ITEM
1. FINANCIAL STATEMENTS
New
World
Brands, Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
as
of
September 30, 2007 and December 31, 2006
(Unaudited)
|
|
September
30,
2007
(Unaudited)
|
|
|
December
1,
2006
|
|
Assets
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
$
1,510,976
|
|
|
|
$
3,396,617
|
|
Accounts
Receivable, net
|
|
|
1,397,336
|
|
|
|
1,496,865
|
|
Inventories,
net
|
|
|
684,510
|
|
|
|
1,817,824
|
|
Other
Current Assets
|
|
|
852,804
|
|
|
|
800,164
|
|
Current
Assets
|
|
|
4,445,626
|
|
|
|
7,511,470
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
1,301,065
|
|
|
|
1,668,802
|
|
Other
Asset
|
|
|
778,975
|
|
|
|
4,324,260
|
|
Long-Term
Assets
|
|
|
2,080,040
|
|
|
|
5,993,062
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
6,525,666
|
|
|
|
13,504,532
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
1,021,199
|
|
|
|
2,435,297
|
|
Other
Current Liabilities
|
|
|
201,216
|
|
|
|
1,266,815
|
|
Current
Liabilities
|
|
|
1,222,415
|
|
|
|
3,702,112
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
553,446
|
|
|
|
175,147
|
|
Other
Long-Term Liabilities
|
|
|
77,324
|
|
|
|
53,411
|
|
Long-Term
Liabilities
|
|
|
630,770
|
|
|
|
228,558
|
|
Total
Liabilities
|
|
|
1,853,185
|
|
|
|
3,930,670
|
|
Preferred
Stock, $0.01 par value: 1,000 shares authorized, 200 shares designated
as
Series A Convertible Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
Series
A Convertible Preferred Stock, $0.01 par value: 200 shares authorized,
0
and 116.666974 shares outstanding
as
of September 30, 2007 and December 31, 2006, respectively
|
|
|
-
|
|
|
|
1
|
|
Common
Stock, $.01 par value: 600,000,000 and 50,000,000 shares authorized,
414,979,673 and 44,303,939 shares
issued
and outstanding as of September 30, 2007 and December 31, 2006,
respectively
|
|
|
4,149,797
|
|
|
|
443,040
|
|
Paid
In Capital
|
|
|
26,973,978
|
|
|
|
36,462,218
|
|
Accumulated
Deficit
|
|
|
(26,451,294
|
)
|
|
|
(27,282,102
|
)
|
Accumulated
Other Comprehensive Income
|
|
|
0
|
|
|
|
(49,295
|
)
|
Stockholders’
Equity
|
|
|
4,672,481
|
|
|
|
9,573,862
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
$
6,525,666
|
|
|
|
$
13,504,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
New
World
Brands, Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
for
the
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
September
30, 2007
(Unaudited)
|
|
|
|
September
30, 2006
(Unaudited)
|
|
Net
Sales
|
|
|
$
11,837,946
|
|
|
|
$
13,034,341
|
|
Cost
of Sales
|
|
|
10,335,632
|
|
|
|
11,455,898
|
|
Gross
Profit
|
|
|
1,502,314
|
|
|
|
1,578,443
|
|
Sales,
General and Administrative Expenses
|
|
|
(2,944,877
|
)
|
|
|
(2,396,368
|
)
|
Depreciation
and Amortization
|
|
|
(309,868
|
)
|
|
|
(1,150,307
|
)
|
Interest
Expense
|
|
|
(109,487
|
)
|
|
|
(88,851
|
)
|
Other
Income
|
|
|
47,047
|
|
|
|
48,272
|
|
Provision
for Taxes
|
|
|
-
|
|
|
|
(3,479
|
)
|
Net
Loss From Continuing Operations
|
|
|
$
(1,814,871
|
)
|
|
|
$
(2,012,290
|
)
|
Loss
From Discontinued Operations
|
|
|
(3,870,359
|
)
|
|
|
(1,029,858
|
)
|
Loss
From Sale of Discontinued Operations
|
|
|
(107,500
|
)
|
|
|
-
|
|
Net
Loss
|
|
|
$
(5,792,730
|
)
|
|
|
$
(3,042,148
|
)
|
Net
Loss Per Share (basic)
|
|
|
$
(0.01
|
)
|
|
|
$
(0.06
|
)
|
Net
Loss Per Share (diluted)
|
|
|
$
(0.01
|
)
|
|
|
$
(0.06
|
)
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
New
World
Brands, Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
for
the
Three Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
September
30,
2007
(Unaudited)
|
|
September
30,
2006
(Unaudited)
|
|
Net
Sales
|
|
|
$
4,182,157
|
|
|
$
4,345,993
|
|
Cost
of Sales
|
|
|
3,672,701
|
|
|
3,876,893
|
|
Gross
Profit
|
|
|
509,456
|
|
|
469,100
|
|
Sales,
General and Administrative Expenses
|
|
|
(1,019,608
|
)
|
|
(659,166
|
)
|
Depreciation
and Amortization
|
|
|
(93,708
|
)
|
|
(92,052
|
)
|
Interest
and Bank Charges
|
|
|
(26,379
|
)
|
|
(46,418
|
)
|
Other
Income and Expenses
|
|
|
6,660
|
|
|
9,193
|
|
Provision
for Taxes
|
|
|
-
|
|
|
-
|
|
Net
Loss From Continuing Operations
|
|
|
$
(623,579
|
)
|
|
$
(319,343
|
)
|
Loss
From Discontinued Operations
|
|
|
-
|
|
|
(300,033
|
)
|
Loss
From Sale of Discontinued Operations
|
|
|
(107,500
|
)
|
|
|
|
Net
Loss
|
|
|
$
(731,079
|
)
|
|
$
(619,376
|
)
|
Net
loss Per Share (basic)
|
|
|
$
(0.00
|
)
|
|
$
(0.01
|
)
|
Net
Loss Per Share (diluted)
|
|
|
$
(0.00
|
)
|
|
$
(0.01
|
)
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
New
World
Brands, Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
for
the
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
(5,793,029
|
)
|
|
$
|
(3,042,148
|
)
|
Adjustments
to Net Income
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
299,579
|
|
|
|
401,278
|
|
Removal
of Discontinued Operations
|
|
|
3,663,076
|
|
|
|
1,057,430
|
|
Foreign
Currency Translation
|
|
|
|
|
|
|
(24,844
|
)
|
(Incr)Decr
in Accounts Receivable
|
|
|
(162,987
|
)
|
|
|
583,310
|
|
(Incr)Decr
in Inventory
|
|
|
201,243
|
|
|
|
899,938
|
|
(Incr)Decr
in Prepaid expenses
|
|
|
(27,990
|
)
|
|
|
163,555
|
|
Income
Tax Receivable
|
