 2008 will continue to place, a significant strain on our
management systems and financial resources. In addition,
our
business requires us to focus on multiple business lines simultaneously. We
are
a young company with a limited operating history, and our management team
regularly faces new challenges. None of our senior executives has operated
a
public reporting company before. T
o
continue to compete in the
highly
competitive and rapidly developing IP communications industry we will be forced
to quickly adapt to changing market conditions in multiple areas, such as shifts
in capital needs, in fundamental communications technologies, and in product
lines and supply sources, and there can be no assurance management can meet
these challenges.
Business
acquisitions, dispositions, joint ventures, or private equity transactions
entail risks and may disrupt our business, dilute stockholder value or distract
management attention.
We
have
grown in part through the acquisition of companies, products, or technologies.
We expect to continue to review opportunities to acquire other businesses or
technologies that would complement our current products, expand the breadth
of
our markets, enhance our technical capabilities or otherwise offer growth
opportunities. Acquisitions are inherently risky, and no assurance can be given
that our previous or future acquisitions will be successful or that they will
not materially and adversely affect our business, operating results, or
financial condition. If we make any further acquisitions, we may issue stock
that would dilute our existing shareholders’ percentage ownership, and we may
incur substantial debt, and/or assume contingent or unknown liabilities. In
the
event of any equity-based financing transaction, we will need to secure
additional capital. S
uch
equity may have rights and preferences superior to the Company’s outstanding
Common Stock, and the issuance of such equity by the Company will dilute the
ownership percentage of the Company’s existing shareholders.
We
rely upon key personnel, and
must
attract and retain additional qualified personnel.
We
are
dependent on the continued efforts of our senior management team, including
our
Chairman, President, and Chief Executive Officer, M. David Kamrat, our Chief
Technology Officer, Noah Kamrat, and our Chief Financial and Operations Officer,
Secretary, and Treasurer, Shehryar Wahid. If these or other key personnel do
not
continue to be active in management, our business, financial condition, or
results of operations could be adversely affected. We cannot be certain that
we
will be able to continue to retain our senior executives or other personnel
necessary for the development of our business. In addition, a
t
present
there is a shortage of qualified management, sales, and technical personnel
in
our industry and we are in direct recruiting competition for these applicants
with larger businesses that are able in some cases to offer more competitive
compensation. We are also limited in our recruiting efforts by our primary
location in the relatively small Eugene, Oregon market and Pacific Northwest
region.
We plan
to use stock options and other forms of equity compensation as key components
of
our employee compensation program in order to align employees’ interests with
the interests of our stockholders, to encourage employee retention, and to
provide competitive compensation. The changing regulatory landscape could make
it more difficult and expensive for us to grant stock options to employees
in
the future. In addition, the use of alternative equity incentives may increase
our compensation expense and reduce our earnings, and may dilute other
shareholders.
We
extend credit to customers for product purchases, creating bad debt
risk.
A
substantial portion of our receivables result from credit extended to customers
for purchases of our products and services. We cannot be sure that we will
be
able to collect all of these accounts receivable. Although we have internal
credit risk policies to identify companies with poor credit histories, we may
not effectively manage these policies and may provide services to companies
that
refuse to pay. The risk is even greater in foreign countries, where the legal
and collection systems available may not be adequate for us to enforce the
payment provisions of our contracts. Our cash reserves will be reduced and
our
results of operations will be materially adversely affected if we are unable
to
collect amounts from our customers.
Although
past such losses have not been significant, future losses, if incurred, could
harm our business and have a material adverse effect on our results and
financial condition.
Litigation
may harm our operating results or financial condition.
We
are a
party to lawsuits in the normal course of our business. Litigation can be
expensive, lengthy, consumptive of management’s time and disruptive to normal
business operations. The results of complex legal proceedings are difficult
to
predict, and expensive to defend or pursue. An unfavorable resolution of a
particular lawsuit could have a material adverse effect on our business,
operating results, or financial condition. For additional information regarding
certain of the lawsuits in which we are involved, see Item 3, “Legal
Proceedings.”
Our
international operations subject us to additional risks and increased costs.
We
intend
to continue to pursue international opportunities, both in VoIP service and
VoIP
equipment sales. International operations are subject to a number of risks
and
barriers, including:
|
·
|
unexpected
changes in foreign regulatory requirements, telecommunications
standards,
and regulatory and contract enforcement and
interpretation;
|
|
·
|
tariffs
and other trade barriers, exchange controls or other currency
restrictions;
|
|
·
|
difficulty
in collecting receivables;
|
|
·
|
difficulty
in staffing and managing foreign
operations;
|
|
·
|
the
need to customize marketing and product features to meet foreign
requirements;
|
|
·
|
inadequate
protection of intellectual property in countries outside the United
States; and
|
|
·
|
foreign
political and economic instability, particularly in emerging markets
where
VoIP growth is robust.
|
We
may
not be able to overcome some of these barriers and may incur significant costs
in addressing others. In addition, f
oreign
currency fluctuations may affect the prices of our products. Our prices for
TELES products are denominated in Euros, but otherwise our sales prices are
primarily denominated in U.S. dollars. Our revenues are therefore affected
by
fluctuations in the Euro/dollar exchange rate. To the extent that the dollar
continues to lose value relative to the Euro, our pricing strength and gross
margins will be negatively affected: the currency of most of our customers
and
our fixed costs (dollars) would become less valuable relative to the currency
of
our primary equipment vendor, TELES (Euros).
We
face state tax uncertainties.
Various
states have sought to require the collection of state and local sales taxes
on
products shipped to the taxing jurisdiction’s residents. We cannot predict the
level of contact, including electronic commerce, shipping, and Internet or
IP
communications activity that might give rise to future or past tax collection
obligations based on existing law. Many states aggressively pursue
out-of-state
businesses, and legislation that would expand the ability of states to impose
sales tax collection obligations on out-of-state businesses has been introduced
in Congress on many occasions. A change in the law could require us to collect
sales taxes or similar taxes on sales in states in which we have no presence
and
could potentially subject us to a liability for prior year sales, either of
which could have a material adverse effect on our business, financial condition,
and results of operations.
Our
business could be disrupted by systems failure
.
Our
operations are dependent on the reliability of information, telecommunication
and other systems that are used for sales, distribution, marketing, purchasing,
inventory management, order processing, customer service, and general accounting
functions. Interruption of our information systems, Internet, or
telecommunication systems could have a material adverse effect on our business,
financial condition, cash flows, and results of operations.
We
face increased expenses as a result of being a public company
.
The
costs
of being a public company have increased significantly since the enactment
of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). W
e
expect
that our general and administrative expenses, in particular legal, accounting,
and IT systems expenses, will increase as a result of our efforts to comply
with
applicable securities laws, in particular with the Sarbanes-Oxley Act.
In
addition, we may be required to comply with the internal control evaluation
and
certification requirements of Section 404 of the Sarbanes-Oxley Act as soon
as
the end of our 2008 fiscal year. We are in the process of determining whether
our existing internal controls over financial reporting systems are compliant
with Section 404. This process will divert internal resources, and may force
us
to implement new internal controls and reevaluate our financial reporting,
or
hire additional personnel, in order for us to comply with Section 404. If we
are
unable to effectively implement these changes, it could harm our operations
and
financial results, and could result in our being unable to obtain an unqualified
report on internal controls from our independent auditors.
We
may undertake new business ventures and enter into new lines of
business.
Management
is constantly evaluating new opportunities in the VoIP service and equipment
industry, including strategic partnerships, joint ventures and acquisitions,
or
combinations of these entities. Further, there can be no assurances that such
opportunities, particularly those involving acquisitions, will be successful.
The Company may finance these new business opportunities through a combination
of equity and/or debt. If the Company determines to finance these opportunities
by issuing additional equity, then such equity may have rights and preferences
superior to the Company’s outstanding Common Stock, and the issuance of such
equity will dilute the ownership percentage of the Company’s existing
shareholders. If the Company determines to finance these opportunities by
incurring debt, then such debt may not be available to the Company on favorable
terms, if at all. As of the date of the filing of this Report, we consider
all
such opportunities to be in the evaluation stage, and their potential effect
upon our gross and net profits is too speculative to quantify.
Risks
Most Specific to our NWB Networks Division (IP Communications Equipment
Resale).
The
following are certain risks we consider most important to the NWB Networks
division of our business, but these risks should be read in connection with
all
the other risks described herein (including those specific to other
divisions).
Rapid
technological change and inventory obsolescence
.
The
computer industry is characterized by rapid technological change and frequent
introductions of new or enhanced products. To timely meet demand and obtain
better purchase pricing, we may be required to carry significant inventory
levels of certain products, which subject us to increased risk of inventory
obsolescence. We participate in first-to-market and end-of-life purchase
opportunities, both of which carry the risk of inventory obsolescence. Special
purchase products are sometimes acquired without return privileges, and there
can be no assurance that we will be able to avoid losses related to such
products if the related purchase contract is not completed. In addition, as
illustrated below in Item 6, “Management’s Discussion and Analysis or Plan of
Operation,” we currently sell used or refurbished products. Manufacturers with
large market share, particularly Cisco, may release new generations of products
that make used or refurbished products obsolete or unattractive. The risk of
rapid technological change is tied to the risk of customer and vendor
concentrations: If, as a result of technological or other change, the demands
of
our key customers or the supplies of our key vendors no longer correspond,
our
revenues may suffer, or we could be forced to seek new customers, new suppliers
or both.
Concentrated
customer risk
.
We
derive
a significant amount of our revenue from a relatively small number of clients.
If we were to lose one or more of these customers, and the business were not
replaced, it could have an adverse impact on our results of operations and
financial condition. While no customer accounted for 10% or more of NWB Networks
revenues during the year ending December 31, 2007, our top ten customers
accounted for a significant amount of our business. Although we to continue
to
do business with these clients, and have no reason to believe we will cease
doing business with any of them in the foreseeable future, the loss of any
large
client could adversely impact our results of operations if the revenue stream
were not replaced by other sales.
Concentrated
vendor/product risk.
Since
the
sale of our IP Gear, Ltd. subsidiary and entry into an exclusive distribution
agreement with TELES, we have been relying to an increasing degree upon TELES
for supply of the VoIP equipment that we distribute and sell. In fact, nearly
all of our profitable equipment sales since the sale of our IP Gear, Ltd.
subsidiary have been of TELES equipment. If TELES is unable to continue to
supply high-demand equipment at attractive prices, our revenues, and/or gross
profits will decline. In addition, we are subject to a risk of supply
interruption if TELES’ business suffers or if our relationship with TELES
suffers.
We
derive a substantial portion of our revenues from sales of the TELES iGate
and
vGate product lines, and we expect that these products will continue to account
for a significant portion of our revenues for the foreseeable future. As a
result, factors adversely affecting the pricing of or demand for these products,
such as competition, technological change or a slower than anticipated rate
of
development or deployment of new products, features and technologies, could
cause a significant decrease in our revenues and profitability.
Reliance
on market purchase and sale opportunities
.
We
acquire a significant portion of our non-TELES inventory on secondary markets
as
used or refurbished product, and we rely upon purchasing opportunities on the
open market. We do not currently rely upon purchases direct from manufacturers,
nor do we purchase primarily from “top tier” distributors of new products (top
tier meaning those distributors who purchase directly from major manufacturers
such as Cisco). We do not have long-term supply or sale contracts for inventory,
and we do not participate in large buying opportunities, which may offer larger
discounts. Termination, interruption, or contraction of our relationships with
our vendors, or unavailability on the open market of our core products, could
have a material adverse effect on our business, financial condition, cash flows,
or results of operations.
Historical
dependence on a small number of customers, the loss of, or reduction in,
purchases by any of which could have a material adverse effect on our revenue.
Historically,
a substantial portion of our revenue has been derived from large purchases
by a
small number of network equipment providers, systems integrators, and
distributors. We do not enter into long-term sales agreements in which the
customer is obligated to purchase a set quantity of our products. Based on
our
experience, we expect that our customer base may change from period to period.
If we lose a large customer and fail to add new customers there could be a
material adverse effect on our results of operations.
Risks
most specific to our NWB Telecom division (wholesale VoIP service provider).
The
following are certain risks we consider most important to the NWB Telecom
division of our business, but these risks should be read in connection with
all
the other risks described herein (including those specific to other
divisions).
Potential
for key supplier interruptions.
We
do not
rely upon or maintain any long term supply or termination service contracts,
and
all of our vendor agreements are terminable at will by either party without
notice. In addition, our suppliers rely upon short term contracts or
arrangements with other local service providers, including tier 1 service
providers, to supply termination routes; these contracts or arrangements may
also be terminated upon short notice. Therefore, our VoIP service business
is
subject to supply disruptions that are not within our control and that could
have a material adverse effect upon the NWB Telecom division’s financial
results. Critical issues concerning the commercial use of the Internet,
including security, cost, ease of use and access, intellectual property
ownership, and other legal liability issues, remain unresolved and could
materially and adversely affect both the growth of Internet usage generally
and
our business in particular. Finally, we will not be able to increase our VoIP
service traffic if Internet infrastructure does not continue to expand to more
locations worldwide, particularly into emerging markets and developing nations.
The risk of negative impact on our gross profit due to supply interruptions
is
increased by our recent reliance on a small number of vendors offering
relatively high-margin VoIP termination services in foreign
countries.
We
rely on third-party providers of phone and data lines and other
telecommunications services and local communications service
providers.
Our
business model depends on the availability of the Internet and traditional
telephone networks to transmit voice and fax calls. Third parties maintain
and
own these networks, other components that comprise the Internet, and business
relationships that allow telephone calls to be terminated over the public
switched telephone network. Some of these third parties are telephone companies.
They may increase their charges for using these lines at any time and thereby
increase our expenses. They may also fail to maintain their lines properly,
fail
to maintain the ability to terminate calls, or otherwise disrupt our ability
to
provide service to our customers. Any such failure that leads to a material
disruption of our ability to complete calls or provide other services could
discourage our customers from using our network. We maintain relationships
with
local communications service providers in foreign countries, some of whom own
the equipment that translates calls from traditional voice networks to the
Internet, and vice versa. We rely upon these third parties both to provide
lines
over which we complete calls and to increase their capacity, when necessary,
as
the volume of our traffic increases. In turn, many of these parties rely upon
their relationships with local phone companies and the use of local PSTN to
complete calls at the termination location. There is a risk that these third
parties may be slow, or may fail, to provide lines, which would affect our
ability to complete calls to certain destinations. Because we rely upon entering
into relationships with local service providers to expand into additional
countries, we may not be able to increase the number of countries to which
we
provide service. Finally, any technical difficulties that these providers
suffer, or difficulties in their relationships with companies that manage the
public switched telephone network, could affect our ability to transmit calls
to
the countries that those providers help serve, significantly reducing our
revenue and cash flows, as well as hurting our reputation.
Single
points of failure on our network, or computer vandalism, may make our business
vulnerable.
We
currently operate two principal network operations centers, one in our Eugene,
Oregon facility and one in a leased collocation facility in New York, New York.
In some cases, we have designed redundant systems, provided for excess capacity,
and taken other precautions against platform and network failures, as well
as
facility failures relating to power, air conditioning, destruction, or theft.
Nonetheless, some of our infrastructure and functionality, including that
associated with certain components of our wholesale business, such as switching
or routing equipment, operate as a single point of failure, meaning, failures
of
the type described may prohibit us from offering services. If the overall
performance of the Internet is seriously downgraded by website attacks, failure
of service attacks, or other acts of computer vandalism or virus infection,
our
ability to deliver our
communication
services over the Internet could be adversely impacted, which could cause us
to
have to increase the amount of traffic we must carry over alternative networks,
including the more costly public switched telephone network. In addition, our
business interruption insurance may not cover losses we could incur because
of
any such disruption of the Internet.
International
governmental regulation and legal uncertainties could limit our ability to
provide current services or increase costs, or subject us to legal
liability.
Regulatory
treatment of Internet telephony outside the United States varies from country
to
country. In many countries in which we purchase termination services, the status
of the laws or contracts that may relate to our services, including their
interpretation and enforcement, is unclear. We cannot be certain that our
customers, local service providers, or other affiliates are currently in
compliance with regulatory or other legal requirements in their respective
countries, or that they or we will be able to comply with existing or future
requirements. We provide our services in reliance on local service providers
that may be subject to telecommunications regulations in their home countries.
In some of those countries, licensed telephony carriers, as well as government
regulators and law enforcement authorities may question the legal authority
of
our local service providers and/or our legal authority. Because of our
relationships with resellers, some countries or local service providers may
assert that we are required to register as a telecommunications carrier in
that
country. In such case, our failure to do so could subject us to regulatory
action such as fines or penalties, including asset forfeitures. In addition,
some countries are considering subjecting VoIP services to the regulations
applied to traditional telephone companies. If foreign governments or other
bodies begin to impose related restrictions on VoIP or our other services or
otherwise enforce laws or regulations against us, our affiliates, or our
vendors, such actions could have a material adverse effect on our operations.
In
addition, deregulation of the communications markets in developing foreign
countries may not continue, and incumbent providers, trade unions, and others
may resist legislation directed toward deregulation and may resist allowing
us
to interconnect to their network switches. Governments and regulations may
change, resulting in availability of licenses and/or cancellations or
suspensions of licenses, confiscation of equipment, and/or rate increases;
the
instability of the regulations applicable to our businesses and their
interpretation and enforcement in these markets could materially and adversely
affect our business.
Domestic
regulatory changes may subject us to additional fees, taxes, or tariffs, or
service restrictions.
We
are
not licensed to offer traditional telecommunications services in any U.S. state
and we have not filed tariffs for any service at the FCC or at any state
regulatory commission. While the FCC has traditionally maintained an informal
policy that information service providers, including VoIP providers, are not
telecommunications carriers for regulatory purposes, various entities have
challenged this idea before the FCC and at various state government agencies.
Local exchange carriers are lobbying the FCC and the states to regulate VoIP
on
the same basis as traditional telephone services. Aspects of our operations
may
currently be, or may become, subject to state or federal regulations governing
licensing, universal service funding, access charges, advertising, disclosure
of
confidential communications or other information, excise taxes, U.S. embargos,
and other reporting or compliance requirements.
Risks
Associated with the Company’s Stock.
Relative
illiquidity of stock; share price fluctuations
.
There
is
relatively limited trading of our stock in the public markets, and this imposes
significant practical limitations on any shareholder’s ability to achieve
liquidity at any particular quoted price. Efforts to sell significant amounts
of
our stock on the open market may precipitate significant declines in the prices
quoted by market makers. The market price for our ordinary shares and the prices
of shares of other technology companies have been volatile.
Our
quarterly and annual operating results are difficult to predict and may
fluctuate significantly. It is possible that we will fail to achieve revenue
or
profit expectations in the future.
The
following factors, many of which are beyond our control, may cause significant
fluctuations in the market price of our shares:
|
·
|
fluctuations
in our quarterly revenues and earnings or those of our
competitors;
|
|
·
|
shortfalls
in our operating results compared to levels forecast by securities
analysts;
|
|
·
|
announcements
concerning us, our competitors, or IP telephony, including technological
innovations;
|
|
·
|
the
introduction of new products, changes in product lines, or changes
in
business models; and
|
|
·
|
market
conditions in the industry, and in technology securities
markets.
|
Our
common shares are sporadically and thinly-traded on the
over-the-counter
market on the OTC Bulletin Board
(the
“OTCBB”), meaning that the number of persons interested in purchasing our Common
Stock at or near ask prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company that is relatively unknown to stock
analysts, stock brokers, institutional investors, and others in the investment
community that generate or influence sales volume, and the fact that even if
we
came to the attention of such persons, they tend to be risk-averse and would
be
reluctant to follow a company with an operating history as limited as ours
or
purchase or recommend the purchase of our shares until such time as we became
more seasoned and viable. As a consequence, there may be periods of several
days
or more when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer, which has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect
on share price. We cannot give you any assurance that a broader or more active
public trading market for our common shares will develop or be sustained, or
that current trading levels will be sustained.
Substantial
shareholders may sell all or a substantial portion of the shares they own or
acquire at any time in the future, which could cause the market price of our
Common Stock to decline.
The
sale,
or the possibility of a sale, by any substantial holder of our Common Stock
could cause the market price of our stock to decline. The sale of a substantial
number of shares or the possibility of such a sale
also
could make it more difficult for us to sell new Common Stock or other new equity
securities in the future at a time and at a price best for the
Company.
We
do
not anticipate declaring any cash dividends on our ordinary shares.
We
have not paid cash dividends in the past and do not plan to pay any cash
dividends in the near future.
Voting
control by principal stockholders.
As
of
March 17, 2008, Qualmax owned preferred stock convertible into approximately
72%
of our Common Stock, with commensurate current voting and economic rights.
M.
David Kamrat and Noah Kamrat, father and son, together with their spouses
(collectively, the “
Kamrat
Family
”),
beneficially control approximately 37% of our Common Stock, via their ownership
of Qualmax common stock; P&S Spirit, an entity controlled by Dr. Selvin
Passen and Jacob Schorr, Ph.D., together with Dr. Selvin Passen separately,
beneficially controls approximately 37% of our Common Stock. Therefore, the
members of Kamrat Family, P&S Spirit, and Dr. Passen collectively are able,
indirectly via their influence on matters requiring Qualmax shareholder vote,
to
significantly influence the vote on matters requiring our stockholders’
approval, including the election of directors. For more information regarding
stock ownership of principal shareholders see Item 11, “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.”
