SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14C INFORMATION
Information
Statement Pursuant to Section 14(c) of the Securities Exchange Act of
1934
Check
the
appropriate box:
x
Preliminary
Information
Statement
o
Confidential,
for Use
of the Commission Only (as permitted by Rule 14c-5(d)(2))
o
Definitive
Information
Statement
NEW
WORLD BRANDS, INC.
(Name
of
Registrant as Specified In Its Charter)
Payment
of Filing Fee (Check the appropriate box):
o
|
Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
|
|
(1)
|
Title
of each class of securities to which transaction applies: Common
Stock,
par value $0.01 per share, of New World Brands, Inc. (“Common
Stock”)
|
|
(2)
|
Aggregate
number of securities to which transaction applies: 298,673,634 shares
of
Common Stock outstanding and owned by Qualmax,
Inc.
|
|
(3)
|
Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11: $0.05, which represents the average of the
bid and
asked price of the Common Stock on April 15,
2008
|
|
(4)
|
Proposed
maximum aggregate value of transaction:
$14,933,681.7
|
|
(5)
|
Total
fee paid: $2,986.74
|
x
|
Fee
paid previously with preliminary
materials.
|
o
|
Check
box if any part of the fee is offset as provided by Exchange Act
Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid
previously. Identify the previous filing by registration statement
number,
or the Form or Schedule and the date of its
filing.
|
(1)
Amount
Previously Paid:
(2)
Form,
Schedule or Registration Statement No.:
(3)
Filing
Party:
(4)
Date
Filed:
340
West Fifth Avenue
Eugene,
Oregon 97401
[____________],
2008
Dear
Stockholder:
You
are
invited to attend a special meeting of stockholders (the “
Special
Meeting
”)
of New
World Brands, Inc. (the “
Company
”),
which
will be held at the offices of the Company at 340 West Fifth Avenue, Eugene,
Oregon 97401 on [___________], 2008 at 10:00 a.m. (PST).
As
described in the enclosed information statement (the “
Information
Statement
”),
at
the Special Meeting, the stockholders will be asked to vote on (i) the adoption
of the 2008 Stock Option Plan (the “
Option
Plan
”)
and
(ii) the adoption of the Agreement and Plan of Merger, dated February 18, 2008,
between the Company and Qualmax, Inc. (“
Qualmax
”).
Under
the
terms of the merger, Qualmax will be merged with and into the Company, with
the
Company being the surviving corporation (the “
Merger
”).
In
connection with the Merger, each share of Qualmax common stock will be converted
into shares of the Company’s common stock,
par
value
$0.01 per share (the “
Common
Stock
”)
.
The
Merger is the final step in the acquisition of Qualmax by the Company. The
process began with the Company selling its former wine and spirits business,
which transaction was consummated on September 14, 2006. Second, the Company
sold 7,500,000 shares of its Common Stock in a private placement transaction
in
exchange for gross proceeds of $1,500,000, which private placement was
consummated on September 15, 2006. Third, the Company acquired substantially
all
of the assets of Qualmax, in exchange for which the Company issued 100 shares
of
Series A Convertible Preferred Stock, par value $0.01 per share (the
“
Preferred
Stock
”)
to
Qualmax, which transaction was consummated on September 15, 2006. On April
24,
2007, in connection with an amendment to the certificate of incorporation of
the
Company, the shares of Preferred Stock automatically converted into 298,673,634
shares of Common Stock. As a result, the shares of Common Stock held by Qualmax
now represents approximately seventy-two percent (72%) of the issued and
outstanding shares of capital stock of the Company (calculated on an
as-converted basis).
The
affirmative vote of a majority of the outstanding shares of Common Stock of
the
Company entitled to vote will be necessary to approve the Option Plan and the
Merger. Qualmax owns a sufficient number of shares to ensure adoption of the
Option Plan and the Merger at the special meeting and has agreed to vote all
of
its shares in favor of adoption. As a result, the affirmative vote of no other
stockholder will be required to effect the Option Plan and the Merger.
Accordingly, the Company has determined not to solicit proxies from its
stockholders.
You
are
welcome to attend the Special Meeting; however, WE ARE NOT ASKING YOU FOR A
PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY. We encourage you to read
the entire Information Statement carefully.
Sincerely,
|
|
/s/
M. David Kamrat
|
M.
David Kamrat
|
Chairman of the Board and Chief Executive Officer
|
NEW
WORLD BRANDS, INC.
340
West Fifth Avenue
Eugene,
Oregon 97401
(541)
868-2900
INFORMATION
STATEMENT
PURSUANT TO SECTION 14(c)
OF
THE SECURITIES EXCHANGE ACT OF 1934
AND
REGULATION 14C THEREUNDER
THIS
IS A NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
TO
CONSIDER ALL MATTERS DESCRIBED HEREIN
TO
BE HELD
[____]
[ ]
,
2008
AT
THE OFFICES OF NEW WORLD BRANDS, INC.
AT
340 WEST FIFTH AVENUE, EUGENE, OREGON.
WE
ARE NOT ASKING YOU FOR A PROXY, AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
[____]
[ ], 2008
Dear
Stockholder:
The
information statement (this “
Information
Statement
”)
enclosed herewith is being provided to the holders of shares of common stock,
par value $0.01 per share (the “
Common
Stock
”),
of
New World Brands, Inc., a Delaware corporation (the “
Company
,
”
“
we
,
”
“
us
,
”
“
its
,
”
or
“
our
”),
to
provide information with respect to the
details
of the business to be conducted at the Special Meeting of Stockholders of the
Company (the “
Special
Meeting
”).
NOTICE
IS
HEREBY GIVEN that a Special Meeting will be held at 10:00 a.m. (PST), on
[____]
[ ],
2008,
at
the offices of the Company at 340 West Fifth Avenue, Eugene, Oregon 97401,
for
the following purposes:
|
ACTION
1:
|
To
approve the adoption of the 2008 Stock Option
Plan;
|
|
ACTION
2:
|
To
approve the merger of Qualmax, Inc., a Delaware corporation (“
Qualmax
”),
and currently a holder of approximately 72% of the outstanding shares
of
the Company’s common stock, with and into the Company;
and
|
|
ACTION
3:
|
To
transact such other business as may properly come before the
meeting.
|
Additional
detail regarding all of the above proposed actions, and about the Company in
general, is provided in this Information Statement. The Company’s Board of
Directors (the “
Board
”)
believes these proposals are in the best interest of the Company and its
stockholders and recommends that you vote for them.
The
Board
has fixed the close of business on
[____]
[ ], 2008
as the
record date (the “
Record
Date
”)
for
determining those stockholders who will be entitled to vote at the meeting
or
any postponement or adjournment thereof. Stockholders are invited to attend
the
meeting in person. This is not a proxy solicitation, and the Board does not
intend to provide a proxy statement in relation to the Special
Meeting.
We
encourage you to read the Information Statement and the accompanying documents
in their entirety. You may also obtain information about us from publicly
available documents that have been filed with the Securities and Exchange
Commission.
This
Information Statement will first be mailed to the Company’s stockholders on or
about [_________], 2008.
/s/
M. David Kamrat
|
Chairman
of
the
Board
and
Chief
Executive
Officer
|
[____]
[ ], 2008
Eugene,
Oregon
TABLE
OF
CONTENTS
BUSINESS
DESCRIPTION AND RECENT DEVELOPMENTS
|
6
|
|
|
RECORD
DATE AND VOTING RIGHTS
|
9
|
|
|
ACTION
1: 2008 STOCK OPTION PLAN
|
10
|
|
|
Reasons
for the Proposal
|
10
|
|
|
Background
of the Proposal
|
10
|
|
|
Description
of the Option Plan
|
10
|
|
|
General
Plan P
rovisions
|
11
|
|
|
Federal
Income Tax Consequences
|
12
|
|
|
Equity
Compensation Plan Information
|
13
|
|
|
New
Option Grants; Interest of Executives or Directors
|
14
|
|
|
REQUIRED
VOTE
|
14
|
|
|
ACTION
2: MERGER OF QUALMAX, INC. WITH AND INTO THE COMPANY
|
15
|
|
|
Background
and Rationale for the Merger
|
15
|
|
|
The
Merger Agreement
|
16
|
|
|
Conditions
to the Obligations of Both Parties to Complete the Merger
|
16
|
|
|
Conversion
of Securities
|
17
|
|
|
Additional
Agreements
|
18
|
|
|
Termination
of the Agreement
|
19
|
|
|
EMPLOYEES
|
20
|
|
|
COMPETITION
|
20
|
|
|
Competition
Among Resellers
|
20
|
|
|
Competition
Among Wholesale Telecom Service
Providers
|
20
|
|
|
DESCRIPTION
OF PROPERTY
|
20
|
|
|
LEGAL
PROCEEDINGS
|
21
|
|
|
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
|
21
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR 2006 AND 2007
FISCAL
YEARS
|
21
|
|
|
General
|
21
|
|
|
Overview
of Business
|
|
|
|
Overview of the NWB Networks Division (TELES Product Sales, VoIP
Equipment
Resale, Refurbishing and Distribution)
|
22
|
|
|
Overview of the NWB Telecom Division (VoIP Telephony Service
Provider)
|
22
|
|
|
Recent
Developments
|
22
|
|
|
P&S
Spirit Term Loan
|
22
|
|
|
P&S
Spirit Credit Line
|
23
|
|
|
Sale
of IP Gear, Ltd. Subsidiary
|
23
|
|
|
TELES
Distributorship
|
23
|
|
|
TELES
Loan Agreement
|
23
|
|
|
TELES
- P&S Spirit Inter-creditor Agreement
|
|
|
|
Repayment
of P&S Spirit Term Loan
|
24
|
|
|
Execution
of Merger Agreement
|
24
|
|
|
Results
of Operations
|
24
|
|
|
Company-wide
Revenue and Gross Profit
|
24
|
|
|
Sale
of IP Gear, Ltd. Subsidiary
|
26
|
|
|
NWB
Networks Division Revenue and Gross Profit
|
26
|
|
|
NWB
Telecom Division Revenue, Gross Profit and Gross Profit
Margin
|
29
|
|
|
Summary:
Company-wide and Divisional Revenue, Gross Profit and Gross Profit
Margin,
on a Quarterly Basis, for 2007
|
31
|
|
|
Total
Company Expenses
|
32
|
|
|
Interest
|
32
|
|
|
Amortization
and Depreciation
|
33
|
|
|
Net
Loss
|
33
|
|
|
Liquidity
and Capital Resources
|
35
|
|
|
Capital
Expenditures
|
36
|
|
|
Future
Capital Needs
|
37
|
|
|
Technology
|
37
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR QUARTERS ENDED
JUNE 30,
2008 AND MARCH 31, 2008
|
38
|
|
|
Management
Changes
|
38
|
|
|
Results
of Operations
|
38
|
|
|
Company-wide
Revenue and Gross Profit
|
38
|
|
|
Sale
of IP Gear, Ltd. Subsidiary
|
39
|
|
|
NWB
Networks Division Revenue and Gross Profit
|
39
|
|
|
NWB
Telecom Division Revenue, Gross Profit and Gross Profit
Margin
|
42
|
|
|
Summary:
Company-wide and Divisional Revenue, Gross Profit and Gross Profit
Margin,
on a Quarterly and Year-End Basis, for 2008 Year to
Date
|
44
|
|
|
Total
Company Expenses
|
45
|
|
|
Interest
|
46
|
|
|
Amortization
and Depreciation
|
46
|
|
|
Net
Loss
|
46
|
|
|
Liquidity
and Capital Resources
|
47
|
|
|
Capital
Expenditures
|
47
|
|
|
Future
Capital Needs
|
49
|
|
|
Technology
|
49
|
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
49
|
|
|
NO
CHANGE IN NAME, BUSINESS, JOBS, MANAGEMENT, OR PHYSICAL
LOCATION
|
49
|
|
|
INTERESTS
OF OFFICERS AND DIRECTORS FOLLOWING THE MERGER
|
50
|
|
|
CONVERSION
OF SHARES OF QUALMAX INTO THE COMPANY’S SHARES
|
50
|
FINANCIAL
INFORMATION
|
51
|
|
|
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER
|
51
|
|
|
REGULATORY
APPROVAL
|
51
|
|
|
REQUIRED
VOTE
|
51
|
|
|
APPRAISAL
OR DISSENTERS’ RIGHTS
|
52
|
|
|
RELATED
PARTY TRANSACTIONS
|
53
|
|
|
Relationship
with Selvin Passen
|
53
|
|
|
Relationship
with Jacob Schorr
|
53
|
|
|
Transactions
with Selvin Passen, Jacob Schorr, and M. David Kamrat and Noah
Kamrat
|
54
|
|
|
Relationship
and Transactions with BOS
|
54
|
|
|
EXECUTIVE
COMPENSATION
|
54
|
|
|
Summary
Compensation Table
|
54
|
|
|
Outstanding
Equity Awards at 2007 Fiscal Year-End
|
55
|
|
|
2007
Compensation to Directors
|
55
|
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
56
|
Current
(Pre-Merger) Beneficial Ownership of New World Brands, Inc.
|
56
|
|
|
Current
(Pre-Merger) Actual Ownership of New World Brands, Inc.
|
58
|
|
|
Current
(Pre-Merger) Actual Ownership of Qualmax, Inc.
|
58
|
|
|
Pro
Forma Exchange Ratio
|
59
|
|
|
Pro
Forma Exchange of Qualmax, Inc. Shares for Shares of New World
Brands,
Inc.
|
59
|
|
|
Pro
Forma Post-Merger Beneficial Ownership of New World Brands, Inc.
|
60
|
WHERE
TO FIND ADDITIONAL INFORMATION
|
61
|
|
|
FINANCIAL
STATEMENTS
|
F-1
|
|
|
CONSOLIDATED
FINANCIALS FOR FISCAL YEAR ENDED
DECEMBER 31, 2007
|
F-2
|
|
|
CONSOLIDATED
FINANCIALS FOR FISCAL YEAR ENDED DECEMBER 31,
2006
|
F-25
|
|
|
CONDENSED
CONSOLIDATED FINANCIALS FOR QUARTER ENDED JUNE 30, 2008
|
F-65
|
|
|
CONDENSED
CONSOLIDATED FINANCIALS FOR QUARTER ENDED MARCH 31, 2008
|
F-80
|
|
|
Annex
A: Agreement and Plan of Merger
|
62
|
|
|
Annex
B: 2008 Stock Option Plan
|
90
|
|
|
Annex
C: Delaware General Corporation Law - Chapter 8, Section
262
|
106
|
NEW
WORLD BRANDS, INC.
340
West Fifth Avenue
Eugene,
Oregon 97401
This
Information Statement is being provided to you by the
Board
of Directors of New World Brands, Inc.
BUSINESS
DESCRIPTION
AND RECENT DEVELOPMENTS
New
World
Brands, Inc. (“
the Company
,”
“
we
,” “
us
,”
“
its
,” or “
our
”) was
incorporated in Deleware 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 chnaged 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.
From
October 16, 2001 until the consummation of the transactions described below
on
September 15, 2006, the Company
was
engaged in the business of
importing
wine and spirits for distribution in the United States through its wholly-owned
subsidiary,
International
Importers, Inc., a Florida corporation (“
Importers
”)
.
During
that period, the Company was unable to achieve a level of sales sufficient
to
fund its costs of operations and accordingly, the Company relied principally
on
equity investments and loans made by Dr. Selvin Passen, the Company’s former
Chairman of the Board and principal stockholder of the Company, together with
affiliates of Dr. Passen, to fund its ongoing operations.
Due
to
the Company’s inability to achieve a level of sales sufficient to fund the costs
of operations, beginning in late 2005, the Board started evaluating the
financial condition of the Company and its prospects as a wine importer and
distributor. Following its evaluation, the Board concluded that i
n
light
of the Company’s inability to achieve sufficient sales to fund operations in the
near future, coupled with the significant costs associated with the Company’s
operations, including those associated with being a public company, Dr. Passen’s
reluctance to fund our operations under the current public company structure,
and the Company’s inability to obtain other sources of funding, with the
exception of a bank credit facility, which is personally guaranteed by Dr.
Passen,
it
would
be in the best interests of the Company and its stockholders to engage in a
restructuring of the Company or a change in our business plan.
In
early
2006, the Company’s management met with management of Qualmax, Inc., a Delaware
corporation (“
Qualmax
”),
a
specialized IP communications solutions provider, equipment reseller,
manufacturer, research and development company, and VoIP (voice over IP) service
provider
.
Following discussions and meetings with management of Qualmax, the Board
determined that it would be in the best interests of the Company and its
stockholders to dispose of its wine and spirits distribution business and
acquire the business of Qualmax by means of a purchase of Qualmax’s assets and
an assumption of Qualmax’s liabilities. The decision of the Board to acquire the
Qualmax business was predicated on several factors, including, among others:
(1)
the belief that
the
future potential of Qualmax’s business exceeded the Company’s wine and spirits
importation business; (2) the belief that the IP communications industry is
a
growing industry with significant potential for growth; and (3) a capital
infusion of $2,000,000 in the aggregate resulting from the sale of Importers
and
the purchase of shares of Common Stock by an affiliated entity of Dr. Passen
(each as described below), both of which were conditions precedent to the
acquisition of Qualmax’s business.
On
June 22, 2006, the Company entered into an asset purchase agreement with
Qualmax, which was amended as of August 28, 2006 (the “
Asset
Purchase Agreement
”).
Pursuant to the Asset Purchase Agreement, the Company agreed to acquire all
of
the assets of Qualmax in exchange for the assumption of Qualmax’s liabilities
and the issuance to Qualmax of shares of Preferred Stock (as defined below).