|
|
-
|
|
|
|
|
|
Deferred
Tax Asset
|
|
|
-
|
|
|
|
2,837
|
|
(Incr)Decr
in Other Current Asset
|
|
|
493,722
|
|
|
|
(377,540
|
)
|
(Decr)Incr
in Accounts Payable
|
|
|
77,749
|
|
|
|
(758,991
|
)
|
(Decr)Incr
in Accrued Expenses
|
|
|
(582,939
|
)
|
|
|
(517,100
|
)
|
Customer
Deposits
|
|
|
-
|
|
|
|
|
|
Income
Taxes Payable
|
|
|
-
|
|
|
|
|
|
Deferred
Income Taxes
|
|
|
-
|
|
|
|
|
|
(Decr)Incr
in Other Current Liabilities
|
|
|
17,699
|
|
|
|
422,213
|
|
Employee
Advances
|
|
|
(7,126
|
)
|
|
|
31,503
|
|
Total
- Cash Flows From Operating Activities
|
|
|
(1,821,004
|
)
|
|
|
(1,158,560
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Loans
Receivable
|
|
|
(107,500
|
)
|
|
|
(18,450
|
)
|
Acquisition
of Property and Equipment
|
|
|
(184,110
|
)
|
|
|
(704,408
|
)
|
Disposal
of Property and Equipment
|
|
|
127,380
|
|
|
|
316,216
|
|
Net
cash acquired from the reverse acquistion
|
|
|
-
|
|
|
|
|
|
Capitalized
Acquisition costs
|
|
|
|
|
|
|
(445,532
|
)
|
Short
term receivable - sale of IPGear Israel
|
|
|
387,500
|
|
|
|
|
|
Long
term receivable - sale of IPGear Israel
|
|
|
678,975
|
|
|
|
|
|
Other
Asset
|
|
|
(1,190,300
|
)
|
|
|
(1,437,414
|
)
|
Total
- Cash Flows From Investing Activities
|
|
|
(288,055
|
)
|
|
|
(2,289,588
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Short
Term Borrowings
|
|
|
24,349
|
|
|
|
600,000
|
|
Credit
Line
|
|
|
(984,323
|
)
|
|
|
124,992
|
|
Long
Term Borrowings
|
|
|
|
|
|
|
-
|
|
Proceeds
from Notes payable
|
|
|
1,000,000
|
|
|
|
600,000
|
|
Payments
on principal of notes payable
|
|
|
(500,000
|
)
|
|
|
(2,660,000
|
)
|
Proceeds
from capital lease obligations
|
|
|
36,065
|
|
|
|
|
|
Payments
on principal of capital lease obligations
|
|
|
(157,766
|
)
|
|
|
(142,772
|
)
|
Other
Equity
|
|
|
|
|
|
|
3,491,840
|
|
Net
repayment of advances from shareholders
|
|
|
(46,000
|
)
|
|
|
|
|
Sale
of Common Stock
|
|
|
851,093
|
|
|
|
443,041
|
|
Total
- Cash Flows From Financing Activities
|
|
|
223,418
|
|
|
|
2,457,101
|
|
|
|
|
|
|
|
|
|
|
Total
- Net Change in Cash and Cash Equivalents
|
|
|
(1,885,641
|
)
|
|
|
(991,046
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
3,396,617
|
|
|
|
1,989,476
|
|
|
|
|
|
|
|
|
|
|
Total
- Cash and Cash Equivalents at End of Period
|
|
$
|
1,510,976
|
|
|
$
|
998,430
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
New
World Brands, Inc. and Subsidiary
|
|
|
|
Condensed
Consolidated Changes in Shareholders' Equity
|
|
|
|
for
the Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
Series
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at
December
31, 2006
|
|
|
|
|
|
116.67
|
|
|
|
1.00
|
|
|
|
|
|
|
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
|
|
|
|
(116.67
|
)
|
|
|
|
|
|
|
(1.00
|
)
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
1
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of Common Stock to P&S Spirit on May 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,222,222
|
|
|
|
|
|
|
|
222,222
|
|
|
|
628,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of IP Gear, Ltd. on July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,500
|
)
|
|
|
(107,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,870,399
|
)
|
|
|
(3,870,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Removal
of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,632,577
|
)
|
|
|
|
|
|
|
49,295
|
|
|
|
|
|
|
|
6,623,578
|
|
|
|
40,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing
Operations
for the Nine
Months
ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,814,871
|
)
|
|
|
(1,814,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
66,526,222
|
|
|
|
|
|
|
$
|
665,263
|
|
|
$
|
30,458,512
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
(26,451,294
|
)
|
|
$
|
4,672,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
The
condensed consolidated unaudited interim financial statements of New World
Brands, Inc. (the “
Company
”) and IP Gear, Ltd. (the
“
Subsidiary
”) were prepared, without
audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
“
SEC
”). In the opinion and to the knowledge of
management, the accompanying condensed consolidated unaudited interim financial
statements reflect all adjustments (including normal recurring adjustments)
which, in the opinion of management and based upon management’s knowledge of the
Company’s business operations during the period presented, are necessary to
present fairly the Company’s financial position and cash flows for the period
presented. The results of operations for the three and nine months ended
September 30, 2007 are not necessarily indicative of the results of operations
for the full year.
As
discussed in the Company’s Current Reports on Form 8-K, filed with the SEC on
September 21, August 29, 2006 and June 23, 2006 and its Quarterly Report on
Form
10-QSB, filed with the SEC on October 16, 2006, 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 Reverse 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.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued
)
|
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.