ITEM
2.
|
DESCRIPTION
OF PROPERTY
|
Our
U.S.
operations are headquartered in Eugene, Oregon, in leased commercial premises
in
two buildings, located at 340 W. 5
th
Avenue
and at 488 Lincoln Street. The condition of these leased premises is good,
and
we have recently made substantial tenant improvements to both premises. The
principal terms and lease payment obligations are discussed in more detail
under
Item 7, “Financial Statements – Note K.”
ITEM
3.
|
LEGAL
PROCEEDINGS
|
Former
Employee Litigation
The
lawsuit brought by a former employee of the Company, Fred Singer, relating
to
stock options and prior compensation, was settled on April 10, 2007, the Company
agreeing that the plaintiff, Mr. Singer, is the holder of options to purchase
70,000 shares of the Company’s Common Stock.
MPI
Litigation
As
a
result of the Reverse Acquisition, the Company assumed the liabilities of
Qualmax. Qualmax was named as a defendant in certain litigation filed
in France before the Trade Tribunal of Nanterre against
B.O.S.
Better Online Solutions Ltd. (“
BOS
”)
by
Media
Partners International (“
MPI
,”
and
the litigation thereto, the “
MPI
Litigation
”),
a
former distributor of BOS, whose contract with BOS allegedly related to certain
distribution rights for the product division Qualmax purchased from BOS on
December 31, 2005. Pursuant to the asset purchase agreement between
Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless from
liability, without limitation, arising from the claims raised in the MPI
Litigation, and BOS has undertaken defense of Qualmax at BOS’s
expense. The litigation remains in its early stages.
Initial
hearings on a motion for change of venue were concluded in February 2007.
Additional hearings were conducted in late April 2007. The Company has been
preliminarily informed that a decision from the French court to maintain venue
in France was made in September 2007, and that defendants have filed an appeal
of that decision, but that no ruling has been made on the appeal as of the
date
of this filing. At present, based upon the limited progress of the matter and
without the benefit of the completion of factual discovery, management believes
this litigation does not pose a significant financial risk to the
Company.
The
Blackstone Litigation
On
April
1, 2008, effective as of March 31, 2008, the Company entered into a settlement
agreement in relation to
a
lawsuit
entitled
Capital
Securities, LLC and Blackstone Communications Company v. Carlos Bertonnatti,
Worldwide PIN Payment Corp. and Qualmax, Inc.
,
Case
No. 2006-15824-CA-01, filed August 10, 2006 in the Circuit Court of the
11
th
Judicial
Circuit in and for Miami-Dade County, Florida (the “
Blackstone
Litigation
”).
As
disclosed in the Company’s Quarterly Reports on Form 10-QSB filed with the SEC
on November 19, August 20, and May 21, 2007, and the Company’s Annual Report on
Form 10-KSB filed with the SEC on April 17, 2007, the facts underlying the
Blackstone Litigation relate to a contract between defendant Worldwide PIN
Payment Corp. and plaintiffs, and a third party, to plaintiffs’ allegations of
misappropriation of trade secrets and corporate opportunity, and to claims
that
defendants, or some of them, tortiously interfered with plaintiffs’ contract
with a third party.
Pursuant
to the settlement agreement, the Company has agreed to pay plaintiffs the sum
of
$50,000 toward plaintiffs’ costs of litigation, and in exchange, plaintiffs have
released the Company from all claims asserted by plaintiffs or otherwise arising
against the Company; all claims against the Company were dismissed with
prejudice.
Additional
Disputes
In
addition to the matters discussed above, the Company is involved in various
disputes or litigation matters that arise in the ordinary course of
business.
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
PART
II
ITEM 5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
for Common Stock
Our
Common Stock is currently traded on the OTCBB under the symbol “NWBD.OB.” The
following table sets forth, for the fiscal quarters indicated, high and low
closing bid prices for the Common Stock in the over-the-counter market as
reported by the National Association of Securities Dealers, Inc. (NASD). The
information below reflects inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual
transactions.
|
|
Low
Bid
|
|
High
Bid
|
|
Fiscal
Year Ended December 31, 2007
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.085
|
|
$
|
0.085
|
|
Second
Quarter
|
|
|
0.170
|
|
|
0.200
|
|
Third
Quarter
|
|
|
0.050
|
|
|
0.080
|
|
Fourth
Quarter
|
|
|
0.040
|
|
|
0.050
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.180
|
|
$
|
0.180
|
|
Second
Quarter
|
|
|
0.330
|
|
|
0.330
|
|
Third
Quarter
|
|
|
0.180
|
|
|
0.210
|
|
Fourth
Quarter
|
|
|
0.090
|
|
|
0.110
|
|
Stockholders
As
of
March 26, 2008, there were approximately 160 holders of record of our Common
Stock. The closing bid and asked prices for our Common Stock on March 26, 2008,
were $0.07.
Dividends
Due
to
negative cash flow, we have not paid any cash dividends on our Common Stock
to
date, and we do not contemplate the payment of cash dividends in the foreseeable
future. The future dividend policy will depend on our earnings, capital
requirements, financial condition, and other factors considered relevant to
our
ability to pay dividends.
Stock
Option Grants
For
the
twelve months ended December 31, 2007, we granted no stock options.
Equity
Compensation Plan Information
The
following table provides information, as of December 31, 2007, with respect
to
all of our compensation plans under which equity securities are authorized
for
issuance:
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of securities
|
|
|
|
for future issuance
|
|
|
|
to be issued upon
|
|
Weighted-average
|
|
under equity
|
|
|
|
exercise of
|
|
exercise price of
|
|
compensation plans
|
|
|
|
outstanding options,
|
|
outstanding options,
|
|
(excluding securities
|
|
Plan category
|
|
warrants and rights
|
|
warrants and rights
|
|
reflected in column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
|
–
|
|
|
–
|
|
|
–
|
|
Equity
compensation plans not approved by stockholders
|
|
|
3,245,000
|
|
$
|
0.20
|
|
|
1,755,000
|
|
Recent
Sales of Unregistered Securities
P&S
Spirit share purchase
.
As
previously reported on the Company’s Current Report on Form 8-K, filed with the
SEC on January 8, 2007, effective December 29, 2006, the Company entered into
the
Subscription
Agreement
with
P&S Spirit and with the Kamrats. On and effective May 31, 2007, the parties
to the Subscription Agreement entered into the
Amended
Subscription Agreement
,
amending the Subscription Agreement as described herein.
Pursuant
to the Subscription Agreement, the Company agreed to sell to P&S Spirit, and
P&S Spirit agreed to purchase: (i) on the date of closing: (A) 11.160454
shares of Preferred Stock of the Company, par value $0.01 per share, which
shares of Preferred Stock are convertible into 33,333,333 shares of the
Company’s Common Stock, par value $0.01 per share, at a price of $268,806.27 per
share of Preferred Stock (equivalent to $0.09 per share of Common Stock), for
an
aggregate purchase price of $3,000,000; and (B) a Warrant to purchase an
additional 9.300378 shares of Preferred Stock at an exercise price of
$268.806.27 per share (equivalent to $0.09 per share of Common Stock); (ii)
upon
the satisfaction of certain conditions set forth in the Subscription Agreement,
Tranche B-1 Shares (i.e., an additional 3.720151 shares of Preferred Stock,
convertible into 11,111,111 shares of Common Stock), at a price of $268,806.27
per share of Preferred Stock (equivalent to $0.09 per share of Common Stock),
for an aggregate purchase price of $1,000,000; and (iii) upon the satisfaction
of certain conditions set forth in the Subscription Agreement, the Tranche
B-2
Shares (i.e., an additional 3.720151 shares of Preferred Stock, convertible
into
11,111,111 shares of Common Stock), at a price of $268,806.27 per share of
Preferred Stock (equivalent to $0.09 per share of Common Stock), or an aggregate
purchase price of $1,000,000. In addition, as part of the transaction, the
Kamrats agreed to transfer a total of 3,827,655 shares of common stock, par
value $0.01 per share, of Qualmax to P&S Spirit, and in consideration of the
Kamrats’ agreement the Company agreed to issue warrants to the Kamrats
representing, in the aggregate, the right to purchase 9.300378 shares of
Preferred Stock (convertible into 27,777,778 shares of Common Stock), at an
exercise price $268.806.27 per share (equivalent to $0.09 per share of Common
Stock on an as-converted basis); the warrants issued to the Kamrats have the
same terms as the warrants issued to P&S Spirit.
As
discussed above, on April 24, 2007, when the Company filed its Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State,
all
outstanding shares of the Company’s Preferred Stock were automatically converted
to shares of Common Stock at a ratio of 2,986,736 shares of Common Stock for
each share of Preferred Stock. As a result, the Tranche B-1 Shares
and Tranche B-2 Shares were each converted into 11,111,111 shares of Common
Stock.
Pursuant
to the Amended P&S Subscription Agreement, P&S Spirit agreed to buy, and
the Company agreed to sell, all of the Tranche B-1 Shares and Tranche B-2
Shares, as converted into a total of 22,222,222 shares of Common Stock, for
an
aggregate purchase price of $1,000,000, and P&S Spirit agreed to waive
certain of the conditions precedent to the purchase of the Tranche B-1 Shares
and Tranche B-2 Shares as set forth in the Subscription
Agreement. The provisions of the Warrants have not been
amended. Such shares of Common Stock are, or will be, issued without
registration under the Securities Act, in reliance on Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder. A
copy of the Amended P&S Subscription Agreement was included as Exhibit 10.6
to the Company’s Current Report on Form 8-K, filed with the SEC on June 6,
2007.
In
connection with the transactions contemplated by the Amended P&S
Subscription Agreement, the Company, Qualmax, the Kamrats, P&S Spirit and
certain affiliates of the Kamrats and P&S Spirit entered into a First
Amendment to Amended and Restated Lock-Up Agreement, a copy of which was filed
with the SEC on June 6, 2007 as Exhibit 10.7 to the Company’s Current Report on
Form 8-K.
Also
in
connection with the transaction contemplated by the Amended P&S Subscription
Agreement, the Company, Qualmax, the Kamrats, P&S Spirit and certain
affiliates of the Kamrats and P&S Spirit entered into a First Amendment to
Amended and Restated Voting Agreement, a copy of which was filed with the SEC
on
June 6, 2007 as Exhibit 10.8 to the Company’s Current Report on Form
8-K.
BOS
debt conversion
.
On
January 9, 2007, the Company, Qualmax, IP Gear, Ltd., P&S Spirit, and BOS
entered into an agreement, effective as of December 31, 2006, pursuant to which,
among other things, the parties agreed to convert approximately $1.48 million,
in the aggregate, of amounts due and payable to BOS under certain loan, royalty,
and outsourcing agreements, into 5.50652 shares of Preferred Stock, par value
$0.01 per share, of the Company; this Preferred Stock is convertible into
16,446,544 shares of Common Stock, par value $0.01 per share, of the Company.
The price of the Preferred Stock issued to BOS was $268.806.27 per share
(equivalent to $0.09 per share of Common Stock on an as-converted
basis).
The
shares of Preferred Stock issued to BOS are issued without registration under
the Securities Act, in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
As
discussed above, on April 24, 2007, when the Company filed its Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State,
all
outstanding shares of the Company’s Preferred Stock were automatically converted
to shares of Common Stock at a ratio of 2,986,736 shares of Common Stock for
each share of Preferred Stock. As a result, the shares of Preferred
Stock issued to BOS were each converted into 16,446,544 shares of Common Stock,
par value $0.01 per share, of the Company.
Lock-Up
Agreement.
In
connection with the transactions contemplated by the P&S Spirit Subscription
Agreement, the Company, the Kamrats, P&S Spirit, certain affiliates of the
Kamrats and P&S Spirit, and BOS entered into a Lock-Up Agreement, as herein
described in more detail in Item 11, “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters – Lock-Up Agreement
Among Principal Shareholders.”
ITEM 6.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
General
The
following discussion and analysis provides information which management believes
is relevant to an assessment and understanding of our results of operations
and
financial operations and financial conditions. This discussion should be read
in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere herein, and in conjunction with Part I, “Disclosure
Regarding Forward-Looking Statements,” and Item 1, “Description of
Business—Certain Risk Factors.”
Results
of Operations
Company-wide
revenue and gross profit.
Company-wide
(referring to the Company’s two principal lines of business, on a consolidated
basis) revenue, gross profit and gross profit margin for the three month and
twelve month periods ended December 31, 2006 and December 31, 2007 were as
follows:
Company-wide
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$4,503,226
|
|
|
$5,263,256
|
|
|
16.88%
|
|
|
Gross
Margin
|
|
|
|
|
15.09%
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
$794,235
|
|
|
180.98%
|
|
|
Company-wide
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
)
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
Company-wide
revenue and gross profit reflect the results of the Company’s initiatives in
both equipment and service divisions to improve gross margins and quality of
accounts receivable, and to reduce slow moving inventory. As illustrated in
more
detail below, the revenue and gross margin increase is primarily due to TELES
sales, in our NWB Networks division, and certain niche VoIP service termination
routes in our NWB Telecom division. Revenue for 2007 is slightly lower than
revenue for 2006, reflecting declining revenues in the first three quarters
of
2007.
We
note
that the following percentages are based upon pro forma restated unaudited
financial statements for the period ended December 31, 2007, showing our former
subsidiary, IP Gear, Ltd. (an Israeli company) listed as discontinued
operations; furthermore, the following percentages are based only upon the
operations of the Company’s continuing businesses in equipment distribution and
resale, and telephony service:
3 Months Ended
December 31, 2007
|
|
NWB Networks
|
|
NWB Telecom
|
|
Portion
of Company-Wide Revenue
|
|
|
36.06%
|
|
|
63.94%
|
|
Portion
of Company-Wide Gross Profit
|
|
|
36.56%
|
|
|
63.44%
|
|
12 Months Ended
December 31, 2007
|
|
NWB Networks
|
|
NWB Telecom
|
|
Portion
of Company-Wide Revenue
|
|
|
33.08%
|
|
|
66.92%
|
|
Portion
of Company-Wide Gross Profit
|
|
|
30.62%
|
|
|
69.38%
|
|
The
following discussion of gross profit on a per-business line or divisional basis
provides additional information regarding each line’s performance.
Sale
of IP Gear, Ltd. Subsidiary.
As
described above in Item 1, “Description of Business—Recent Developments—Sale of
IP Gear, Ltd. Subsidiary,” effective July 1, 2007, the Company sold its IP Gear,
Ltd. subsidiary to TELES, a VoIP equipment developer and manufacturer based
in
Berlin, Germany.
We
believe that IP Gear, Ltd.’s losses through the second quarter of 2007 reflect a
long-term trend in declining VoIP technology prices, and that to maintain a
research and development and manufacturing business and regain profitability
would require a lengthy and sustained cost-cutting effort and substantial
interim financing. We did not know how long that process would take or whether
we would ultimately be able to adequately adjust our costs in relation to our
competitors. Further, during the entire period of our ownership of IP Gear,
Ltd., even during periods of higher gross margin, IP Gear, Ltd. experienced
substantial operating losses and negative cash flow. Our ability to secure
sources of funding for IP Gear, Ltd.’s operating losses was tenuous, and we were
not able to identify a source of adequate additional capital on acceptable
terms, in the form of equity or debt, within the time needed for operations.
Faced with a rapidly deteriorating cash position, and limited prospects for
securing necessary capital on acceptable terms within the necessary timeframe,
we determined that the Company’s interests would be best served by a sale of our
IP Gear, Ltd. subsidiary.
We
further believe that the sale of IP Gear, Ltd. to TELES provides the Company
an
opportunity for growth and restructuring beyond the sale itself, in the form
of
the Partner Contract granting the Company exclusive rights (subject to certain
limitations) to distribute both TELES and IP Gear, Ltd. products in North
America. We recognize that by selling IP Gear, Ltd., we have given up the
opportunity to build upon a potentially valuable technology asset. However,
we
believe that the short-term cash flow and operational benefit to the Company,
and the potential long-term value represented by our new Partner Contract with
TELES, make the transaction favorable to the Company.
NWB
Networks division revenue and gross profit.
Our
VoIP
and other telephony product distribution and resale business, which formerly
operated under the name “IP Gear,” has been renamed “
NWB
Networks
.”
NWB
Networks focuses on the distribution, resale and support of TELES and IP Gear,
Ltd. products, and, on a more limited basis, continues to act as a niche
reseller of certain additional manufacturers’ products.
Revenue,
gross profit and gross profit margin for the NWB Networks division for the
three
month and twelve month periods ended December 31, 2006 and December 31, 2007
were as follows:
NWB Networks
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$1,226,531
|
|
|
$1,898,148
|
|
|
54.76%
|
|
|
Gross
Margin
|
|
15.29%
|
|
|
15.30%
|
|
|
|
|
|
Gross
Profit
|
|
$187,583
|
|
|
$290,340
|
|
|
54.78%
|
|
|
NWB Networks
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
(10.30)%
|
|
|
Gross
Margin
|
|
15.69%
|
|
|
12.43%
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
(28.94)%
|
|
|
Sales
of
our legacy VoIP equipment resale business (VoIP access servers and related
equipment, other than TELES and IP Gear, Ltd. products) have stabilized, albeit
at levels much lower than we experienced in the first half of 2006, and we
continue to struggle to maintain acceptable gross margins. As illustrated below,
our legacy equipment business experienced a gross loss in the fourth quarter
of
2007, and slim margins for the year, reflecting both declining prices in the
market for that product line and an effort to reduce or eliminate slow moving
legacy inventory.
We
believe that our margins are not likely to improve in these product lines in
the
near term. Our search for higher margin product lines has resulted in our
exclusive distributor status in relation to TELES and IP Gear, Ltd.
products.
We
believe that the consummation of the Partner Contract with TELES will play
a key
role in our initiative to improve revenues and margins in our NWB Networks
division. In particular, by acquiring IP Gear, Ltd., TELES now offers a more
comprehensive product line, and TELES products greatly expand the scope of
IP
Gear, Ltd.’s product line. Our relationship with TELES as an exclusive
distributor in North America provides an opportunity for the Company to sell
these products at an attractive margin, and to build a support and service
network for end-users and VARs. In light of the Partner Contract, we plan to
focus sales and distribution growth on North American sales of TELES and IP
Gear, Ltd. products and certain other complementary products, for as long as
we
maintain our distributor relationship with TELES, and to continue to pursue
other product sales opportunities on a more opportunistic basis, particularly
where complementary to sales of our core TELES and IP Gear, Ltd. product line.
We are currently pursuing a sales and marketing campaign in North America,
in
concert with TELES, under the name “TELES USA.”
We
note
that the Company has been selling TELES equipment as an exclusive distributor
only since July, 2007, and therefore, has very limited experience and only
preliminary results on which to evaluate future potential. We therefore believe
that comparisons to revenues and gross profits in fiscal 2006 are not
meaningful.
The
table
below shows the portion of NWB Networks divisional revenue, gross profit and
gross profit margin attributable to sales of TELES and IP Gear products, in
comparison to sales of all other products in the NWB Networks division, during
2007 on a quarterly and year end basis. We note that the following figures
are
based upon financial statements for the year ended December 31, 2007, showing
our former subsidiary, IP Gear, Ltd. (an Israeli company) listed as discontinued
operations; the following figures are based only upon the operations of the
Company’s NWB Networks division continuing businesses in equipment distribution
and resale for the following periods in 2007:
2007
|
|
Revenue
NWB
Networks
(non-TELES)
|
|
Revenue
TELES
Products
only
|
|
Gross
Profit
NWB
Networks
(non-TELES)
|
|
Gross
Profit
TELES
Products
only
|
|
Gross
Profit
Margin
NWB
Networks
(non-TELES)
|
|
Gross
Profit
Margin
TELES
Products
only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$1,127,874
|
|
|
$100,150
|
|
|
|
|
|
$19,903
|
|
|
7.90%
|
|
|
19.87%
|
|
|
Q2
|
|
$833,349
|
|
|
$133,642
|
|
|
|
|
|
$66,651
|
|
|
5.49%
|
|
|
49.87%
|
|
|
Q3
|
|
$1,018,220
|
|
|
$546,306
|
|
|
|
|
|
$149,038
|
|
|
4.18%
|
|
|
27.28%
|
|
|
Q4
|
|
$557,059
|
|
|
$1,341,089
|
|
|
|
)
|
|
$397,333
|
|
|
(19.21
|
)%
|
|
29.63%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$3,536,502
|
|
|
$2,121,187
|
|
|
|
|
|
$632,925
|
|
|
1.99%
|
|
|
29.84%
|
|
|
The
majority of our TELES product sales during 2007 have been of TELES’s mobile
fixed wireless application gateways, marketed under the iGate and vGate brands.
TELES mobile gateways provide a consolidated mobile, public switched telephone
network (PSTN) and VoIP gateway solution to carriers and corporate network
customers seeking to connect their private branch exchange (PBX) to mobile
and
VoIP services, and can be added to integrated services digital network (ISDN)
and internet protocol (IP) environments for least cost routing and other
advanced call routing and rerouting applications. While this has been a strong
market for us in the third and fourth quarters of 2007, it is possible that
market demand will slow in 2008, depending on whether VoIP networks in our
key
markets continue to expand using iGate and vGate technology.
Our
exclusive distribution rights for TELES equipment are contingent upon reaching
certain minimum purchase thresholds (meaning, the amount of TELES equipment
we
purchase from TELES). For the fifteen month period ending September 30, 2008,
our purchase threshold is $1,000,000. For the six month period from July 1
to
December 31, 2007, our TELES purchases (for inventory received from TELES)
totaled $1,798,162.