The
consummation of the transactions contemplated by the Asset Purchase Agreement
was conditioned, among other things, on the sale or disposition of the Company’s
wine and spirits distribution business, as well as an additional capital
infusion from Dr. Passen.
Reference
is made to the Company’s quarterly report on Form 10-QSB for the quarter ended
September 30, 2006 for information concerning the Qualmax business acquired
by
the Company pursuant to the Asset Purchase Agreement, which quarterly report
was
filed with the Securities and Exchange Commission (the “SEC”) on November 20,
2006.
On
August 28, 2006, the Company entered into a Stock Subscription Agreement
with Oregon Spirit, LLC, a Nevada limited liability company (“
Oregon
Spirit
”),
pursuant to which, at a closing that took place on September 14, 2006, the
Company sold to Oregon Spirit in a private placement transaction exempt from
the
registration requirements of the Securities Act of 1933, as amended (the
“Securities Act”), in reliance on Section 4(2) thereunder and Rule 506 of
Regulation D promulgated thereunder, a total of 7,500,000 shares of Common
Stock
in exchange for gross proceeds of $1,500,000 in cash, or $0.20 per
share.
On
September 15, 2006, the Company entered into a Stock Purchase Agreement
with International Spirits, LLC, a Nevada limited liability company
(“
Spirits
”),
an
entity controlled by Dr. Passen, pursuant to which the Company sold all of
the
issued and outstanding shares of capital stock of Importers to Spirits in
exchange for gross proceeds of $500,000 in cash. As a result of the sale of
Spirits, the Company ceased being engaged it the wine and spirits distribution
business.
Also
on
September 15, 2006, following the sale of Importers, the Company consummated
the
transactions under the Asset Purchase Agreement with Qualmax and in connection
therewith, acquired all of the assets and assumed all of the liabilities of
Qualmax.
In
connection with the transactions contemplated by the Asset Purchase Agreement,
the Board authorized the creation and issuance of shares of voting preferred
stock designated as “Series A Convertible Preferred Stock” (the “
Preferred
Stock
”).
The
terms, rights, preferences and privileges of the Preferred Stock are set forth
in a Certificate of Designation filed with the Secretary of State of the State
of Delaware on August 30, 2006, as amended on January 8, 2007 to increase the
authorized number of shares of Preferred Stock from 100 to 200 (the
“
Certificate
of Designation
”).
Pursuant to the Asset Purchase Agreement, the Company issued 100 shares of
Preferred Stock to Qualmax, which shares of Preferred Stock were
convertible into
298,673,634
shares of Common Stock and which represented more than a majority of the voting
power of the Company’s issued and outstanding shares of capital stock (on an
as-converted basis).
Pursuant
to the Certificate of Designation, the shares of Preferred Stock would be
automatically converted into shares of Common Stock upon the filing of the
Charter Amendments described below.
Pursuant
to the terms of the Asset Purchase Agreement, the holders of an aggregate of
22,225,000 shares of Common Stock, which shares currently represent
approximately 50.2% of the issued and outstanding shares of Common Stock,
executed a Voting Agreement and Proxy dated as of September 15, 2006 (the
“
Voting
Agreement
”),
pursuant to which each such holder agreed to vote his, her or its shares of
Common Stock in favor of the Actions following the Closing and for which this
Information Statement is being provided.
Effective
December 29, 2006, the Company entered into an Amended and Restated Stock
Subscription and Share Transfer Agreement (the “
Subscription
Agreement
”),
as
well as various other agreements, with P&S Spirit, LLC, a Nevada limited
liability company (“
P&S
Spirit
”),
as
well as M. David Kamrat and Noah R. Kamrat (the “
Kamrats
”),
pursuant to which, among other things, the Company sold to P&S Spirit, and
P&S Spirit purchased from the Company, a total of 11.160454 shares of
Preferred Stock (which shares of Preferred Stock are convertible into 33,333,333
shares of the Common Stock), for an aggregate purchase price of $3,000,000,
and
the Company agreed to sell, and P&S agreed to purchase, up to an additional
7.440303 shares of Preferred Stock (which shares of Preferred Stock were
convertible into 22,222,222 shares of the Common Stock) upon the satisfaction
of
certain conditions precedent, for an aggregate purchase price of $2,000,000,
the
Kamrats transferred certain shares of the common stock of Qualmax, Inc. to
P&S Spirit, and certain warrants to purchase Preferred Stock were issued to
P&S Spirit and to the Kamrats. Reference is made to the Company’s Current
Report on Form 8-K for additional information concerning the Subscription
Agreement and the transactions entered into in connection therewith, which
Current Report was filed with the SEC on January 8, 2007.
On
January 9, 2007, the Company, IP Gear, Ltd., an Israeli corporation and
wholly-owned subsidiary of the Company (
“
IP
Gear
”
),
P&S Spirit and
B.O.S.
Better Online Solutions Ltd. (
“
BOS
”
)
entered
into an agreement effective as of December 31, 2006 (the “
BOS
Agreement
”),
pursuant to which, among other things, the parties agreed to convert
approximately
$1.48 million, in the aggregate of amounts due and payable to BOS under certain
agreements between the Company, IP Gear and BOS into 5.50652 shares of Preferred
Stock (which shares of Preferred Stock were convertible into 16,446,544 shares
of Common Stock).
Reference
is made to the Company’s Current Report on Form 8-K for additional information
concerning the BOS Agreement and the transactions entered into in connection
therewith, which Current Report was filed with the SEC on January 10,
2007.
Pursuant
to a written consent of the Board, dated January 31, 2007, 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, $0.01 par value per share, by 550,000,000 shares;
(ii) created 1,000 shares, $0.01 par value per share, of Preferred Stock;
(iii) implemented a staggered Board with three classes, each serving three
years; and (iv) made such other changes to the certificate of incorporation
as were necessary and incidental to the foregoing. As a result of the approval
of our Amended and Restated Certificate of Incorporation, effective April 24,
2007, all outstanding shares of Preferred Stock were converted to shares of
Common Stock, at a ratio of 2,986,736 shares of Common Stock for each share
of
Preferred Stock (meaning approximately 116.67 shares of Preferred Stock,
constituting all of the Company’s outstanding Preferred Stock, were converted
into approximately 348.4 million shares of Common Stock).
On
and
effective March 30, 2007 the Company entered into a Term Loan and Security
Agreement (the “
P&S
Term
Loan
Agreement
”
and
the
debt obligation pursuant thereto, the “
P&S
Term
Loan
”)
with
P&S Spirit in the principal amount of $1,000,000. The P&S Term Loan
proceeds were used by the Company to repay all outstanding principal, interest
and fees payable to Bank of America, N.A., pursuant to a pre-existing loan
agreement with Bank of America, N.A., and to pay certain professional fees
associated with preparation and negotiation of the P&S Loan Agreement.
Subsequently, the P&S Term Loan was repaid in two payments, the first in the
amount of $500,000 in August, 2007, and the second in the amount of $500,000
in
February, 2008.
For
additional information regarding the authorization of additional shares and
the
conversion of Preferred Stock, reference is made to our Current Report on Form
8-K, filed with the SEC on April 30, 2007, and the Company’s Definitive Schedule
14C, filed with the SEC on March 20, 2007. For additional information regarding
the P&S Term Loan, reference is made to our Current Reports on Forms 8-K,
filed with the SEC on April 5, 2007, August 1, 2007 and February 27, 2008.
As
previously reported on the Company’s Current Report on Form 8-K, filed with the
SEC on June 6, 2007, on and effective May 31, 2007, the
Company
entered
into a Credit Line and Security Agreement (the “
P&S
Credit
Line Agreement
”
and
the
debt obligation pursuant thereto, the “
P&S
Credit
Line
”)
with
P&S Spirit, for a maximum principal available amount of $1,050,000. On
February 21, 2008, the Company drew $500,000 in principal on the P&S Credit
Line in order to repay its obligations under the P&S Term Loan Agreement.
For additional information regarding the P&S Credit Line, reference is made
to our Current Reports on Forms 8-K, filed with the SEC on June 6, 2007 and
February 27, 2008.
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
P&S Subscription Agreement
”),
amending the Subscription Agreement. As noted above, 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 were 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. On April 24,
2007, when the Company filed its Amended and Restated Certificate of
Incorporation with the Delaware Secretary of State, all outstanding shares
of
Preferred Stock were automatically converted to shares of Common Stock at a
ratio of 2,986,736 shares of Common Stock for each share of Preferred
Stock. As a result, the Tranche B-1 Shares and Tranche B-2 Shares
were each converted into 11,111,111 shares of Common Stock.
Pursuant
to the Amended P&S Subscription Agreement, P&S Spirit agreed to buy, and
the Company agreed to sell, all of the Tranche B-1 Shares and Tranche B-2
Shares, as converted into a total of 22,222,222 shares of Common Stock, for
an
aggregate purchase price of $1,000,000, and P&S Spirit agreed to waive
certain of the conditions precedent to the purchase of the Tranche B-1 Shares
and Tranche B-2 Shares as set forth in the P&S Subscription
Agreement. In connection with the transactions contemplated by the
Amended P&S Subscription Agreement, the Company, Qualmax, the Kamrats,
P&S Spirit and certain affiliates of the Kamrats and P&S Spirit entered
into a First Amendment to Amended and Restated Lock-Up Agreement, a copy of
which was filed with the SEC on June 6, 2007 as Exhibit 10.7 to the Company’s
Current Report on Form 8-K. Also in connection with the transaction contemplated
by the Amended P&S Subscription Agreement, the Company, Qualmax, the
Kamrats, P&S Spirit and certain affiliates of the Kamrats and P&S Spirit
entered into a First Amendment to Amended and Restated Voting Agreement, a
copy
of which was filed with the SEC on June 6, 2007 as Exhibit 10.8 to the Company’s
Current Report on Form 8-K. For additional information regarding the Amended
P&S Subscription Agreement, reference is made to our Current Report on Form
8-K filed with the SEC on June 6, 2007.
Effective
July 1, 2007, the Company sold its IP Gear, Ltd. subsidiary to TELES pursuant
to
a Share Sale and Purchase Agreement (the “
Final
Agreement
”),
following the execution of a preliminary share sale and purchase agreement
(the
“
Preliminary
Agreement
”),
both
of which agreements are governed by the laws of Germany. The
Preliminary Agreement was executed on July 18, 2007, and the Final Agreement
was
approved by the Board and by TELES’ supervisory board on July 25,
2007. The closing of the purchase and sale took place on July 26,
2007, immediately upon the execution of the Final Agreement. The
share sale and purchase has an effective date, for accounting purposes, of
July
1, 2007. Pursuant to the Final Agreement, the Company sold all of the
outstanding capital stock of its wholly-owned subsidiary, IP Gear, Ltd., to
TELES. For additional information regarding the Preliminary and Final
Agreements, reference is made to our Current Reports on Forms 8-K filed with
the
SEC on July 20, 2007, and August 1 and 9, 2007.
RECORD
DATE AND VOTING RIGHTS
We
are
currently authorized to issue up to 600,000,000 shares of Common Stock, $0.01
par value and 1,000 shares of Preferred Stock, $0.01 par value. As of
May
14,
2008,
418,479,673 shares of Common Stock were issued and outstanding and no shares
of
Preferred Stock were outstanding. Each share of Common Stock shall be entitled
to one (1) vote on all matters submitted for stockholder approval. The record
date for determination of stockholders entitled to notice of and to vote at
the
Special Meeting is [
____]
[ ], 2008
.
A
majority of the outstanding shares of Common Stock of the Company, entitled
to
vote must be represented in person or by proxy at the Special Meeting to
constitute a quorum for the transaction of business. A majority of quorum
is required to approve all proposals. Abstentions will not be counted either
for
or against any proposal to determine if a proposal is approved.
ACTION
1:
2008
STOCK OPTION PLAN
The
Board
recommends adoption of the 2008 Stock Option Plan (the “
Option
Plan
”).
R
EASONS
FOR THE PROPOSAL
The
Option Plan is designed to further the growth and development of the Company
by
enabling eligible persons to obtain a proprietary interest in the Company and
affording the Company a means of attracting to it service persons of outstanding
quality.
Management
and the Board believe that strong additions to the executive level, as well
as
middle management level, are necessary to the Company’s near and long term
success. In order to attract, hire, and retain the caliber of executives that
management and the Board believe will be required to help us position ourselves
for growth, we will need to have the flexibility to grant stock options. The
Board believes that equity incentive compensation is also an important component
of our overall compensation and incentive strategy for employees, directors,
and
executives. Without a broad based equity plan, we believe that we will be
impaired in our efforts to hire new executives of the caliber that we believe
is
required, and will not be able to offer competitive packages to retain such
executives.
B
ACKGROUND
OF THE PROPOSAL
A
copy of
the Option Plan is attached as a Annex B hereto. Under the Option
Plan, up to 41,500,000 shares of common stock of the Company (“Common Stock”)
shall be available from which to grant options when the grant is approved by
stockholders.
The
Board
believes that equity incentive compensation is an important component of our
overall compensation and incentive strategy for employees, directors, officers
and consultants. We are committed to broad-based participation in the equity
incentive grants by employees, directors, officers and consultants. We believe
that the equity incentive program is important in order to maintain our culture,
employee ownership, employee motivation and continued success.
D
ESCRIPTION
OF THE OPTION PLAN
Structure
.
The
follow summary of the principal features of the Option Plan is qualified by
reference to the full text of the Option Plan, which is attached hereto as
Annex
B.
Types
of Options
.
The
Option Plan permits the granting of non-qualified stock options and incentive
stock options (“
ISOs
”).
Option
Shares; Grants
.
The
total number of shares of Common Stock that will be allocated to the Option
Plan
(the “
Reserved
Shares
”)
will
not exceed in the aggregate 41,500,000. It is intended that the number of shares
available for grant under the Option Plan should always be 10% of the number
of
shares of Common Stock issued and outstanding. Accordingly, as of each
January 1, beginning with January 1, 2009, and continuing through and
including January 1, 2018, the number of Reserved Shares will be increased
automatically to the extent necessary so that the number of Reserved Shares
is
10% of the total number of shares of Common Stock issued and outstanding. For
purposes of this increase in the number of Reserved Shares, shares of Common
Stock issued as a result of the exercise of options granted under the Option
Plan shall not be included in the total number of shares of Common Stock issued
and outstanding.
Individual
Limits
.
No one
employee of the Company or a subsidiary may be granted options with respect
to
more than 10,000,000 Reserved Shares in any one calendar year under this Option
Plan.
Administration
by Committee
.
Authority to control and manage the operation and administration of the Option
Plan will be vested in the Compensation Committee of the Board (the
“
Committee
”).
Members of the Committee are appointed by, and serve at the pleasure of, the
Board. It is intended that the Committee shall have at least two members, both
of whom are “non-employee directors” within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and “outside
directors” within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the “
Code”
).
Nonetheless, no grant will be invalidated even if the Committee is not so
constituted. The Committee has the authority to interpret the Option Plan and
the rights underlying any grants or awards made subject to the Option Plan.
Any
decision or action of the Committee in connection with the Option Plan is final
and binding. No member of the Committee shall be liable for any action arising
out of or related to the Option Plan provided the member was acting in good
faith and for a purpose believed to have been in the best interests of the
Company or its subsidiaries.
Eligibility
.
Officers, directors (whether or not they are employed by the Company), and
executive, managerial, or administrative employees of, and consultants and
advisors to, the Company, it subsidiaries and its joint ventures are eligible
to
participate in the Option Plan. The Committee shall decide to whom among the
eligible individuals options should be granted, except that upon receiving
notice from the Committee of a determination to grant options to any member
of
the Board, the holders of Common Stock of the Company will have 30 days to
reverse such determination and to block the grant of options to such Director.
The approximate number of persons in each class who will be eligible to receive
grants under the Option Plan is 35. The Board and the Committee may delegate
to
any officer of the Company the authority to determine to whom options should
be
granted.
Terms
and Conditions of Option Grants
.
One or
more options may be granted to each eligible person. The options granted under
the Option Plan will be evidenced by a written option grant agreement. The
Committee shall specify the grant date, exercise price, which must be at least
100% of the fair market value of a share of Common Stock on the grant
date, and terms and conditions for the exercise of the options. No option
under the Option Plan shall be exercisable later than 10 years after the date
of
grant.
Exercise
of the Option
.
Options
may be exercised by the filing of a written notice with the Company or the
Company’s designated agent in the form and manner prescribed by the Committee
together with payment in full of the exercise price for the number of shares
being purchased. Payment for shares purchased pursuant to the Option Plan may
be
made (i) by certified or official bank check for the full exercise price or
(ii)
with the prior written consent of the Committee, by delivery of shares of Common
Stock owned by the grantee (provided that if such shares were acquired pursuant
to the exercise of a stock option, they were acquired at least six months prior
to the exercise date or such other period as the Committee may determine) having
a fair market value (as of the exercise date) equal to all or part of the option
exercise price and a certificate or official bank check for any remaining
portion of the full excise price, or (iii) at the sole discretion of the
Committee and to the extent permitted by law, by such other methods not
inconsistent with the terms of the Option Plan.
Transferability
of Options
.
Generally, an option may not be transferred, other than by will or by the laws
of descent and distribution. The Committee may provide, in any applicable Option
Certificate, for transfer of an option (other than an ISO to the extent
inconsistent with the requirements of Section 422 of the Code) to designated
family members and certain other entities specified in the Option Plan. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment.
G
eneral
Plan Provisions
Dissolution,
Liquidation, or Merger and Change of Control
.
In the
event of an occurrence after which we no longer survive as an entity, the
Committee may, in its sole discretion, (i) cancel each option in exchange for
a
payment equal to the amount that would be received by a holder of the shares
subject to the option, less the exercise price or (ii) provide for the exchange
of each outstanding option for an equivalent option to purchase stock of the
acquiring entity. The Committee may also accelerate or shorten the time within
which each outstanding award may be exercised. After a merger, consolidation,
combination or reorganization in which we are the survivor, the Committee shall
determine any appropriate adjustments to outstanding Options.