Under
the
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 will be presented as a
continuation of the operations of Qualmax and not New World Brands,
Inc. Accordingly, the accompanying financial statements consist of
the balance sheet of both the Company and Qualmax as of September 30, 2007
and
December 31, 2006, and the results of operations of both the Company and Qualmax
for the three and nine months ended September 30, 2007 and September 30,
2006. As a result of the Reverse Acquisition, the Company’s fiscal year
changed from May 31 to December 31.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted pursuant to
the
rules and regulations of the SEC. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
the
Company suggests that these financial statements be read in conjunction with
the
year-end and interim financial statements and notes thereto, and additional
information included in the Company’s prior annual, quarterly and current
reports on Forms 10-KSB, 10-QSB and 8-K, respectively, as filed with the
SEC.
The
accompanying condensed consolidated unaudited interim financial statements
have
been prepared in conformity with GAAP and contemplate continuation of the
Company as a going concern. During the first three quarters of 2007, during
the
fiscal year 2006 and in prior years, the Company incurred ongoing substantial
losses and used cash from operating activities in 2006 and in prior
years.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued
)
|
These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern without access to substantial additional capital or undertaking
a
restructuring or discontinuance of non-profitable business divisions or
activities. As a result, during the third quarter of 2007, the Company sold
its
manufacturing and research subsidiary, IP Gear, Ltd. (as described below in
“NOTE G—SALE OF DISCONTINUED OPERATIONS – IP GEAR, LTD.”) and has undertaken to
restructure its remaining business operations accordingly. These condensed
consolidated unaudited interim financial statements do not include any
adjustments to reflect the possible future effect on the recoverability and
classification of assets or the amounts and classifications of liabilities
that
may result from the outcome of these uncertainties.
Updated
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (the
“
FASB
”) issued Statement of Financial Accounting
Standards (“
SFAS
”) No. 157
(“
SFAS 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
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“
SFAS 158
”), which
requires employers to fully recognize in their financial statements the
obligations associated with single-employer defined benefit pension, retiree
healthcare and other postretirement plans. In addition, SFAS 158 requires
companies to measure plan assets and liabilities as of the end of a fiscal
year
rather than a date within 90 days of the end of the fiscal year. The Company
adopted SFAS 158 effective December 31, 2006, except for the change in
measurement date provisions, which are not effective until 2008. The
Company does not expect the adoption of the change in measurement date
provisions to have a material effect 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” (“
SFAS 159
”), 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.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories
as of September 30, 2006 and 2007 consisted of the following:
|
|
September
30,
2006
Resale
Hardware
|
|
|
September
30,
2007
Resale
Hardware
|
|
Finished
goods inventories
|
|
|
$
875,531
|
|
|
|
$
729,096
|
|
Less
allowance for obsolete inventories
|
|
|
(93,973
|
)
|
|
|
(44,586
|
)
|
Inventories,
net
|
|
|
$
781,558
|
|
|
|
$
684,510
|
|
Loan
from P&S Spirit
On
and
effective March 30, 2007, the Company entered into a term loan and security
agreement with P&S Spirit (the “
P&S Loan
Agreement
” and the debt obligation pursuant thereto, the
“
P&S Loan
”). The principal amount of
the P&S Loan was $1,000,000. Monthly payments of interest are
only at two percent over the Wall Street Journal Prime Rate and are payable
in
arrears commencing on May 1, 2007. The rate of interest on this loan
was 9.75% on September 30, 2007. The principal balance of the P&S Loan and
any unpaid accrued interest thereon becomes due in full on January 2,
2009. The P&S Loan includes certain covenants, including a
financial reporting requirement which is due 45 days after the close of a
calendar quarter, and requirements that the Company maintain a ratio of current
assets to current liabilities of at least 1.2 to 1 (third quarter
2007 ratio was 3.64 to 1) and a total liabilities to tangible net
worth ratio not exceeding 2.5 to 1 (third quarter 2007 ratio was ratio 0.40
to
1). As of September 30, 2007, the Company was in compliance with both ratio
requirements of the covenants. For additional information concerning
the P&S Loan Agreement and the P&S Loan, see the Company’s Current
Report on Form 8-K, filed with the SEC on April 5, 2007.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
C
|
NOTES
PAYABLE (continued
)
|
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 Preferred Stock, which Preferred Stock was converted, effective April
24, 2007, upon the filing of the Company’s Amended and Restated Certificate of
Incorporation with the Delaware Secretary of State, 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 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 Loan.
On
August
13, 2007, the Company paid $500,000 towards the balance of the P&S Loan.
This reduced the balance of the loan to $500,000, and the remaining principal
balance remains at this amount as of September 30, 2007. This P&S Loan is
due in its entirety by December 31, 2008.
The
principals of P&S Spirit include a director and stockholder of the Company,
as well as its former Chief Executive Officer, and another who is also a
director of the Company.