Initially,
our TELES sales orders outpaced TELES’s ability to supply certain products,
particularly fixed wireless gateways, potentially constraining sales growth
and
negatively impacting customer relations and brand acceptance. However, in the
fourth quarter TELES was able to increase production and enable us to fill
a
number of pending orders. We believe time-to-market is a critical component
of
success for technology product sales, both in terms of product deliver and
product innovation. We remain confident in TELES’s ability to meet product
demand and continue product innovation in key product lines, such as fixed
wireless gateways and customer premise VoIP equipment. However, we do not
control production of any of the products we distribute and sell.
All
products purchased from TELES are per contract quoted in the base currency
used
by TELES, the Euro. New World Brands sells all goods to its customers in U.S.
dollars. As a result, we have a certain exposure to currency risk to the extent
the relative value of the U.S. dollar drops compared to the Euro. During 2007,
the Euro has increased substantially relative to the U.S. dollar, and it appears
likely that the Euro may increase further. Currently our exposure to dollar
devaluation relative to the Euro is limited, because our purchase volume from
TELES and other Euro-based manufacturers has been limited compared to our total
revenue, because we do not maintain a substantial amount of Euro-based
inventory, and because we have been able adjust product pricing and limit the
time between Euro-based product purchase and dollar-based product sale. However,
if we are successful in our efforts to increase TELES sales, and as we increase
our Euro-based inventory, our exposure to currency risk will
increase.
NWB
Telecom division revenue, gross profit and gross profit
margin.
Our
wholesale VoIP services business, which formerly operated under the name “IP
Gear Connect,” has been renamed “
NWB
Telecom
.”
Revenue
and cost of goods for the IP Gear Connect division (wholesale VoIP services)
for
the three month and twelve month periods ended December 31, 2006 and December
31, 2007 were as follows:
NWB Telecom
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$3,237,776
|
|
|
$3,365,108
|
|
|
3.93%
|
|
|
Gross
Margin
|
|
1.88%
|
|
|
14.97%
|
|
|
|
|
|
Gross
Profit
|
|
$60,982
|
|
|
$503,895
|
|
|
726.30%
|
|
|
NWB Telecom
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$11,230,284
|
|
|
$11,443,514
|
|
|
1.90%
|
|
|
Gross
Margin
|
|
7.55%
|
|
|
13.92%
|
|
|
|
|
|
Gross
Profit
|
|
$847,558
|
|
|
$1,593,242
|
|
|
87.98%
|
|
|
We
completed the initial implementation of our upgraded switching equipment as
of
September 30, 2007, thereby expanding the potential volume of our wholesale
telephony service offering, and our switching monitoring, support and service
capacity in order to adequately support expanding service volume. During 2007,
we have ramped-up sales and marketing efforts, and as illustrated below have
managed to increase revenue during 2007 while maintaining gross margins. The
comparative fourth quarter periods reflect unusually low gross margins in the
fourth quarter of 2006.
The
comparative periods’ increase in gross profit resulted primarily from our
continued focus on higher margin niche markets and longer-term vendor
relationships. Our increased selectivity in this area has also slowed revenue
growth to some degree. The focus on niche markets increases our reliance on
a
limited number of small telecom carriers operating in foreign countries, whose
service may be prone to interruption, and may only be replaced at substantially
higher prices or lower quality. Our near-term plan for the NWB Telecom division
is to continue to pursue higher gross margin VoIP termination routes from a
more
diversified group of vendors at a revenue growth rate we are able to maintain
and finance. Our longer term plan includes expansion of our carrier and customer
service capabilities, by building on the network infrastructure and expertise
that we have developed by reselling termination routes.
During
2007, NWB Telecom has substantially expanded its purchases of foreign
termination service from a particular affiliated group of vendors. The following
table illustrates, for 2007, the revenue generated from resale of services
purchased from these vendors, and the related gross profit, in comparison to
the
costs and associated revenue of all other NWB Telecom vendors, and all other
Company vendors, during the period:
12 Months Ended
December 31, 2007
|
|
Significant Vendor
|
|
All Other NWB
Telecom Vendors
|
|
All Other Company-Wide
(including all other NWB
Telecom vendors)
|
|
Revenue
(generated from resale of service purchased from vendor)
|
|
$4,067,559
|
|
|
$7,375,955
|
|
|
$13,033,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit (earned from resale of service purchased from
vendor)
|
|
$1,075,824
|
|
|
$517,417
|
|
|
$1,220,726
|
|
|
Resale
of
termination routes purchased from the affiliated vendors represented 36.54%
of
revenue for the NWB Telecom division, 23.79% of the revenue for the entire
Company, and generated 67.52% of the gross profit of the NWB Telecom division
and 46.85% of the gross profit of the entire Company.
These
vendors are under no enforceable obligation to sell us service of any kind,
and
we are under no obligation to buy, other than on a week-by-week basis, and
we
are at risk of losing some or all of the services supplied by this vendor with
little or no notice. Furthermore, we can have no assurance that these vendors
will continue to be able to offer services for sale at the gross margins
currently earned. Loss of this significant vendor, or of the high-margin
services we currently purchase, would result in an attendant loss of associated
gross profits, without a corresponding immediate decrease in related sales,
general and administrative costs, therefore negatively impacting our overall
profitability in the near term.
The
table
below shows the portion of NWB Telecom divisional revenue, gross profit and
gross profit margin, and NWB Telecom gross profit as a percentage of
Company-wide gross profit, during 2007 on a quarterly and year end basis. We
note that the following figures are based upon financial statements for the
year
ended December 31, 2007, showing our former subsidiary, IP Gear, Ltd. (an
Israeli company) listed as discontinued operations:
2007
|
|
Revenue
NWB
Telecom
|
|
Gross
Profit
NWB
Telecom
|
|
Gross
Profit
Margin
NWB
Telecom
|
|
NWB
Telecom
Gross
Profit as
% of
Company-
wide
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$2,870,997
|
|
|
$461,535
|
|
|
16.08%
|
|
|
80.89%
|
|
|
Q2
|
|
$2,589,778
|
|
|
$309,911
|
|
|
11.97%
|
|
|
73.39%
|
|
|
Q3
|
|
$2,617,632
|
|
|
$317,900
|
|
|
12.14%
|
|
|
62.40%
|
|
|
Q4
|
|
$3,365,108
|
|
|
$503,896
|
|
|
14.97%
|
|
|
63.44%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$11,443,514
|
|
|
$1,593,242
|
|
|
13.92%
|
|
|
69.38%
|
|
|
Summary:
company-wide and divisional revenue, gross profit and gross profit margin,
on a
quarterly and year-end basis, for 2007.
It
is the
goal of management to present the Company’s financial performance in as
comprehensive, accurate, and illustrative a manner as possible. To that end,
management continually seeks to improve the presentation of results of the
Company’s operations in this Item 6, “Management’s Discussion and Analysis or
Plan of Operation.” The following tables duplicate information presented
elsewhere in this Item 6, but we believe that the following presentation of
that
information may be helpful to shareholders and potential investors. As the
Company continues to develop its internal controls and financial records
keeping, we hope to be able to present this sort of consolidated and
comprehensive information for current periods in comparison to prior periods.
The following presentation is not intended to substitute for any other portion
of this Item 6.
2007
|
|
Revenue
Company
Wide
|
|
Revenue
NWB
Telecom
|
|
%
of Company-Wide
Revenue
|
|
Revenue
NWB
Networks (non-
TELES)
|
|
%
of Company-
Wide
Revenue
|
|
Revenue
TELES
Products
only
|
|
%
of Company-Wide
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$4,099,021
|
|
|
$2,870,997
|
|
|
70.04%
|
|
|
$1,127,874
|
|
|
27.52%
|
|
|
$100,150
|
|
|
2.44%
|
|
|
Q2
|
|
$3,556,768
|
|
|
$2,589,778
|
|
|
72.81%
|
|
|
$833,349
|
|
|
23.43%
|
|
|
$133,642
|
|
|
3.76%
|
|
|
Q3
|
|
$4,182,157
|
|
|
$2,617,632
|
|
|
62.59%
|
|
|
$1,018,220
|
|
|
24.35%
|
|
|
$546,306
|
|
|
13.06%
|
|
|
Q4
|
|
$5,263,257
|
|
|
$3,365,108
|
|
|
63.94%
|
|
|
$557,059
|
|
|
10.58%
|
|
|
$1,341,089
|
|
|
25.48%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$17,101,203
|
|
|
$11,443,514
|
|
|
66.92%
|
|
|
$3,536,502
|
|
|
20.68%
|
|
|
$2,121,187
|
|
|
12.40%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
Gross
Profit
Company Wide
|
|
Gross
Profit
NWB
Telecom
|
|
%
of Company-Wide
Gross
Profit
|
|
Gross
Profit
NWB
Networks (non-
TELES)
|
|
%
of Company-Wide
Gross
Profit
|
|
Gross
Profit
TELES
Products
only
|
|
%
of Company-Wide
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$570,550
|
|
|
$461,535
|
|
|
80.89%
|
|
|
$89,112
|
|
|
15.62%
|
|
|
$19,903
|
|
|
3.49%
|
|
|
Q2
|
|
$422,304
|
|
|
$309,911
|
|
|
73.39%
|
|
|
$45,742
|
|
|
10.83%
|
|
|
$66,651
|
|
|
15.78%
|
|
|
Q3
|
|
$509,455
|
|
|
$317,900
|
|
|
62.40%
|
|
|
$42,517
|
|
|
8.35%
|
|
|
$149,038
|
|
|
29.25%
|
|
|
Q4
|
|
$794,240
|
|
|
$503,896
|
|
|
63.44%
|
|
|
$(106,989
|
)
|
|
(13.47)%
|
|
|
$397,333
|
|
|
50.03%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$2,296,550
|
|
|
$1,593,242
|
|
|
69.38%
|
|
|
$70,383
|
|
|
3.06%
|
|
|
$632,925
|
|
|
27.56%
|
|
|
2007
|
|
Gross
Profit
Margin
Company
Wide
|
|
Gross
Profit
Margin
NWB
Telecom
|
|
Gross
Profit
Margin
NWB
Networks
(non-TELES)
|
|
Gross
Profit
Margin
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
13.92%
|
|
|
16.08%
|
|
|
7.90%
|
|
|
19.87%
|
|
|
Q2
|
|
11.87%
|
|
|
11.97%
|
|
|
5.49%
|
|
|
49.87%
|
|
|
Q3
|
|
12.18%
|
|
|
12.14%
|
|
|
4.18%
|
|
|
27.28%
|
|
|
Q4
|
|
15.09%
|
|
|
14.97%
|
|
|
(19.21)%
|
|
|
29.63%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
13.43%
|
|
|
13.92%
|
|
|
1.99%
|
|
|
29.84%
|
|
|
Total
Company expenses.
Total
Company expenses (sales, marketing, general, and administrative) for the three
and twelve month periods ended December 31, 2006 and 2007 were as
follows:
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Total Expenses
|
|
|
$1,811,074
|
|
|
$1,269,545
|
|
|
(29.92)%
|
|
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Total Expenses
|
|
|
$4,065,361
|
|
|
$4,214,422
|
|
|
3.66%
|
|
The
substantial decrease in total expenses for the comparative three month period
is
due primarily to decreases in legal, accounting, and other professional fees,
related to 2006 restructurings and debt and equity offerings, litigation, and
accounting services.
However,
total expenses increased slightly for the twelve month period ending December
31, 2007 as compared to that ending December 31, 2006, reflecting: (i) higher
legal, accounting, and professional fees during the nine month period ending
September 30, 2007, as compared to the nine month period ending September 30,
2006; (ii) increased sales and marketing costs (including sales staff) during
the twelve month period ending December 31, 2007, as compared to the twelve
month period ending December 31, 2006; and (iii) migration during the third
and
fourth quarters of 2007 of the Company's core telecom service switching and
routing operations to an outsource provider, utilizing the outsource provider's
equipment rather than our own, resulting in an increase in related expenses
and
a decrease in related capitalized expenditures.
We note that the above
figures are based upon financial statements for the periods ended December
31,
2007 and 2006, showing our former subsidiary, IP Gear, Ltd. (an Israeli
company), listed as discontinued operations; the above figures are based only
upon the operations of the Company’s continuing businesses in equipment
distribution and resale, and telephony service.
Interest.
Continuing
Operations Only
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Interest
|
|
|
$32,073
|
|
|
$19,859
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months Ended
December 31, 2006
|
|
|
12 Months Ended
December 31, 2007
|
|
Interest
|
|
|
$178,967
|
|
|
$129,346
|
|
The
change over both periods is due primarily to fluctuations in the principal
amount of the P&S Term Loan and the BoA Loan, and differences in interest
rates between the two loans. (The P&S Term Loan has been a smaller principal
amount at a lower interest rate than the BoA Loan.)
Amortization
and depreciation.
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Continuing
Operations Only
|
|
|
$296,110
|
|
|
$416,441
|
|
|
40.64%
|
|
Amortization
and depreciation for the Company for continuing operations increased in 2007
due
to increased depreciation reflecting increased capital investment during prior
periods in switching, routing, and tracking equipment and technology utilized
in
relation to our NWB Telecom VoIP service business. Our U.S.-based operations
have a very limited amount invested in software technology, and as a result,
our
current amortization is negligible and not expected to increase in the near
term.
Net
loss
.
The
above
factors contributed to a net loss for the Company for both the three and nine
month periods ended December 31, 2007. As a result of the sale of our IP Gear,
Ltd. subsidiary to TELES, we are required to restate financials on a pro forma
basis for years 2007 and 2006, showing our former subsidiary, IP Gear, Ltd.,
listed as discontinued operations, and separately reporting the results of
operations of the Company’s continuing businesses in equipment distribution and
resale, and telephony service. However, we believe that for a better
understanding of the impact of the IP Gear, Ltd. sale on our net losses, it
is
important to also consider the Company’s net losses reported to include the
losses generated by discontinued operations (meaning, including losses from
IP
Gear, Ltd.) in net losses generated by continuing operations. The Company’s net
losses for the three and twelve month periods ended December 31, 2007 and 2006,
shown both excluding and including discontinued operations, are as
follows:
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing Operations Only
|
|
|
$(1,073,525)
|
|
|
$(581,883)
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months Ended
December 31, 2006
|
|
|
12 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing Operations Only
|
|
|
$(2,278,660)
|
|
|
$(2,758,497)
|
|
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing
and
Discontinued Operations
|
|
|
$(2,163,109)
|
|
|
$(910,157)
|
|
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing
and
Discontinued Operations
|
|
|
$(5,425,674)
|
|
|
$(6,703,186)
|
|
The
difference between net loss from continuing operations only, as compared to
the
net loss for continuing and discontinued (meaning, IP Gear, Ltd.), illustrates
the impact of the Company’s former subsidiary, IP Gear, Ltd., on the Company’s
financial performance.
Following
is a summary of total company expenses, interest, amortization and depreciation,
and resultant net profit/loss, allocated among our two operating divisions,
NWB
Telecom and NWB Networks, and showing NWB Networks results for non-TELES
products and TELES products only. We note that the following figures are based
upon financial statements for the periods ended December 31, 2007 and 2006,
showing our former subsidiary, IP Gear, Ltd. (an Israeli company), listed as
discontinued operations.
2006
Continuing Operations
(1)
|
|
Company-
Wide
|
|
Corporate
Expenses
|
|
NWB
Telecom
|
|
NWB
Networks
(non-
TELES)
|
|
NWB
Networks
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$1,837,350
|
|
|
N/A
|
|
|
$847,558
|
|
|
$989,792
|
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
Expense
(2)
|
|
$(4,138,286
|
)
|
|
$(1,664,031
|
)
(3
)
|
|
$(1,451,158
|
)
|
|
$(1,023,097
|
)
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$(178,967
|
)
|
|
$(175,229
|
)
|
|
$(3,697
|
)
|
|
$(40
|
)
|
|
$0
|
|
|
Depreciation/Amortization
|
|
$(296,110
|
)
|
|
$(125,198
|
)
|
|
$(136,736
|
)
|
|
$(34,175
|
)
|
|
$0
|
|
|
Other
Income (Expense)
|
|
$24,448
|
|
|
$87,406
|
|
|
$0
|
|
|
$(62,958
|
)
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Net Profit (Loss) from Continuing Operations Only
|
|
$(2,751,565
|
)
|
|
$(1,877,052
|
)
|
|
$(744,034
|
)
|
|
$(130,478
|
)
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Continuing and Discontinued Operations
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(Loss) on Write Down of Discontinued Operations
|
|
$(3,147,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss) on Disposition of Discontinued Operations
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Provision
|
|
$472,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Net Profit (Loss) from Continuing and Discontinued
Operations
|
|
$(5,425,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Continuing Operations
|
|
Company-
Wide
|
|
Corporate
Expenses
|
|
NWB
Telecom
|
|
NWB
Networks
(non-
TELES)
|
|
NWB
Networks
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
$2,296,550
|
|
|
$0
|
|
|
$1,593,242
|
|
|
$70,383
|
|
|
$632,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
Expense
(2)
|
|
|
$(4,214,422
|
)
|
|
$(1,942,020
|
)
(3
)
|
|
$(1,259,716
|
)
|
|
$(620,720
|
)
|
|
$(391,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
$(129,346
|
)
|
|
$(119,347
|
)
|
|
$(9,409
|
)
|
|
$(456
|
)
|
|
$(134
|
)
|
Depreciation/Amortization
|
|
|
$(416,441
|
)
|
|
$(177,504
|
)
|
|
$(236,519
|
)
|
|
$(2,344
|
)
|
|
$(73
|
)
|
Other
Income (Expense)
|
|
|
$109,157
|
|
|
94,291
|
|
|
$21,247
|
|
|
$(6,381
|
)
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Net Profit (Loss) from Continuing Operations Only
|
|
|
$(2,354,502
|
)
|
|
$(2,144,280
|
)
|
|
$108,845
|
|
|
$(559,518
|
)
|
|
$240,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Continuing and Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(Loss) on write down of discontinued operations
|
|
|
$(3,949,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss) on disposition of discontinued operations
|
|
|
$
4,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Provision
|
|
|
$(403,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Net Profit (Loss) from Continuing and Discontinued
Operations
|
|
|
$(6,703,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
2006
is presented in a manner consistent with 2007 for comparison purposes,
showing the operations of our former subsidiary, IP Gear, Ltd.,
as
discontinued, even though the subsidiary’s operations were not
discontinued until 2007.
|
(2)
|
Includes
management’s determination of sales, general, and administrative expenses
directly allocable to each division or line of
business.
|
(3)
|
Includes
indirectly allocable expenses, which include, for example, legal,
and
accounting fees, costs of SEC compliance, costs of leasing and
operating
our facilities in Eugene, Oregon, and certain executive-level management
costs.
|
Liquidity
and Capital Resources
The
Company’s year-end cash balance and ratio of current assets to current
liabilities for the twelve month periods ending December 31, 2007 and 2006
are
indicated below:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
|
|
$2,038,635
|
|
|
|
|
|
Current
Assets
|
|
$4,562,198
|
|
|
$7,511,470
|
|
|
Current
Liabilities
|
|
$2,274,814
|
|
|
$3,702,112
|
|
|
Current
Ratio (current assets to current liabilities)
|
|
2.17:1
|
|
|
2.03:1
|
|
|
Quick
Ratio (cash to current liabilities)
|
|
0.90:1
|
|
|
0.92:1
|
|
|
The
Company’s cash utilization rates (meaning, amount of cash used in operations)
for both Continuing Operations and Discontinued Operations for the twelve months
ended December 31, 2007 and 2006 were, respectively, $6,220,155 and $5,425,674.
However, the Company’s cash utilization rate for Continuing Operations only for
the twelve months ending December 31, 2007 was $2,242,296. Because no
Discontinued Operations will occur in fiscal year 2008, as a result of the
sale
of our IP Gear, Ltd. subsidiary, we believe that our cash utilization rate
for
Continuing Operations is the relevant starting point for anticipating cash
utilization rates in fiscal year 2008.
Our
capital raised from loan financing remained unchanged in 2007, at $1,000,000.
As
a result of the partial loan repayment relating to the TELES Loan transaction
in
March, 2008, our loan financing proceeds have decreased in 2008 as of the date
of this filing by $500,000. Capital raised from equity financing totaled
$1,000,000 in 2007 as compared to over $6,000,000 in 2006. We currently have
available to us $500,000 in additional debt financing from the P&S Credit
Line, and, contingent upon completion of the merger of Qualmax with and into
the
Company (among other contingencies), $1,000,000 in additional debt financing
from the TELES Loan.
Capital
expenditures.
The
Company’s primary investment in capital had been focused on funding the R&D
efforts of our IP Gear, Ltd. subsidiary. In the first six months of 2007, the
Company made investments in this subsidiary, until it was sold on July 1, 2007.
These capital expenditures are referred to as “Discontinued Operations” in our
current financial statements. Capital expenditures by the Company for equipment
providing the infrastructure of our telecom services division, NWB Telecom
are
referred to as “Continuing Operations” in our current financial statements.
Capital expenditures of Continuing Operations for 2006 and 2007 also include
certain expenditures associated with equity-based financing activities. The
following chart provides a comparative representation of the capital
expenditures for Continuing Operations and Discontinued Operations during 2007
and 2006:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Capital
Expenditures, Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures, Discontinued Operations
|
|
$748,858
|
|
|
$5,972,978
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization, Continuing Operations
|
|
$406,152
|
|
|
$296,110
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization, Discontinued Operations
|
|
$1,157,308
|
|
|
$1,868,492
|
|
|
Reasons
for reduced capital expenditures in 2007 as compared with 2006 primarily include
the following:
|
·
|
As
a result of the sale of our IP Gear, Ltd. subsidiary, the Company
engaged
in no meaningful research and development activities during the third
and
fourth quarters of 2007; and
|
|
·
|
The
Company had no equity-based financing activities during the third
and
fourth quarters of 2007.
|
The
reduction in capital expenditures for Continuing Operations also reflects a
larger investment during 2006 in telecommunications equipment used to operate
our NWB Telecom division. In the beginning of the third quarter of 2007, we
began the process of migrating our core telecom service switching and routing
operations to an outsource service provider, utilizing the service provider’s
equipment rather than purchasing our own. As a result, our costs related to
the
service provider are treated as a current expense, while the costs related
to
investment in our in-house switching and routing equipment have been largely
capitalized.