Changes
in Common Stock or Certain Other Events
.
In the
event any change is made to the outstanding shares of Common Stock by reason
of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change in corporate structure, the maximum number
of
shares of Common Stock with respect to which the Committee may grant options,
and the individual limits, will be adjusted by the Committee. In the event
of
any change in the number of shares of Common Stock outstanding for any other
event or transaction, the Committee may in its discretion, make such adjustments
in the maximum number of shares of Common Stock with respect to which the
Committee may grant options, and individual limit, as it deems
appropriate.
Termination
of Employment
.
The
Option Plan includes provisions relating to the option recipient’s termination
of employment. In general (unless the Committee provides otherwise), if a
grantee terminates employment with the Company, options held at the date of
such
termination must be exercised within 30 days of the date of such termination
(but in no event after the original expiration date of the option). If the
termination of employment is by reason of a disability (as defined in the Option
Plan) or death, any outstanding vested options may be exercised by the earlier
of 90 days after the grantee’s termination of employment or the original
expiration date of the option. If a grantee dies subsequent to incurring a
termination of employment, but prior to the expiration of the 30-day or 90-day
exercise period with respect to an option, the option will remain exercisable
until the earlier of 90 days after the grantee’s death or the original
expiration date of the option. Any exercise of an option following a grantee’s
death may only be made by the grantee
’
s executor
or
administrator or other duly appointed representative acceptable to the
Committee, unless the grantee’s will specifically disposes of the option.
Unvested options are forfeited upon termination of employment. In the event
of a
termination of employment for cause (as defined in the Option Plan), all
options, whether or not vested, will terminate upon termination of
employment.
Amendment
and Termination
.
The
Board may amend, suspend or terminate the Option Plan at any time and for any
reason. Further, the Board may, in its discretion, determine that any amendment
should be effective only if approved by the stockholders even if such approval
is not expressly required by the Option Plan or by law. But no amendment,
suspension or termination shall be made which would materially impair the right
or materially increase the obligations of any grantee under any outstanding
option without such grantee’s consent. Unless sooner terminated by the Board,
the Option Plan will in all events terminate 10 years from the date the Option
Plan is adopted by the Board. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the Option
Plan and the instruments evidencing such awards.
Securities
Laws
.
No
award shall be effective unless made in compliance with all federal and state
securities laws, rules and regulations and in compliance with any rules on
any
exchange on which shares are quoted.
Other
Provisions
.
The
option agreements may contain such other terms, provisions and conditions not
inconsistent with the Option Plan as may be determined by the Board or the
Committee.
Federal
Income Tax Consequences
The
following is a brief description of the federal income tax treatment that will
generally apply to grants under the Option Plan based on current federal income
tax rules. The actual tax treatment may vary depending on each individual
option recipient’s circumstances.
Stock
Options
.
The
grant of an option will not result in taxable income to the recipient of the
option. Upon exercise of the option and subsequent disposition of the shares
of
Common Stock acquired through option exercise, the recipient will realize income
as described below, depending on whether the option is a non-qualified option
or
an ISO.
Non-Qualified
Options
.
The
option recipient will realize ordinary income at the time of exercise in an
amount equal to the excess of the fair market value of the Common Stock acquired
over the exercise price for those shares and the Company will be entitled to
a
corresponding deduction. Gains or losses realized upon disposition of such
shares will be treated as capital gains and losses, with the basis in such
Common Stock equal to the fair market value of the shares at the time of
exercise.
ISOs
.
The
exercise of an ISO will not result in taxable income to the option recipient
provided that he or she was, without a break in service, an employee of the
Company or a subsidiary during the period beginning on the date of the grant
of
the option and ending on the date three months prior to the date of exercise
(one year prior to the date of exercise if the grantee is disabled, as that
term
is defined in the Code). The excess of the fair market value of the stock at
the
time of the exercise of an ISO over the exercise price is an adjustment that
is
included in the calculation of the option recipient’s alternative minimum
taxable income for the tax year in which the ISO is exercised.
If
the
option recipient does not sell or otherwise dispose of the shares of Common
Stock within two years from the date of the grant of the ISO or within one
year
after the transfer of such Common Stock to the individual, then, upon
disposition of such Common Stock, any amount realized in excess of the exercise
price will be taxed as capital gain and the Company will not be entitled to
a
corresponding deduction. A capital loss will be recognized to the extent that
the amount realized is less than the exercise price.
If
the
option recipient sells or otherwise disposes of the shares without satisfying
the foregoing holding period requirements, he or she generally will realize
ordinary income at the time of the disposition of the shares, in an amount
equal
to the lesser of (i) the excess of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price, or (ii) the excess,
if
any, of the amount realized upon disposition of the shares over the exercise
price and the Company will be entitled to a corresponding deduction. If the
amount realized exceeds the value of the shares on the date of exercise, any
additional amount will be capital gain. If the amount realized is less than
the
exercise price, the option recipient will recognize no income, and a capital
loss will be recognized equal to the excess of the exercise price over the
amount realized upon the disposition of the shares. The Company will be entitled
to a deduction to the extent that the option recipient recognizes ordinary
income because of a disposition of shares before the end of the holding
periods.
Section
409A
.
Section
409A of the Code imposes significant restrictions on deferred compensation
and
may have an impact on stock options under the Option Plan. If the
Section 409A restrictions are not followed, a recipient of an option could
be subject to accelerated liability for tax on the non-complying option, as
well
as a 20% penalty tax. The Option Plan is intended to comply with the
requirements of Section 409A. Any action of the Board or Committee
that in any way alters or affects the tax treatment of any option or that in
the
sole discretion of the Board is necessary to prevent an option from being
subject to tax under Section 409A of the Code will not be considered to
materially impair any rights of any grantee.
Compliance
with Section 162(m) of the Code
.
Section
162(m) of the Code limits publicly-held companies to certain annual deductions
for federal income tax purposes for compensation in excess of $1 million per
year paid to their chief executive officer and the three highest compensated
executive officers (other than the chief executive officer and chief financial
officer) determined at the end of each year. However, performance-based
compensation is excluded from this limitation. Stock options granted under
the
Option Plan are expected to qualify as “performance-based compensation” so that
the deductibility limit should not impact negatively on the Company.
The
table
below provides certain information concerning our equity compensation plans
as
of May 14, 2008.
Equity
Compensation Plan Information
Plan
category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
Number of securities
remaining available
for
future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans
approved
by stockholders
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Equity
compensation plans
not
approved by stockholders
|
|
|
3,245,000
|
|
$
|
0.20
|
|
|
1,755,000
|
|
New
Option Grants; Interest of Executives or Directors
The
actual Option Grants to be made are not determinable at this time.
REQUIRED
VOTE
Proposal No.
One requires the affirmative vote of a majority of the votes cast on the
proposal. Stockholders may vote “
FOR
”
or
“
AGAINST
”
the
proposal, or they may abstain from voting on the proposal. Abstentions will
have
effect of voting “
AGAINST
”
the
proposal, but broker non-votes will not have any effect on the outcome of this
proposal. In the event the stockholders do not approve this proposal, the Option
Plan will not be effected.
ACTION
1:
THE
BOARD RECOMMENDS A VOTE
“FOR”
THE
APPROVAL
OF THE 2008 STOCK OPTION PLAN.
ACTION
2:
MERGER
OF QUALMAX, INC. WITH AND INTO THE COMPANY
BACKGROUND
AND RATIONALE FOR THE MERGER
On
February 18, 2008, the Company and Qualmax, Inc., a Delaware corporation
(“Qualmax”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”), a copy of which is attached hereto as
Annex
A
pursuant
to which Qualmax will be merged with and into the Company upon the terms and
subject to the conditions set forth in the Merger Agreement (the “Merger”), with
the Company being the surviving corporation in the Merger. The Merger Agreement
is attached as
Annex
A
hereto.
As
previously disclosed, in 2006, the Company consummated three separate
transactions as a result of a determination by the Board to change its
business plan. First, the Company sold its former wine and spirits business
in
exchange for gross proceeds of $500,000, which transaction was consummated
on
September 14, 2006. Second, the Company sold 7,500,000 shares of Common Stock
in
a private placement transaction in exchange for gross proceeds of $1,500,000,
which private placement was consummated on September 15, 2006 (the “September
15, 2006 Private Placement”). Third, the Company acquired substantially all of
the assets of Qualmax (the “Purchase Transaction”), in exchange for which the
Company issued 100 shares of Series A Convertible Preferred Stock, par value
$0.01 per share (the “Preferred Stock”) to Qualmax, which transaction was
consummated on September 15, 2006. On April 24, 2007, in connection with an
amendment to the certificate of incorporation of the Company, the shares of
Preferred Stock automatically converted into 298,673,634 shares of Common Stock.
As a result of the Purchase Transaction, Qualmax ceased conducting any business
activities other than in connection with its ownership of the shares of capital
stock in the Company. The shares of Common Stock held by Qualmax represent
approximately seventy-two percent (72%) of the issued and outstanding shares
of
capital stock of the Company (calculated on an as-converted basis). For
accounting purposes, the Company and Qualmax each agreed to treat the Purchase
Transaction as a reverse acquisition of Qualmax by the Company. The Company
and
Qualmax desire to effectuate the Merger to cause a downstream merger of Qualmax
with and into the Company.
Pursuant
to the Reverse Acquisition, New World Brands issued 100 shares of its Series
A
Convertible Preferred Stock (the “
Preferred
Stock
”)
to
Qualmax. The Preferred Stock was issued because the Company did not
have sufficient authorized and unissued shares of Common Stock to issue on
September 15, 2006 when the Reverse Acquisition was consummated. Subsequently,
effective as of April 24, 2007, as disclosed on that Information Statement
on
Definitive Schedule 14C filed with the SEC on March 20, 2007, the Preferred
Stock was converted into shares of Common Stock.
At
the
time of the Purchase Transaction, the Boards of Directors of the Company
and
Qualmax (the “
Boards
”)
each
agreed that Qualmax would be merged with the Company, after which the separate
corporate existence of Qualmax shall cease. In addition, the stockholders
of
Qualmax, in its capacity as a stockholder of the Company, agreed to vote
its
shares in favor of the Merger. However, the Boards determined that it was
not in
the Company’s best interests to consummate the Merger at the time of the
Purchase Transaction, and consummation of the Merger was deferred for two
reasons. First, to conserve Company resources for critical expenses necessary
for the Company’s continued operations after the Purchase Transaction, and,
second, to avoid delays in consummating the Purchase Transaction, which delays
would have delayed the infusion of capital resulting from the September 15,
2006
Private Placement. At the time of the Purchase Transaction the Company faced
a
pressing need for operating capital and dedication of management resources
to
core business operations, particularly the operations of its former wholly
owned
subsidiary, IP Gear, Ltd., an Israeli company, and the Boards determined
that
access to that operating capital, and conservation of capital for operating
expenses rather than consumption of capital for corporate expenses, was critical
to the Company’s short term survival. In late 2007, after the sale of the
Company’s IP Gear, Ltd. subsidiary and consummation of the Partner Contract with
TELES effective July 1, 2007, the Company’s use of capital, cash flow, and
operations somewhat stabilized, and the Boards determined that the Company
had
sufficient capital and management resources available to consummate the Merger.
Pursuant
to the Merger Agreement, following the Merger, all of the properties, rights,
privileges, powers and franchises of Qualmax and the Company shall vest in
the
Company and all debts, liabilities and duties of Qualmax and the Company shall
become the debts, liabilities and duties of the Company. No changes will be
made
to the executive officers and directors of the Company in connection with the
Merger.
In
connection with the Merger, each issued and outstanding share of common stock,
par value $0.001 per share, of Qualmax (“Qualmax Stock”) immediately prior to
the effective time (the “Effective Time”) of the Merger (excluding any shares of
Qualmax Stock held in the treasury immediately prior to the Effective Time,
which shall cease to be outstanding, be canceled and retired without payment
of
any consideration therefor, and shall cease to exist), will be converted into
a
number of shares of Common Stock equal to the total number of shares of Common
Stock owned by Qualmax immediately prior to the Effective Time, divided
by the total number of shares of Qualmax Stock issued and outstanding
immediately prior to the Effective Time (the “Exchange Ratio”). The Exchange
Ratio is subject to adjustment based on any stock split, reverse split, or
stock
dividend (including any dividend or distribution of securities convertible
into
Common Stock); or any reorganization, recapitalization, reclassification,
readjustment, split up, combination or exchange of shares, or other like event
with respect to the Common Stock, in any case occurring prior to the Effective
Time. Except as described below and provided for in the Merger Agreement, any
other shares of capital stock or options, warrants or other securities
convertible or exercisable into shares of capital stock of Qualmax, whether
vested or unvested, shall automatically be cancelled and retired and shall
cease
to exist.
At
the
Effective Time, certain warrants to purchase shares of Qualmax Stock (the
“Qualmax Stock Rights”) will be assumed by the Company and shall continue to
have, and be subject to, the same terms and conditions set forth in the relevant
agreement governing such Qualmax Stock Rights immediately prior to the Effective
Time; except that (i) each Qualmax Stock Right will be exercisable for the
number of shares of Common Stock equal to the number of shares of Common Stock
that were issuable upon exercise of such Qualmax Stock Right, immediately prior
to the Effective Time, multiplied by the Exchange Ratio (as defined above),
rounded up to the nearest whole number of shares of Common Stock, and (ii)
the
per share exercise price for the Common Stock issuable upon exercise of such
Qualmax Stock Right will be equal to the exercise price per share of Qualmax
Stock at which such Qualmax Stock Right was exercisable immediately prior to
the
Effective Time, divided by the Exchange Ratio, rounded down to the nearest
whole
cent.
In
connection with the Merger, Stockholders of the Company who oppose the Merger
are not entitled to dissenters’ rights. However, holders of shares of Qualmax
Stock will be entitled to appraisal and dissenter’s rights pursuant to the
Delaware General Corporation Law (the “DGCL”). Any holder of shares of Qualmax
Stock that demands and perfects appraisal or dissenters’ rights (any such shares
that are subject to appraisal or dissenters’ rights, “Dissenting Shares”) in
compliance with the DGCL shall not be converted into or represent a right to
receive shares of Common Stock in the Merger, but shall only be entitled to
such
rights afforded to such person under the DGCL.
As
described in greater detail below, the consummation of the Merger and the
transactions contemplated under the Merger Agreement are subject to satisfaction
of certain conditions, including (which list is not exhaustive): (1) obtaining
the requisite consent of the stockholders of each of the Company and Qualmax
to
approve the Merger Agreement and the transactions contemplated thereunder;
(2)
obtaining a valid exemption from registration under the Securities Act, of
the
shares of Common Stock issuable to the stockholders of Qualmax in connection
with the Merger, which the Company anticipates will be obtained pursuant to
a
“fairness hearing” conducted in the State of Oregon pursuant to Section 3(a)(10)
of the Securities Act; and (3) the number of Dissenting Shares shall not exceed
five percent (which percentage may be increased to 15% as provided in the Merger
Agreement) of the shares of Qualmax Stock outstanding immediately prior to
the
Effective Time. In addition, the Merger Agreement is subject to termination
upon
the occurrence of certain events, including in the event that the Merger is
not
consummated by June 1, 2008.
THE
MERGER AGREEMENT
On
February 18, 2008, the Company entered into a Merger Agreement, by and between
the Company and Qualmax, a Delaware corporation that currently beneficially
owns
298,673,634 shares of the Common Stock, representing approximately 72% of the
Company’s issued and outstanding Common Stock. Pursuant to the Merger Agreement,
upon the satisfaction or waiver of the conditions set forth therein, Qualmax
will merge with and into the Company, and the separate existence of Qualmax
will
cease; the Company will continue as the surviving corporation in the merger.
The
separate corporate existence of the Company, with all its rights, privileges
and
powers, will continue following the Merger.
Conditions
to the Obligations of Both Parties to Complete the Merger
The
obligation of the Company or Qualmax to effect the Merger is subject to the
satisfaction of the following conditions:
(a)
Exemption
from Registration
.
Either
(i) the shares of Common Stock to be issued to Qualmax as merger consideration
shall be “exempt securities” under Section 3(a)(10) of the Securities Act or
(ii) the Securities and Exchange Commission (the “SEC”) shall have declared
effective a registration statement on Form S-4 (the “Registration Statement”)
covering such shares, no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, and no similar proceeding in respect of this
Information Statement on Schedule 14C, shall have been initiated or threatened
in writing by the SEC.
(b)
Stockholder
Approval
.
The
Merger shall, to the extent applicable, have been approved by the requisite
vote
of the stockholders of each of Qualmax and the Company.
(c)
Governmental
Actions
.
There
shall not have been instituted and pending any action by any governmental
authority that is reasonably expected to result in an order, nor shall there
be
in effect any judgment, decree or order of any governmental authority,
either preventing the consummation of the Merger or compelling the Company
or any of its subsidiaries to dispose of or hold separate assets which are
material, in the aggregate, to the Company or its subsidiaries taken as a
whole.
(d)
Illegality
.
No
statute, rule, regulation, executive or other order, ruling or injunction shall
have been enacted, promulgated, entered, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal or that prohibits,
restrains or enjoins consummation of the Merger.
Conditions
to the Obligation of the Company to Complete the Merger
In
addition, the obligations of the Company to effect the Merger are also subject
to the following conditions:
(a)
Representations
and Warranties
.
Except
as set forth in the Merger Agreement the representations and warranties made
by
Qualmax as set forth in the Merger Agreement shall be true and correct as of
the
Effective Time.
(b)
Agreements
and Covenants
.