Total
maturities of notes payable as of September 30, 2007 were as
follows:
2007
|
|
|
$
-
|
|
2008
|
|
|
-
|
|
2009
|
|
|
500,000
|
|
Total
notes payable
|
|
|
500,000
|
|
|
|
|
|
|
Notes
payable, current portion
|
|
|
-
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
|
$
500,000
|
|
Other
Long-Term Debt
The
balance of long-term debt owed by the Company relates to a number of capital
leases. The long-term portion of these leases total $ 53,
446.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
D
|
STOCKHOLDERS’ EQUITY
|
Computation
of Basic and Diluted Share Data
The
following tables set forth the computation of basic and diluted share data
for
the nine months ended September 30, 2007 and 2006:
Weighted
average number of shares outstanding as at September 30,
2006:
|
|
|
|
Basic
(Common Stock)
|
|
|
37,153,254
|
|
Preferred
Stock (as converted to Common Stock)
|
|
|
13,092,541
|
|
Total
|
|
|
50,245,795
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
Stock - options and warrants
|
|
|
-
|
|
Preferred
Stock - options and warrants
|
|
|
-
|
|
Total
|
|
|
-
|
|
Weighted
average number of shares outstanding (diluted)
|
|
|
50,245,795
|
|
Weighted
average of options and warrants not included
above (anti-dilutive):
|
|
|
|
|
Basic
(Common Stock)
|
|
|
3,093,384
|
|
Preferred
Stock (as converted to Common Stock)
|
|
|
-
|
|
Total
|
|
|
3,093,384
|
|
Weighted
average number of shares outstanding as at September 30,
2007:
|
|
|
|
Basic
(Common Stock)
|
|
|
402,769,600
|
|
Total
|
|
|
402,769,600
|
|
Effect
of dilutive securities:
|
|
|
|
|
Common
Stock - options and warrants
|
|
|
-
|
|
Preferred
Stock - options and warrants
|
|
|
-
|
|
Total
|
|
|
-
|
|
Weighted
average number of shares outstanding (diluted)
|
|
|
402,769,600
|
|
Weighted
average of options and warrants not included
above (anti-diluted):
|
|
|
|
|
Basic
(Common Stock)
|
|
|
61,050,548
|
|
Preferred
Stock (as converted to Common Stock)
|
|
|
-
|
|
Total
|
|
|
61,050,548
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
May
2007, the FASB issued FASB Staff Position (“
FSP
”) FIN
48-1 (“
FSP FIN 48-1
),” which clarifies when a tax
position is considered settled under FIN 48. The FSP explains that a tax
position can be effectively settled on the completion of an examination by
a
taxing authority without legally being extinguished. For tax positions
considered effectively settled, an entity would recognize the full amount of
tax
benefit, even if (i) the tax position is not considered more likely than
not to be sustained solely on the basis of its technical merits and
(ii) the statute of limitations remain open. FSP FIN 48-1 should be applied
upon the initial adoption of FIN 48. The impact of the Company’s adoption of FIN
48 (as of January 1, 2007) is in accordance with this FSP, and the
implementation has not resulted in any changes to its consolidated financial
statements.
NOTE
F
|
COMMITMENTS
AND CONTINGENCIES
|
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 deposit is in the Company’s money market account with
the bank and is reported on its balance sheet as part of cash and cash
equivalents.
Piecom
Tech
As
part
of the agreement to sell its IP Gear, Ltd. subsidiary to TELES AG
Informationstechnologien (“
TELES
”), (see
“NOTE G—SALE OF DISCONTINUED OPERATIONS – IP GEAR, LTD.”), the Company has
accepted any liabilities and or any amounts recovered as a result of any claims
from/against Piecom Tech (“
Piecom
”) to or 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 held in
escrow of $32,000 pending resolution of the matter. There is currently no
expectation of any liability to the Company arising from this
commitment.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
F
|
COMMITMENTS
AND CONTINGENCIES
|
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; and the Company has been preliminarily informed that a decision
from the court to maintain venue in France was made in September
2007. 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
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 11
th
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. (“
WPP
”)
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. 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.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
F
|
COMMITMENTS
AND CONTINGENCIES
(continued)
|
On
March
29, 2007, the first deposition in this matter was conducted of a non-party
witness who is one of the principal creators of certain intellectual property
owned, or controlled, by WPP. The deposition will be continued, but a
continuation has not been scheduled as of the time of filing of this
Report. The first formal discovery request was made by the Company on
March 27, 2007, followed by a second request on April 10, 2007. The
Company has not yet filed any responsive pleadings, but has provided initial
materials responsive to the plaintiffs’ discovery requests.
Co-defendants
have answered and filed counterclaims and third party claims, but none of the
claims of co-defendants are against Qualmax nor do they allege wrongdoing by
Qualmax as a defense to claims against them by plaintiffs. The
Company is still investigating the claims against it, and the facts surrounding
the claims against co-defendants, but that investigation is in its early stages
and is incomplete. Based on the limited information available to
management at this point, management does not believe Qualmax or the Company
is
liable for any wrongdoing, act or omission, in relation to the litigation,
and
management believes that Qualmax is not properly a party to the
litigation. However, management does not have sufficient information
to provide a meaningful assessment of all the facts and circumstances relating
to the claims against Qualmax and co-defendants nor to determine how costly
and
time-consuming defense of the matter may be regardless of the merits of the
Company’s defense. In addition, the Company believes it has viable
claims for indemnification and damages against co-defendants but has not yet
formally raised those claims or made a full determination of their value or
role
in the litigation.
NOTE
G
|
SALE
OF DISCONTINUED OPERATIONS – IP GEAR,
LTD.
|
New
World
Brands completed the sale of its Israeli subsidiary IP Gear, Ltd. effective
July
1, 2007. The transaction was a sale of all the outstanding shares of
the Company’s subsidiary to TELES 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 (the terms of the
loan have yet to be finalized as of September 30, 2007). The Company
also received a return of working capital invested during the transition
period. 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.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
G
|
SALE
OF DISCONTINUED OPERATIONS – IP GEAR, LTD.
(continued)
|
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 at the end of June 2007, with a transaction date set for July 1, 2007;
the closing occurred on July 26, 2007. The final agreement for the
sale of the subsidiary was approved by Board consent on July 25,
2007. The stock purchase agreement calls for TELES to acquire all of
the shares of IP Gear, Ltd. (Israel).
The
condensed statement of operations below for the nine months ended September
30,
2007 represents the reclassified discontinued operations of New World Brands
as
a result of the sale of IP Gear, Ltd. The table below also shows the loss
recorded at the end of the second quarter of 2007 due to the revaluation
of the Company's 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 the Nine Months Ended September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$
|
998,981
|
|
|
$
|
1,907,469
|
|
Pre-Tax
Loss From Discontinued Operations
|
|
|
(1,407,911)
|
|
|
|
(1,183,863)
|
|
Income
Tax Provision
|
|
|
-
|
|
|
|
-
|
|
Loss
From Discontinued Operations
|
|
|
(1,407,911)
|
|
|
|
(1,183,863)
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax
Impairment Loss
|
|
|
(2,462,448)
|
|
|
|
-
|
|
Loss
on Sale of IP Gear, Ltd.