Future
capital needs.
We
believe that as a result of the sale of IP Gear, Ltd., our negative cash flow
and operating losses should decrease substantially over the course of the fiscal
year, and we believe the Company is now better positioned to achieve positive
cash flow. As a result, management expects that in 2008 it will be able to
focus
its efforts on restructuring operations and cultivating high margin sales
opportunities, rather than on raising capital and restructuring to fund or
reduce operational losses.
Current
capital expenditures are primarily related to investments made in the switching
equipment used to operate the NWB Telecom division. We may also increase capital
expenditures in relation to expansion of our customer and vendor support and
training services provided in relation to sales and distribution of TELES
products. However, the Company’s ability to pursue its current business plan
without seeking additional debt- or equity-based capital is entirely dependent
on management’s ability to increase revenues at current or higher gross margins,
while decreasing overall Company costs relative to gross profits, and there
can
be no assurance that current market conditions will continue or that management
will achieve its goals. In addition, management may recommend seeking additional
debt- or equity-based capital to grow or maintain current operations, including
without limitation additional build-out of our VoIP services network and
infrastructure, or to pursue new lines of business or ventures, if market
conditions appear to support additional investment.
Technology
As
of
December 31, 2006, our balance sheet reflected a value for our IP Gear, Ltd.
subsidiary’s proprietary Claro technology. As discussed in “Note
B—Sale of Discontinued Operations—IP Gear, Ltd.” to the Company’s financial
statements appearing in Item 7 of this Form 10-KSB), as a result of the sale
of
our IP Gear, Ltd. subsidiary, as of June 30, 2007, we began accounting for
this
asset as sold.
Since
selling our IP Gear, Ltd. subsidiary, we have focused our investment in
technology on our NWB Telecom VoIP service business, through the purchase or
lease of switching and routing equipment, and the expansion of our technical
staff and support contractors. We expect to continue to invest in the expansion
of our NWB Telecom business, including potentially the implementation of new
or
enhanced billing and tracking software, and additional technical support and
service staff. In addition, we expect to expand the customer support services
offered by our NWB Networks division, by investing in additional staff and
equipment. However, at this time, our investment in technology does not include
the development of significant proprietary intellectual property.
Management
Changes
Noah
Kamrat, formerly our President and Chief Operations Officer, resigned from
those
positions effective January 24, 2008, in order to assume the position of Chief
Technology Officer. M. David Kamrat, who also serves as Chief Executive Officer
and a director, assumed the duties of President, and Shehryar Wahid, who also
serves as Chief Financial Officer, Secretary, Treasurer, and a director, assumed
the duties of Chief Operations Officer. These changes to key management
positions are intended to address a potential void in our management team
resulting from the sale of our IP Gear, Ltd. subsidiary. Upon the sale of our
IP
Gear, Ltd. subsidiary, we divested ourselves of our R&D and manufacturing
business, and as a result lost the core of our in-house technology expertise
in
the VoIP industry, particularly with respect to new products and emerging trends
in VoIP network equipment and its deployment. Noah Kamrat is particularly well
suited to assuming the role of Chief Technology Officer due to his depth and
breadth of experience selling and operating VoIP service networks, and selling,
developing, and deploying VoIP technology equipment. We believe that, in the
role of Chief Technology Officer, Mr. Kamrat will be able to better position
the
Company to take advantage of emerging product and service trends, and enable
the
Company to work closely with TELES to identify and serve emerging markets and
uses for TELES and IP Gear, Ltd. products.
ITEM
7.
FINANCIAL
STATEMENTS
New
World
Brands’ financial statements for the fiscal year ended December 31, 2007 begin
on page F-1.
ITEM
8.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item
8A(T). CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”)) as of December 31, 2007, the end of the period covered by this Annual
Report on Form 10-KSB/A2. Our disclosure controls and procedures are intended
to
ensure that the information we are required to disclose in the reports
that we
file or submit under the Exchange Act is (i) recorded, processed, summarized
and
reported within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including our chief executive
officer and chief financial officer (as the Company’s principal executive
officer and principal financial officer, respectively) to allow timely
decisions
regarding required disclosures.
Based
on
that evaluation, our chief executive officer and chief financial officer
concluded that, as of the end of the period covered by this Annual Report,
our
disclosure controls and procedures were not effective due to our failure
to
adequately report such officers’ conclusion with respect to internal control
over financial reporting.
Our
management has concluded that the financial statements included in this
Annual
Report present fairly, in all material respects, our financial position,
results
of operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the United States of
America.
It
should
be noted that any system of controls, however well designed and operated,
can
provide only reasonable, and not absolute, assurance that the objectives
of the
system will be met. In addition, the design of any control system is based
in
part upon certain assumptions about the likelihood of future
events.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control
over
our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of
the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.
Our
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
(ii) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that
our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use
or
disposition of our assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Our management, with the
participation of our chief executive officer and chief financial officer,
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in
Internal
Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Based on this evaluation, our chief executive officer and chief financial
officer concluded that, as of the end of the period covered by this Annual
Report, our internal control over financial reporting was
effective.
This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the SEC that permit
us to
provide only management’s report in this Annual Report.
Changes
in Internal Control over Financial Reporting
During
the fourth quarter of 2007, there have been no changes in our internal
control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
8B.
OTHER
INFORMATION
None.
PART
III
ITEM
9.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors
and Officers
As
a
result of the approval of our Amended and Restated Certificate of Incorporation,
effective April 24, 2007, a staggered Board, divided into three classes, was
created: (i) the initial term for Class I directors will expire at the 2007
annual meeting of stockholders; (ii) the initial term for Class II
directors will expire at the 2008 annual meeting of stockholders; and
(iii) the initial term for Class III directors will expire at the 2009
annual meeting of stockholders. Existing directors were assigned to the
following classes: Noah R. Kamrat, Class II; M. David Kamrat, Class III; and
Jacob Schorr, Ph.D., Class III.
For
additional information regarding the authorization of additional shares, the
conversion of Preferred Stock, and the staggered Board, reference is made to
our
Current Report on Form 8-K, filed with the SEC on April 30, 2007, and the
Company’s Schedule 14C, filed with the SEC on March 20, 2007.
Effective
January 31, 2007, Ian Richardson resigned as Chief Financial Officer of the
Company, and Shehryar Wahid was appointed Chief Financial Officer of the
Company. Ian Richardson continued to serve as Vice President and General
Counsel.
Effective
August 1, 2007, Ian Richardson resigned as Vice President and General Counsel
of
the Company and his employment with the Company terminated. Since August 1,
2007, Mr. Richardson has served the Company as outside counsel in private
practice. Also effective August 1, 2007, Duy Tran resigned as Vice President
and
Secretary of the Company, M. David Kamrat, then the Company’s Chief Executive
Officer, assumed the duties of Secretary on an interim basis.
Effective
August 20, 2007, Noah Kamrat resigned as a member of the Board, and continued
to
serve as President and Chief Operating Officer of the Company. Also effective
August 20, 2007, Dr. Selvin Passen joined the Board as a Class II
member.
Effective
January 24, 2008, Noah Kamrat resigned as President and Chief Operations Officer
of the Company and was appointed by the Board to serve as the Company’s Chief
Technology Officer and Vice President of Operations. Effective January 24,
2008,
the Board appointed M. David Kamrat, who at that time served as the Chief
Executive Officer of the Company and as the Chairman of the Board, to also
serve
as President of the Company. Also effective January 24, 2008, the Board
appointed Shehryar Wahid, who currently serves as the Company’s Chief Financial
Officer and Secretary and is a member of the Board to also serve as Chief
Operations Officer and Treasurer of the Company. Also effective January 24,
2008, the Board appointed Abe Narkunski to serve as Senior Vice
President.
As
a
result of the foregoing changes to the Company’s officers and directors, the
officers and directors of the Company as of March 31, 2008 are as
follows:
Name
|
|
Age
|
|
Position(s)
|
|
|
|
|
|
M.
David Kamrat
|
|
55
|
|
Chief
Executive Officer, President and Chairman of the Board
|
Noah
R. Kamrat
|
|
37
|
|
Chief
Technology Officer and Vice President of Operations
|
Shehryar
Wahid
|
|
43
|
|
Chief
Financial Officer, Chief Operations Officer, Secretary, Treasurer
and
Director
|
Selvin
Passen, M.D.
|
|
73
|
|
Director
|
Jacob
M. Schorr, Ph.D.
|
|
63
|
|
Director
|
Abe
Narkunski
|
|
61
|
|
Senior
Vice President
|
M.
David Kamrat
has
served as the Company’s Chief Executive Officer and Chairman of the Board since
September 15, 2006, the date on which the Company acquired the Qualmax business.
On January 24, 2008, Mr. Kamrat was appointed President of the Company. Prior
to
that, Mr. Kamrat served as Chief Executive Officer and Chairman of the Board
of
Directors of Qualmax; he has held both positions since he founded Qualmax in
2001. From 1999 - 2004, Mr. Kamrat operated Mind Opening Corporation, a
telecommunications consulting business. Prior to that, Mr. Kamrat worked as
a
sales executive with MCI, Inc. (“
MCI
”).
Prior
to working with MCI, Mr. Kamrat had a successful career in construction and
land
development. Mr. Kamrat also serves as Chief Executive Officer and Chairman
of
the Board of Qualmax.
Noah
Kamrat
served
as the Company’s President and as a director since September 15, 2006, the date
on which the Company acquired the Qualmax business. On August 20, 2007 Mr.
Kamrat resigned as a director. On January 24, 2008, Mr. Kamrat resigned as
President and Chief Operations Officer and was appointed Chief Technology
Officer and Vice President of Operations. Prior to that, Mr. Kamrat served
as
President, Chief Operating Officer, and as a director of Qualmax, which
positions he has held since 2002. From 1998 to 2002, Mr. Kamrat served as
President of Synergyx Communications Group, an IP consulting and technology
company. In 1998, Mr. Kamrat served as a director of National Accounts for
Frontier Communications (Global) located in Miami, Florida. Mr. Kamrat was
a
sales consultant specializing in long distance and Internet services for MCI
from 1994 to 1997. Mr. Kamrat also serves as President and a director of
Qualmax.
Shehryar
Wahid
has
served as the Company’s Chief Financial Officer since February 1, 2007, and as
Chief Operations Officer, Secretary, and Treasurer since January 24, 2008.
Mr.
Wahid has served as a director of the Company since August 20, 2007. From
approximately September 2006 through January 2007, Mr. Wahid acted as a
consultant to the Company. Mr. Wahid has over the last 16 years held various
executive level positions in finance and operations in the telecommunications
and logistics industries, and has worked both as an auditor, for the Financial
Services Group at Ernst & Young, and as a controller and chief financial
officer for a number of telecommunications companies. Mr. Wahid holds a
Chartered Accountancy Designation from Canada and has substantial knowledge
of
U.S.-based GAAP reporting requirements. Mr. Wahid received a B.S. in
Biochemistry from the University of Toronto and a Business Degree from the
University of Western Ontario’s Ivey School of Business.
Selvin
Passen, M.D.
has
served as a director of the Company since August 20, 2007. Prior to that, Dr.
Passen served as the Company’s Chairman of the Board from May 22, 2004 to
September 15, 2006. Dr. Passen is a retired pathologist who was the Medical
Director of Maryland Medical Laboratory, Inc., a subsidiary of Corning, Inc.,
until 1994. Since then, Dr. Passen has been involved in real estate
development and is the principal holder in Baltimore Marine Center in Baltimore,
Maryland, and Lauderdale Marine Center in Fort Lauderdale, Florida.
Jacob
M. Schorr, Ph.D.
has
served as a director of the Company since September 15, 2006, the date on which
the Company acquired the Qualmax business. From April 2000 to July 2006, Dr.
Schorr served as Chief Executive Officer and a director of Spirit Airlines,
Inc., and as Chairman of the Board of Spirit Airlines, Inc. from February 2004
to July 2006. From 1997 until 2000, Dr. Schorr served as Spirit Airline’s Chief
Information Officer. From 1977 until 1994, Dr. Schorr served in various
management capacities at Maryland Medical Laboratory, and he served as Vice
President of Corning Clinical Laboratories from 1994 to 1996.
Abram
Narkunski
was
appointed to serve as Senior Vice President effective January 24,
2008. Mr. Narkunski was founder and Vice President of Public
Communications of America from 1986 – 1989, pioneering in the private pay
phones, operator services and inmate services businesses. He founded
and served as Vice President of Public Phone, which later became Cominex, from
1989 - 1999, where he automated inmate services and was instrumental in
introducing prepaid telephone cards into the U.S.
marketplace. Subsequently, Mr. Narkunski held executive positions for
calling card companies and a leading point-of-sale (POS) provider prior to
becoming Vice President of Sales and Marketing for Omega Enhanced
Services. Mr. Narkunski also acted as a consultant to numerous
leading telecommunications companies prior to joining the Company on May 1,
2007 as telecom sales and operations manager.
Family
Relationships
M.
David
Kamrat is the father of Noah Kamrat.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our officers, directors, and persons who
beneficially own more than 10% of a registered class of our equity securities
(“10% stockholders”) to file reports of ownership and changes in ownership with
the SEC. Officers, directors, and 10% stockholders also are required to furnish
us with copies of all Section 16(a) forms they file.
To
our
knowledge, based solely upon a review of the copies of such reports furnished
to
us and written representations that no other reports were required during fiscal
2007, the Company’s directors, executive officers and 10% stockholders
have complied with all Section 16(a) filing requirements, as
applicable.
Code
of Ethics
The
Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
and all other employees and directors of the Company and its subsidiaries.
The
Company has posted its Code of Ethics on its website (
www.nwbtechnologies.com
),
and it
is available in print to any stockholder upon request. The Company will post
any
amendments to, or any waivers from, a provision of its Code of
Ethics.
Audit
Committee
The
Company’s entire Board acts as our audit committee. Selvin Passen serves as our
audit committee chairman, and Jacob Schorr is the committee’s financial expert.
No member of our audit committee is independent.
Compensation
Committee
The
Company’s entire board acts as our compensation committee. Selvin Passen serves
as our compensation committee chairman. No member of our compensation committee
is independent.
ITEM
10.
EXECUTIVE
COMPENSATION
The
following table sets forth compensation earned, whether paid or deferred, by
our
Chief Executive Officer, Chief Financial Officer, President, General Counsel,
and Secretary, our most highly compensated executive officer who earned over
$100,000 during the 2007 fiscal year (collectively, the “
Named
Executive Officers
”),
for
services rendered in all capacities to us during fiscal years ended December
31,
2007 and 2006.
Summary
Compensation Table
The
following table sets forth the compensation of the named executive officers
of
the Company for the Company’s last two completed fiscal years:
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards ($)
|
|
Option
Awards ($)
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
Nonqualified
Deferred Compensation
($)
|
|
All
Other Compensation ($)
|
|
Total
($)
|
|
M.
David Kamrat
(1)
CEO
, President, & Chairman
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noah
Kamrat
(2)
President
& Director
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian
R. Richardson
(3)
Vice
President, General
Counsel
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duy
Tran
(4)
Vice
President, Secretary
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shehryar
Wahid
(5)
Chief
Financial Officer
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Rudden
(6)
Former
Chief Executive
Officer
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
executive officer has served in such capacity since September 15,
2006,
the date on which the Company consummated the acquisition of the
Qualmax
business (as further discussed above under Item 1, “Description of
Business—Company History—2006 reverse acquisition of Qualmax,
Inc.”).
|
(2)
|
Mr.
Kamrat served as the Company’s President, Chief Operating Officer from
September 15, 2000 until January 24, 2007, and since January 24,
2007 has
served as the Company’s Chief Technology Officer and Vice President of
Operations.
|
(3)
|
Mr.
Richardson served as Chief Financial Officer of the Company from
September
15, 2006 to January 31, 2007, and from September 15, 2006 until August
1,
2007, served as General Counsel and Vice
President.
|
(4)
|
Mr.
Tran served as the Company’s Vice President and Secretary from September
15, 2006 until August 1, 2007.
|
(5)
|
Mr.
Wahid did not become an officer until February 1, 2007, and therefore
did
not receive any compensation as an officer during fiscal year 2006.
|
(6)
|
Mr.
Rudden served as Chief Executive Officer from November 10, 2005 until
his
resignation on September 14, 2006.
|
Outstanding
Equity Awards at Fiscal Year-End
|
|
OPTION
AWARDS
|
|
STOCK
AWARDS
|
|
Name
|
|
Number of
Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number of
Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying
Unexercised Unearned Options
(#)
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
Number of
Shares or Units of Stock That Have Not Vested
(#)
|
|
Market
Value of Shares or Units of Stock That Have Not
Vested
($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units
or
Other
Rights That
Have Not Vested
(#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units or Other Rights That Have Not Vested
(#)
|
|
M.
David Kamrat
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
n/a
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
Noah
Kamrat
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
n/a
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
Ian
Richardson
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
n/a
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
Duy
Tran
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
n/a
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
Shehryar
Wahid
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
n/a
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
Director
Compensation
DIRECTOR
COMPENSATION
|
|
Name
|
|
Fees
Earned or
Paid
in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Non-Qualified
Deferred Compensation
Earnings
($)
|
|
All
Other
Compensation ($)
|
|
Total
($)
|
|
M.
David Kamrat
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
Noah
Kamrat
(1)
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
Jacob
Schorr, Ph.D.
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
(1)
|
Mr.
Kamrat resigned from the Board effective August 20, 2007.
|
Option/SAR
Grants in the Last Fiscal Year
The
following table reflects option grants to our executive officers during fiscal
year 2007:
|
|
|
|
% Total Options/
|
|
|
|
|
|
|
|
# of Securities
|
|
SARs Granted to
|
|
Exercise or
|
|
|
|
|
|
Underlying Options/
|
|
Employees in Fiscal
|
|
Base
|
|
Expiration
|
|
Name
|
|
SARs Granted
|
|
Year
|
|
Price ($/Share)
|
|
Date
|
|
M. David Kamrat
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Noah
Kamrat
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Duy
Tran
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Ian
Richardson
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Shehryar
Wahid
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Aggregate
Option Exercises and Fiscal Year-End Option Values
The
following table sets forth certain information relating to the exercise of
stock
options during the 2007 fiscal year for each of our executive officers and
provides the fiscal year-end value of the unexercised options held by our
executive officers:
|
|
|
|
|
|
|
|
|
|
Value
of Unexercised
|
|
|
|
Shares
|
|
|
|
# of Unexercised Options
|
|
In-The-Money Options
|
|
|
|
Acquired
|
|
Value
|
|
At Fiscal Year End
|
|
At Fiscal Year End
|
|
Name
|
|
On Exercise
|
|
Realized
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
(1)
|
|
Unexercisable
|
|
M. David
Kamrat
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
$0
|
|
Noah
Kamrat
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
$0
|
|
Duy
Tran
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
$0
|
|
Ian
Richardson
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
$0
|
|
Shehryar
Wahid
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
0
|
|
|
$0
|
|
|
$0
|
|
ITEM
11.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth certain information as of March 26, 2008, with
respect to (i) those persons known to us to beneficially own more than 5% of
our
voting securities, (ii) each of our directors, (iii) each of our executive
officers, and (iv) all directors and executive officers as a group. The
information is determined in accordance with Rule 13d-3 promulgated under the
Exchange Act. Except as indicated below, the beneficial owners have sole voting
and dispositive power with respect to the shares beneficially
owned.
|
|
|
|
Beneficial
Ownership
|
|
|
|
|
|
|
|
Percentage
of
|
|
Title
of Class
|
|
Name
and Address of Beneficial
Owner
(1)
|
|
Number
of
Shares
|
|
Class
|
|
Total
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Qualmax,
Inc.
|
|
|
298,673,634
|
|
|
71.97%
|
|
|
71.97%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.
David Kamrat
(2)
|
|
|
166,176,267
|
(3)
|
|
37.53%
|
|
|
37.53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noah
Kamrat
(4)
|
|
|
166,176,267
|
(5)
|
|
37.53%
|
|
|
37.53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&S
Spirit LLC
(6)
c/o
Oregon Spirit LLC
2019
SW 20
th
Street, Suite 108
Fort
Lauderdale, FL 33315
|
|
|
136,198,022
|
(7)
|
|
30.76%
|
|
|
30.76%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Selvin Passen
(8)
2019
SW 20
th
Street, Suite 108
Fort
Lauderdale, FL 33315
|
|
|
100,221,768
|
(9)
|
|
23.27%
|
|
|
23.27%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob
Schorr, Ph.D.
(10)
|
|
|
68,099,011
|
(11)
|
|
15.88%
|
|
|
15.88%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian
T. Richardson
(12)
|
|
|
0
|
|
|
0%
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duy
Tran
(13)
|
|
|
18,913,655
|
(14)
|
|
4.56%
|
|
|
4.56%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.O.S.
Better Online Solutions Ltd.
Beit
Rabin, Teradyon Industrial Park
Misgav
20170
Israel
|
|
|
71,040,519
|
(15)
|
|
17.12%
|
|
|
17.12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
directors and executive officers as a group
|
|
|
334,497,045
|
|
|
70.83%
|
|
|
70.83%
|
|
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is 340
West
Fifth Avenue, Eugene, Oregon 97401.
|
(2)
|
M.