Qualmax
shall have performed or complied in all material respects with all agreements
and covenants required by the Merger Agreement to be performed or complied
with
by Qualmax on or prior to the Merger.
(c)
Consents
Obtained
.
Except
as set forth in the Merger Agreement, the Company shall have been provided
with
satisfactory evidence that all material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be
made, by Qualmax for the authorization, execution and delivery of the Merger
Agreement and the consummation by it of the transactions contemplated thereby
shall have been obtained and made by Qualmax.
(d)
Dissenting
Shares
.
Except
as set forth in the Merger Agreement, the number of Dissenting Shares shall
not
exceed five percent (5%) of the shares of Qualmax stock outstanding immediately
prior to the Merger.
(e)
No
Material Adverse Changes
.
There
shall not have occurred any material adverse change in the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations, results of operations or prospects of Qualmax, other
than
a change that is directly caused by the public announcement of, and the response
or reaction to, the Merger.
Conditions
to the Obligation of Qualmax to Complete the Merger
In
addition, the obligations of Qualmax to effect the Merger are also subject
to
the following conditions:
(a)
Representations
and Warranties
.
Except
as set forth in the Merger Agreement, the representations and warranties of
the
Company as set forth in the Merger Agreement shall be true and correct as of
the
Effective Time.
(b)
Agreements
and Covenants
.
The
Company shall have performed or complied in all material respects with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by the Company on or prior to the Merger.
(c)
Consents
Obtained
.
Except
as set forth in the Merger Agreement, Qualmax shall have been provided with
satisfactory evidence that all material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be
made, by the Company for the authorization, execution and delivery of the Merger
Agreement and the consummation by it of the transactions contemplated thereby
shall have been obtained and made by the Company.
Conversion
of Securities
In
connection with the Merger, each issued and outstanding share of common stock,
par value $0.001 per share, of Qualmax (“Qualmax Stock”) immediately prior to
the effective time (the “Effective Time”) of the Merger (excluding any shares of
Qualmax Stock held in the treasury immediately prior to the Effective Time,
which shall cease to be outstanding, be canceled and retired without payment
of
any consideration therefor, and shall cease to exist), will be converted into
a
number of shares of Common Stock determined by dividing (x) the total number
of
shares of Common Stock owned by Qualmax immediately prior to the Effective
Time
by (y) the total number of shares of Qualmax Stock issued and outstanding
immediately prior to the Effective Time (which ratio is subject to
adjustment based on any stock split, reverse split, or stock dividend (including
any dividend or distribution of securities convertible into Common Stock);
or
any reorganization, recapitalization, reclassification, readjustment, split
up,
combination or exchange of shares, or other like event with respect to the
Common Stock, in any case occurring prior to the Effective Time) (the “Exchange
Ratio”), and except as described below and provided for in the Merger Agreement,
and any other shares of capital stock or options, warrants or other securities
convertible or exercisable into shares of capital stock of Qualmax, whether
vested or unvested, shall automatically be cancelled and retired and shall
cease
to exist.
Additional
Agreements
Stockholders’
Actions
.
Each of
the Company and Qualmax has agreed to take, as promptly as practicable after
the
execution of the Merger Agreement, all reasonable actions necessary to cause
the
approval and authorization of the Merger
and
any
related agreements, instruments or certificates.
Exemption
from Registration
.
The Company shall file such documents and instruments as are required under
Oregon Law with respect to a request for a fairness hearing to be held by the
Department to consider the terms, conditions and fairness of the Merger. The
parties have agreed to use their respective commercially reasonable efforts
to
obtain approval of the Merger under Oregon law as promptly as practicable after
the filing of the hearing documents and to fully cooperate with each other
in
good faith to assist in such efforts.
If,
despite Qualmax’s and the Company’s commercially reasonable efforts to obtain
approval of the Merger under Oregon law the Department refuses to set a hearing
date or approve the Merger, then the Company has agreed to use all commercially
reasonable efforts to file, no event later than sixty (60) business days after
such refusal or rejection, a Registration Statement on Form S-4 with respect
to
the shares of Common Stock to be issued in the Merger and to use all reasonable
efforts to cause the Registration Statement to become effective as soon
thereafter as practicable.
Consents;
Approvals
.
Qualmax
and the Company each agreed to use reasonable best efforts to obtain and to
cooperate with one another in order to obtain all consents, waivers, approvals,
authorizations or orders, and to make all filings required in connection with
the authorization, execution and delivery of the Merger Agreement.
Notification
of Certain Matters
.
Qualmax
has agreed to give prompt notice to the Company, and the Company has agreed
to
give prompt notice to Qualmax, of the occurrence of any event which would
reasonably be expected to cause any representation or warranty set forth in
the
Merger Agreement to be materially untrue or inaccurate, or of any failure to
materially comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by such party under the Merger
Agreement.
Further
Action/Tax Treatment
.
The
parties have agreed to use all reasonable efforts to take all actions necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement, to obtain in a timely manner
all necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and otherwise to satisfy or cause to be satisfied
all
conditions precedent to its obligations under this Agreement.
In
addition, the parties have agreed to use their reasonable best efforts to cause
the Merger to qualify as a reorganization under the provisions of Section 368(a)
of the Code.
Public
Announcements
.
The
Company and Qualmax have agreed to consult with each other before issuing any
press release or making any written public statement with respect to the Merger
or this Agreement.
Stock
Rights
.
The
Company has agreed to take all action necessary immediately following the
Effective Time to provide that each outstanding Qualmax Stock Right shall
continue to have, and be subject to, the same terms and conditions set forth
in
the relevant Qualmax Stock Right Agreement immediately prior to the Effective
Time; except that (i) each Qualmax Stock Right will be exercisable for the
number of shares of Common Stock equal to the number of shares of Common Stock
that were issuable upon exercise of such Qualmax Stock Right, immediately prior
to the Effective Time, multiplied by the Exchange Ratio, rounded up to the
nearest whole number of shares of Common Stock, and (ii) the per share exercise
price for the Common Stock issuable upon exercise of such Qualmax Stock Right
will be equal to the exercise price per share of Qualmax Stock at which such
Qualmax Stock Right was exercisable immediately prior to the Effective Time,
divided by the Exchange Ratio, rounded down to the nearest whole cent (each
such
Qualmax Stock Right, as modified, an “
Adjusted
Stock Right
”).
In
addition, the Company has agreed to take all corporate action necessary to
reserve for issuance, as of the Effective Time, a sufficient number of shares
of
Common Stock for delivery upon exercise of the Adjusted Stock Rights and to
deliver to holders of Adjusted Stock Rights, upon the exercise of such options,
shares of Common Stock.
Not
later
than 30 days following the Effective Time, the Company (i) shall file with
the
SEC a registration statement on Form S-8 of the SEC (or any successor or
other appropriate form) with respect to the shares of Common Stock issuable
upon
the exercise of the Adjusted Stock Rights and shall use reasonable best efforts
thereafter to maintain the effectiveness of such registration statement and
(ii)
shall deliver to holders of the Adjusted Stock Rights a prospectus or
prospectuses relating to such registration statement and thereafter maintain
the
current status of such prospectus or prospectuses, until all of the Adjusted
Stock Rights have been exercised, expired or forfeited.
Prior
to
the Effective Time, the Company and Qualmax shall take all such reasonable
steps
as may be required to cause any dispositions of shares of Common Stock
(including derivative securities with respect to Common Stock) or acquisitions
of shares of Common Stock (including derivative securities with respect to
Common Stock) resulting from the transactions contemplated by this Agreement
by
each officer and director of Qualmax to be exempt under Rule 16b-3 promulgated
under the Exchange Act.
Compliance
with State Property Transfer Statutes
.
Qualmax
agrees that it shall use commercially reasonable efforts to comply promptly
with
all requirements of applicable state property transfer laws as may be required
by the relevant state agency and shall take all action reasonably necessary
to
cause the transactions contemplated hereby to be effected in compliance with
applicable state property transfer laws. Qualmax, after consultation with the
Company, shall determine which actions must be taken prior to or after the
Effective Time to comply with applicable state property transfer laws, except
where the failure to so comply will not materially affect the right to use
or
enjoy any applicable property after the Effective Time. Qualmax agrees to
provide the Company with any documents required to be submitted to the relevant
state agency prior to submission. The Company shall provide to Qualmax any
assistance reasonably requested by Qualmax with respect to such
compliance.
Termination
of the Agreement
The
Merger Agreement may be terminated at any time prior to the effective time
of
the Merger by either the board of directors of Qualmax or the Board of the
Company:
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·
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upon
mutual written consent by the board of directors of Qualmax and by
the
Board of the Company; or
|
|
·
|
except
as set forth in the Merger Agreement, if the Merger shall not have
been
consummated by June 1, 2008; or
|
|
·
|
if
a court of competent jurisdiction or a governmental authority shall
have
issued a nonappealable final order, decree or ruling or taken any
other
nonappealable final action having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger;
or
|
|
·
|
if
the stockholders of the Company do not approve the Merger;
or
|
|
·
|
if
the stockholders of Qualmax do not approve the
Merger.
|
The
Merger Agreement may be terminated at any time prior to the effective time
of
the Merger by the board of directors of Qualmax or by the Board of the
Company:
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·
|
any
of the representations and warranties of the other party as set forth
in
the Merger Agreement are or become inaccurate, which inaccuracy would
reasonably be expected, individually or in the aggregate, to have
a
Material Adverse Effect (as defined in the Merger Agreement);
or
|
|
·
|
the
other party has materially breached any of the covenants or agreements
on
the part of such party as set forth in the Merger Agreement.
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EMPLOYEES
As
of May
14, 2008, we had approximately 35 full-time employees and 2 part-time employees,
all based in our Eugene, Oregon headquarters (including outside sales and
remote
technical support staff reporting to management in Eugene). We consider our
employee relationships to be good. None of our employees are members of a
labor
union, and we have never experienced a work stoppage.
COMPETITION
The
markets for IP telephony products and services are extremely competitive
and
subject to rapid change. We are a small company in an industry dominated
by very
large companies that are better capitalized and, in comparison to us, have
greater sales, marketing, customer support, and technical resources, have
access
to more experienced management, can take advantage of larger economies
of scale,
and have much greater name recognition and reputation. We have been able
to
compete in this market due to our adaptability, the depth of industry experience
among our key managers, and the relatively low barriers to entry in the
VAR and
VoIP service provider businesses. We expect that the conditions that have
facilitated our entry into the VoIP industry will allow additional competitors,
including large companies as well as niche operators, to enter the market.
The
fundamental technology and computer hardware component of the IP telephony
service solution is readily available. Accordingly, relatively few barriers
to
entry exist in our business for companies with computer and network sales,
and
distribution and service provider experience. An increase in the number
or size
of our competitors could negatively affect the amount of business that
we obtain
and the prices that we can charge.
Competition
among resellers
.
Our
NWB
Networks distribution and sales business competes not only with small boutique
IT firms that have entered the market due to reduced costs of entry resulting
from various technological advances, but also with large, global companies,
including manufacturers who now compete against us to sell directly to
end
users. Although we offer our clients a range of services and support in
conjunction with a select product line at competitive prices, increased
competition may require us to further reduce prices, potentially reducing
profit
margins. We believe the current market trend favors larger, well-capitalized
specialty distributors and resellers who can afford to take advantage of
cost
savings in bulk purchases, foreclosure sales, and other large opportunities,
who
can afford to warehouse substantial amounts of inventory until profitable
opportunities arise, and who can afford large and skilled product service
and
support staffs. Nonetheless, new opportunities continue to arise in this
business, and we believe that our ability to quickly identify currently
popular
products to sell, and our experience with a diverse market of equipment
buyers
and sellers, including resellers and end users, gives us a continued competitive
edge over new competitors in the market.
We
believe that our new exclusive distribution relationship with TELES may
also
give us a competitive edge over other distributors and resellers. We believe
that TELES has well developed R&D and manufacturing capabilities, and we
believe that TELES has demonstrated its willingness and ability to adapt
its
products to changing market needs and specific opportunities, particularly
in
emerging VoIP markets in the Americas. We hope that, as our sales and support
teams continue to work closely with TELES product development teams, we
will be
able to provide products meeting the niche opportunities and new technology
opportunities that our sales staff and management team identify in emerging
markets. However, TELES products face stiff competition from a variety
of other
manufacturers, and while we consider TELES a well capitalized and well
managed
technology company, TELES remains a relatively small player in the industry
compared to organizations such as Cisco and Siemens. In addition, larger
telecom
service providers, particularly “tier 1” providers and government-sponsored
foreign providers, continue to develop their own internal products, potentially
competing with products they would otherwise buy from companies like TELES,
thus
competing with sales opportunities for products such as those manufactured
by
TELES.
Competition
among wholesale telecom service providers
.
Competition
in the wholesale VoIP service industry is intense and diverse, including
“tier
1” telecom companies in the U.S. and abroad, as well as smaller “tier 2”
carriers, and very small niche service providers. The NWB Telecom division
does
business with very large entities, including foreign tier 1 incumbent
providers, as well as a number of small niche providers in certain foreign
markets. As a result of deregulation, growth of the Internet and IP network
infrastructure generally, and development of more powerful, lower cost
VoIP
equipment, the price of entry into the VoIP service business has dramatically
decreased. Lower cost of entry has drawn a growing number of entrepreneurs
to
the industry and has driven down the cost of telecom services at both
the
wholesale and retail levels. As a result, both supply and demand have
skyrocketed, and although we see a growing number of customer and vendor
opportunities, we also see a growing number of aggressive competitors,
declining
prices, and declining technological barriers to entry.
NWB
Telecom competes principally on price and quality of service. The communications
industry, including VoIP, is highly competitive, rapidly evolving, and
subject
to constant technological change and intense marketing by providers with
similar
products and services. We expect that new competitors, including the
growth of
“gray market” operators (potentially including operators who arrange call
termination in a manner that bypasses the local telephone company), are
likely
to enter the communications industry, including the market for VoIP,
Internet,
and data services. Also, a number of large VoIP service providers appear
to be
aggressively seeking market share via acquisitions and competitive pricing.
We
believe the trend in this area is for increased competition to continue
to drive
down market prices and profit margins. Our ability to continue to compete
in
this market will depend upon our ability to secure more stable vendor
relationships, to implement a more stable network infrastructure capable
of
handling higher call volume and to continue to build long-term customer
relationships.
Our
U.S.
operations are headquartered in Eugene, Oregon, in leased commercial
premises in
two buildings, located at 340 W. 5
th
Avenue
and at 488 Lincoln Street. The condition of these leased premises is
good, and
we have recently made substantial tenant improvements to both premises.
The
principal terms and lease payment obligations are discussed in more
detail under
Item 7, “Financial Statements - Note K.”
The
Company is currently engaged in one legal proceeding in which a director,
officer, affiliate, beneficial holder of more than 5% of the Company’s
outstanding Common Stock (or an associate of the aforementioned) is a party
adverse to the Company. Specifically, the Company is involved in a legal
proceeding with BOS, which is the beneficial owner of 17.2% of the Company.
As
a
result of the reverse acquisition, the Company assumed the liabilities of
Qualmax. Qualmax was named as a defendant in certain litigation filed
in France before the Trade Tribunal of Nanterre against
BOS
by
Media
Partners International (“
MPI
,”
and
the litigation thereto, the “
MPI
Litigation
”),
a
former distributor of BOS, whose contract with BOS allegedly related to certain
distribution rights for the product division Qualmax purchased from BOS on
December 31, 2005. Pursuant to the asset purchase agreement between
Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless from
liability, without limitation, arising from the claims raised in the MPI
Litigation, and BOS has undertaken defense of Qualmax at BOS’s
expense. The litigation remains in its early stages.
Initial
hearings on a motion for change of venue were concluded in February 2007.
Additional hearings were conducted in late April 2007. The Company has been
preliminarily informed that a decision from the court to maintain venue in
France was made in September 2007, and that defendants have filed an appeal
of
that decision. 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.
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,”
“hope,” “intend,” “plan,” “envision,” “continue,” “target,” “contemplate,” or
“will” and similar words or phrases or comparable terminology. Forward-looking
statements involve substantial 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 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 any forward-looking statements to reflect new
information or the occurrence of unanticipated events or otherwise.
The
Company has a short operating history and is operating in a rapidly changing
industry environment, and its ability to predict results or the actual effect
of
future plans or strategies, based on historical results or trends or otherwise,
is inherently uncertain. While we believe that these forward-looking statements
are reasonable, they are merely 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, implied or suggested 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/A, filed with the SEC on May
13,
2008 (the “2007 10-KSB”), 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:
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•
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A downturn in the market
for, or supply
of, our core products and services, could
reduce
our
revenue and gross profit margin by placing downward pressure
on prices and
sales volume, and we may not accurately anticipate changing
supply and
demand conditions.
|
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•
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We have a limited backlog,
or “pipeline,”
of product and services sales, and we do not control the
manufacturing of
the core products we distribute and sell, exposing our future
revenues and
profits to fluctuations and risks of either supply interruptions
in areas
of high demand, or rapid declines in demand. Increased demand
has on
occasion exceeded our capacity, and we are taking steps,
including adding
new vendors and new routes, and utilizing new technologies,
to increase
our capacity to meet the
demand.