|
|
|
(107,500)
|
|
|
|
-
|
|
Income
Tax Provision
|
|
|
-
|
|
|
|
-
|
|
Loss
From Discontinued Operations, net of tax
|
|
|
(3,977,859)
|
|
|
|
(1,183,863)
|
|
As
a
result of the impairment, the Company reported a loss of $2,462,448
at the end of the second quarter in accordance with FASB No. 144, “Accounting
for Impairment of and Disposal of Long-Lived Assets,” and in the third quarter,
the Company incurred an additional $107,500 of losses as a result of the actual
sale of the subsidiary. These losses are recorded on the Company’s financial
statements in the income statements for the three and nine months ended
September 30, 2007, in the line items “Loss from Discontinued Operations” and
“Loss From Sale of Discontinued Operations,” respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
H
|
BUSINESS
SEGMENT REPORTING
(continued)
|
The
following presents our segmented financial information by business line for
the
nine month periods ended September 30, 2007 and 2006. As a result of
the sale of its wholly-owned subsidiary, IP Gear, Ltd., the Company is currently
focused on two principal lines of businesses: (i) resale hardware, which is
the
sale and distribution of VoIP and other telephony equipment and related
professional services via our U.S.-based business, which operates under the
name
“NWB Networks,” including sales and support of TELES and IP Gear, Ltd. products;
and (ii) wholesale carrier services, which is telephony service resale and
direct call routing via our U.S.-based VoIP service business, which operates
under the name “NWB Telecom.”
|
|
2007
|
|
|
2006
|
|
Net
Sales:
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
$
8,078,406
|
|
|
|
$
7,992,507
|
|
NWB
Networks
|
|
|
3,759,540
|
|
|
|
5,041,833
|
|
|
|
|
11,837,946
|
|
|
|
13,034,341
|
|
Cost
of Sales
:
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
6,989,059
|
|
|
|
6,989,059
|
|
NWB
Networks
|
|
|
3,346,573
|
|
|
|
4,215,525
|
|
|
|
|
10,335,632
|
|
|
|
11,455,898
|
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
1,089,347
|
|
|
|
826,308
|
|
NWB
Networks
|
|
|
412,968
|
|
|
|
752,135
|
|
|
|
|
$
1,502,315
|
|
|
|
$
1,578,443
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
References
in this Quarterly Report on Form 10-QSB (the “
Report
”)
to the “
Company
,” “
we
,”
“
us
”
and
“
our
”
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
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 Annual Report on Form 10-KSB, filed with the
Securities Exchange Commission (the “
SEC
”) on April
17, 2007 and our other prior filings with the SEC.
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 our 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 include
those factors discussed in our Annual Report on Form 10-KSB, filed with the
SEC
on April 17, 2007, under Item 1, “Description of Business—Certain Risk Factors,”
and other factors set forth in this Report, and in our other SEC filings,
including, without limitation, the following:
|
|
a
downturn in the market for, or supply of, our core products and services,
could reduce 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,
exposing future revenues and profits to fluctuations and risks of
supply
interruptions or rapid declines in demand, and to the extent we have
a
backlog in equipment sales, the backlog results from a shortage of
product
supply, which shortage could limit future revenue and any associated
profit;
|
|
|
we
have recurring quarterly and annual losses and continuing negative
cash
flow, which may continue, and very limited cash reserves, requiring
us to
either raise additional profits on 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 stockholders’ 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;
|
|
|
if
we are forced to restructure to contain costs, we may lose enterprise
value and lose time to market for our proprietary products;
and
|
|
|
changes
in laws or regulations, or regulatory practices, in the U.S. and
internationally, may increase our costs or prohibit continued operations
or entry into some areas of business.
|
You
are
cautioned not to place undue reliance on these forward-looking statements,
which
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.
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. (“
IP Gear, Ltd.
”), we are no longer in the
VoIP equipment research and development 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 TELES AG
Informationstechnologien (“
TELES
”) and IP Gear, Ltd.
products; and (ii) telephony service resale, direct call routing and carrier
support. Our VoIP-related telecommunications equipment distribution
and resale business, which formerly operated under the divisional name “IP
Gear,” now operates under the name “NWB Networks.” Our wholesale
international VoIP service business, which formerly operated under the name
“IP
Gear Connect,” now operates under the name “NWB Telecom.” Both NWB
Networks and NWB Telecom are based in Eugene, Oregon.
Brief
Company History.
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.
Reverse
Acquisition of Qualmax, Inc., Qualmax History.
On
September 15, 2006, we sold our subsidiary, Importers, 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 accounting acquiring party. 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.
As
Qualmax, we were founded in 2002 as a reseller of VoIP-related
telecommunications equipment from companies such as Cisco Systems and Quintum,
and as a reseller of VoIP telephony service, primarily selling 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 value-added reseller (VAR)
division.
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, a
telecommunications equipment manufacturer and technology development company
based in Berlin, Germany, as reported in more detail in the Company’s Current
Reports on Form 8-K filed with the SEC on July 20, August 1, and August 9,
2007,
and as discussed in more detail below. The 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
of 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 (as discussed in more detail below), and have
therefore focused our telecommunications equipment sales and distribution plan
on TELES and IP Gear, Ltd. products.
Employees.
As
of
September 30, 2007, we had 30 full-time employees and 2 part-time employees
based in our Eugene, Oregon headquarters (including outside sales 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.
Recent
Developments
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 the Preferred Stock were
converted to shares of Common Stock of the Company, at a ratio of 2,986,736
shares of Common Stock for each share of Preferred Stock (meaning approximately
116.67 Preferred Stock of the Company, constituting all of the Company’s
outstanding Preferred Stock, converted into approximately 348.4 million shares
of Common Stock of the Company). In addition, 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.
On
and
effective August 20, 2007, Noah Kamrat resigned as a member of the Board. On
and
effective August 20, 2007, at a special meeting of the Board and immediately
following the acceptance of the resignation of Noah Kamrat as a member of the
Board, Selvin Passen, M.D., was elected by the Board, in accordance with the
Company’s Bylaws, to be a member of the Board as a Class II
director. Furthermore, immediately following the election of Dr.
Selvin Passen, M.D., to the Board, Shehryar Wahid, who serves as Chief Financial
Officer and Secretary of the Company, was elected by the Board, in accordance
with the Company’s Bylaws, to serve as a member of the Board as a Class II
director. The Company’s Board members at this time, therefore, consist of the
following: Selvin Passen, M.D. and Shehryar Wahid, 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 our 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.
Bank
of America Loan Repayment.