David Kamrat serves as our President and Chief Executive Officer,
and our
Chairman of the Board. Mr. Kamrat is also a director and a principal
stockholder of Qualmax.
|
(3)
|
Represents:
(a) 59,488,149 shares of Common Stock beneficially owned as a result
of
Mr. Kamrat’s direct ownership interest in Qualmax; (b) indirect beneficial
ownership of 78,910,340 shares of Common Stock based on Mr. Kamrat’s wife,
son and daughter-in-law’s direct ownership interests in Qualmax; (c)
direct ownership of a warrant to purchase 13,888,889 shares of Common
Stock exercisable within the next 60 days; and (d) indirect beneficial
ownership of a warrant to purchase 13,888,889 shares of Common Stock
based
upon Mr. Kamrat’s son’s direct ownership of a warrant to purchase shares
of Common Stock.
|
(4)
|
Noah
Kamrat serves as our Chief Technology Officer, and until August 20,
2007,
served as a director. Mr. Kamrat is also a director and a principal
stockholder of Qualmax.
|
(5)
|
Represents:
(a) 60,967,347 shares of Common Stock beneficially owned as a result
of
Mr. Kamrat’s direct ownership interest in Qualmax; (b) indirect beneficial
ownership of 77,431,142 shares of Common Stock based on Mr. Kamrat’s wife,
father and mother’s direct ownership interests in Qualmax; (c) direct
ownership of a warrant to purchase 13,888,889 shares of Common Stock
exercisable within the next 60 days; and (d) indirect beneficial
ownership
of a warrant to purchase 13,888,889 shares of Common Stock based
upon Mr.
Kamrat’s father’s direct ownership of a warrant to purchase shares of
Common Stock.
|
(6)
|
P&S
Spirit is owned equally by Dr. Selvin Passen and Jacob Schorr, Ph.D.,
both
of whom are directors of the
Company.
|
(7)
|
Represents:
(a) 55,555,555 shares of Common Stock owned directly by P&S Spirit;
(b) a warrant, owned directly by P&S Spirit, to purchase 27,777,778
shares of Common Stock exercisable within the next 60 days; and (c)
indirect beneficial ownership of 52,864,689 shares of Common Stock
based
upon P&S Spirit’s direct ownership interest in
Qualmax.
|
(8)
|
Dr.
Passen serves as a director of the Company.
|
(9)
|
Represents:
(a) 10,000,000 shares of Common Stock directly owned by Dr. Passen;
(b)
800,000 shares of Common Stock indirectly beneficially owned by Dr.
Passen
based upon certain of his children’s direct ownership of Common Stock; (c)
7,500,000 shares of Common Stock indirectly beneficially owned based
upon
Dr. Passen’s ownership of Oregon Spirit LLC, as a result of Oregon
Spirit’s direct ownership of shares of Common Stock; (d) 4,829,103 shares
of Common Stock indirectly beneficially owned by Dr. Passen based
on his
direct ownership interest in Qualmax; (e) 7,243,654 shares of Common
Stock
indirectly beneficially owned by owned by Dr. Passen based on his
ownership interest in Oregon Spirit LLC, as a result of Oregon Spirit’s
direct ownership interest in Qualmax; (f) 27,777,778 shares of Common
Stock indirectly beneficially owned by Dr. Passen based on his direct
one-half ownership interest in P&S Spirit LLC; (g) direct ownership of
warrants and options to purchase 1,750,000 shares of Common Stock
exercisable within the next 60 days; (h) indirect beneficial ownership
of
a warrant to purchase 13,888,889 shares of Common Stock, exercisable
within the next 60 days, based upon Dr. Passen’s direct one-half ownership
interest in P&S Spirit, as a result of P&S Spirit’s direct
ownership of warrants to purchase shares of Common Stock; and (i)
indirect
beneficial ownership of 26,432,344 shares of Common Stock based upon
Dr.
Passen’s direct one-half ownership interest in P&S Spirit, as a result
of P&S Spirit’s direct ownership interest in
Qualmax.
|
(10)
|
Dr.
Schorr serves as a director of the Company.
|
(11)
|
Represents:
(a) 27,777,778 shares of Common Stock indirectly beneficially owned
by Dr.
Passen based on his direct one-half ownership interest in P&S Spirit
LLC; (b) indirect beneficial ownership of a warrant to purchase 13,888,889
shares of Common Stock, exercisable within the next 60 days, based
upon
Dr. Schorr’s direct one-half ownership interest in P&S Spirit, as a
result of P&S Spirit’s direct ownership of warrants to purchase shares
of Common Stock; and (c) indirect beneficial ownership of 26,432,344
shares of Common Stock based upon Dr. Schorr’s direct one-half ownership
interest in P&S Spirit, as a result of P&S Spirit’s direct
ownership interest in Qualmax.
|
(12)
|
Mr.
Richardson served as Vice President and interim Chief Financial Officer
from September 15, 2006 until January 31, 2007 and from September
15, 2006
to July 31, 2007 served as Vice President and General Counsel to
the
Company.
|
(13)
|
Mr.
Tran served as Vice President & Secretary of the Company from
September 15, 2006 to July 31, 2007, and from September 15, 2006
until
January 31, 2007 served as a director of the
Company.
|
(14)
|
Represents:
(a) indirect beneficial ownership of 8,564,341 shares of Common Stock
based on the direct ownership interest in Qualmax by Microstar
Communications Corp, an entity controlled by Mr. Tran; and (b) indirect
beneficial ownership of 10,349,314 shares of Common Stock based on
Mr.
Tran’s direct ownership of options to purchase shares of common stock
of
Qualmax exercisable within the next 60
days.
|
(15)
|
Represents:
(a) direct ownership of 16,446,544 shares of Common Stock; (b) indirect
beneficial ownership of 53,384,683 shares of Common Stock based on
BOS’s
direct ownership interest in Qualmax; and (c) indirect beneficial
ownership of 1,209,282 shares of Common Stock based on BOS’s ownership of
options to purchase shares of common stock of Qualmax exercisable
within
the next 60 days.
|
Lock-Up
Agreement Among Principal Shareholders
In
connection with the transactions contemplated by the Subscription Agreement,
the
Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
P&S Spirit entered into the Lock-Up Agreement, pursuant to which each such
party agreed to certain restrictions on transfer on certain shares of capital
stock (and securities convertible into share of capital stock) of the Company
on
the terms set forth therein. A copy of the Amended and Restated Lock-Up
Agreement is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed with the SEC on January 8, 2007. In particular, the parties agreed to
restrict their ability to transfer shares of capital stock in the Company for
up
to two years without the prior approval of the other stockholders party thereto
(meaning, both the Kamrats and P&S Spirit must seek the consent of the other
to sell subject shares during the term of the Lock-Up Agreement). Also, in
connection with the transactions contemplated by the BOS Agreement: (i) BOS
agreed to be subject to the Lock-Up Agreement, restricting the ability of BOS
to
transfer shares of capital stock in the Company and Qualmax for up to two years
without the prior approval of the other stockholders party thereto; and (ii)
BOS
granted the Company a three-year option, contingent upon certain conditions,
to
purchase up to 30% of the shares of Preferred Stock (or shares of Common Stock)
held by BOS, at a price per share ranging from $0.12 to $0.24 per share (on
a
common-equivalent basis).
ITEM
12.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Relationship
with Selvin Passen
To
fund
operations in the past, we have had to rely on loans from Dr. Selvin Passen,
a
director and our former Chairman and a substantial stockholder (directly and
beneficially, as disclosed in the above table in Item 11, “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters”). As
of September 15, 2006, none of those loans remained. Dr. Passen has invested
substantially in the Company since September 15, 2006, investing $1,500,000
on
September 14, 2006, in relation to the Reverse Acquisition, and via P&S
Spirit investing between $1,500,000 and $2,500,000 (based upon Dr. Passen’s 50%
ownership in P&S Spirit) pursuant to the P&S Subscription Agreement
described in more detail in this Report in Item 5, “Market for Common Equity and
Related Stockholder Matters and Small Business Issuer Purchases of Equity
Securities—Recent Sales of Unregistered Securities.”
Relationship
with Jacob Schorr
Jacob
Schorr, Ph.D., serves on our Board and is a substantial stockholder
(beneficially, as disclosed in the above table in Item 11, “Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters”),
investing via P&S Spirit between $1,500,000 and $2,500,000 (based upon Dr.
Schorr’s 50% ownership in P&S Spirit) pursuant to the Subscription Agreement
herein described in more detail in Item 5, “Market for Common Equity and Related
Stockholder Matters and Small Business Issuer Purchases of Equity
Securities—Recent Sales of Unregistered Securities.”
Transactions
with Dr. Selvin Passen, Jacob Schorr, M. David Kamrat, and Noah
Kamrat
Since
January 1, 2006, the Company has entered into various transactions with Dr.
Selvin Passen, a principal stockholder of the Company, and his affiliates,
as
well as with Jacob Schorr, Ph.D., a director of the Company, M. David Kamrat,
the Company’s President and Chief Executive Officer and Chairman of the Board,
and Noah R. Kamrat, the Company’s Chief Technology Officer and a former
director. Reference is made to the description of each these related party
transactions earlier in Item 1, “Description of Business—Recent
Developments
—P&S
Spirit Subscription Agreement,” and in Item 5, “Market for Common Equity and
Related Stockholder Matters and Small Business Issuer Purchases of Equity
Securities—Recent Sales of Unregistered Securities.”
Relationship
and Transactions with BOS
As
a
result of our acquisition on December 31, 2005 of certain assets of BOS, BOS
became a principal stockholder of the Company. Reference is made to the
description of related party transactions with BOS in Item 5, “Market for Common
Equity and Related Stockholder Matters and Small Business Issuer Purchases
of
Equity Securities—Recent Sales of Unregistered Securities.”
Corporate
Governance
Based
on
our adoption of the NASDAQ definition of independence, as of December 31, 2007,
two of our directors, M. David Kamrat and Shehryar Wahid, were not considered
independent as a result of their status as employees and officers of the
Company, and our other two directors, Jacob Schorr and Selvin Passen, are not
considered an independent director as a result of their respective ownership
interests in P&S Spirit.
ITEM
13.
EXHIBITS
Exhibits
required to be attached by Item 601 of Regulation S-B are listed in this Form
10-KSB’s Exhibit Index, which is incorporated herein by reference.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Fees
Paid to Independent Registered Public Accounting Firms
The
following table sets forth, for each of the years indicated, the aggregate
fees
paid to our independent registered public accounting firms and the percentage
of
each of the fees out of the total amount paid to the accountants:
|
|
12 Months Ended
|
|
|
|
December 31, 2006
|
|
December 31, 2007
|
|
Services Rendered
|
|
Fees
|
|
Percentages
|
|
Fees
|
|
Percentages
|
|
|
|
|
|
|
|
|
|
|
|
Audit
(1)
|
|
|
$49,934
|
|
|
100%
|
|
|
$203,344
|
|
|
94%
|
|
Audit-Related
Fees
(2)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Tax
Fees
(3)
|
|
|
-
|
|
|
-
|
|
|
12,100
|
|
|
6%
|
|
All
Other Fees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$49,934
|
|
|
100%
|
|
|
$215,444
|
|
|
100%
|
|
(1)
|
Audit
fees consist of services that would normally be provided in connection
with statutory and regulatory filings or engagements, including services
that generally only the independent accountant can reasonably provide.
|
(2)
|
Audit-related
fees relate to assurance and associated services that traditionally
are
performed by the independent accountant, including: attest services
that
are not required by statute or regulation; accounting consultation
and
audits in connection with mergers, acquisitions and divestitures;
employee
benefit plans audits; and consultation concerning financial accounting
and
reporting standards.
|
(3)
|
Tax
fees relate to services performed by the tax division for tax compliance,
planning, and advice.
|
Pre-Approval
Policies and Procedures
Our
Board
has adopted a policy and procedures for the pre-approval of audit and non-audit
services rendered by our independent public accountants, Berenfeld, Spritzer,
Shechter & Sheer. The policy generally pre-approves certain specific
services in the categories of audit services, audit-related services, and tax
services up to specified amounts, and sets requirements for specific
case-by-case pre-approval of discrete projects, those which may have a material
effect on our operations or services over certain amounts. Pre-approval may
be
given as part of the Board’s approval of the scope of the engagement of our
independent auditor or on an individual basis. The pre-approval of services
may
be delegated to one or more of the Board members, but the decision must be
presented to the full Board at its next scheduled meeting. The policy prohibits
retention of the independent public accountants to perform the prohibited
non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the
rules of the SEC, and also considers whether proposed services are compatible
with the independence of the public accountants.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
NEW
WORLD BRANDS, INC.
|
|
|
|
Date:
September 24, 2008
|
By:
|
/s/
M. David
Kamrat
|
|
|
M.
David Kamrat, Chief Executive
Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ M. David Kamrat
|
|
Chief
Executive Officer,
|
|
September
24, 2008
|
M.
David Kamrat
|
|
President,
and Chairman of the Board
|
|
|
|
|
|
|
|
/s/
Shehryar Wahid
|
|
Chief
Financial Officer,
|
|
|
Shehryar
Wahid
|
|
Secretary,
Treasurer,
Chief
Operations Officer and Director
|
|
|
|
|
|
|
|
/s/
Selvin Passen, M.D.
|
|
Director
|
|
|
Selvin Passen,
M.D.
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
Number
|
|
Document
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of New World Brands,
Inc.
(1)
|
|
|
|
4.2
|
|
Certificate
of Designation, Preferences and Rights of Series A Convertible
Preferred
Stock (2)
|
|
|
|
4.3
|
|
Certificate
of Amendment to Certificate of Designation, Preferences and
Rights of
Series A Convertible Preferred Stock (3)
|
|
|
|
4.4
|
|
Amended
and Restated Stock Subscription and Share Transfer Agreement,
dated as of
December 29, 2006, by and among New World Brands, Inc., P&S Spirit,
LLC, M. David Kamrat and Noah Kamrat
(3)
|
|
|
|
4.5
|
|
Amended
and Restated Escrow Agreement dated as of December 29, 2006
by and among
New World Brands, Inc., P&S Spirit, LLC and the Escrow Agent (as
defined therein)
(3)
|
|
|
|
4.6
|
|
Amended
and Restated Lock-Up Agreement dated as of December 29, 2006
by and among
New World Brands, Inc., P&S Spirit, LLC, M. David Kamrat, Noah Kamrat
and certain other stockholders party thereto
(3)
|
|
|
|
4.7
|
|
Amended
and Restated Voting Agreement dated as of December 29, 2006
by and among
New World Brands, Inc., P&S Spirit, LLC, M. David Kamrat, Noah Kamrat
and certain other stockholders party thereto
(3)
|
|
|
|
4.8
|
|
Form
of Warrant Agreement dated as of December 29,
2006 (3)
|
|
|
|
10.1
|
|
Letter
agreement among New World Brands, Inc., Qualmax, Inc., IP Gear,
Ltd.,
P&S Spirit, LLC and B.O.S. Better Online Solutions Ltd., dated
December 31, 2006 (4)
|
|
|
|
10.2
|
|
Term
Loan and Security Agreement by and between New World Brands,
Inc. and
P&S Spirit, LLC dated as March 30, 2007 (5)
|
|
|
|
10.3
|
|
Term
Note by and between New World Brands, Inc. and P&S Spirit, LLC dated
as March 30, 2007 (5)
|
|
|
|
10.4
|
|
Guaranty
by Qualmax, Inc. dated as of March 30, 2007 (5)
|
|
|
|
10.5
|
|
Limited
Guaranty by M. David Kamrat dated as of March 30, 2007
(5)
|
|
|
|
10.6
|
|
Collateral
Pledge Agreement made by Qualmax, Inc. dated as of March 30,
2007
(5)
|
|
|
|
10.7
|
|
Credit
Line and Security Agreement, dated as of May 31, 2007, between
New World
Brands, Inc. and P&S Spirit, LLC
(6)
|
10.8
|
|
Credit
Line Note, dated as of May 31, 2007, of New World Brands, Inc.
(6)
|
|
|
|
10.9
|
|
Guaranty
of Qualmax, Inc., dated as of May 31, 2007 (6)
|
|
|
|
10.10
|
|
Collateral
Pledge Agreement, dated as of May 31, 2007, by Qualmax, Inc.
in favor of
P&S Spirit, LLC (6)
|
|
|
|
10.11
|
|
Collateral
Pledge Agreement, dated as of May 31, 2007, by New World Brands,
Inc., in
favor of P&S Spirit, LLC (6)
|
|
|
|
10.12
|
|
First
Amendment to Amended and Restated Stock Subscription and Share
Transfer
Agreement, dated as of May 31, 2007, by and between New World
Brands, Inc.
and P&S Spirit, LLC, and acknowledged and agreed by M. David Kamrat
and Noah Kamrat (6)
|
|
|
|
10.13
|
|
First
Amendment to Amended and Restated Lock-Up Agreement, dated
as of May 31,
2007, by and among New World Brands, Inc., Qualmax, Inc., M.
David Kamrat,
Jane Kamrat, Noah Kamrat, Tracy Habecker, Dr. Selvin Passen,
Oregon
Spirit, LLC, and P&S Spirit, LLC (6)
|
|
|
|
10.14
|
|
First
Amendment to Amended and Restated Voting Agreement, dated as
of May 31,
2007, by and among New World Brands, Inc., Qualmax, Inc., P&S Spirit,
LLC, Dr. Selvin Passen, Oregon Spirit, LLC, and solely for
the purposes of
Section 21 of the Restated Original Voting Agreement, M. David
Kamrat,
Jane Kamrat, Noah Kamrat, and Tracy Habecker (6)
|
|
|
|
10.15
|
|
Preliminary
Agreement, dated July 18, 2007, between New World Brands, Inc.
and TELES
AG Informationstechnologien (7)
|
|
|
|
10.16
|
|
Share
Sale and Purchase Agreement, dated July 26, 2007, by and between
New World
Brands, Inc. and TELES AG Informationstechnologien (including
the Partner
Contract as Annex 2) (8)
|
|
|
|
10.17
|
|
Consent
of Lender to Sale of Asset, dated July 26, 2007, by P&S Spirit, LLC
(8)
|
|
|
|
10.18
|
|
Agreement
and Plan of Merger, dated February 18, 2008, by and between
New World
Brands, Inc. and Qualmax, Inc. (9)
|
|
|
|
10.19
|
|
Term
Loan and Security Agreement, effective February 15, 2008, by
and between
New World Brands, Inc. as Borrower and TELES AG Informationstechnologien
as Lender (10)
|
|
|
|
10.20
|
|
Intercreditor
Agreement, effective February 15, 2008, by and among New World
Brands,
Inc., P&S Spirit, LLC and TELES AG Informationstechnologien
(10)
|
10.21
|
|
Settlement
Agreement, effective March 31, 2008, by and between Capital
Securities,
LLC, Blackstone Communications Company, Carlos Bertonatti,
Worldwide PIN
Payment Corp., Qualmax, Inc./New World Brands, Inc. and others
(as listed
therein) (11)
|
|
|
|
16.1
|
|
Letter
from Salberg & Company, P.A., dated March 13, 2007 regarding
change in certifying accountant (12)
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes- Oxley
Act of 2002
(*)
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes- Oxley
Act of 2002
(*)
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(*)
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C., Section
1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(*)
|
(*)
|
|
Filed
herewith.
|
(1)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on April 30, 2007.
|
(2)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 10-QSB, filed with
the SEC on October 16, 2006.
|
(3)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on January 8, 2007.
|
(4)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on January 10, 2007.
|
(5)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on April 5, 2007.
|
(6)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on June 6, 2007.
|
(7)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on July 20, 2007.
|
(8)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on August 1, 2007.
|
(9)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on February 22, 2008.
|
(10)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on February 27, 2008.
|
(11)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on April 7, 2008.
|
(12)
|
|
Previously
filed as an exhibit to New World Brands, Inc.’s Form 8-K, filed with the
SEC on March 14, 2007.
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
TABLE
OF CONTENTS
DECEMBER
31, 2007
|
Page
|
|
|
Report
of independent registered public accounting firm
|
F-2
|
|
|
Financial
statements:
|
|
Consolidated
balance sheet
|
F-3
- F-4
|
Consolidated
statements of comprehensive loss
|
F-5
|
Consolidated
statements of changes in stockholders’ equity
|
F-6
|
Consolidated
statements of cash flows
|
F-7
- F-8
|
Notes
to consolidated financial statements
|
F-9
- F-23
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Audit Committee and Stockholders
New
World
Brands, Inc. and Subsidiary
Eugene,
Oregon
We
have
audited the accompanying consolidated balance sheet of New World Brands,
Inc.
and Subsidiary as of December 31, 2007 and the related consolidated statements
of comprehensive loss, changes in stockholders’ equity and cash flows for the
years ended December 31, 2007 and 2006. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to
express an opinion on the consolidated financial statements based on our
audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of New World
Brands, Inc. and Subsidiary as of December 31, 2007, and the consolidated
results of its operations and its cash flows for the years ended December
31,
2007 and 2006 in conformity with accounting principles generally accepted
in the
United States of America.