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•
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We
derive a relatively large amount of our revenue and gross profit
from
sales to a small number of customers, and from resale o products
and
services purchased from a small number of vendors. The interruption
of our
relationships with one or more of these key customers or vendors
could
negatively impact our gross profit, without a corresponding short-term
reduction in our expenses, negatively impacting our net
profits.
|
•
|
Changes
in laws or regulations, or regulatory practices, in the United
States and
internationally, may increase our costs or may prohibit continued
operations or entry into some areas of business. The market for
our
products and services is particularly subject to change resulting
from
foreign regulatory practices in South and Central America, and
Mexico.
|
•
|
The
limited availability of technically skilled employees in the VoIP
industry, especially in the Eugene, OR area, may affect our ability
to
grow and properly service our networks, which could be reasonably
expected
to negatively affect sales and profits. We rely upon a small number
of key
sales and management employees, and should one or more of them
depart the
company on short notice, the company may experience a short-teen
decline
in sales revenue until adequate replacements can be found and
trained.
|
|
We
have had recurring quarterly and annual losses and negative cash
flow,
potentially requiring us to either raise additional capital, increase
gross profits relative to total expenditures, 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 or otherwise increase profits sufficiently to reverse
our
negative cash flow, absent additional
capital.
|
•
|
If
we are successful in raising additional capital, it will likely
dilute
current shareholders
’
ownership.
|
We
may
not be able to effectively contain corporate overhead and other costs, including
the costs of operating a public company, relative to our profits and
cash.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR 2006 AND 2007 FISCAL
YEARS
|
General
The
following discussion and analysis provides information which management believes
is relevant to an assessment and understanding of our results of operations
and
financial operations and financial conditions. This discussion should be read
in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere herein, and in conjunction with o
ur
Annual
Report on Form 10-KSB, filed with the SEC on April 17, 2007 (the “2006 10-KSB”)
and our 2007 10-KSB, and our other prior filings with the
SEC.
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. effective July 1, 2007,
we are
no longer in the VoIP equipment research and development
(“
R&D
”) and manufacturing business, and instead
currently focus on two principal lines of business: (i) resale and distribution
of VoIP and other telephony equipment, and related professional services,
particularly as the exclusive North American distributor of products
manufactured by TELES AG Informationstechnologien
(“
TELES
”); and (ii) telephony service resale, direct
call routing and carrier support services. Our VoIP-related telecommunications
equipment distribution and resale business, formerly operated under the
divisional name “IP Gear,” is now operated under the divisional name
“
NWB Networks
.” Our wholesale international VoIP service
business, formerly operated under the name “IP Gear Connect,” is now operated
under the divisional name “
NWB Telecom
.” Both NWB
Networks and NWB Telecom are based in Eugene, Oregon.
The
following are certain key
industry or technical terms used throughout this Report in describing the
Company’s current business and in discussing its prospects in the VoIP equipment
and services market:
“
VoIP
,”
or
Voice over Internet Protocol, also called IP Telephony, Internet Telephony,
Broadband Telephony, Broadband Phone, Voice over Broadband or Voice over
Packet
Networks, is the routing of voice conversations over the Internet or through
any
other internet protocol (“
IP
”) based network.
“
GSM
” is short for Global System
for Mobile
Communications, a leading digital cellular system using narrowband TDMA (time
division multiple access) that has become a cellular standard in Europe and
Asia.
“IP
networks”
are telecommunication systems (consisting of transmission
lines or devices, and components including gateways, routers, switches, and
servers) by which a number of computers are connected together for the purpose
of communicating and sharing data and/or software applications. The fundamental
equipment components of IP networks, and the products we sell, include:
gateways
, enabling access to IP networks as a
translation unit between disparate telecommunications networks;
routers
and
switches
, to
direct data traffic on, to and from IP networks; and
servers
,
computers
that operate IP
communications software applications, process and store data traversing IP
networks, and provide computing functions to other computers.
“
IP
Telephony
” uses an IP network to perform voice communications that
have traditionally been conducted by conventional private branch exchange
(
PBX
) telephone systems, or “key systems” primarily used
in smaller telephone systems, used by enterprises and by the public switched
telephone network (PSTN). IP telephony uses IP network infrastructure, such
as a
local area network (LAN) or a wide area network ( WAN), to replace the telephony
functions performed by an organization’s PBX telephone system. “
IP
communications
” is a term generally used to describe data, voice,
and video communications using an IP network.
“
Convergence
” is a term generally used to describe the
manner in which voice and video communications technology is converging with
data communications technology onto the IP network.
Overview of
the NWB
Networks division (TELES product sales, VoIP equipment resale, refurbishing
and
distribution)
.
The
Company’s NWB Networks division
was historically operated under the names “Qualmax” and “Qualmax Professional
Services,” as well as “IP Gear,” as a distributor and value added reseller
(“
VAR
”) of new, used, and refurbished IP communications
equipment made by manufacturers such as Cisco, Quintum, Adtran and other
telephony industry leaders. Resale of third-party IP communications equipment
was Qualmax’s core legacy business, and the Company’s VAR business continues to
be a core revenue component. However, we have refocused our distribution,
sales
and support efforts on equipment manufactured by TELES. We continue to sell
other manufacturers’ equipment, but primarily in support of or complimentary to
the sales of TELES equipment.
Since
July 1, 2007, the Company has
been the exclusive distributor of TELES products in certain north American
markets (the United States, Canada, Mexico, all Caribbean nations, Guatemala
and
Honduras) pursuant to an exclusive distribution agreement. The Company currently
promotes and distributes TELES products in those markets, sells directly
to
large end-user customers and provides support and training services under
the
assumed business name “
TELES USA
.” The distribution
rights include those products previously manufactured by the Company under
the
IP Gear name (including the Claro and Quasar brands). TELES USA is part of
the
NWB Networks division, but because TELES sales represent a substantial and
growing part of our equipment reseller business we report TELES revenues
and
gross profits separate from the sale of other products below under “Results of
Operations.”
Overview of
the NWB
Telecom division (VoIP Telephony service provider)
.
The
Company’s NWB Telecom division
is a wholesale provider of VoIP termination service, connecting carrier-level
buyers and sellers of VoIP service, currently focused on international call
routing. We receive VoIP traffic from customers (originating carriers) who
are
interconnected to our network, and we route the VoIP traffic via IP networks
to
local service providers and terminating carriers in the destination countries
from whom we purchase completion or termination services. (Our vendors provide
the communications service to complete the calls within the destination
country.) We offer this service on a wholesale basis to carriers, VoIP
companies, telephony resellers, and other telecommunication service providers.
We are party to a number of reciprocal carrier agreements, through which
we both
buy from and sell to a carrier and set-off, or net out, the parties’ respective
fees for termination services. To the extent we sell VoIP equipment (through
the
NWB Networks division or its subdivision, TELES USA) to our VoIP termination
service providers, we may set-off accounts receivable for equipment against
accounts payable for communication services. We have call termination agreements
with local lower-tier service providers in Latin America, Europe, Asia and
Africa.
In
addition, although the Company’s
VoIP service business is currently entirely wholesale, management is identifying
and evaluating “bundled” VoIP service opportunities (“bundled” meaning the
offering of both VoIP equipment and VoIP connectivity service as a turnkey
VoIP
solution for small to medium size business entities
(“
SMEs
”)). The Company also evaluates a variety of other
opportunities in the VoIP service and support industry, but to date has remained
focused on its existing core businesses. As of the date of filing this Report,
we consider all such opportunities to be in the evaluation stage, and their
potential effect upon our revenues or profits is too speculative to
quantify.
Recent
Developments
The
following important Company
developments occurring in 2008 to date, and related prior developments,
are
described below.
P&S Spirit term
loan
.
On
and effective March 30, 2007, the
Company entered into a Term Loan and Security Agreement (the “
P&S
Term
Loan Agreement
” and the debt
obligation pursuant thereto, the “
P&S
Term
Loan
”) with P&S Spirit, LLC, a
Nevada limited liability company (“
P&S Spirit
”) in
the principal amount of $1,000,000. The P&S Term Loan proceeds were used by
the Company to repay all outstanding principal, interest and fees payable
to
Bank of America, N.A. (“
BoA
”) under the BoA Loan, and to
pay certain professional fees associated with preparation and negotiation
of the
P&S Term Loan Agreement. Reference is made to the Company’s Current Report
on Form 8-K filed with the SEC on April 5, 2007.
As
discussed below under “Repayment
of P&S Term Loan,” the P&S Term Loan was repaid in two payments, the
first in the amount of $500,000 in August 2007, and the second in the amount
of
$500,000 in February 2008.
The
principals of P&S Spirit
include Dr. Selvin Passen, who is a director of the Company as well as
a
shareholder of the Company and its former Chief Executive Officer, and
Dr. Jacob
Schorr, who is a director of the Company.
P&S Spirit credit
line
.
As
previously reported on the
Company’s Current Report on Form 8-K, filed with the SEC on June 6, 2007, on and
effective May 31, 2007, the Company entered into a Credit Line and Security
Agreement (the “
P&S Credit Line Agreement
” and the
debt obligation pursuant thereto, the “
P&S Credit
Line
”) with P&S Spirit. The maximum principal available under
the Credit Line is $1,050,000; the interest rate is 2% over the Prime Rate
(as
reported in The Wall Street Journal), payable in relation to the
then-outstanding principal; consecutive monthly payments of interest only
(payable in arrears) are required commencing July 1, 2007; and all unpaid
principal, interest and charges are due upon the maturity date of June
1, 2011.
Upon default, the entire P&S Credit Line amount (including accrued unpaid
interest and any fees) will be accelerated, and the Company would be required
to
pay any costs of collection. The P&S Credit Line Agreement includes certain
affirmative covenants, including, without limitation, a financial reporting
requirement (quarterly – 45 days after the close of a calendar quarter), and a
requirement that the Company maintain a ratio of current assets to current
liabilities of at least 1.2:1.0 and a total liabilities to tangible net
worth
ratio not exceeding 2.5:1.0. Both of these covenants had been met at of
June 30,
2008.
The
P&S Credit Line Agreement
grants P&S Spirit a security interest with respect to all of the Company’s
assets, but was subordinated to the P&S Term Loan. The P&S Credit Line
Agreement is also backed by a corporate Guaranty by Qualmax (which, pending
completion of the contemplated merger of Qualmax into the Company, holds
a
controlling interest in the Company), and a security interest in the assets
of
Qualmax (consisting solely of 298,673,634 shares of Common Stock). Copies
of the
P&S Credit Line Agreement, P&S Credit Line Note, Guaranty of Qualmax,
Collateral Pledge Agreement by Qualmax, and the Collateral Pledge Agreement
by
the Company, were included as Exhibits 10.1, 10.2, 10.3, 10.4, and 10.5,
respectively, to the Company’s Current Report on Form 8-K, filed with the SEC on
June 6, 2007.
On
February 21, 2008, the Company
drew $500,000 in principal on the P&S Credit Line in order to repay its
obligations under the P&S Term Loan Agreement, as discussed in more detail
below under “Repayment of P&S Term Loan.”
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, 2007 and
August 9, 2007, effective July 1, 2007 the Company sold its IP Gear, Ltd.
subsidiary to TELES pursuant to a Share Sale and Purchase Agreement (the
“
Final Agreement
”), following the execution of a
preliminary share sale and purchase agreement (the “
Preliminary
Agreement
”), both of which agreements are governed by the laws of
Germany. The Preliminary Agreement was executed on July 18, 2007, and the
Final
Agreement was approved by the Board and by TELES’ supervisory board on July 25,
2007. The closing of the purchase and sale took place on July 26, 2007,
immediately upon the execution of the Final Agreement. The share sale and
purchase has an effective date, for accounting purposes, of July 1,
2007.
Pursuant
to the Final Agreement, the
Company agreed to sell all of the outstanding capital stock of its wholly-owned
subsidiary, IP Gear, Ltd., to TELES for a purchase price consisting of:
(i) a
payment at closing of $1.5 million and (ii) an earn out equal to 10% of
TELES’
worldwide revenues (including revenues of TELES’ affiliates) within TELES’ CPE
Product Line (as defined in the Final Agreement) for a period of four years
after closing. The total earn out payments shall not be less than $750,000
(the
“
Minimum Earn Out
”), and shall not be subject to a cap.
The Minimum Earn Out shall be paid in quarterly amounts of $46,875, each
quarterly payment due within 90 days of the close of the quarter, commencing
with the quarter
ended
September 30, 2007. In the event the Minimum Earn Out is exceeded, the
differential amount is due within 90 days after June 30, 2008, 2009, 2010
and
2011.
With
certain exceptions, commencing
on the date of the closing and for a certain period of time (as specified
in the
Final Agreement), the Company agreed not to, or cause any of its affiliates
to,
engage in any research and development or manufacturing activities competitive
with those conducted by IP Gear, Ltd., and not to, or cause any of its
affiliates to, engage in the sale, distribution, marketing, and services
of
products that may compete with certain products of TELES. In addition,
with
certain exceptions, commencing one year after the date of closing, and
effective
for a period of time and within certain geographic regions relative to
the grant
of exclusive distribution and sale rights to the Company pursuant to the
partner
contract described below, the Company agreed not to, or cause any of its
affiliates to, engage in the sale, distribution, marketing and services
of
products that may compete with products of IP Gear, Ltd.
TELES
distributorship
.
In
accordance with the Final
Agreement, the Company and TELES entered into a contract (the
“
Partner Contract
”) relating to the promotion,
marketing, sale and support of certain products of TELES and IP Gear, Ltd.,
pursuant to which the Company became the exclusive distributor of TELES
and IP
Gear, Ltd. products in North America (including the United States, Canada,
Mexico, all Caribbean nations, Guatemala and Honduras), and a non-exclusive
distributor in other markets. In connection therewith, TELES granted the
Company
a marketing subsidy of 5% of total annual purchases and additional marketing
support 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 initial amount of $200,000 (the
“
Inventory Credit Line
”), which has been increased based
upon subsequent sales performance by the Company. The Company received
the first
year’s $200,000 marketing subsidy as follows; $100,000, received as of March
31,
2008 in the form of a credit memo offset against accounts payable to TELES
for
inventory purchases and $100,000, received as of December 31, 2007 in the
form
of a direct cash payment.
In
addition, TELES agreed to grant
the Company a loan in the amount of $1,000,000 pursuant to a separate loan
agreement to be finalized by the parties. For more details regarding the
TELES
loan, see “TELES loan agreement” below.
The
Preliminary Agreement was
included as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with
the SEC on July 20, 2007. The Final Agreement and the Partner Contract
were
included as Exhibit 10.1 and Annex 2 to Exhibit 10.1, respectively, to
the
Company’s Current Report on Form 8-K, filed with the SEC on August 1,
2007.
TELES
loan agreement
.
On
February 21, 2008, the Company
and TELES entered into a Term Loan and Security Agreement, effective February
15, 2008 (the “
TELES Loan Agreement
,” and the loan
thereunder, the “
TELES Loan
”), providing the Company a
loan of up to the principal amount of $1,000,000 (the
“
Commitment
”) pursuant to which, from time to time prior
to February 1, 2009 or the earlier termination in full of the Commitment,
the
Company may obtain advances from TELES up to the amount of the outstanding
Commitment. Amounts borrowed may not be reborrowed, notwithstanding any
payments
thereunder. The outstanding balance of the TELES Loan will be due and payable
on
or before February 1, 2012. The outstanding principal amount of the TELES
Loan
will be payable in 12 approximately equal quarterly installments commencing
May
1, 2009. Interest on the outstanding principal amount of the TELES Loan
is
payable quarterly commencing May 1, 2008, at an interest rate equal to
7% per
annum, compounded quarterly (subject to certain adjustments provided therein).
The description of the TELES Loan Agreement herein is qualified in its
entirety
by reference to the full text of such agreement, which is attached as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February
27, 2008.
Without
the prior written consent of
TELES, the TELES Loan may not be used, in whole or in part, to make any
payment
to P&S Spirit with respect to any obligations of the Company owed to P&S
Spirit pursuant to the P&S Credit Line Agreement.
The
obligation of TELES to make
advances to the Company pursuant to the TELES Loan Agreement is subject
to the
satisfaction of certain conditions, including without limitation, the
following:
•
|
|
The
merger of Qualmax with and into the Company shall have been consummated
in
all respects;
|
•
|
|
On
the closing date and on the date of each advance, no default
or event of
default under the P&S Credit Line Agreement and all related documents
thereto shall have occurred and remain outstanding or uncured;
and
|
|
|
|
•
|
|
All
obligations of the Company owed to P&S Spirit under the P&S Term
Loan Agreement shall have been irrevocably repaid in full, and
the
obligations under any related guarantees, stock pledges and other
loan
documents securing the obligations of the Company under the P&S Term
Loan Agreement shall have been released (on February 21, 2008,
effective
February 15, 2008, the Company repaid all outstanding obligations
under
the P&S Term Loan Agreement, in the amount of $500,000).
|
Pursuant
to the TELES Loan
Agreement, the Company agreed to comply with certain affirmative covenants,
including without limitation, the following:
•
|
|
maintaining
on a consolidated basis a ratio of current assets to
current liabilities of not less than 1.2:1; and
|
|
|
|
•
|
|
maintaining
on a consolidated basis a ratio of total indebtedness
(with certain exclusions) to tangible net worth of not greater
than
2.5:1.
|
Pursuant
to the TELES Loan
Agreement, the Company also agreed to comply with certain negative covenants,
including without limitation, the following:
•
|
|
issuing
or distributing any capital stock or other securities of
the Company without giving TELES at least 15 days prior written
notice;
and
|
|
|
|
•
|
|
amending,
modifying or waiving any provisions of the P&S Credit
Line Agreement.
|
The
TELES Loan Agreement grants
TELES a security interest with respect to all of the Company’s assets, subject
to the terms of the Inter-creditor Agreement (as defined below).
TELES
–
P&S Spirit Inter-creditor agreement
.
Also
on February 21, 2008, as
contemplated by the TELES Loan Agreement, the Company, TELES and P&S Spirit
entered into an Inter-creditor Agreement (the “
Inter-creditor
Agreement
”), effective February 15, 2008. The description of the
Inter-creditor Agreement herein is qualified in its entirety by reference
to the
full text of the agreement, which is set forth in the Company’s Current Report
on Form 8-K filed with the SEC on February 27, 2008.