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 it 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 Loan Agreement
discussed below under “P&S Spirit Credit Line,” and it repaid all
outstanding BoA Loan principal, interest and fees on March 30,
2007. 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 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 “
Credit Line
Agreement
” and the debt obligation pursuant thereto, the
“
Credit Line
”) with P&S Spirit, LLC, a Nevada
limited liability company (“
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 Credit Line amount (including accrued
unpaid interest and any fees) would be accelerated, and the Company would be
required to pay any costs of collection. The 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 to 1.0 and a total
liabilities to tangible net worth ratio not exceeding 2.5 to 1.0.
The
Credit Line Agreement grants P&S Spirit a security interest with respect to
all of the Company’s assets, but is subordinated to that Term Loan and Security
Agreement between the Company as borrower and P&S Spirit as lender, as
reported on the Company’s Current Report on Form 8-K, filed with the SEC on
April 5, 2007. The 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), a security interest in the assets of Qualmax (consisting solely of
298,673,634 shares of the Company’s Common Stock, and a security interest in
certain shares of the Common Stock of the Company’s wholly-owned subsidiary, IP
Gear, Ltd. Copies of the Credit Line Agreement, 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.
The
principals of P&S Spirit include Dr. Selvin Passen, who is a director of the
Company, as well as a stockholder of the Company and its former Chief Executive
Officer, and Dr. Jacob Schorr, who is a director of the Company.
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
“
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 Subscription Agreement entered into a First Amendment to
Amended and Restated Stock Subscription and Share Transfer Agreement (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 (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
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 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 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 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 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 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,
a
VoIP equipment developer and manufacturer based in Berlin, Germany, 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 agreements of which 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’s 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’s worldwide revenues (including
revenues of TELES’s affiliates) within TELES’s 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. As of November 19, 2007, we
have not been provided sales information from TELES sufficient to determine
whether the Minimum Earn Out amount was exceeded during the third quarter of
2007.
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.
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 will become 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, which
may be increased based upon subsequent sales performance by the Company. In
addition, TELES agreed to grant the Company a line of credit in the amount
of
$1,000,000 (the “
TELES Loan
”) pursuant to a separate
loan agreement to be finalized by the parties within 20 days following
closing. The loan agreement is to have a four-year term, in which the
Company is required to redeem the loan in 12 quarterly installments (beginning
after the first year), with a fixed interest rate of 7% per annum. As
of November 19, 2007, negotiations regarding the TELES Loan had not been
concluded among the Company, TELES and P&S Spirit.
The
Preliminary Agreement was included as Exhibit 10.1 to the Company’s Current Form
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.
The
sale
of IP Gear, Ltd., which was completed on August 7, 2007, is further discussed
below in “—Results of Operations—Sale of IP Gear, Ltd. Subsidiary.”
Partial
Repayment of 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 two loan agreements, a term loan dated March
29, 2007 (the “
Term Loan
”) and the Credit Line dated
May 31, 2007 (together, the “
Loans
” or
“
Loan Agreements
,” as applicable) entered
into by
P&S Spirit and the Company, P&S Spirit had a security interest in all of
the Company’s shares of IP Gear, Ltd., and furthermore, the sale of the
Company’s IP Gear, Ltd. shares without P&S Spirit’s consent would have
caused a repayment by the Company of all outstanding principal under the
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
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 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 Term Loan, if and when the Company and TELES
execute final documentation of the TELES Loan. 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; 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.
Management
and Board Changes.
Since
the filing with the SEC of the
Company’s Annual Report on Form 10-KSB on April 17, 2007, there have been
various changes in the composition of both the Board and senior management,
which is described in more detail below in “PART II—ITEM 5. OTHER INFORMATION.
”
Results
of Operations
Company-Wide
Revenue and Cost of Goods.
Company-Wide
(referring to the Company’s two principal lines of business, on a consolidated
basis) revenue and cost of goods for the three month and nine month periods
ended September 30, 2006 and September 30, 2007 were as follows:
Company-Wide
|
3
Months Ended September 30, 2006
|
3
Months Ended September 30, 2007
|
Change
|
Revenue
|
4,345,993
|
4,182,157
|
(3.77%)
|
Cost
of Goods
|
3,876,893
|
3,672,701
|
(5.27%)
|
Gross
Margin
|
10.79%
|
12.18%
|
12.86%
|
Gross
Profit
|
469,100
|
509,456
|
8.60%
|
|
|
|
|
Company-Wide
|
9
Months Ended September 30, 2006
|
9
Months Ended September 30, 2007
|
Change
|
Revenue
|
13,034,341
|
11,837,946
|
(9.18%)
|
Cost
of Goods
|
11,455,898
|
10,335,632
|
(9.78%)
|
Gross
Margin
|
12.11%
|
12.69%
|
4.80%
|
Gross
Profit
|
1,578,443
|
1,502,314
|
(4.82%)
|
|
|
|
|
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. We have
also worked to position the Company for revenue growth and are implementing
sales and marketing initiatives in both divisions. However, despite our improved
margins, our gross profit for the first nine months of 2007 slightly decreased
over the first nine months of 2006, reflecting lower revenues in the first
nine
months of 2007.
The
table
below shows the portion of Company-Wide revenue, cost of goods and gross profit
attributable to each of our two business divisions during the three month and
nine month periods ended September 30, 2007. We note that the following
percentages are based upon pro forma restated unaudited financial statements
for
the period ended September 30, 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 September 30, 2007
|
NWB
Networks
|
NWB
Telecom
|
Portion
of Company-Wide Revenue
|
37.41%
|
62.59%
|
Portion
of Company-Wide Cost of Goods
|
37.38%
|
62.62%
|
Portion
of Company-Wide Gross Profit
|
37.60%
|
62.40%
|
9
Months Ended September 30, 2007
|
NWB
Networks
|
NWB
Telecom
|
Portion
of Company-Wide Revenue
|
31.76%
|
68.24%
|
Portion
of Company-Wide Cost of Goods
|
32.38%
|
67.62%
|
Portion
of Company-Wide Gross Profit
|
27.49%
|
72.51%
|
The
following discussion of gross profit on a per-business line basis provides
additional information regarding each line’s performance.