BERENFELD,
SPRITZER, SHECHTER & SHEER, LLP
Coral
Gables, Florida
April
15,
2008
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
DECEMBER
31, 2007
ASSETS
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,038,635
|
|
Accounts
receivable, net
|
|
|
1,027,739
|
|
Inventories,
net
|
|
|
744,654
|
|
Prepaid
expenses
|
|
|
244,157
|
|
Other
current assets
|
|
|
507,012
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
4,562,197
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
1,421,806
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Deposits
and other assets
|
|
|
668,750
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
6,652,753
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
DECEMBER
31, 2007
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
|
$
|
1,564,299
|
|
Accrued
expenses
|
|
|
406,910
|
|
Customer
deposits
|
|
|
121,874
|
|
Capital
leases, current portion
|
|
|
181,731
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
2,274,814
|
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
31,317
|
|
Note
payable
|
|
|
500,000
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
531,317
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,806,131
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
Preferred
stock, $.01 par value, 1,000 shares authorized, 200 shares designated
as Series A preferred stock
|
|
|
|
|
Series
A preferred stock, $.01 par value, no shares issued.
|
|
|
-
|
|
Common
stock, $.01 par value, 600,000,000 shares authorized,
414,979,673
shares issued and outstanding
|
|
|
4,149,797
|
|
Additional
paid-in capital
|
|
|
33,641,557
|
|
Accumulated
deficit
|
|
|
(33,944,732
|
)
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
3,846,622
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
6,652,753
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 2007 AND
2006
|
|
2007
|
|
2006
|
|
Net
Sales
|
|
|
|
|
|
Hardware
|
|
$
|
5,657,689
|
|
$
|
6,307,644
|
|
Carrier
Services
|
|
|
11,443,514
|
|
|
11,230,284
|
|
|
|
|
17,101,203
|
|
|
17,537,928
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
Hardware
|
|
|
(4,954,381
|
)
|
|
(5,317,852
|
)
|
Carrier
Services
|
|
|
(9,850,272
|
)
|
|
(10,382,726
|
)
|
|
|
|
(14,804,653
|
)
|
|
(15,700,578
|
)
|
Gross
Profit
|
|
|
2,296,550
|
|
|
1,837,350
|
|
Sales,
General and Administrative Expenses
|
|
|
(4,630,863
|
)
|
|
(4,434,396
|
)
|
Loss
from Continuing Operations Before Other Income
|
|
|
(2,334,313
|
)
|
|
(2,597,046
|
)
|
Other
Income
|
|
|
|
|
|
|
|
Interest
and Bank Charges
|
|
|
(129,346
|
)
|
|
(178,967
|
)
|
Other
Income
|
|
|
109,157
|
|
|
24,448
|
|
|
|
|
(20,189
|
)
|
|
(154,519
|
)
|
Loss
From Continuing Operations Before Income Taxes
|
|
|
(2,354,502
|
)
|
|
(2,751,565
|
)
|
|
|
|
|
|
|
|
|
(Provision)
Benefit for Income Taxes
|
|
|
(403,995
|
)
|
|
472,905
|
|
Net
Loss From Continuing Operations
|
|
|
(2,758,497
|
)
|
|
(2,278,660
|
)
|
|
|
|
|
|
|
|
|
Loss
From Discontinued Operations
|
|
|
(3,949,395
|
)
|
|
(3,147,014
|
)
|
Gain
from Sale of Discontinued Operations
|
|
|
4,706
|
|
|
-
|
|
|
|
|
(3,944,689
|
)
|
|
(3,147,014
|
)
|
Net
Loss
|
|
$
|
(6,703,186
|
)
|
$
|
(5,425,674
|
)
|
|
|
|
|
|
|
|
|
Net
Loss Per Share From Continuing Operations (Basic)
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
Net
Loss Per Share From Continuing Operations (Diluted)
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
Net
Loss Per Share from Discontinued Operations (Basic)
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
Net
Loss Per Share from Discontinued Operations (Diluted)
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
Net
loss per Share (Basic)
|
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
Net
Loss per Share (Diluted)
|
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding During the Year
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
433,592,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
433,592,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss:
|
|
|
(6,703,186
|
)
|
|
(5,425,674
|
)
|
Net
Loss
|
|
|
|
|
|
|
|
Gain
(Loss) on Foreign Currency Translation, Net of Income Tax
Benefit
|
|
|
40,556
|
|
|
(49,295
|
)
|
Comprehensive
Loss
|
|
$
|
(6,662,630
|
)
|
$
|
(5,474,969
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 2007 AND 2006
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
Accumulated
Other
Comprehensive
|
|
Retained
Earnings
(Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2006
|
|
|
-
|
|
$
|
-
|
|
|
271,431,841
|
|
$
|
2,714,317
|
|
$
|
2,332,791
|
|
$
|
-
|
|
$
|
1,064,647
|
|
$
|
6,111,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of stock - 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
common stock issued in consideration of asset
acquisition
|
|
|
-
|
|
|
-
|
|
|
5,806,633
|
|
|
58,066
|
|
|
594,321
|
|
|
-
|
|
|
-
|
|
|
652,387
|
|
Issuance
of common stock for cash
|
|
|
-
|
|
|
-
|
|
|
13,315,856
|
|
|
133,159
|
|
|
1,206,841
|
|
|
-
|
|
|
-
|
|
|
1,340,000
|
|
Issuance
of common stock in exchange for partial repayments of principal
on note payable
|
|
|
-
|
|
|
-
|
|
|
5,981,070
|
|
|
59,811
|
|
|
540,189
|
|
|
-
|
|
|
-
|
|
|
600,000
|
|
Issuance
of stock for equipment
|
|
|
-
|
|
|
-
|
|
|
2,138,235
|
|
|
21,382
|
|
|
193,118
|
|
|
-
|
|
|
-
|
|
|
214,500
|
|
Recapitalization
of Qualmax common stock as a result of the reverse
acquisition
|
|
|
-
|
|
|
-
|
|
|
(298,673,635
|
)
|
|
(2,986,735
|
)
|
|
2,986,735
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
of New World Brands as a result of the reverse
acquisition
|
|
|
-
|
|
|
-
|
|
|
44,303,939
|
|
|
443,040
|
|
|
24,278,035
|
|
|
-
|
|
|
(22,921,075
|
)
|
|
1,800,000
|
|
Issuance
of Series A preferred stock as a result of the reverse
acquisition
|
|
|
100
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of Series A preferred stock for cash
|
|
|
11.160454
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
Cost
of raising capital
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(150,000
|
)
|
|
-
|
|
|
-
|
|
|
(150,000
|
)
|
Issuance
of Series A preferred stock in exchange for partial repayment
of note payable, accrued royalties and outsourcing expenses,
and release of obligations from operating
agreements
|
|
|
5.50652
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,480,189
|
|
|
-
|
|
|
-
|
|
|
1,480,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss - 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,425,674
|
)
|
|
(5,425,674
|
)
|
Loss
on foreign currency translation, net of tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(49,295
|
)
|
|
-
|
|
|
(49,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
|
116.666974
|
|
$
|
1
|
|
|
44,303,939
|
|
$
|
443,040
|
|
$
|
36,462,218
|
|
$
|
(49,295
|
)
|
$
|
(27,282,102
|
)
|
$
|
9,573,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of series A preferred stock to common stock April 24, 2007
|
|
|
(116.6666974
|
)
|
|
(1
|
)
|
|
348,453,512
|
|
|
3,484,535
|
|
|
(3,484,534
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
22,222,222
|
|
|
222,222
|
|
|
663,873
|
|
|
|
|
|
|
|
|
886,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of subsidiary
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,706
|
|
|
4,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,295
|
|
|
(3,949,395
|
)
|
|
(3,900,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on foreign currency translation, net of tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,556
|
|
|
40,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from continuing operations for the twelve months ended December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,758,497
|
)
|
|
(2,758,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
414,979,673
|
|
$
|
4,149,797
|
|
$
|
33,641,557
|
|
$
|
-
|
|
$
|
(33,944,732
|
)
|
$
|
3,846,622
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(2,758,497
|
)
|
|
(2,278,660
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
406,152
|
|
|
296,110
|
|
Issuance
of stock for royalties and outsourcing expenses
|
|
|
-
|
|
|
356,817
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
-
Accounts receivable
|
|
|
76,118
|
|
|
410,648
|
|
-
Change in allowance for doubtful accounts
|
|
|
(15,046
|
)
|
|
129,046
|
|
-
Inventories
|
|
|
141,098
|
|
|
795,743
|
|
-
Prepaid expenses
|
|
|
(121,362
|
)
|
|
112,919
|
|
-
Income tax refund receivable
|
|
|
|
|
|
(403,995
|
)
|
-
Deferred tax asset
|
|
|
-
|
|
|
45,467
|
|
-
Other current assets
|
|
|
(368,139
|
)
|
|
(134,934
|
)
|
-
Deposits and other assets
|
|
|
(568,750
|
)
|
|
253,142
|
|
-
Accounts payable
|
|
|
1,122,665
|
|
|
(383,701
|
)
|
-
Accrued expenses
|
|
|
(678,032
|
)
|
|
299,346
|
|
-
Customer deposits
|
|
|
62,249
|
|
|
(23,712
|
)
|
-
Deferred income taxes
|
|
|
-
|
|
|
(111,540
|
)
|
-
Other liabilities
|
|
|
-
|
|
|
(1,746,040
|
)
|
Net
cash used in operating activities
|
|
|
(2,297,549
|
)
|
|
(2,384,342
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(284,044
|
)
|
|
1,186,902
|
|
Net
cash acquired from the reverse acquisition
|
|
|
-
|
|
|
1,800,000
|
|
Net
cash provided by (used in) investing activities
|
|
|
(284,044
|
)
|
|
2,986,902
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
1,000,000
|
|
|
-
|
|
Payments
of principal on notes payable
|
|
|
(1,484,323
|
)
|
|
(460,000
|
)
|
Payments
of principal on capital lease obligations
|
|
|
(131,301
|
)
|
|
(141,153
|
)
|
Net
repayment of advances from shareholders
|
|
|
(53,479
|
)
|
|
(75,245
|
)
|
Sales
of common and preferred stock
|
|
|
886,095
|
|
|
2,136,459
|
|
Foreign
currency translation
|
|
|
(29,740
|
)
|
|
29,740
|
|
Net
cash provided by financing activities
|
|
|
187,252
|
|
|
1,489,801
|
|
Net
cash flow from continuing operations
|
|
|
(2,394,341
|
)
|
|
2,092,362
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Total
cash flows from discontinued operations
|
|
|
(1,160,828
|
)
|
|
(274,529
|
)
|
Net
investing activities from discontinued operations
|
|
|
2,197,187
|
|
|
(410,689
|
)
|
Net
cash flow from discontinued operations
|
|
|
1,036,358
|
|
|
(685,218
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash
equivalents
|
|
|
(1,357,983
|
)
|
|
1,407,144
|
|
Cash
and cash equivalents, beginning of year
|
|
|
3,396,617
|
|
|
1,989,473
|
|
Cash
and cash equivalents, end of year
|
|
$
|
2,038,634
|
|
$
|
3,396,617
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Supplemental
Disclosures of Cash Flow Information:
|
|
2007
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
-
Income taxes
|
|
$
|
-
|
|
$
|
-
|
|
-
Interest
|
|
$
|
129,346
|
|
$
|
178,168
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Issuance
of common stock for asset acquisition
|
|
|
|
|
|
|
|
-
Inventories
|
|
$
|
|
|
$
|
79,179
|
|
-
Property and equipment
|
|
|
|
|
|
573,208
|
|
-
Additional paid-in capital
|
|
$
|
|
|
$
|
(652,387
|
)
|
|
|
|
|
|
|
|
|
Issuance
of stock for payment of note payable
|
|
|
|
|
|
|
|
-
Note payable
|
|
$
|
|
|
$
|
600,000
|
|
-
Additional paid-in capital
|
|
$
|
|
|
$
|
(600,000
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of common stock for property and equipment
|
|
|
|
|
|
|
|
-
Fair value of property and equipment acquired
|
|
$
|
|
|
$
|
214,500
|
|
-
Additional paid-in capital
|
|
|
|
|
|
(214,500
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of preferred stock for partial repayment of note payable,
accrued
royalties and outsourcing expenses, and release
of obligations from
operating agreements
|
|
|
|
|
|
|
|
-
Note payable
|
|
$
|
|
|
$
|
400,000
|
|
-
Royalties and outsourcing expenses
|
|
|
|
|
|
356,817
|
|
-
Property and equipment
|
|
|
|
|
|
723,372
|
|
-
Additional paid-in capital
|
|
|
|
|
|
(1,480,189
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Acquisition
of property and equipment through capital lease
obligations
|
|
|
|
|
|
|
|
-
Fair value of property and equipment acquired
|
|
$
|
|
|
$
|
387,384
|
|
-
Capital lease obligations incurred
|
|
$
|
|
|
$
|
(387,384
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of Common Stock for Preferred Stock
|
|
|
|
|
|
|
|
-
Common Stock
|
|
$
|
3,706,757
|
|
$
|
-
|
|
- Preferred
Stock
|
|
|
(1
|
)
|
|
-
|
|
- Paid
in Capital
|
|
|
(3,706,756
|
)
|
|
-
|
|
|
|
$
|
-
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization
and Basis of Presentation
New
World
Brands, Inc. (“
New
World Brands
”,
the
“
Company
”,
“
we
”,
“
us
”
or
“
our
”)
is a
Delaware corporation that until September 15, 2006 was an importer of wine
and
spirits beverages for sale and distribution throughout the United
States. On September 15, 2006, we sold our wine and spirits business,
and, by way of a reverse acquisition, acquired all of the assets and assumed
all
of the liabilities of Qualmax, Inc., a Delaware corporation (“
Qualmax
”
and
the
reverse acquisition the “
Reverse
Acquisition
”).
As
a
result of the Reverse Acquisition we are no longer in the wine and spirits
business, and instead we are now a telecommunications, sales, and service
company, focusing on products and services utilizing voice over internet
protocol (“
VoIP
”)
technology. We provide wholesale long distance carrier termination
services. We are also a reseller of VoIP related telecommunications
equipment, and a reseller of wholesale VoIP telephony service.
Our
acquisition of Qualmax and its wholly owned subsidiary IP Gear, Ltd. was
accounted for as a reverse acquisition. Although New World Brands was
the company that made the acquisition, Qualmax was treated as the surviving
company for accounting purposes. As a result, the accompanying
financial statements reflect the results of operations and cash flows of
Qualmax
and IP Gear, Ltd. prior to September 15, 2006, and the financial position,
results of operations, and cash flows of New World Brands, Qualmax, and IP
Gear,
Ltd. from and after September 15, 2006.
All
inter-company accounts and transactions have been eliminated in
consolidation.
On
September 15, 2006 the Company changed its fiscal year end from May 31 to
December 31, which is Qualmax’s fiscal year end. The change in fiscal
year results from the acquisition of Qualmax and IP Gear, Ltd., which was
accounted for as a reverse acquisition.
On
July
1, 2007 we sold the IP Gear Ltd subsidiary in a transaction that is explained
in
full detail in “Note B—Sale of Discontinued Operations—IP Gear,
Ltd.”
This
subsidiary was sold for cash and other consideration. The impact of the sale
on
the presentation of the financial statements and other financial information
is
to have all 2007 and comparative 2006 information(where applicable) restated
to
be presented in a format where all discontinued operations are moved from
continuing operations and listed separately. Comparative prior year information
is also restated to remove the discontinued operations from the ongoing
business.
Reverse
Acquisition Accounting
In
June
2006, the Company decided to change its business plan by selling its wine
and
spirits business for the sum of $500,000 (the “
Sale
Transaction
”),
selling 7,500,000 shares of its common stock (the “
Common
Stock
”)
for
$1,500,000 (the “
Private
Equity Investment
”),
and
acquiring substantially all of the assets of Qualmax, Inc. (“
Qualmax
”)
in
exchange for shares of the Company’s Series A Convertible, par value $0.01 per
share (the “
Preferred
Stock
”
and
the
transaction, the “
Reverse
Acquisition
”).
The
Private Equity Investment was consummated on September 14, 2006, and the
Sale
Transaction and Reverse Acquisition were consummated on September 14 and
15,
2006, respectively. As a result of the Sale Transaction and Reverse Acquisition,
the Company is no longer in the wine and spirits business, and the business
formerly operated by Qualmax is now operated by the Company, meaning that
New
World Brands, Inc. is now a specialized internet protocol (IP) communications
solutions provider, equipment reseller, and Voice over Internet Protocol
(“
VoIP
”)
service provider, focused on the deployment of best of breed VoIP networks,
virtual private networks, turnkey network design, wireless connectivity and
direct call traffic routing.
In
furtherance of treating the Sale Transaction and Acquisition as a reverse
acquisition for accounting purposes, the board of directors of the Company
(the “
Board
”)
and
the board of directors of Qualmax (collectively, the “
Boards
”)
have
agreed that for accounting purposes they have treated the transactions as
a
reverse acquisition of Qualmax by the Company, and have since the time of
the
consummation, intended the transaction to ultimately result in a downstream
merger of the Company and Qualmax, and, in furtherance thereof, the Boards
have
each determined that Qualmax will merge with and into the Company (the
“
Merger
”),
and
in connection with the Merger, the separate corporate existence of Qualmax
will
cease.
The
Boards agreed that certain events (the “
Merger
Events
”)
were
required to occur in order to effectively consummate the transactions
contemplated, including, without limitation, certain amendments to the
Certificate of Incorporation of the Company to, among other things, increase
the
authorized number of shares of Common Stock of the Company, the resultant
conversion of the Preferred Stock into shares of the Company’s Common Stock,
make any filings necessary to complete the Merger, and receive approval by
the stockholders of the Company and Qualmax. During 2007, the number of
authorized shares was increased from 50 million shares to 600 million shares
to
allow for a sufficient number of authorized shares to convert the existing
Preferred shares to common. All preferred shares were then converted to common
stock as a further step towards the completion of the merger.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Under
generally accepted accounting principles in the United States of America
(“
GAAP
”),
the
acquisition of Qualmax has been accounted for as a reverse acquisition and
Qualmax has been treated as the acquiring entity for accounting and financial
reporting purposes. As such, the Company’s consolidated financial
statements have been and will be presented as a continuation of the operations
of Qualmax and not New World Brands, Inc. Effective on the
acquisition date of September 15, 2006, New World Brands’ consolidated balance
sheet included the assets and liabilities of Qualmax and its wholly owned
subsidiary IP Gear, Ltd. and its consolidated equity accounts were recapitalized
to reflect the combined equity of New World Brands, Qualmax and IP Gear,
Ltd.
Also, as a result of the Reverse Acquisition, the Company’s fiscal year changed
from May 31 to December 31.
Accordingly,
the accompanying financial statements consist of the balance sheet of both
the
Company and Qualmax as of December 31, 2007, and the results of operations
and
cash flows of Qualmax for the years ended December 31, 2007 and 2006, and
the
Company for the year ended December 31, 2007 and for the period from September
16, 2006 to December 31, 2006.
Basis
of Accounting and Revenue Recognition
The
accompanying consolidated financial statements have been prepared using the
accrual method of accounting. Revenues from our VoIP telephony
services division have been recognized as services are
rendered. Revenue from the sale of products from our exclusive
distributorship of VoIP equipment or reseller equipment is recognized as
our
customers take delivery of our products. Any amounts received from
our customers in advance are recorded as customer deposits and classified
as
other current liabilities.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and the reported amounts
of
revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments in debt instruments purchased
with original maturities of three months or less to be cash
equivalents.
Accounts
Receivable
Accounts
receivable are presented at net realizable value, which is comprised of total
accounts receivable less any allowances for uncollectible
accounts. The Company provides an allowance for potentially
uncollectible accounts based upon a periodic review and analysis of outstanding
accounts receivable balances. The resulting estimate of uncollectible
receivables is charged to an allowance for doubtful
accounts. Recoveries of accounts previously written off are used to
offset the allowance account in the periods in which the recoveries are
made. Accordingly, accounts receivable has been written down to its
estimated net realizable value. The results of operations for the years ended
December 31, 2007 and 2006 include charges of approximately $323,000 and
$437,000, respectively. The allowance for doubtful accounts as of December
31, 2007 was approximately $114,000.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis. Market represents the lower of replacement
cost or net realizable value on inventories as a whole. Inventories
are made up primarily of high technology telephone switching and VoIP routing
equipment and their parts. All year ending inventories
consisted of finished goods for resale that were purchased from other
manufacturers. Due to rapid technological advancements in the
industry, inventories may, from time to time, be subject to impairment and
obsolescence. We record an allowance for slow-moving and obsolete
inventories based upon a periodic review and analysis of inventories on
hand. We perform a periodic comparison of this slow moving and
obsolete inventory to determine if its value is below its cost in our records
and reduce the value on our records if the cost is above the current
value. Accordingly, the allowance for obsolete inventories as of
December 31, 2007 was approximately $75,000.
Concentration
of Deposit Risk
From
time
to time, the Company has cash in financial institutions in excess of federally
insured limits. However, the Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk
on its cash balances. Cash exceeding federally insured limits
amounted to approximately $1,762,000 as of December 31, 2007.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Business
Concentrations
We
had
one supplier during the year ended December 31, 2007 that exceeded 10% of
our
total cost of sales. They accounted for 17% of the total purchases made by
New
World Brands during 2007. The top three vendors collectively represent 31%
of
purchases. We did not have any single supplier that represented more than
ten
percent of purchases or any single customer that represented more than ten
percent of sales during the year ended December 31,
2006.
We
had no
customers in 2007 that made up a sufficiently large amount of our sales to
be
considered a concentration risk on the revenue side of our
business.
Impairment
of Long-Lived Assets and Long-Lived Assets Subject to
Disposal
We
review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, in
accordance with Statement of Financial Accounting Standards (“
SFAS
”)
No.
144. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash
flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount
by
which the carrying an amount of the assets exceeds its fair
value. Assets subject to disposal are reported at the lower of the
carrying amount or fair value less costs to sell. We did have an
impairment of a long lived asset during the year that was written down and
subsequently sold in 2007. See “Note B—Sale of Discontinued Operations—IP Gear,
Ltd.” We had no impairment in 2006.
Property
and Equipment
Property
and equipment are recorded at cost. For financial statement purposes,
depreciation of software, furniture and equipment is computed using the
straight-line method over their estimated useful lives of the assets while
leasehold improvements are amortized over the shorter of their estimated
useful
lives or the terms of their respective leases. Expenditures for
replacements, maintenance and repairs that do not extend the lives of the
assets
are charged to operations as the expenses are incurred. When assets
are retired, sold or otherwise disposed of, their costs and related accumulated
depreciation are removed from the accounts and resulting gains or losses
are
reflected in the year of disposal.
Stock
Options
Effective
January 1, 2006, we adopted the fair value method of accounting for awards
of
employee stock and options in accordance with SFAS No. 123, “Accounting for
Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation, Transition and Disclosure,” and SFAS No. 123R,
“Share-Based Payment.” These standards require the cost associated with employee
services in exchange for equity instruments based on the grant date fair
value
of the award, be recognized over the period during which the employee is
required to provide services in exchange for the award. No compensation cost
is
recognized for awards for which employees do not render the requisite service.
Because the Company changed its method of accounting from the intrinsic method
as per APB Opinion No. 25, upon adoption, the grant date fair value of employee
share options was estimated using the Black-Scholes model. Compensation cost
for
the unvested portion of equity awards granted prior to January 1, 2006, will
be
recognized over the remaining vesting periods. Due to the prospective adoption
of SFAS No. 123R, results of operations for prior periods have not been
restated.See “Note G—Stock Option Plans.”
Software
Costs
Certain
computer software development costs are capitalized in the accompanying
consolidated balance sheet in accordance with SFAS No. 86,
“Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Capitalization ceases and
amortization of capitalized costs begins when the software product is
commercially available for general release to customers. Amortization of
capitalized computer software development costs is included in general and
administrative expenses and is provided using the straight-line method over
the
remaining estimated economic life of the product, not to exceed three
years. Much of the software that we had in past years was related to the
development of equipment in our IP Gear Ltd subsidiary that is not considered
as
part our “continuing operations.” Net unamortized software costs as of December
31, 2007 amounted to approximately $ 1,000. Amortization of software
costs for the years ended December 31, 2007 and 2006 was approximately $20,000
and $ 18,000, respectively.
Segment
Information
Our
business consisted of three operating segments: (i) proprietary hardware,
which
is our VoIP technology development and equipment manufacturing subsidiary
that
is located in Israel, IP Gear, Ltd.; (ii) resale hardware, which is the sale
and
distribution of VoIP and other telephony equipment and related professional
services via our U.S.-based business operated under the name “IP Gear”; and
(iii) wholesale carrier services, which is telephony service resale and direct
call routing via our U.S.-based VoIP service business operated under the
name
“IP Gear Connect.” The proprietary hardware segment, IP Gear Ltd. was
discontinued as at June 30, 2007 and subsequently sold on July 1 2007. See
“Note
B—Sale of Discontinued Operations—IP Gear, Ltd.” for further information
regarding this transaction. Our continuing business was subsequently organized
into two segments, the resale hardware operating under the name “NWB Networks”
and the carrier segment operating under the name “NWB Telecom.” Please see “Note
N—Business Segment Reporting.”
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Reclassification
Certain
reclassifications of amounts previously reported have been made to the
accompanying consolidated financial statements in order to maintain consistency
and comparability between periods presented.
In
June
2007, the Company sold IP Gear, Ltd. (
See
“Note
B—Sale of Discontinued Operations—IP Gear, Ltd.”
)
For
purposes of comparability, the results of these operations have been
reclassified from continuing operations to discontinued operations for all
years
presented in the accompanying consolidated statements of
operations.
Fair
Value of Financial Instruments
Our
financial instruments consist primarily of cash, certificates of deposit,
accounts receivable, accounts payable, accrued liabilities and notes
payable. The carrying amounts of such financial instruments
approximate their respective estimated fair values due to the short-term
maturities and approximate market interest rates of these
instruments. The estimated fair values are not necessarily indicative
of the amounts we would realize in a current market exchange or from future
earnings or cash flows.
Earnings
per Share
Net
income per share is computed in accordance with SFAS No. 128, “Earnings per
Share.” Basic net income per share is based upon the weighted average number of
common shares outstanding during the period. Diluted net income per share
is
based upon the weighted average number of common shares outstanding and dilutive
common stock equivalents outstanding during the period. Common stock equivalents
are options and warrants granted by the Company and are calculated under
the
treasury stock method. Common equivalent shares from unexercised stock options
and warrants are excluded from the computation when there is a loss as their
effect is antidilutive, or if the exercise price of such options and warrants
is
greater than the average market price of the stock for the
period. See “Note G—Stockholders’ Equity” for the computation of
basic and diluted share data.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109,
“Accounting
for Income Taxes,”
which
requires recognition of deferred tax assets and liabilities for expected
future
tax consequences of events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates
in
effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets amounts expected to be
realized. U.S. income taxes are not provided on
undistributed earnings, which are expected to be permanently reinvested by
the
foreign subsidiary, unless the earnings can be repatriated in a tax-free
or
cash-flow neutral manner.
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(the “FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in
Income Taxes” and FSP FIN 48-1, which amended certain provisions of FIN 48. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 requires that
the
Company determine whether the benefits of the Company’s tax positions are more
likely than not of being sustained upon audit based on the technical merits
of
the tax position. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods and disclosure.
In
connection with our adoption of FIN No. 48, we analyzed the filing
positions in all of the federal and state jurisdictions where we are required
to
file income tax returns, as well as all open tax years in these jurisdictions.
There was no impact on our condensed consolidated financial statements upon
adoption of FIN No. 48 on January 1, 2007. The Company did not have
any unrecognized tax benefits and there was no effect on the financial condition
or results of operations for the year ended December 31, 2007 as a result
of
implementing FIN 48, or FIN 48-1. In accordance with FIN48, the Company adopted
the policy of recognizing interest and penalties, if any, related to
unrecognized tax positions as income tax expense. The tax years 2004 - 2007
remain subject to examination by major tax jurisdictions.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Advertising
and Promotional Costs
We
expense advertising and promotional costs as incurred. Advertising
and promotional expenses amounted to approximately $45,000 and $107,000 for
the
years ended December 31, 2007 and 2006, respectively.
Leases
We
account for leases in accordance with SFAS No.13,
“Accounting
for Leases,” under which we perform a review of each newly acquired lease to
determine whether it should be treated either as a capital or an operating
lease. A capital lease asset is capitalized and depreciated over the
term of the initial lease. A liability equal to the present value of
the aggregated lease payments is recorded utilizing the stated lease interest
rate. If an interest rate is not stated, we will determine our
estimated incremental borrowing rate.
Foreign
Currency Translation
As
of the
year end at December 31, 2007, New World Brands did not have any balances
or
transactions in a foreign currency. All amounts on the consolidated balance
sheets are reported in their native currency, the US dollar.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which establishes a framework for measuring fair value in GAAP terms and
expands
disclosures about fair value measurements. While SFAS 157 does not require
any new fair value measurements, it may change the application of fair value
measurements embodied in other accounting standards. SFAS 157 will be
effective at the beginning of the Company’s 2008 fiscal year. The Company is
currently assessing the effect of this pronouncement on its consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—including an Amendment of FASB
Statement No. 115”, which is effective for fiscal years beginning after
November 15, 2007. SFAS 159 permits an entity to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Subsequent unrealized gains and losses on items for which
the
fair value option has been elected will be reported in earnings. The Company
is
currently evaluating the potential impact, if any, that SFAS 159 will have
on
its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business
Combinations” (
“SFAS
141(R)”
).
SFAS
141(R) retains the fundamental requirements of the original pronouncement
requiring that the purchase method be used for all business combinations.
SFAS
141(R) defines the acquirer as the entity that obtains control of one or
more
businesses in the business combination, establishes the acquisition date
as the
date that the acquirer achieves control and requires the acquirer to recognize
the assets acquired, liabilities assumed and any non-controlling interest
at
their fair values as of the acquisition date. SFAS 141(R) also requires that
acquisition-related costs be recognized separately from the acquisition.
SFAS
141(R) is effective for the Company in 2009. The Company is currently evaluating
the potential impact, if any, that SFAS 141(R) will have on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51.”
SFAS 160 establishes accounting and reporting standards pertaining to
ownership interests in subsidiaries held by parties other than the parent;
the
amount of net income attributable to the parent and to the noncontrolling
interest; changes in a parent’s ownership interest; and the valuation of any
retained noncontrolling equity investment when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is required to be adopted prospectively for
the first annual reporting period after December 15, 2008. The Company is
currently reviewing this statement and has not yet determined the impact,
if
any, on its consolidated financial statements.
NOTE
B
|
SALE
OF DISCONTINUED OPERATIONS - IP GEAR,
LTD.
|
New
World
Brands completed the sale of its Israeli subsidiary IP Gear, Ltd. as of an
effective date of July 1, 2007 for accounting purposes. The company agreed
to
sell all the outstanding shares of the Company’s subsidiary, IP Gear Ltd., to
TELES A.G. of Germany in exchange for cash on closing and further payments
over
a period of time. New World Brands’ consideration, as determined by the final
agreement, calls for four elements: a fixed price of $1,500,000 as part of
closing; an earn out over four years paid quarterly of not less than $750,000
over the four years; a minimum of $400,000 over two years defined as marketing
support; and an interest bearing loan credit facility up to $1,000,000 repayable
over four years. (See “Note O—Subsequent Events and Other Matters” for further
details). The Earn Outs are to be paid at the greater of $46,875 or 10% of
the
“CPE” product line revenue for the quarter to be paid within 90 days of the end
of the quarter. The Company also received a return of working capital invested
during the transition period.
With
certain exceptions, commencing on the date of the closing and for a certain
period of time (as specified in the Final Agreement), the Company agreed
not to,
or cause any of its affiliates to, engage in any research and development
or
manufacturing activities competitive with those conducted by IP Gear, Ltd.,
and
not to, or cause any of its affiliates to, engage in the sale,
distribution, marketing, and services of products that may compete with certain
products of TELES. In addition, with certain exceptions, commencing
one year after the date of closing, and effective for a period of time and
within certain geographic regions relative to the grant of exclusive
distribution and sale rights to the Company pursuant to the partner contract
described below, the Company agreed not to, or cause any of its affiliates
to,
engage in the sale, distribution, marketing, and services of products that
may
compete with products of IP Gear, Ltd.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
B
|
SALE
OF DISCONTINUED OPERATIONS - IP GEAR, LTD.
(CONTINUED)
|
In
accordance with the Final Agreement, the Company and TELES entered into a
partner contract relating to the promotion, marketing, sale, and support
of
certain products of TELES and IP Gear, Ltd., pursuant to which the Company
became the exclusive distributor of products of TELES and IP Gear, Ltd. in
North
America (including the United States, Canada, Mexico, all Caribbean nations,
Guatemala, and Honduras) and non-exclusive distributor in other
markets.
TELES
assumed responsibility for all the liabilities and obligations of IP Gear,
Ltd.
except those specifically outlined in the agreement. The two items excluded
are
any past potential liability that IP Gear, Ltd. may have to the Office of
the
Chief Scientist of Israel and under a contract with one of IP Gear, Ltd.’s
vendors, Piecom Tech. (See “Note O—Subsequent Events and Other
Matters.”)
New
World
Brands’ management was authorized by the board to complete the sale to TELES of
its IP Gear, Ltd. (Israel) subsidiary. A preliminary agreement was reached
July
18 2007 and the closing occurred on July 26, 2007. The final agreement for
the
sale of the subsidiary was approved by our Board’s consent and by Teles’
Supervisory board on July 25, 2007
The
condensed statement of operations for the 12 months ended December 31, 2007
below represent the reclassified discontinued operations of New World Brands
as
a result of the sale of IP Gear Ltd. It also shows the loss recorded at the
end
of the second quarter due to the revaluation of our investment in IP Gear
Ltd
down to its net realizable value as defined by the then pending transaction
to
sell IP Gear Ltd.
|
|
Selected
Statements of Operations
Data
for
the Company’s
Discontinued
Operations
for
12
Months Ended December 31
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$
|
998,981
|
|
$
|
2,592,543
|
|
|
|
|
|
|
|
|
|
Pre
Tax Loss from Discontinued Operations
|
|
|
(1,407,911
|
)
|
|
(3,147,014
|
)
|
Income
Tax Provision
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations
|
|
|
(1,407,911
|
)
|
|
(3,147,014
|
)
|
|
|
|
|
|
|
|
|
Pre-Tax
Impairment Loss
|
|
|
(2,462,448
|
)
|
|
-
|
|
Gain
from Sale of Discontinued Operations
|
|
|
4,706
|
|
|
-
|
|
Income
Tax Provision
|
|
|
-
|
|
|
-
|
|
Loss
from Discontinued Operations, net of Tax
|
|
$
|
(3,944,689
|
)
|
$
|
(3,147,014
|
)
|
As
a
result of the impairment, the Company reported a loss of $3,949,394 at the
end
of the second quarter in accordance with FASB No. 144, “Accounting for
Impairment of and Disposal of Long-Lived Assets,” and recorded a gain on
disposal of $4,706 by the end of the year due to gains from the Earn Out
portion
of the sale in excess of the minimums by an amount of $28,681. These losses
and
gains are recorded on the Company’s financial statements in the income
statements for the years ended 2007 and 2006, in the line items “Loss from
Discontinued Operations” and “Gain From Sale of Discontinued Operations,”
respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Inventories
as of December 31,
2007
consisted of the following:
|
|
Resale
Hardware
|
|
Total
Inventories
|
|
$
|
819,654
|
|
Less
allowance for obsolete inventories
|
|
|
(75,000
|
)
|
Inventories,
net
|
|
$
|
744,654
|
|
NOTE
D
|
PROPERTY
AND
EQUIPMENT
|
As
of
December 31,
2007,
our
property and equipment consisted of the following:
|
|
|
|
Useful
Lives
(In Years)
|
|
Operating
Equipment
|
|
$
|
1,804,175
|
|
5
|
|
Rental
Equipment
|
|
|
44,928
|
|
5
|
|
Leasehold
improvements
|
|
|
227,922
|
|
15
|
|
Computer
software
|
|
|
189,256
|
|
3
- 5
|
|
Furniture
and fixtures
|
|
|
30,419
|
|
3
- 5
|
|
Other
|
|
|
4,100
|
|
5
|
|
Total
property and equipment
|
|
|
2,300,800
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
878,994
|
|
|
|
|
Property
and equipment, net
|
|
$
|
1,421,806
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
equipment acquired under capital leases
|
|
$
|
456,197
|
|
|
|
|
Less
accumulated amortization
|
|
|
167,181
|
|
|
|
|
|
|
$
|
289,016
|
|
|
|
|
Depreciation
and amortization expense of continuing operations amounted to approximately
$406,000 and $296,000 for the years ended December 31, 2007 and 2006,
respectively. Amortization of leased equipment, which has been
included in depreciation expense on the accompanying financial statements,
was
approximately $ 90,000 and $ 77,000 for the years ended December 31, 2007
and
2006, respectively.
Bank
of America and P & S Spirit.
At
the
start of 2007, New World Brands maintained a loan outstanding to the Bank
of
America in the amount of approximately $98,000. This term loan was due by
March
31, 2007. New World Brands repaid this loan with the proceeds of a new term
loan
it obtained from P & S Spirit on March 30, 2007. On and effective March 30,
2007, we entered into a term loan and security agreement with P&S Spirit
(the “
P&S
Term Loan
”). The
principal amount of the P&S Loan is $1,000,000. Monthly payments
of interest only at two percent over the Wall Street Journal Prime Rate payable
in arrears are due commencing on May 1, 2007. The interest rate on
this loan at December 31, 2007 was 9.25%. The principal balance of the P&S
Loan and any unpaid accrued interest up to that date becomes due in full
on
January 2, 2009. The P&S Loan includes certain covenants,
including a financial reporting requirement which is due forty-five days
after
the close of a calendar quarter, and requirements that we maintain a ratio
of
current assets to current liabilities of at least 1.2 to 1 and a total
liabilities to tangible net worth ratio not exceeding 2.5 to 1. The company
was
in compliance with both of these ratios as at December 31, 2007.
The
P&S Loan also grants P&S Spirit a first position security interest with
respect to all of the Company’s assets. The P&S Loan is also
backed by a guaranty by Qualmax (which, pending completion of the contemplated
merger of Qualmax into the Company, holds a controlling interest in the
Company), a security interest in the assets of Qualmax (consisting solely
of 100
shares of series A convertible preferred stock of the Company, par value
$0.01
per share, which stock is convertible into 298,673,634 shares of the Company’s
common stock, par value $0.01 per share), and by the personal guaranty of
M.
David Kamrat, Chairman of the Board of Directors and Chief Executive Officer
of
the Company, and a director and executive officer of Qualmax. M.
David Kamrat’s personal Guaranty is limited to the sum of $1,000,000, although
the guaranteed obligations include indemnification for certain claims against
P&S Spirit relating to the P&S Term Loan.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
E
|
NOTES
PAYABLE
(CONTINUED)
|
The
Loan
proceeds were used by the Company to repay all outstanding principal, interest
and fees due on our note payable with B of A, and to pay certain professional
fees associated with preparation and negotiation of the P&S Term
Loan.
On
August
10, 2007, $500,000 of the principal balance of the P & S Term Loan was
repaid by the company. The balance at December 31, 2007 was $500,000. This
remaining balance of $500,000 was paid off in February 2008 closing out the
P
& S Spirit Term Loan. Please see “Note O—Subsequent Events and Other
Matters” for further activity associated with these loans.
On
May
31, 2007, the company entered into another agreement with P & S Spirit, a
Credit line and Security Agreement( P & S Credit Line), for a line of credit
facility in the amount of $1,050,000. The terms of the loan facility are
an
interest rate of Prime plus 2% (as reported in the Wall Street Journal),
payments are to be interest only in arrears commencing July 1, 2007. The
P &
S Credit Line is secured by a corporate guaranty by Qualmax(which pending
completion of the merger of Qualmax into the company, holds a controlling
interest in the company) and a security interest in the assets of
Qualmax(consisting solely of 298,673,634 shares of common stock of the company).
The company must meet covenants of a ratio of current assets to current
liabilities of at least 1.2 :1.0 and a total liabilities to net worth ratio
not
exceeding 2.5:1.0. The maturity date of the loan is June 1, 2011 when all
principal and any outstanding interest payments are due. As of December 31,
2007, we had not drawn any funds from this loan facility. The Company was
in
compliance with the convenants as of December 31, 2007.
The
principals of P&S Spirit include Dr. Selvin Passen, who is a director and
shareholder of the Company, as well as its former Chief Executive Officer,
and
Dr. Jacob Schorr, who is a director of the Company
Total
maturities of notes payable as of December 31, 2007 were as
follows:
Total
notes payable as at Dec 31, 2007
|
|
$
|
500,000
|
|
|
|
|
|
|
Notes
payable, current portion
|
|
|
0
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
$
|
500,000
|
|
Interest
expense on the notes payable was approximately $119,000 and $142,000 for
the
years ended December 31, 2007 and 2006, respectively.
NOTE
F
|
CAPITAL
LEASE
OBLIGATIONS
|
We
currently lease equipment pursuant to four capital lease agreements. In
conjunction therewith, the Company has capitalized the cost of the equipment
in
the amount of $87,683, which is the present value of the lease payments.
Interest expense on the capital lease obligations amounted to approximately
$10,000 and $36,000 for the years ended December 31, 2007 and 2006,
respectively. Future minimum lease payments required under the capital leases
as
of December 31, 2007 were as follows:
2008
|
|
$
|
181,731
|
|
2009
|
|
|
19,929
|
|
2010
|
|
|
11,388
|
|
|
|
|
6,024
|
|
|
|
|
3,012
|
|
|
|
|
222,084
|
|
Less:
amounts representing interest
|
|
|
9,036
|
|
|
|
|
|
|
Present
value of net minimum lease payments
|
|
|
213,048
|
|
|
|
|
|
|
Capital
lease obligations, current portion
|
|
|
181,731
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
$
|
31,317
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
G
|
STOCKHOLDERS’
EQUITY
|
Capitalization
The
Company’s authorized capital stock consists of 600,000,000 shares of common
stock, $.01 par value per share, and 1,000 shares of preferred stock, $.01
par
value. There were 414,979,673 shares of common stock and no shares of
Series A Convertible Preferred Stock issued and outstanding as of December
31, 2007.
The
board
of directors has the authority, without action by the Company’s stockholders, to
provide for the issuance of preferred stock in one or more classes or series
and
to designate the rights, preferences and privileges of each class or series,
which may be greater than the rights of the common stock.
Common
Stock
As
of
December 31, 2006, our total number of authorized common stock, $.01 par
value,
was 50 million shares, with 44,303,909 shares issued and
outstanding. On February 1, 2007 our board acted to increase the
number of authorized common stock to 600 million shares. The additional common
stock was created to allow for the conversion of all outstanding preferred
shares to common stock. This conversion was authorized by board consent on
January 31, 2007 and become effective on April 24, 2007 resulting in the
conversion of all Series A Convertible Preferred Shares to common shares
at a
ratio of 2,986,736 common shares for every one preferred share. Approximately
116.67 Series A Preferred Shares were converted into approximately 348 million
common shares. This transaction was another step in the planned sequence
of
transactions that will conclude in the completion of the merger of New World
Brands Inc. with Qualmax Inc.