Pursuant
to the Inter-creditor
Agreement, P&S Spirit and TELES have agreed to hold equal rights in and to
substantially all of the Company’s assets, with the exception of inventory
consisting of TELES products purchased by the Company from TELES (during
the
time that obligations are owed to TELES for such purchases under the Inventory
Credit Line).
Repayment
of P&S Spirit Term Loan
.
On
July 26, 2007, P&S Spirit
executed a consent to the sale of IP Gear, Ltd. by the Company (the
“
Lender Consent
”), which was filed with the SEC on
August 1, 2007 as Exhibit 10.2 to the Company’s Current Report on Form 8-K.
Pursuant to the P&S Term Loan Agreement and the P&S Credit Line
Agreement (together, the “
P&S Loans
” or
“
P&S Loan Agreements
,” as applicable) P&S Spirit
had a security interest in all of the Company’s shares of IP Gear, Ltd., and,
the sale of the Company’s IP Gear, Ltd. shares without P&S Spirit’s consent
would have triggered a repayment by the Company of all outstanding principal
under the P&S Loans.
In
accordance with the Lender
Consent, the Company agreed to pay to P&S Spirit from the proceeds of the
closing, as a partial repayment of principal of the P&S Term Loan, the sum
of $500,000. In addition, the Company agreed to pay P&S Spirit the
additional sum of $500,000, as a repayment of principal of the P&S Term
Loan, which amount is to be provided by P&S Spirit to the Company as a
credit line advance to be used by the Company solely to repay the outstanding
principal under the P&S Term Loan upon execution of the TELES Loan
Agreement. By the Lender Consent, subject to certain terms and conditions,
P&S Spirit consented to the sale of IP Gear, Ltd. to TELES in accordance
with the Final Agreement, released and terminated P&S Spirit’s security
interest in the IP Gear, Ltd. shares, and agreed that the consummation
of the
sale of IP Gear, Ltd. to TELES shall not be deemed or give rise to an event
of
default, penalty, or
increase under,
or termination of, the Loan Agreements and shall not,
except as otherwise provided in the Lender Consent, accelerate any amounts
owing
under the Loan Agreements or trigger any prepayment or give rise to any
payment
not otherwise required under the Loan Agreements, and shall not require
the
Company to provide any additional security, collateral, reserve, or payment
under the Loan Agreements.
On
February 21, 2008, the Company
drew $500,000 in principal on the P&S Credit Line in order to repay in full
its obligations under the P&S Term Loan Agreement.
On
May 22 and 23, 2008, in two equal
amounts, the Company drew an additional $550,000 (in total) in principal
on the
P&S Credit Line, leaving no further amounts available for borrowing by the
Company under the P&S Credit Line.
Execution
of merger agreement
.
On
February 18, 2008, the Company
and Qualmax entered into an agreement by which Qualmax will be merged with
and
into the Company (the “
Merger Agreement
” and the merger
contemplated thereby, the “
Merger
”). As of the date of
this filing, the Merger had not been completed. Reference is made to the
Company’s Current Report on Form 8-K, filed with the SEC on February 22, 2008,
and the Company’s Information Statement on Schedule 14C, filed with the SEC on
May 20, 2008, for additional information and documentation concerning the
Merger
and the Merger Agreement.
Results
of Operations
Company-wide
revenue and gross profit.
Company-wide
(referring to the Company’s two principal lines of business, on a consolidated
basis) revenue, gross profit and gross profit margin for the three month and
twelve month periods ended December 31, 2006 and December 31, 2007 were as
follows:
Company-wide
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$
|
4,503,226
|
|
$
|
5,263,256
|
|
|
16.88
|
%
|
Gross
Margin
|
|
|
6.28
|
%
|
|
15.09
|
%
|
|
|
|
Gross
Profit
|
|
$
|
282,669
|
|
$
|
794,235
|
|
|
180.98
|
%
|
Company-wide
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$
|
17,537,928
|
|
$
|
17,101,203
|
|
|
(2.49
|
%)
|
Gross
Margin
|
|
|
10.48
|
%
|
|
13.43
|
%
|
|
|
|
Gross
Profit
|
|
$
|
1,837,350
|
|
$
|
2,296,550
|
|
|
24.99
|
%
|
Company-wide
revenue and gross profit reflect the results of the Company’s initiatives in
both equipment and service divisions to improve gross margins and quality
of
accounts receivable, and to reduce slow moving inventory. As illustrated
in more
detail below, the revenue and gross margin increase is primarily due to TELES
sales, in our NWB Networks division, and certain niche VoIP service termination
routes in our NWB Telecom division. Revenue for 2007 is slightly lower than
revenue for 2006, reflecting declining revenues in the first three quarters
of
2007.
We
note
that the following percentages are based upon pro forma restated unaudited
financial statements for the period ended December 31, 2007, showing our
former
subsidiary, IP Gear, Ltd. (an Israeli company) listed as discontinued
operations; furthermore, the following percentages are based only upon the
operations of the Company’s continuing businesses in equipment distribution and
resale, and telephony service:
3 Months Ended
December 31, 2007
|
|
NWB Networks
|
|
NWB Telecom
|
|
Portion
of Company-Wide Revenue
|
|
|
36.06%
|
|
|
63.94%
|
|
Portion
of Company-Wide Gross Profit
|
|
|
36.56%
|
|
|
63.44%
|
|
12 Months Ended
December 31, 2007
|
|
NWB Networks
|
|
NWB Telecom
|
|
Portion
of Company-Wide Revenue
|
|
|
33.08%
|
|
|
66.92%
|
|
Portion
of Company-Wide Gross Profit
|
|
|
30.62%
|
|
|
69.38%
|
|
The
following discussion of gross profit on a per-business line or divisional
basis
provides additional information regarding each line’s
performance.
Sale
of IP Gear, Ltd. Subsidiary.
As
described above in Item 1, “Description of Business—Recent Developments—Sale of
IP Gear, Ltd. Subsidiary,” effective July 1, 2007, the Company sold its IP Gear,
Ltd. subsidiary to TELES, a VoIP equipment developer and manufacturer based
in
Berlin, Germany.
We
believe that IP Gear, Ltd.’s losses through the second quarter of 2007 reflect a
long-term trend in declining VoIP technology prices, and that to maintain
a
research and development and manufacturing business and regain profitability
would require a lengthy and sustained cost-cutting effort and substantial
interim financing. We did not know how long that process would take or whether
we would ultimately be able to adequately adjust our costs in relation to
our
competitors. Further, during the entire period of our ownership of IP Gear,
Ltd., even during periods of higher gross margin, IP Gear, Ltd. experienced
substantial operating losses and negative cash flow. Our ability to secure
sources of funding for IP Gear, Ltd.’s operating losses was tenuous, and we were
not able to identify a source of adequate additional capital on acceptable
terms, in the form of equity or debt, within the time needed for operations.
Faced with a rapidly deteriorating cash position, and limited prospects for
securing necessary capital on acceptable terms within the necessary timeframe,
we determined that the Company’s interests would be best served by a sale of our
IP Gear, Ltd. subsidiary.
We
further believe that the sale of IP Gear, Ltd. to TELES provides the Company
an
opportunity for growth and restructuring beyond the sale itself, in the form
of
the Partner Contract granting the Company exclusive rights (subject to certain
limitations) to distribute both TELES and IP Gear, Ltd. products in North
America. We recognize that by selling IP Gear, Ltd., we have given up the
opportunity to build upon a potentially valuable technology asset. However,
we
believe that the short-term cash flow and operational benefit to the Company,
and the potential long-term value represented by our new Partner Contract
with
TELES, make the transaction favorable to the Company.
NWB
Networks division revenue and gross profit.
Our
VoIP
and other telephony product distribution and resale business, which formerly
operated under the name “IP Gear,” has been renamed “
NWB
Networks
.”
NWB
Networks focuses on the distribution, resale and support of TELES and IP
Gear,
Ltd. products, and, on a more limited basis, continues to act as a niche
reseller of certain additional manufacturers’ products.
Revenue,
gross profit and gross profit margin for the NWB Networks division for the
three
month and twelve month periods ended December 31, 2006 and December 31, 2007
were as follows:
NWB Networks
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$
|
1,226,531
|
|
$
|
1,898,148
|
|
|
54.76
|
%
|
Gross
Margin
|
|
|
15.29
|
%
|
|
15.30
|
%
|
|
|
|
Gross
Profit
|
|
$
|
187,583
|
|
$
|
290,340
|
|
|
54.78
|
%
|
NWB Networks
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$
|
6,307,644
|
|
$
|
5,657,689
|
|
|
(10.30
|
)%
|
Gross
Margin
|
|
|
15.69
|
%
|
|
12.43
|
%
|
|
|
|
Gross
Profit
|
|
$
|
989,792
|
|
$
|
703,308
|
|
|
(28.94
|
)%
|
Sales
of
our legacy VoIP equipment resale business (VoIP access servers and related
equipment, other than TELES and IP Gear, Ltd. products) have stabilized,
albeit
at levels much lower than we experienced in the first half of 2006, and we
continue to struggle to maintain acceptable gross margins. As illustrated
below,
our legacy equipment business experienced a gross loss in the fourth quarter
of
2007, and slim margins for the year, reflecting both declining prices in
the
market for that product line and an effort to reduce or eliminate slow moving
legacy inventory.
We
believe that our margins are not likely to improve in these product lines
in the
near term. Our search for higher margin product lines has resulted in our
exclusive distributor status in relation to TELES and IP Gear, Ltd.
products.
We
believe that the consummation of the Partner Contract with TELES will play
a key
role in our initiative to improve revenues and margins in our NWB Networks
division. In particular, by acquiring IP Gear, Ltd., TELES now offers a more
comprehensive product line, and TELES products greatly expand the scope of
IP
Gear, Ltd.’s product line. Our relationship with TELES as an exclusive
distributor in North America provides an opportunity for the Company to sell
these products at an attractive margin, and to build a support and service
network for end-users and VARs. In light of the Partner Contract, we plan
to
focus sales and distribution growth on North American sales of TELES and
IP
Gear, Ltd. products and certain other complementary products, for as long
as we
maintain our distributor relationship with TELES, and to continue to pursue
other product sales opportunities on a more opportunistic basis, particularly
where complementary to sales of our core TELES and IP Gear, Ltd. product
line.
We are currently pursuing a sales and marketing campaign in North America,
in
concert with TELES, under the name “TELES USA.”
We
note
that the Company has been selling TELES equipment as an exclusive distributor
only since July, 2007, and therefore, has very limited experience and only
preliminary results on which to evaluate future potential. We therefore believe
that comparisons to revenues and gross profits in fiscal 2006 are not
meaningful.
The
table
below shows the portion of NWB Networks divisional revenue, gross profit
and
gross profit margin attributable to sales of TELES and IP Gear products,
in
comparison to sales of all other products in the NWB Networks division, during
2007 on a quarterly and year end basis. We note that the following figures
are
based upon financial statements for the year ended December 31, 2007, showing
our former subsidiary, IP Gear, Ltd. (an Israeli company) listed as discontinued
operations; the following figures are based only upon the operations of the
Company’s NWB Networks division continuing businesses in equipment distribution
and resale for the following periods in 2007:
2007
|
|
Revenue
NWB
Networks
(non-TELES)
|
|
Revenue
TELES
Products
only
|
|
Gross Profit
NWB
Networks
(non-TELES)
|
|
Gross
Profit
TELES
Products
only
|
|
Gross Profit
Margin
NWB
Networks
(non-TELES)
|
|
Gross Profit
Margin
TELES
Products
only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
1,127,874
|
|
$
|
100,150
|
|
$
|
89,100
|
|
$
|
19,903
|
|
|
7.90
|
%
|
|
19.87
|
%
|
Q2
|
|
$
|
833,349
|
|
$
|
133,642
|
|
$
|
45,743
|
|
$
|
66,651
|
|
|
5.49
|
%
|
|
49.87
|
%
|
Q3
|
|
$
|
1,018,220
|
|
$
|
546,306
|
|
$
|
42,650
|
|
$
|
149,038
|
|
|
4.18
|
%
|
|
27.28
|
%
|
Q4
|
|
$
|
557,059
|
|
$
|
1,341,089
|
|
$
|
(107,020
|
)
|
$
|
397,333
|
|
|
(19.21
|
)%
|
|
29.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
3,536,502
|
|
$
|
2,121,187
|
|
$
|
70,383
|
|
$
|
632,925
|
|
|
1.99
|
%
|
|
29.84
|
%
|
The
majority of our TELES product sales during 2007 have been of TELES’s mobile
fixed wireless application gateways, marketed under the iGate and vGate brands.
TELES mobile gateways provide a consolidated mobile, public switched telephone
network (PSTN) and VoIP gateway solution to carriers and corporate network
customers seeking to connect their private branch exchange (PBX) to mobile
and
VoIP services, and can be added to integrated services digital network (ISDN)
and internet protocol (IP) environments for least cost routing and other
advanced call routing and rerouting applications. While this has been a strong
market for us in the third and fourth quarters of 2007, it is possible that
market demand will slow in 2008, depending on whether VoIP networks in our
key
markets continue to expand using iGate and vGate technology.
Our
exclusive distribution rights for TELES equipment are contingent upon reaching
certain minimum purchase thresholds (meaning, the amount of TELES equipment
we
purchase from TELES). For the fifteen month period ending September 30, 2008,
our purchase threshold is $1,000,000. For the six month period from July
1 to
December 31, 2007, our TELES purchases (for inventory received from TELES)
totaled $1,798,162.
Initially,
our TELES sales orders outpaced TELES’s ability to supply certain products,
particularly fixed wireless gateways, potentially constraining sales growth
and
negatively impacting customer relations and brand acceptance. However, in
the
fourth quarter TELES was able to increase production and enable us to fill
a
number of pending orders. We believe time-to-market is a critical component
of
success for technology product sales, both in terms of product deliver and
product innovation. We remain confident in TELES’s ability to meet product
demand and continue product innovation in key product lines, such as fixed
wireless gateways and customer premise VoIP equipment. However, we do not
control production of any of the products we distribute and sell.
All
products purchased from TELES are per contract quoted in the base currency
used
by TELES, the Euro. New World Brands sells all goods to its customers in
U.S.
dollars. As a result, we have a certain exposure to currency risk to the
extent
the relative value of the U.S. dollar drops compared to the Euro. During
2007,
the Euro has increased substantially relative to the U.S. dollar, and it
appears
likely that the Euro may increase further. Currently our exposure to dollar
devaluation relative to the Euro is limited, because our purchase volume
from
TELES and other Euro-based manufacturers has been limited compared to our
total
revenue, because we do not maintain a substantial amount of Euro-based
inventory, and because we have been able adjust product pricing and limit
the
time between Euro-based product purchase and dollar-based product sale. However,
if we are successful in our efforts to increase TELES sales, and as we increase
our Euro-based inventory, our exposure to currency risk will
increase.
NWB
Telecom division revenue, gross profit and gross profit
margin.
Our
wholesale VoIP services business, which formerly operated under the name
“IP
Gear Connect,” has been renamed “
NWB
Telecom
.”
Revenue
and cost of goods for the IP Gear Connect division (wholesale VoIP services)
for
the three month and twelve month periods ended December 31, 2006 and December
31, 2007 were as follows:
NWB Telecom
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$
|
3,237,776
|
|
$
|
3,365,108
|
|
|
3.93
|
%
|
Gross
Margin
|
|
|
1.88
|
%
|
|
14.97
|
%
|
|
|
|
Gross
Profit
|
|
$
|
60,982
|
|
$
|
503,895
|
|
|
726.30
|
%
|
NWB Telecom
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Revenue
|
|
$
|
11,230,284
|
|
$
|
11,443,514
|
|
|
1.90
|
%
|
Gross
Margin
|
|
|
7.55
|
%
|
|
13.92
|
%
|
|
|
|
Gross
Profit
|
|
$
|
847,558
|
|
$
|
1,593,242
|
|
|
87.98
|
%
|
We
completed the initial implementation of our upgraded switching equipment
as of
September 30, 2007, thereby expanding the potential volume of our wholesale
telephony service offering, and our switching monitoring, support and service
capacity in order to adequately support expanding service volume. During
2007,
we have ramped-up sales and marketing efforts, and as illustrated below have
managed to increase revenue during 2007 while maintaining gross margins.
The
comparative fourth quarter periods reflect unusually low gross margins in
the
fourth quarter of 2006.
The
comparative periods’ increase in gross profit resulted primarily from our
continued focus on higher margin niche markets and longer-term vendor
relationships. Our increased selectivity in this area has also slowed revenue
growth to some degree. The focus on niche markets increases our reliance
on a
limited number of small telecom carriers operating in foreign countries,
whose
service may be prone to interruption, and may only be replaced at substantially
higher prices or lower quality. Our near-term plan for the NWB Telecom division
is to continue to pursue higher gross margin VoIP termination routes from
a more
diversified group of vendors at a revenue growth rate we are able to maintain
and finance. Our longer term plan includes expansion of our carrier and customer
service capabilities, by building on the network infrastructure and expertise
that we have developed by reselling termination routes.
During
2007, NWB Telecom has substantially expanded its purchases of foreign
termination service from a particular affiliated group of vendors. The following
table illustrates, for 2007, the revenue generated from resale of services
purchased from these vendors, and the related gross profit, in comparison
to the
costs and associated revenue of all other NWB Telecom vendors, and all other
Company vendors, during the period:
12 Months Ended
December 31, 2007
|
|
Significant Vendor
|
|
All Other NWB
Telecom Vendors
|
|
All Other Company-Wide
(including all other NWB
Telecom vendors)
|
|
Revenue
(generated from resale of service purchased from vendor)
|
|
$
|
4,067,559
|
|
$
|
7,375,955
|
|
$
|
13,033,644
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit (earned from resale of service purchased from
vendor)
|
|
$
|
1,075,824
|
|
$
|
517,417
|
|
$
|
1,220,726
|
|
Resale
of
termination routes purchased from the affiliated vendors represented 36.54%
of
revenue for the NWB Telecom division, 23.79% of the revenue for the entire
Company, and generated 67.52% of the gross profit of the NWB Telecom division
and 46.85% of the gross profit of the entire Company.