We
note
that our quarterly revenue and cost figures are unaudited and
preliminary. We have implemented financial reporting tools to
accurately segregate revenue and costs on a divisional and quarterly basis
beginning in the fourth quarter of 2006. However, those tools were
not in use during the first three quarters of 2006, and therefore the quarterly
and divisional figures for the period during 2006 reflect certain allocations
and assumptions, and are potentially inaccurate, but are consistent in all
material respects with our audited 2006 consolidated financial
statements. We note also that because we sold no meaningful volume of
TELES products in 2006, we are not able to provide sales and profit figures,
for
comparison purposes or otherwise, for periods ending in 2006.
Sale
of IP Gear, Ltd. Subsidiary.
As
described above in “—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 been 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 very
favorable to the Company.
NWB
Networks Division Revenue and Cost of Goods.
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
and cost of goods for the NWB Networks division for the three month and nine
month periods ended September 30, 2006 and September 30, 2007 were as
follows:
NWB
Networks
|
3
Months Ended September 30, 2006
|
3
Months Ended September 30, 2007
|
Change
|
Revenue
|
1,502,402
|
1,564,525
|
4.13%
|
Cost
of Goods
|
1,320,849
|
1,372,970
|
3.95%
|
Gross
Margin
|
12.01%
|
12.24%
|
1.92%
|
Gross
Profit
|
180,491
|
191,555
|
6.13%
|
NWB
Networks
|
9
Months Ended September 30, 2006
|
9
Months Ended September 30, 2007
|
Change
|
Revenue
|
5,041,833
|
3,759,540
|
(25.43%)
|
Cost
of Goods
|
4,215,525
|
3,346,573
|
(20.61%)
|
Gross
Margin
|
16.39%
|
10.98%
|
(32.98%)
|
Gross
Profit
|
826,308
|
412,968
|
(50.02%)
|
In
the
first quarter and first nine months of 2007, we experienced a substantial
decrease in revenue and gross profit margin in our U.S.-based equipment reseller
business, compared to the comparable periods in 2006. The comparative
figures for the nine month periods illustrate the deterioration of the Company’s
telecom equipment reseller business beginning in mid-2006. The
comparative figures for the three month periods reflect our efforts to stabilize
revenues and improve our margins in our reseller business.
Sales
of
our legacy VoIP equipment resale business (VoIP access servers and related
equipment, particularly Cisco and Quintum 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.
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. 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 have very limited experience and only
preliminary results on which to evaluate future potential.
The
tables below show the portion of NWB Networks divisional revenue, cost of goods
and gross profit attributable to sales of TELES and IP Gear products, in
comparison to sales of all other products, during the three month and nine
month
periods ended September 30, 2007. We note that the following figures are based
upon pro forma restated unaudited financial statements for the period ended
September 30, 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:
3
Months Ended
September
30, 2007
|
TELES/IP
Gear Products
|
Other
Products
|
Revenue
|
546,305
|
1,018,220
|
Cost
of Goods
|
397,267
|
975,703
|
Gross
Margin for Product Line
|
27.28%
|
4.18%
|
Gross
Profit
|
149,038
|
42,517
|
9
Months Ended
September
30, 2007
|
TELES/IP
Gear Products
|
Other
Products
|
Revenue
|
780,098
|
2,979,442
|
Cost
of Goods
|
544,506
|
2,802,067
|
Gross
Margin for Product Line
|
30.20%
|
5.95%
|
Gross
Profit
|
235,592
|
177,376
|
The
majority of our TELES product sales during the third quarter of 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.
Our
initial TELES sales orders have outpaced TELES’s ability to supply certain
products, particularly fixed wireless gateways, potentially constraining sales
growth and negatively impacting customer relations and brand
acceptance. We believe time-to-market is a critical component of
success for technology product sales. Our customers’ technology needs
and opportunities will not wait for our production capacity to catch
up. However, we remain confident in TELES’s ability to increase
manufacturing in order to meet customer demand in key product lines, such as
fixed wireless gateways and customer premise VoIP equipment, and we believe
the
current product backlog is a result of the start-up of our North American sales
campaign and can be resolved over the coming quarters.
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 the nine months ended September 30, 2007, the Euro
increased 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 (i) because our purchase volume from TELES
and other Euro-based manufacturers has been limited compared to our total
revenue, (ii) because we do not maintain a substantial amount of
Euro-based inventory and (iii) 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 if we substantially
increase our Euro-based inventory, our exposure to currency risk will
increase.
NWB
Telecom Division Revenue and Cost of Goods.
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 nine month periods ended September 30, 2006 and September
30, 2007 were as follows:
NWB
Telecom
|
3
Months Ended September 30, 2006
|
3
Months Ended September 30, 2007
|
Change
|
Revenue
|
2,843,827
|
2,617,632
|
(7.95%)
|
Cost
of Goods
|
2,540,359
|
2,299,731
|
(9.47%)
|
Gross
Margin
|
10.67%
|
12.14%
|
13.78%
|
Gross
Profit
|
303,468
|
317,901
|
4.76%
|
NWB
Telecom
|
9
Months Ended September 30, 2006
|
9
Months Ended September 30, 2007
|
Change
|
Revenue
|
7,992,506
|
8,078,406
|
1.07%
|
Cost
of Goods
|
7,044,619
|
6,989,059
|
(0.79%)
|
Gross
Margin
|
11.86%
|
13.48%
|
13.66%
|
Gross
Profit
|
947,887
|
1,089,347
|
14.92%
|
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. We
are also in the process of ramping-up sales and marketing efforts, and we expect
to make progress toward increased volume throughout the fourth quarter of
2007.
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
the three month period ended September 30, 2007, NWB Telecom has substantially
expanded its purchases of foreign termination service from a particular
affiliated group of vendors. The following table illustrates, for the
three month period ended September 30, 2007, the revenue generated from resale
of service purchased from these vendors, and the related cost, in comparison
to
the costs and associated revenue of all other NWB Telecom vendors during the
period:
3
Months Ended
September
30, 2007
|
Significant
Vendor
|
All
Other NWB
Telecom
Vendors
|
Cost
(amounts paid to vendor)
|
1,089,637
|
1,210,094
|
Revenue
(generated from resale of service purchased from vendor)
|
1,307,497
|
1,310,135
|
Gross
Profit (earned from resale of service purchased from
vendor)
|
217,860
|
100,041
|
Resale
of
termination routes purchased from the affiliated vendors represented 49.95%
of
revenue for the NWB Telecom division, 31% of the revenue for the entire Company,
and generated 68.53% of the gross profit of the NWB Telecom division and 43%
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. 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.