On
May
31, 2007, the company issued as converted 22,222,222 shares of common stock
to
P & S Spirit, in exchange for an investment of $886,093 (net of
all costs) in the company. The gross amount of the purchase price prior to
any
costs was $1,000,000. These shares of common stock will be issued without
registration under the Securities Act of 1933, as amended, and are subject
to
the lock out agreement signed by Qualmax, the Kamrats, P & S
Spirit and certain affiliates of the Kamrats and P & S Spirit
filed with the SEC on June 6, 2007.
Stockholders’
equity transactions prior to the New World Brands/Qualmax, Inc. merger date
have
been retroactively restated for the equivalent number of shares received
in the
merger after giving effect to any difference in par value of the issuer’s and
acquirer’s stock with an offset to paid-in capital.
Preferred
Stock
As
of
December 31, 2007, we had 1,000 shares of authorized preferred stock, $.01
par
value. There was no issued or outstanding preferred stock at December
31, 2007.
Common
Stock Warrants
Warrants
for the purchase of our common stock were granted during the 12 months ending
December 31, 2007. Common stock warrants were issued in exchange for all
outstanding preferred stock warrants concurrent with the conversion of all
preferred stock to common as mentioned in the common stock segment of the
notes
to the financial statements at the same ratio as the common stock conversion
or
2,986,736 common stock warrants in exchange for each preferred stock warrant.
A
total of 18.600756 preferred stock warrants were converted into 55,555,548
common stock warrants at this time with a strike price of $0.09. The warrants
expire on December 31, 2011.
Common
stock warrant activity for the year was as follows:
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Balance
granted at December 31, 2006
|
|
|
2,320,000
|
|
$
|
0.49
|
|
Granted
in 2007
|
|
|
55,555,548
|
|
$
|
0.09
|
|
Exercised
in 2007
|
|
|
-
|
|
$
|
-
|
|
Balance
granted at December 31, 2007
|
|
|
57,875,548
|
|
$
|
0.12
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
G
|
STOCKHOLDERS’
EQUITY
(CONTINUED)
|
Preferred
Stock Warrants
All
preferred stock warrants that had been outstanding at the start of 2007 were
cancelled during the year. There were no preferred stock warrants outstanding
at
December 31, 2007.
Preferred
stock warrant activity for the year was as follows:
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Balance
granted at December 31, 2006
|
|
|
18,600758
|
|
$
|
-
|
|
(As
converted to common stock)
|
|
|
55,555,548
|
|
$
|
0.09
|
|
Cancelled
during 2007
|
|
|
18.600758
|
|
|
|
|
Balance
granted at December 31, 2007
|
|
|
0
|
|
|
|
|
Computation
of Basic and Diluted Share Data
The
following tables set forth the computation of basic and diluted share data
for
2007 and 2006 (rounded to the nearest thousand):
Weighted
average number of shares outstanding during 2006:
|
|
|
|
Basic
(common)
|
|
|
39,044,000
|
|
Preferred
(as converted to common)
|
|
|
86,148,000
|
|
Total
|
|
|
125,192,000
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
- options and warrants
|
|
|
-
|
|
Preferred
- options and warrants
|
|
|
-
|
|
Total
|
|
|
-
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
125,192,000
|
|
Weighted
average of options and warrants not included
above (anti-diluted):
|
|
|
|
|
Basic
(common)
|
|
|
4,478,000
|
|
Preferred
(as converted to common)
|
|
|
55,556,000
|
|
Total
|
|
|
60,034,000
|
|
Weighted
average number of shares outstanding during 2007:
|
|
|
|
Basic
(common)
|
|
|
433,592,000
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
- options and warrants
|
|
|
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
433,592,000
|
|
Weighted
average of options and warrants not included
above (anti-dilutive)
|
|
|
43,851,000
|
|
Lock-Up
Agreement
In
connection with the transactions contemplated by the Subscription Agreement,
the
Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
P&S Spirit entered into an Amended and Restated Lock-Up Agreement (the
“
Lock-Up
Agreement
”),
pursuant to which each such party agreed to certain restrictions on transfer
on
certain shares of capital stock (and securities convertible into share of
capital stock) of the Company on the terms set forth therein. A copy of the
Amended and Restated Lock-Up Agreement is filed as Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed with the SEC on January 8, 2007. In
particular, the parties agreed to restrict their ability to transfer shares
of
capital stock in the Company for up to two years without the prior approval
of
the other stockholders party thereto (meaning, both the Kamrats and P&S
Spirit must seek the consent of the other to sell subject shares during the
term
of the Lock-Up Agreement). Also, in connection with the transactions
contemplated by the BOS Agreement BOS agreed to be subject to the Lock-Up
Agreement, restricting the ability of BOS to transfer shares of capital stock
in
the Company and Qualmax for up to two years without the prior approval of
the
other stockholders party thereto.
NOTE
H
|
STOCK
OPTION
PLANS
|
Performance
Equity Plan
We
have a
Performance Equity Plan (the “
Performance
Equity Plan
”)
under
which we may grant incentive and nonqualified stock options, stock appreciation
rights, restricted stock awards, deferred stock, stock reload options, and
other
stock-based awards to purchase up to 600,000 shares of Common Stock to officers,
directors, key employees, and consultants. The Company may not grant any
options
with a purchase price less than fair market value of Common Stock as of the
date
of grant. No options or other stock-based rights were issued under
the Performance Equity Plan during 2007 and 2006, and none were exercised
or exercisable during 2007 and 2006.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
H
|
STOCK
OPTION PLANS
(CONTINUED)
|
Stock
Option Plan
In
October 2001, we adopted a stock option plan (the “
2001
Option Plan
”)
whereby we have reserved 5,000,000 shares of its Common Stock for purposes
of
granting options to purchase such shares pursuant to the 2001 Stock Option
Plan. Options are granted to officers and employees of the Company by
the Board of Directors and to members of the Board on a non-discretionary
basis,
provided that the exercise price of the options is equal or greater than
the
fair market price of our Common Stock on the date the option is granted.
The
2001 Stock Option Plan terminates 10 years from its effective date. A
total of 2,945,000 of options (“the New World Brands options”), granted under
the 2001 Option Plan to purchase our Common Stock in exchange for services
rendered, were vested and exercisable as of December 31, 2007. There were
no
issuances, exercises or forfeitures in 2007 or 2006.. The employees
and consultant performed services related to product promotion, general
business, financing, and public/investor relations. These
options were granted prior to September 15, 2006.
Employee
compensation expense for the New World Brands stock options was not recognized
in 2006 in the accompanying consolidated statements of income as the options
were granted and fully exercisable on September 14, 2006, prior to the merger
date. The consolidated statements of income include the results of operations
of
New World Brands from the date of the merger, September 15, 2006, to December
31, 2006. As of December 31, 2006, there was approximately $41,610 of
total unrecognized compensation cost related to unvested stock options granted
under our stock option plan. That cost is expected to be recognized over
a
weighted average of 4 years. There are 1,755,000 shares of common stock
available for future issuance, as of December 31, 2007. The following
table summarizes stock option plan as of December 31, 2007:
|
|
Exercise
Price
|
|
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
Options
Exercisable
|
|
|
|
$ 0.18
|
|
|
1,000,000
|
|
4.9
|
|
|
1,000,000
|
|
|
|
$ 0.18
|
|
|
1,000,000
|
|
4.9
|
|
|
1,000,000
|
|
|
|
$ 0.18
|
|
|
250,000
|
|
4.9
|
|
|
250,000
|
|
|
|
$ 0.18
|
|
|
100,000
|
|
4.9
|
|
|
100,000
|
|
|
|
$ 0.18
|
|
|
100,000
|
|
4.9
|
|
|
100,000
|
|
|
|
$ 0.18
|
|
|
100,000
|
|
4.9
|
|
|
100,000
|
|
|
|
$ 0.50
|
|
|
300,000
|
|
3.5
|
|
|
-
|
|
|
|
$ 0.25
|
|
|
325,000
|
|
1.75
|
|
|
325,000
|
|
|
|
$ 0.10
|
|
|
70,000
|
|
5.5
|
|
|
70,000
|
|
|
|
|
|
|
3,245,000
|
|
|
|
|
2,945,000
|
|
Income
tax consisted of the following for the years ended December 31, 2007 and
2006:
|
|
2007
|
|
2006
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
)
|
$
|
403,995
|
|
Deferred
|
|
|
|
|
|
579,475
|
|
State:
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
-
|
|
Deferred
|
|
|
|
|
|
51,130
|
|
Subtotal
|
|
|
(403,995
|
)
|
|
1,034,600
|
|
Change
in valuation allowance
|
|
|
|
|
|
(561,695
|
)
|
Benefit
(provision) for income taxes
|
|
$
|
(403,995
|
)
|
$
|
472,905
|
|
The
effective tax rate varies from the federal statutory maximum rate for the
year
ended December 31, 2007 and 2006 principally due to the following:
|
|
2007
|
|
2006
|
|
|
|
34
%
|
|
34
%
|
|
Loss
from foreign subsidiary
|
|
(8)
%
|
|
(19)
%
|
|
Benefit
of net operating loss carryback
|
|
|
|
(7)
%
|
|
State
tax rate, net of federal tax benefit
|
|
6
%
|
|
1
%
|
|
Book
vs tax loss on sale of subsidiary
|
|
11
%
|
|
-
|
|
Other
|
|
2
%
|
|
|
|
Total
|
|
(6)
%
|
|
8
%
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
I
|
INCOME
TAXES
(CONTINUED)
|
Significant
portions of the deferred tax assets and liabilities results from the tax
effects
of temporary differences, which of December 31, 2007, were as
follows:
Deferred
tax assets
(short-term):
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
1,829,437
|
|
Capital
loss from sale of subsidiary
|
|
|
1,772,929
|
|
Allowance
for doubtful accounts receivable
|
|
|
43,726
|
|
Allowance
for inventory obsolescence
|
|
|
28,767
|
|
Depreciation
& amortization
|
|
|
21,607
|
|
Allowance
for disputes
|
|
|
4,219
|
|
Accruals
|
|
|
3,836
|
|
Deferred
tax assets
(long-term):
|
|
|
|
|
Charitable
contributions carry forward
|
|
|
775
|
|
Net
deferred tax assets before valuation allowance
|
|
|
3,705,296
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(3,705,296
|
)
|
|
|
|
|
|
Net
deferred tax asset after valuation
|
|
$
|
-
|
|
As
of
December 31, 2007, the Company had net operating losses of approximately
$4.8
million that can be carried forward for up to twenty years and deducted
against
future taxable income. The net operating loss carry forwards expire in
2026 and
2027. The company also has a capital loss carry forward of approximately
$4.6
million that can be carried forward for five years and deducted against
future
capital gain income. The capital loss carry forward expires in
2012.
NOTE
J
|
RELATED
PARTY
TRANSACTIONS
|
Loans
from Shareholders
The
Company received $1,000,000 in a term loan from P & S Spirit, a stockholder
of the company and a company controlled by two stockholders and members of
the
Board of Directors of New World Brands. The terms of this loan are listed
in
detail in note E - Notes Payable.
NOTE
K
|
COMMITMENTS
AND
CONTINGENCIES
|
Operating
Leases
We
have
entered into various operating leases for our facilities and
equipment. The future minimum annual rental payments due on these
operating leases as of December 31, 2007 for each of the next 5 years are
as
follows:
Year
ending December 31:
|
|
|
|
2008
|
|
$
|
291,371
|
|
2009
|
|
|
68,260
|
|
2010
|
|
|
50,230
|
|
2011
|
|
|
49,780
|
|
2012
|
|
|
14,880
|
|
|
|
|
|
|
|
|
$
|
477,121
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
K
|
COMMITMENTS
AND CONTINGENCIES
(CONTINUED)
|
Our
U.S.
operations are headquartered in Eugene, Oregon in leased commercial
premises in
two buildings, and the total rental expense for the years ended December
31,
2007 and 2006 was approximately $68,000 and $77,000, respectively.
We have made substantial leasehold improvements to our rental
premises.
The
MPI Litigation
As
a
result of the Reverse Acquisition the Company assumed the liabilities of
Qualmax. Qualmax was named as a defendant in certain litigation filed
in France before the Trade Tribunal of Nanterre against BOS by Media Partners
International (“
MPI
,”
and
the “
MPI
Litigation
”),
a
former distributor of BOS, whose contract with BOS allegedly related to certain
distribution rights for the product division Qualmax purchased from BOS on
December 31, 2005. Pursuant to the asset purchase agreement between
Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless from
liability, without limitation, arising from the claims raised in the MPI
Litigation, and BOS has undertaken defense of Qualmax at BOS’s
expense. The litigation remains in its early stages, and at last
report from counsel the French court had not yet made definitive rulings
on
defendant’s motion to change venue and jurisdiction from France to
Israel.
Initial
hearings on a motion for change of venue were concluded in February 2007.
Additional hearings were conducted in late April 2007. The Company has been
preliminarily informed that a decision from the French court to maintain
venue
in France was made in September 2007, and that defendants have filed an appeal
of that decision, but that no ruling has been made on the appeal as of the
date
of this filing. At present, based upon the limited progress of the matter
and
without the benefit of the completion of factual discovery, management believes
this litigation does not pose a significant financial risk to the
Company.
Former
Employee Litigation
The
lawsuit brought by a former employee of the company, Fred Singer, relating
to
stock options and prior compensation, was settled on April 10, 2007, the
company
agreeing that the plaintiff, Mr. Singer, is the holder of options to purchase
70,000 shares of the company’s common stock.
The
Blackstone Litigation
Qualmax
was named as a defendant in a lawsuit entitled Capital Securities, LLC and
Blackstone Communications Company v. Carlos Bertonnatti, Worldwide PIN Payment
Corp. and Qualmax, Inc., Case No. 2006-15824-CA-01, in the Circuit Court
of the
11th Judicial Circuit in and for Miami-Dade County, Florida, filed August
10,
2006. The facts underlying the proceeding relate to a contract
between defendant Worldwide PIN Payment Corp. and plaintiffs, and a third
party,
to plaintiff’s allegations of misappropriation of trade secrets and corporate
opportunity, and to claims that defendants, or some of them, tortiously
interfered with plaintiffs’ contract with a third party. Plaintiffs’
seek monetary damages. Management believes it is not entirely clear
from the pleadings filed to date whether plaintiffs claim that Qualmax
misappropriated trade secrets, or tortiously interfered with a third party
contract, or is liable under some other theory.
This
litigation was settled on April 1, 2008 between New World Brands and Blackstone.
The details are provided in the subsequent events section of the notes -
Note
M
Credit
Facility with Pacific Continental Bank
The
company entered into an agreement for the use of various credit services
with
Pacific Continental Bank in February 2007. The conditions of this
agreement require the deposit of $250,000 with the bank as security for the
services. The terms and balance remain unchanged at December 31, 2007. The
deposit is in the company’s money market account with the bank and is reported
on the balance sheet as part of cash and cash equivalents.
Piecom
Tech
As
part
of the agreement to sell our IP Gear Ltd. subsidiary to Teles A.G. (see “Note
B—
Sale
of
Discontinued Operations—IP Gear, Ltd.”
),
we
have accepted any liabilities and or any amounts recovered as a result of
any
claims from/against Piecom to/from IP Gear Ltd. in the future, beyond the
date
of closing the sale of our subsidiary. Piecom Tech had been a vendor to IP
Gear
Ltd and was contracted to provide outsourced contract manufacturing services.
There is currently a deposit held by Piecom of $214,000 towards the production
of equipment not yet delivered and an amount in escrow of $32,000 pending
resolution of this matter. There is currently no expectation of any liability
arising from this commitment to the company.
NOTE
L
|
REGULATORY
MATTERS
|
The
telecommunications industry is subject to federal, state and local
regulation. Any changes in the regulations or enforcement could
impact the Company’s ability to continue its current operations.
NOTE
M
|
DEFINED
CONTRIBUTION
PLAN
|
In
May
2005, we adopted a Savings Incentive Match Plan for Employees (SIMPLE) (the
“Plan”) for the benefit of our employees who are reasonably expected to receive
at least $5,000 in compensation during a calendar year. We have
elected to contribute to each eligible employee’s simple individual retirement
account a matching contribution equal to the employee’s elective salary
reduction contributions, up to a limit of three percent of the employee’s
compensation for the calendar year. Total expense for the years ended
December 31, 2007 and 2006 was approximately $ 23,000 and $11,000
respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
N
|
BUSINESS
SEGMENT
REPORTING
|
The
following presents our segmented financial information by business line for
the
years ended December 31, 2007 and 2006. We are currently focused on
two principal lines of businesses: (i) new and resale hardware, which is
the
sale and distribution of VoIP and other telephony equipment and related
professional services via our U.S.-based business operated under the names
“Teles USA” and “Qualmax”); and (ii) wholesale carrier services, which is
telephony service resale and direct call routing via our U.S.-based VoIP
service
business operated under the name “NWB Telecom.”
Segmented
Financial Information by Business Line For New World Brands
Inc.:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
$
|
11,443,514
|
|
$
|
11,230,284
|
|
Resale
Hardware
|
|
|
5,657,689
|
|
|
6,307,644
|
|
Total
|
|
|
17,101,203
|
|
|
17,537,928
|
|
|
|
|
|
|
|
|
|
Cost
of Sales:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
9,850,272
|
|
|
10,382,726
|
|
Resale
Hardware
|
|
|
4,954,381
|
|
|
5,317,852
|
|
Total
|
|
|
14,804,653
|
|
|
15,700,578
|
|
|
|
|
|
|
|
|
|
Gross
Profit:
|
|
|
|
Wholesale
Carrier Services
|
|
|
1,593,242
|
|
|
847,558
|
|
Resale
Hardware
|
|
|
703,308
|
|
|
989,792
|
|
Total
|
|
|
2,296,550
|
|
|
1,837,350
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
236,519
|
|
|
199,335
|
|
Resale
Hardware
|
|
|
2,417
|
|
|
90,514
|
|
Corporate
|
|
|
177,504
|
|
|
6,260
|
|
Total
|
|
|
416,440
|
|
|
296,109
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
1,259,716
|
|
|
1,451,158
|
|
Resale
Hardware
|
|
|
1,012,687
|
|
|
1,023,097
|
|
Corporate
|
|
|
1,942,020
|
|
|
1,664,032
|
|
Total
|
|
|
4,214,423
|
|
|
4,138,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Contining Operations Before Income Taxes:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
97,007
|
|
|
(802,935
|
)
|
Resale
Hardware
|
|
|
(311,797
|
)
|
|
(123,819
|
)
|
Corporate
|
|
|
(2,119,524
|
)
|
|
(1,470,292
|
)
|
Total
|
|
$
|
(2,334,313
|
)
|
$
|
(2,397,046
|
)
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
O
|
SUBSEQUENT
EVENTS AND OTHER
MATTERS
|
Term
Loan and Repayment of Note Payable with P & S
Spirit
On
February 21, 2008, effective February 15, 2008, the Company repaid all
outstanding obligations under the P&S Term Loan Agreement, in the amount of
$500,000. We made a draw of $500,000 against the P & S credit line facility
to obtain the fund to pay the P & S term loan.
Teles
AG Loan Agreement
On
February 21, 2008, New World Brands, Inc., and TELES AG Informationstechnologien
(“
TELES
”),
entered into a Term Loan and Security Agreement, effective February 15, 2008,
pursuant to which, from time to time prior to February 1, 2009 or the earlier
termination in full of the, the Company may obtain advances from TELES up
to the
amount of the outstanding Commitment. Amounts borrowed may not be
reborrowed, notwithstanding any payments thereunder. The outstanding
balance of the TELES Loan will be due and payable on or before February 1,
2012. The outstanding principal amount of the TELES Loan will be
payable in 12 quarterly installments commencing May 1, 2009. Interest
on the outstanding principal amount of the TELES Loan shall be
paid quarterly commencing May 1, 2008, at the per annum interest rate of
7%, compounded quarterly
Blackstone
Litigation
On
April
1, 2008, effective as of March 31, 2008, the Company entered into a settlement
agreement in relation to
a
lawsuit
entitled
Capital
Securities, LLC and Blackstone Communications Company v. Carlos Bertonnatti,
Worldwide PIN Payment Corp. and Qualmax, Inc.
,
Case
No. 2006-15824-CA-01, filed August 10, 2006 in the Circuit Court of the
11
th
Judicial
Circuit in and for Miami-Dade County, Florida (the “
Blackstone
Litigation
”).
As
disclosed in the Company’s Quarterly Reports on Form 10-QSB filed with the SEC
on November 19, August 20, and May 21, 2007, and the Company’s Annual Report on
Form 10-KSB filed with the SEC on April 17, 2007, the facts underlying the
Blackstone Litigation relate to a contract between defendant Worldwide PIN
Payment Corp. and plaintiffs, and a third party, to plaintiffs’ allegations of
misappropriation of trade secrets and corporate opportunity, and to claims
that
defendants, or some of them, tortiously interfered with plaintiffs’ contract
with a third party.
Pursuant
to the settlement agreement, the Company has agreed to pay plaintiffs the
sum of
$50,000 toward plaintiffs’ costs of litigation, and in exchange, plaintiffs have
released the Company from all claims asserted by plaintiffs or otherwise
arising
against the Company; all claims against the Company were dismissed with
prejudice.
Grafico Azioni New World Brands (CE) (USOTC:NWBD)
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Da Giu 2024 a Lug 2024
Grafico Azioni New World Brands (CE) (USOTC:NWBD)
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