These
vendors are under no enforceable obligation to sell us service of any kind,
and
we are under no obligation to buy, other than on a week-by-week basis, and
we
are at risk of losing some or all of the services supplied by this vendor
with
little or no notice. Furthermore, we can have no assurance that these vendors
will continue to be able to offer services for sale at the gross margins
currently earned. Loss of this significant vendor, or of the high-margin
services we currently purchase, would result in an attendant loss of associated
gross profits, without a corresponding immediate decrease in related sales,
general and administrative costs, therefore negatively impacting our overall
profitability in the near term.
The
table
below shows the portion of NWB Telecom divisional revenue, gross profit and
gross profit margin, and NWB Telecom gross profit as a percentage of
Company-wide gross profit, during 2007 on a quarterly and year end basis.
We
note that the following figures are based upon financial statements for the
year
ended December 31, 2007, showing our former subsidiary, IP Gear, Ltd. (an
Israeli company) listed as discontinued operations:
2007
|
|
Revenue
NWB
Telecom
|
|
Gross
Profit
NWB
Telecom
|
|
Gross
Profit
Margin
NWB
Telecom
|
|
NWB
Telecom
Gross
Profit as
% of
Company-
wide
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
2,870,997
|
|
$
|
461,535
|
|
|
16.08
|
%
|
|
80.89
|
%
|
Q2
|
|
$
|
2,589,778
|
|
$
|
309,911
|
|
|
11.97
|
%
|
|
73.39
|
%
|
Q3
|
|
$
|
2,617,632
|
|
$
|
317,900
|
|
|
12.14
|
%
|
|
62.40
|
%
|
Q4
|
|
$
|
3,365,108
|
|
$
|
503,896
|
|
|
14.97
|
%
|
|
63.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
11,443,514
|
|
$
|
1,593,242
|
|
|
13.92
|
%
|
|
69.38
|
%
|
Summary:
company-wide and divisional revenue, gross profit and gross profit margin,
on a
quarterly and year-end basis, for 2007.
It
is the
goal of management to present the Company’s financial performance in as
comprehensive, accurate, and illustrative a manner as possible. To that end,
management continually seeks to improve the presentation of results of the
Company’s operations in this Item 6, “Management’s Discussion and Analysis or
Plan of Operation.” The following tables duplicate information presented
elsewhere in this Item 6, but we believe that the following presentation
of that
information may be helpful to shareholders and potential investors. As the
Company continues to develop its internal controls and financial records
keeping, we hope to be able to present this sort of consolidated and
comprehensive information for current periods in comparison to prior periods.
The following presentation is not intended to substitute for any other portion
of this Item 6.
2007
|
|
Revenue
Company
Wide
|
|
Revenue
NWB
Telecom
|
|
%
of Company-Wide
Revenue
|
|
Revenue
NWB
Networks (non-
TELES)
|
|
%
of Company-
Wide
Revenue
|
|
Revenue
TELES
Products
only
|
|
%
of Company-Wide
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
4,099,021
|
|
$
|
2,870,997
|
|
|
70.04
|
%
|
$
|
1,127,874
|
|
|
27.52
|
%
|
$
|
100,150
|
|
|
2.44
|
%
|
Q2
|
|
$
|
3,556,768
|
|
$
|
2,589,778
|
|
|
72.81
|
%
|
$
|
833,349
|
|
|
23.43
|
%
|
$
|
133,642
|
|
|
3.76
|
%
|
Q3
|
|
$
|
4,182,157
|
|
$
|
2,617,632
|
|
|
62.59
|
%
|
$
|
1,018,220
|
|
|
24.35
|
%
|
$
|
546,306
|
|
|
13.06
|
%
|
Q4
|
|
$
|
5,263,257
|
|
$
|
3,365,108
|
|
|
63.94
|
%
|
$
|
557,059
|
|
|
10.58
|
%
|
$
|
1,341,089
|
|
|
25.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
17,101,203
|
|
$
|
11,443,514
|
|
|
66.92
|
%
|
$
|
3,536,502
|
|
|
20.68
|
%
|
$
|
2,121,187
|
|
|
12.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Gross
Profit
Company Wide
|
|
|
Gross
Profit
NWB
Telecom
|
|
|
%
of Company-WideGross Profit
|
|
|
Gross
Profit
NWB
Networks (non-
TELES)
|
|
|
%
of Company-Wide
Gross
Profit
|
|
|
Gross
Profit
TELES
Products only
|
|
|
%
of Company-Wide Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
570,550
|
|
$
|
461,535
|
|
|
80.89
|
%
|
$
|
89,112
|
|
|
15.62
|
%
|
$
|
19,903
|
|
|
3.49
|
%
|
Q2
|
|
$
|
422,304
|
|
$
|
309,911
|
|
|
73.39
|
%
|
$
|
45,742
|
|
|
10.83
|
%
|
$
|
66,651
|
|
|
15.78
|
%
|
Q3
|
|
$
|
509,455
|
|
$
|
317,900
|
|
|
62.40
|
%
|
$
|
42,517
|
|
|
8.35
|
%
|
$
|
149,038
|
|
|
29.25
|
%
|
Q4
|
|
$
|
794,240
|
|
$
|
503,896
|
|
|
63.44
|
%
|
$
|
(106,989
|
)
|
|
(13.47
|
)%
|
$
|
397,333
|
|
|
50.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
2,296,550
|
|
$
|
1,593,242
|
|
|
69.38
|
%
|
$
|
70,383
|
|
|
3.06
|
%
|
$
|
632,925
|
|
|
27.56
|
%
|
2007
|
|
Gross
Profit
Margin
Company
Wide
|
|
Gross
Profit
Margin
NWB
Telecom
|
|
Gross
Profit
Margin
NWB
Networks
(non-TELES)
|
|
Gross
Profit
Margin
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
13.92%
|
|
|
16.08%
|
|
|
7.90%
|
|
|
19.87%
|
|
|
Q2
|
|
11.87%
|
|
|
11.97%
|
|
|
5.49%
|
|
|
49.87%
|
|
|
Q3
|
|
12.18%
|
|
|
12.14%
|
|
|
4.18%
|
|
|
27.28%
|
|
|
Q4
|
|
15.09%
|
|
|
14.97%
|
|
|
(19.21)%
|
|
|
29.63%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
13.43%
|
|
|
13.92%
|
|
|
1.99%
|
|
|
29.84%
|
|
|
Total
Company expenses.
Total
Company expenses (sales, marketing, general, and administrative) for the
three
and twelve month periods ended December 31, 2006 and 2007 were as
follows:
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Change
|
|
Total Expenses
|
|
$
|
1,811,074
|
|
$
|
1,269,545
|
|
|
(29.92
|
)%
|
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Total Expenses
|
|
$
|
4,065,361
|
|
$
|
4,214,422
|
|
|
3.66
|
%
|
The
substantial decrease in total expenses for the comparative three month period
is
due primarily to decreases in legal, accounting, and other professional fees,
related to 2006 restructurings and debt and equity offerings, litigation,
and
accounting services. However, total expenses increased slightly for the twelve
month period ending December 31, 2007 as compared to that ending December
31,
2006, reflecting: (i) higher legal, accounting, and professional fees during
the
nine month period ending September 30, 2007, as compared to the nine month
period ending September 30, 2006; (ii) increased sales and marketing costs
(including sales staff) during the twelve month period ending December 31,
2007,
as compared to the twelve month period ending December 31, 2006; and (iii)
migration during the third and fourth quarters of 2007 of the Company’s core
telecom service switching and routing operations to an outsource provider,
utilizing the outsource provider’s equipment rather than our own, resulting in
an increase in related expenses and a decrease in related capitalized
expenditures. We note that the above figures are based upon financial statements
for the periods ended December 31, 2007 and 2006, showing our former subsidiary,
IP Gear, Ltd. (an Israeli company), listed as discontinued operations; the
above
figures are based only upon the operations of the Company’s continuing
businesses in equipment distribution and resale, and telephony
service.
Interest.
Continuing
Operations Only
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Interest
|
|
$
|
32,073
|
|
$
|
19,859
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months Ended
December 31,
2006
|
|
|
12
Months Ended
December
31,
2007
|
|
Interest
|
|
$
|
178,967
|
|
$
|
129,346
|
|
The
change over both periods is due primarily to fluctuations in the principal
amount of the P&S Term Loan and the BoA Loan, and differences in interest
rates between the two loans. (The P&S Term Loan has been a smaller principal
amount at a lower interest rate than the BoA Loan.)
Amortization
and depreciation.
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Change
|
|
Continuing
Operations Only
|
|
$
|
296,110
|
|
$
|
416,441
|
|
|
40.64
|
%
|
Amortization
and depreciation for the Company for continuing operations increased in 2007
due
to increased depreciation reflecting increased capital investment during
prior
periods in switching, routing, and tracking equipment and technology utilized
in
relation to our NWB Telecom VoIP service business. Our U.S.-based operations
have a very limited amount invested in software technology, and as a result,
our
current amortization is negligible and not expected to increase in the near
term.
Net
loss
.
The
above
factors contributed to a net loss for the Company for both the three and
nine
month periods ended December 31, 2007. As a result of the sale of our IP
Gear,
Ltd. subsidiary to TELES, we are required to restate financials on a pro
forma
basis for years 2007 and 2006, showing our former subsidiary, IP Gear, Ltd.,
listed as discontinued operations, and separately reporting the results of
operations of the Company’s continuing businesses in equipment distribution and
resale, and telephony service. However, we believe that for a better
understanding of the impact of the IP Gear, Ltd. sale on our net losses,
it is
important to also consider the Company’s net losses reported to include the
losses generated by discontinued operations (meaning, including losses from
IP
Gear, Ltd.) in net losses generated by continuing operations. The Company’s net
losses for the three and twelve month periods ended December 31, 2007 and
2006,
shown both excluding and including discontinued operations, are as
follows:
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing Operations Only
|
|
$
|
(1,073,525
|
)
|
$
|
(581,883
|
)
|
|
|
12 Months Ended
December 31,
2006
|
|
12
Months Ended
December
31,
2007
|
|
Net
Loss From Continuing Operations Only
|
|
$
|
(2,278,660
|
)
|
$
|
(2,758,497
|
)
|
|
|
3 Months Ended
December 31, 2006
|
|
3 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing
and
Discontinued Operations
|
|
$
|
(2,163,109
|
)
|
$
|
(910,157
|
)
|
|
|
12 Months Ended
December 31, 2006
|
|
12 Months Ended
December 31, 2007
|
|
Net
Loss From Continuing
and
Discontinued Operations
|
|
$
|
(5,425,674
|
)
|
$
|
(6,703,186
|
)
|
The
difference between net loss from continuing operations only, as compared
to the
net loss for continuing and discontinued (meaning, IP Gear, Ltd.), illustrates
the impact of the Company’s former subsidiary, IP Gear, Ltd., on the Company’s
financial performance.
Following
is a summary of total company expenses, interest, amortization and depreciation,
and resultant net profit/loss, allocated among our two operating divisions,
NWB
Telecom and NWB Networks, and showing NWB Networks results for non-TELES
products and TELES products only. We note that the following figures are
based
upon financial statements for the periods ended December 31, 2007 and 2006,
showing our former subsidiary, IP Gear, Ltd. (an Israeli company), listed
as
discontinued operations.
2006
Continuing Operations
(1)
|
|
Company-
Wide
|
|
Corporate
Expenses
|
|
NWB
Telecom
|
|
NWB
Networks
(non-
TELES)
|
|
NWB
Networks
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
1,837,350
|
|
|
N/A
|
|
$
|
847,558
|
|
$
|
989,792
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
Expense
(2)
|
|
$
|
(4,138,286
|
)
|
$
|
(1,664,031
|
)
(3)
|
$
|
(1,451,158
|
)
|
$
|
(1,023,097
|
)
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
(178,967
|
)
|
$
|
(175,229
|
)
|
$
|
(3,697
|
)
|
$
|
(40
|
)
|
$
|
0
|
|
Depreciation/Amortization
|
|
$
|
(296,110
|
)
|
$
|
(125,198
|
)
|
$
|
(136,736
|
)
|
$
|
(34,175
|
)
|
$
|
0
|
|
Other
Income (Expense)
|
|
$
|
24,448
|
|
$
|
87,406
|
|
$
|
0
|
|
$
|
(62,958
|
)
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Net Profit (Loss) from Continuing Operations Only
|
|
$
|
(2,751,565
|
)
|
$
|
(1,877,052
|
)
|
$
|
(744,034
|
)
|
$
|
(130,478
|
)
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Continuing and Discontinued Operations
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(Loss) on Write Down of Discontinued Operations
|
|
$
|
(3,147,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss) on Disposition of Discontinued Operations
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Provision
|
|
$
|
472,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Net Profit (Loss) from Continuing and Discontinued
Operations
|
|
$
|
(5,425,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Continuing Operations
|
|
Company-
Wide
|
|
Corporate
Expenses
|
|
|
NWB
Telecom
|
|
NWB
Networks
(non-
TELES)
|
|
NWB
Networks
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
2,296,550
|
|
$
|
0
|
|
|
$
|
1,593,242
|
|
$
|
70,383
|
|
$
|
632,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
Expense
(2)
|
|
$
|
(4,214,422
|
)
|
$
|
(1,942,020
|
)
(3
)
|
|
$
|
(1,259,716
|
)
|
$
|
(620,720
|
)
|
$
|
(391,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
(129,346
|
)
|
$
|
(119,347
|
)
|
|
$
|
(9,409
|
)
|
$
|
(456
|
)
|
$
|
(134
|
)
|
Depreciation/Amortization
|
|
$
|
(416,441
|
)
|
$
|
(177,504
|
)
|
|
$
|
(236,519
|
)
|
$
|
(2,344
|
)
|
$
|
(73
|
)
|
Other
Income (Expense)
|
|
$
|
109,157
|
|
|
94,291
|
|
|
$
|
21,247
|
|
$
|
(6,381
|
)
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Net Profit (Loss) from Continuing Operations Only
|
|
$
|
(2,354,502
|
)
|
$
|
(2,144,280
|
)
|
|
$
|
108,845
|
|
$
|
(559,518
|
)
|
$
|
240,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Continuing and Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(Loss) on write down of discontinued operations
|
|
$
|
(3,949,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss) on disposition of discontinued operations
|
|
$
|
4,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Provision
|
|
$
|
(403,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Net Profit (Loss) from Continuing and Discontinued
Operations
|
|
$
|
(6,703,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
2006
is presented in a manner consistent with 2007 for comparison purposes,
showing the operations of our former subsidiary, IP Gear, Ltd.,
as
discontinued, even though the subsidiary’s operations were not
discontinued until 2007.
|
(2)
|
Includes
management’s determination of sales, general, and administrative expenses
directly allocable to each division or line of
business.
|
(3)
|
Includes
indirectly allocable expenses, which include, for example, legal,
and
accounting fees, costs of SEC compliance, costs of leasing and
operating
our facilities in Eugene, Oregon, and certain executive-level management
costs.
|
Liquidity
and Capital Resources
The
Company’s year-end cash balance and ratio of current assets to current
liabilities for the twelve month periods ending December 31, 2007 and 2006
are
indicated below:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,038,635
|
|
$
|
3,396,617
|
|
Current
Assets
|
|
$
|
4,562,198
|
|
$
|
7,511,470
|
|
Current
Liabilities
|
|
$
|
2,274,814
|
|
$
|
3,702,112
|
|
Current
Ratio (current assets to current liabilities)
|
|
|
2.17:1
|
|
|
2.03:1
|
|
Quick
Ratio (cash to current liabilities)
|
|
|
0.90:1
|
|
|
0.92:1
|
|
The
Company’s cash utilization rates (meaning, amount of cash used in operations)
for both Continuing Operations and Discontinued Operations for the twelve
months
ended December 31, 2007 and 2006 were, respectively, $6,220,155 and $5,425,674.
However, the Company’s cash utilization rate for Continuing Operations only for
the twelve months ending December 31, 2007 was $2,242,296. Because no
Discontinued Operations will occur in fiscal year 2008, as a result of the
sale
of our IP Gear, Ltd. subsidiary, we believe that our cash utilization rate
for
Continuing Operations is the relevant starting point for anticipating cash
utilization rates in fiscal year 2008.
Our
capital raised from loan financing remained unchanged in 2007, at $1,000,000.
As
a result of the partial loan repayment relating to the TELES Loan transaction
in
March, 2008, our loan financing proceeds have decreased in 2008 as of the
date
of this filing by $500,000. Capital raised from equity financing totaled
$1,000,000 in 2007 as compared to over $6,000,000 in 2006. We currently have
available to us $500,000 in additional debt financing from the P&S Credit
Line, and, contingent upon completion of the merger of Qualmax with and into
the
Company (among other contingencies), $1,000,000 in additional debt financing
from the TELES Loan.
Capital
expenditures.
The
Company’s primary investment in capital had been focused on funding the R&D
efforts of our IP Gear, Ltd. subsidiary. In the first six months of 2007,
the
Company made investments in this subsidiary, until it was sold on July 1,
2007.
These capital expenditures are referred to as “Discontinued Operations” in our
current financial statements. Capital expenditures by the Company for equipment
providing the infrastructure of our telecom services division, NWB Telecom
are
referred to as “Continuing Operations” in our current financial statements.