Total
Company Expenses.
Total
Company expenses (sales, marketing, general and administrative) for the three
month and nine month periods ended September 30, 2006 and September 30, 2007
were as follows:
|
3
Months Ended
September
30, 2006
|
3
Months Ended
September
30, 2007
|
Change
|
Total
Expenses
|
659,166
|
1,019,608
|
54.68%
|
|
9
Months Ended
September
30, 2006
|
9
Months Ended
September
30, 2007
|
Change
|
Total
Expenses
|
2,396,368
|
2,944,877
|
22.89%
|
The
substantial increase in total expenses for the comparative three month periods
is due primarily to (i) increases in staffing, technical and service costs
for
our NWB Telecom business and TELES reseller business, in support of sales and
marketing and (ii) increases in legal, accounting and other professional
fees. We do not anticipate recurring professional fees of the
magnitude reflected in the third quarter of 2007, but we do anticipate continued
increases in sales and marketing expenses in our effort to increase
revenue.
We
note
that the above figures are based upon pro forma restated unaudited financial
statements for the periods ended September 30, 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.
|
3
Months Ended
September
30, 2006
|
3
Months Ended
September
30, 2007
|
Interest
|
46,418
|
26,379
|
|
9
Months Ended
September
30, 2006
|
9
Months Ended
September
30, 2007
|
Interest
|
88,851
|
109,487
|
The
change over both periods is due
primarily to fluctuations in the principal amount of the Term Loan and the
BoA
Loan.
Amortization
and Depreciation.
|
9
Months Ended
September
30, 2006
|
9
Months Ended
September
30, 2007
|
Change
|
Depreciation
|
314,076
|
330,624
|
5.00%
|
Amortization
|
1,199,087
|
1,126,262
|
(6.07%)
|
Amortization
and depreciation for the Company declined in the most recent quarter due to
the
sale of our IP Gear, Ltd. (Israel) subsidiary and the related disposition of
our
principal software technology asset. 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 September
30, 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 the three
and nine month periods ended September 30, 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 nine month
periods ended September 30, 2007 and 2006, shown both excluding and including
discontinued operations, are as follows:
|
3
Months Ended September 30, 2006
|
3
Months Ended September 30, 2007
|
Net
Loss From Continuing Operations Only
|
(319,343)
|
(623,579)
|
|
|
|
|
9
Months Ended September 30, 2006
|
9
Months Ended September 30, 2007
|
Net
Loss From Continuing Operations Only
|
(2,012,290)
|
(1,814,871)
|
|
3
Months Ended September 30, 2006
|
3
Months Ended September 30, 2007
|
Net
Loss From Continuing
and
Discontinued Operations
|
(619,376)
|
(731,079)
|
|
|
|
|
9
Months Ended September 30, 2006
|
9
Months Ended September 30, 2007
|
Net
Loss From Continuing
and
Discontinued Operations
|
(3,042,148)
|
(5,792,730)
|
Liquidity
and Capital Resources
We
had
recurring quarterly net losses and had cash used in operations in the nine
months ended September 30, 2007 of ($432,621) compared to ($243,614) for the
nine months ended September 30, 2006. For the three months ended September
30,
2007, we had a net increase in cash from operations of $1,365,772 compared
to
the three months ended September 30, 2006 of a net use of cash from operations
of ($862,128).
We
had
positive working capital of $3,223,212 at September 30, 2007.
We
had
continuing negative cash flow from operating activities during the nine month
period ended September 30, 2007. However, we had a net increase in
cash from operations in the three months ended September 30,
2007, reflecting the impact on Company costs of sale of our IP Gear, Ltd.
subsidiary.
Capital
expenditures.
Prior
to our sale of our IP Gear, Ltd.
subsidiary, we provided a substantial amount of information regarding our cash
position and capital resources. We believed this information to be of
critical importance because we experienced substantial negative cash flow,
and
expected that negative cash flow to continue while we continued to fund
development of new products by IP Gear. Ltd. Our focus prior to sale
of IP Gear, Ltd. was not on achieving positive cash flow, but on securing
capital to fund continued operating losses.
Now,
after the sale of IP Gear, Ltd. and the related change in our business model,
our near-term goal is to achieve positive cash flow, and to operate within
the
capital resources currently available to us. Company expenditures in
capital have reduced significantly since the sale of IP Gear,
Ltd. Current capital expenditures are primarily related to
investments made in the switching equipment used to operate the NWB Telecom
division. In the current quarter, the Company invested $92,079 into
capital expenditures, as compared to $22,840 during the same quarter in 2006
(based upon pro forma restated unaudited financial statements for the period
ended September 30, 2007, showing our former subsidiary, IP Gear, Ltd. (an
Israeli company) listed as discontinued operations).
Reasons
for reduced capital
expenditures included the following, among other items:
·
|
The
Company engaged in no meaningful research and development activities
during the quarter ended September 30,
2007;
|
·
|
The
Company had no equity based financing activities during the quarter
ended
September 30, 2007;
|
·
|
Net
cash provided by debt-based financing activities remained unchanged
in the
quarter ended September 30, 2007 compared to the quarter ended June
30,
2007.
|
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 positioned to achieve positive cash
flow. We believe that under current market conditions for the
Company’s products and services, we will be able to operate for the foreseeable
future within the capital resources currently available to us (including,
without limitation, cash, receivables, loan and stocking/inventory credit
facilities and marketing funds).
As
a
result, management expects that over the remainder of the fiscal year, and
probably beyond, it will be able to focus its efforts on restructuring
operations and cultivating high margin sales opportunities, rather than on
raising capital and funding operational losses. 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
operations, if market conditions appear to support additional
investment.
Technology
Our
balance sheet reflects a carrying value for our Claro software
technology. As of December 31, 2006, our balance sheet reflected a
value for the Claro technology of $5,894,827, before amortization. As
discussed in “NOTE G—SALE OF DISCONTINUED OPERATIONS – IP GEAR, LTD.” to the
Company’s quarterly unaudited financial statements (appearing in Item 1 of this
Form 10-QSB), as a result of the sale of our IP Gear, Ltd. subsidiary, as of
June 30, 2007, we account for this asset as sold.