Capital expenditures of Continuing Operations for 2006 and 2007 also include
certain expenditures associated with equity-based financing activities. The
following chart provides a comparative representation of the capital
expenditures for Continuing Operations and Discontinued Operations during
2007
and 2006:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Capital
Expenditures, Continuing Operations
|
|
$
|
284,044
|
|
$
|
648,074
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures, Discontinued Operations
|
|
$
|
748,858
|
|
$
|
5,972,978
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization, Continuing Operations
|
|
$
|
406,152
|
|
$
|
296,110
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization, Discontinued Operations
|
|
$
|
1,157,308
|
|
$
|
1,868,492
|
|
Reasons
for reduced capital expenditures in 2007 as compared with 2006 primarily
include
the following:
|
·
|
As
a result of the sale of our IP Gear, Ltd. subsidiary, the Company
engaged
in no meaningful research and development activities during the
third and
fourth quarters of 2007; and
|
|
·
|
The
Company had no equity-based financing activities during the third
and
fourth quarters of 2007.
|
The
reduction in capital expenditures for Continuing Operations also reflects
a
larger investment during 2006 in telecommunications equipment used to operate
our NWB Telecom division. In the beginning of the third quarter of 2007,
we
began the process of migrating our core telecom service switching and routing
operations to an outsource service provider, utilizing the service provider’s
equipment rather than purchasing our own. As a result, our costs related
to the
service provider are treated as a current expense, while the costs related
to
investment in our in-house switching and routing equipment have been largely
capitalized.
Future
capital needs.
We
believe that as a result of the sale of IP Gear, Ltd., our negative cash
flow
and operating losses should decrease substantially over the course of the
fiscal
year, and we believe the Company is now better positioned to achieve positive
cash flow. As a result, management expects that in 2008 it will be able to
focus
its efforts on restructuring operations and cultivating high margin sales
opportunities, rather than on raising capital and restructuring to fund or
reduce operational losses.
Current
capital expenditures are primarily related to investments made in the switching
equipment used to operate the NWB Telecom division. We may also increase
capital
expenditures in relation to expansion of our customer and vendor support
and
training services provided in relation to sales and distribution of TELES
products. However, the Company’s ability to pursue its current business plan
without seeking additional debt- or equity-based capital is entirely dependent
on management’s ability to increase revenues at current or higher gross margins,
while decreasing overall Company costs relative to gross profits, and there
can
be no assurance that current market conditions will continue or that management
will achieve its goals. In addition, management may recommend seeking additional
debt- or equity-based capital to grow or maintain current operations, including
without limitation additional build-out of our VoIP services network and
infrastructure, or to pursue new lines of business or ventures, if market
conditions appear to support additional investment.
Technology
As
of
December 31, 2006, our balance sheet reflected a value for our IP Gear, Ltd.
subsidiary’s proprietary Claro technology. As discussed in “Note
B—Sale of Discontinued Operations—IP Gear, Ltd.” to the Company’s financial
statements appearing in Item 7 of this Form 10-KSB), as a result of the sale
of
our IP Gear, Ltd. subsidiary, as of June 30, 2007, we began accounting for
this
asset as sold.
Since
selling our IP Gear, Ltd. subsidiary, we have focused our investment in
technology on our NWB Telecom VoIP service business, through the purchase
or
lease of switching and routing equipment, and the expansion of our technical
staff and support contractors. We expect to continue to invest in the expansion
of our NWB Telecom business, including potentially the implementation of
new or
enhanced billing and tracking software, and additional technical support
and
service staff. In addition, we expect to expand the customer support services
offered by our NWB Networks division, by investing in additional staff and
equipment. However, at this time, our investment in technology does not include
the development of significant proprietary intellectual property.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR QUARTERS ENDED JUNE 30,
2008
AND MARCH 31, 2008
Management
Changes
Noah
Kamrat, formerly our President and Chief Operations Officer, resigned
from those
positions effective January 24, 2008, in order to assume the position
of Chief
Technology Officer. M. David Kamrat, who also serves as Chief Executive
Officer
and a director, assumed the duties of President, and Shehryar Wahid,
who also
serves as Chief Financial Officer, Secretary, Treasurer, and a director,
assumed
the duties of Chief Operations Officer. These changes to key management
positions are intended to address a potential void in our management
team
resulting from the sale of our IP Gear, Ltd. subsidiary. Upon the sale
of our IP
Gear, Ltd. subsidiary,
we
divested
ourselves of our R&D and manufacturing business, and as a result lost the
core
of
our
in-house
technology expertise in the VoIP industry, particularly with respect
to new
products and emerging trends in VOID network equipment and its deployment.
Noah
Kamrat is particularly well suited to assuming the role of Chief Technology
Officer due to his depth and breadth of experience selling and operating
VoIP
service networks, and selling, developing, and deploying VoIP technology
equipment. We believe that, in the role of Chief Technology Officer,
Mr. Kamrat
will be able to better position the Company to take advantage of emerging
product and service trends, and enable the Company to work closely with
TELES to
identify and serve emerging markets and uses for TELES and IP Gear, Ltd.
products.
Results
of Operations
Company-wide
revenue and gross profit
.
Company-wide
(referring to the Company’s two principal lines of business, on a consolidated
basis) revenue, gross profit and gross profit margin for the three and
six month
periods ended June 30, 2008 and 2007, were as follows:
Revenue
|
|
|
|
|
|
|
|
Company-Wide
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
4,099,021
|
|
$
|
5,080,949
|
|
|
23.96
|
%
|
June
30
|
|
$
|
3,556,769
|
|
|
6,603,386
|
|
|
85.66
|
%
|
September
30
|
|
$
|
4,182,157
|
|
|
n/a
|
|
|
n/a
|
|
December
31
|
|
$
|
5,263,257
|
|
|
n/a
|
|
|
n/a
|
|
Year-to-Date
June 30
|
|
$
|
7,655,790
|
|
$
|
11,684,335
|
|
|
52.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
Company-Wide
|
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
570,550
|
|
$
|
704,391
|
|
|
23.46
|
%
|
June
30
|
|
$
|
422,310
|
|
|
1,324,944
|
|
|
213.74
|
%
|
September
30
|
|
$
|
509,455
|
|
|
n/a
|
|
|
n/a
|
|
December
31
|
|
$
|
794,240
|
|
|
n/a
|
|
|
n/a
|
|
Year-to-Date
June 30
|
|
$
|
992,860
|
|
$
|
2,029,335
|
|
|
104.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit Margin
|
|
|
|
|
|
|
|
|
|
|
Company-Wide
|
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
13.92
|
%
|
|
13.86
|
%
|
|
-0.43
|
%
|
June
30
|
|
|
11.87
|
%
|
|
20.06
|
%
|
|
69.00
|
%
|
September
30
|
|
|
12.18
|
%
|
|
n/a
|
|
|
n/a
|
|
December
31
|
|
|
15.09
|
%
|
|
n/a
|
|
|
n/a
|
|
Year-to-Date
June 30
|
|
|
12.97
|
%
|
|
17.37
|
%
|
|
33.92
|
%
|
Company-wide
revenue and gross profit reflect the results of the Company’s initiatives in
both equipment and service divisions to improve gross margins and quality
of
accounts receivable, and to reduce slow moving inventory. As illustrated
in more
detail below, the revenue and gross margin increase reflects continued
revenue
and gross margin growth of TELES sales in our NWB Networks division, and
a
short-term recovery from recent supply interruptions in certain niche VoIP
service termination routes in our NWB Telecom division.
We
note
that the following percentages are based upon pro forma restated unaudited
financial statements for the three and six month periods ended June 30,
2007 and
2008, 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:
|
|
|
NWB
Networks
|
|
NWB
Telecom
|
|
|
|
as
Portion of Company-Wide
|
|
as
Portion of Company-Wide
|
Revenue
|
|
|
Revenue
|
|
Revenue
|
for
3 Months Ending and
|
|
|
|
|
Year-to-Date
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
29.96
|
%
|
|
40.20
|
%
|
|
70.04
|
%
|
|
59.80
|
%
|
June
30
|
|
|
27.19
|
%
|
|
40.19
|
%
|
|
72.81
|
%
|
|
59.81
|
%
|
September
30
|
|
|
37.41
|
%
|
|
n/a
|
|
|
62.59
|
%
|
|
n/a
|
|
December
31
|
|
|
36.06
|
%
|
|
n/a
|
|
|
63.94
|
%
|
|
n/a
|
|
Year-to-Date
June 30
|
|
|
28.67
|
%
|
|
40.19
|
%
|
|
71.33
|
%
|
|
59.81
|
%
|
|
|
|
NWB
Networks
|
|
NWB
Telecom
|
|
|
|
as
Portion of Company-Wide
|
|
as
Portion of Company-Wide
|
Gross
Profit
|
|
|
Gross
Profit
|
|
Gross
Profit
|
for
3 Months Ending and
|
|
|
|
|
Year-to-Date
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
19.11
|
%
|
|
53.12
|
%
|
|
80.89
|
%
|
|
46.88
|
%
|
June
30
|
|
|
26.61
|
%
|
|
57.18
|
%
|
|
73.39
|
%
|
|
42.82
|
%
|
September
30
|
|
|
37.60
|
%
|
|
n/a
|
|
|
62.40
|
%
|
|
n/a
|
|
December
31
|
|
|
36.56
|
%
|
|
n/a
|
|
|
63.44
|
%
|
|
n/a
|
|
Year-to-Date
June 30
|
|
|
22.30
|
%
|
|
55.77
|
%
|
|
77.70
|
%
|
|
44.23
|
%
|
The
discussion below of gross profit on a per-business line or divisional basis
provides additional information regarding each line’s performance.
Sale
of IP Gear, Ltd. subsidiary
.
As
described above in “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.
In
mid-2007 we determined that IP Gear, Ltd.’s losses through the second quarter of
2007 reflected a long-term trend in declining VoIP technology prices, and
that
maintaining a research and development and manufacturing business and regaining
profitability would require a lengthy and sustained cost-cutting effort
and
substantial interim financing. We did not know how long that process would
take
or whether we would ultimately be able to adequately adjust our costs in
relation to our competitors. Further, during the entire period of our ownership
of IP Gear, Ltd., even during periods of higher gross margin, IP Gear,
Ltd.
experienced substantial operating losses and negative cash flow. Our ability
to
secure sources of funding for IP Gear, Ltd.’s operating losses was tenuous, and
we were not able to identify a source of adequate additional capital on
acceptable terms, in the form of equity or debt, within the time needed
for
operations. Faced with a rapidly deteriorating cash position, and limited
prospects for securing necessary capital on acceptable terms within the
necessary timeframe, we determined that the Company’s interests would be best
served by a sale of our IP Gear, Ltd. subsidiary.
The
sale
of IP Gear, Ltd. to TELES also provides the Company an opportunity for
growth
and restructuring beyond the sale itself, in the form of the Partner Contract
granting the Company exclusive rights (subject to certain limitations)
to
distribute both TELES and IP Gear, Ltd. products in North America. We recognize
that by selling IP Gear, Ltd., we have given up the opportunity to build
upon a
potentially valuable technology asset. However, we believe that the short-term
cash flow and operational benefit to the Company, and the potential long-term
value represented by our new Partner Contract with TELES, make the transaction
favorable to the Company.
NWB
Networks division revenue and gross profit
.
Our
VoIP
and other telephony product distribution and resale business, which formerly
operated under the name “IP Gear,” has been renamed
“
NWB
Networks.
”
NWB
Networks focuses on the distribution, resale and support of TELES and IP
Gear,
Ltd. products, and, on a more limited basis, continues to act as a niche
reseller of certain additional manufacturers’ products.
Revenue,
gross profit and gross profit margin for the NWB Networks division for
the three
and six month periods ended June 30, 2007 and 2008 were as follows:
Revenue
|
|
|
|
|
|
|
|
|
|
NWB
Networks
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
1,228,024
|
|
$
|
2,042,400
|
|
66.32
|
%
|
June
30
|
|
$
|
966,991
|
|
|
2,653,742
|
|
174.43
|
%
|
September
30
|
|
$
|
1,564,526
|
|
|
n/a
|
|
n/a
|
|
December
31
|
|
$
|
1,898,148
|
|
|
n/a
|
|
n/a
|
|
Year-to-Date
June 30
|
|
$
|
2,195,015
|
|
$
|
4,696,142
|
|
113.95
|
%
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
NWB
Networks
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
109,015
|
|
$
|
374,174
|
|
243.27
|
%
|
June
30
|
|
$
|
112,393
|
|
|
757,605
|
|
574.04
|
%
|
September
30
|
|
$
|
191,555
|
|
|
n/a
|
|
n/a
|
|
December
31
|
|
$
|
290,313
|
|
|
n/a
|
|
n/a
|
|
Year-to-Date
June 30
|
|
$
|
221,408
|
|
$
|
1,131,779
|
|
411.19
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit Margin
|
|
|
|
|
|
|
|
|
|
NWB
Networks
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
8.88
|
%
|
|
18.32
|
%
|
106.31
|
%
|
June
30
|
|
|
11.62
|
%
|
|
28.55
|
%
|
145.70
|
%
|
September
30
|
|
|
12.25
|
%
|
|
n/a
|
|
n/a
|
|
December
31
|
|
|
15.29
|
%
|
|
n/a
|
|
n/a
|
|
Year-to-Date
June 30
|
|
|
10.09
|
%
|
|
24.10
|
%
|
138.85
|
%
|
Revenues
of our legacy VoIP equipment resale business (VoIP access servers and related
equipment, other than TELES and IP Gear, Ltd. products) continued to reflect
a
declining market for these products at acceptable gross margins. As illustrated
below, our legacy equipment business
experienced
a 33.7% decline in the first quarter of 2008 compared to the first quarter
of
2007, and
continued
to decline in the second quarter of 2008, reflecting declining prices in
the
market for legacy and refurbished products, a continued effort to reduce
or
eliminate slow moving legacy inventory, and the Company’s decision to focus more
of its resources on the TELES equipment line. Gross profits in our legacy
equipment business also
substantially
decreased in the first quarter of 2008 as compared to the first quarter
of 2007.
While gross profits
continue
to remain low, they have increased over recent quarters reflecting recent
efforts to eliminate slow-moving inventory.
We
believe that our margins are not likely to materially improve in our non-TELES
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 (and a non-exclusive distributor elsewhere)
provides an opportunity for the Company to sell these products at attractive
margins, and to build a support and service network for end-users and VARs.
In
light of the Partner Contract, we plan to focus sales and distribution
growth on
North American sales of TELES and IP Gear, Ltd. products and certain other
complementary products, for as long as we maintain our distributor relationship
with TELES, and to continue to pursue other product sales opportunities
on a
more opportunistic basis, particularly where complementary to sales of
our core
TELES and IP Gear, Ltd. product line. We are currently pursuing a sales
and
marketing campaign in concert with TELES, under the name “TELES USA,” with
activity in the United States, Canada and Mexico, to increase recognition
of the
TELES brand in key industry segments.
The
table
below shows the portion of NWB Networks divisional revenue, gross profit
and
gross profit margin attributable to sales of TELES and IP Gear products,
in
comparison to sales of all other products in the NWB Networks division,
during
2007 and 2008 year-to-date on a quarterly and year end basis. We note that
the
following figures are based upon financial statements 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 and 2008:
|
|
2007
NWB
Networks Revenue
|
|
2007
NWB
Networks
Revenue
|
|
|
|
2008
NWB
Networks
Revenue
|
|
2008
NWB
Networks
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-
TELES
|
|
TELES
only
|
|
non-
TELES
|
|
|
TELES
only
|
|
|
|
|
non-
TELES
|
|
|
TELES
only
|
|
non-
TELES
|
|
|
TELES
only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
1,127,874
|
|
$
|
100,150
|
|
91.84
|
%
|
|
8.16
|
%
|
|
Q1
|
|
$
|
748,150
|
|
$
|
1,294,250
|
|
36.63
|
%
|
|
63.37
|
%
|
Q2
|
|
$
|
833,349
|
|
$
|
133,642
|
|
86.18
|
%
|
|
13.82
|
%
|
|
Q2
|
|
|
340,896
|
|
|
2,312,847
|
|
12.85
|
%
|
|
87.15
|
%
|
Q3
|
|
$
|
1,018,220
|
|
$
|
546,306
|
|
65.08
|
%
|
|
34.92
|
%
|
|
Q3
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
n/a
|
|
Q4
|
|
$
|
557,059
|
|
$
|
1,341,089
|
|
29.35
|
%
|
|
70.65
|
%
|
|
Q4
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
3,536,502
|
|
$
|
2,121,187
|
|
62.51
|
%
|
|
37.49
|
%
|
|
2008
|
|
$
|
1,089,046
|
|
$
|
3,607,097
|
|
23.19
|
%
|
|
76.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
NWB
Networks
Gross
Profit
|
|
2007
NWB
Networks Gross
Profit
Margin
|
|
|
|
2008
NWB
Networks
Gross
Profit
|
|
2008
NWB
Networks
Gross
Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-
TELES
|
|
TELES
only
|
|
non-
TELES
|
|
|
TELES
only
|
|
|
|
|
non-
TELES
|
|
TELES
only
|
|
non-
TELES
|
|
|
TELES
only
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
89,112
|
|
$
|
19,903
|
|
7.90
|
%
|
|
19.87
|
%
|
|
Q1
|
|
$
|
15,342
|
|
$
|
358,832
|
|
2.05
|
%
|
|
27.73
|
%
|
Q2
|
|
$
|
45,742
|
|
$
|
66,651
|
|
5.49
|
%
|
|
49.87
|
%
|
|
Q2
|
|
|
26,962
|
|
|
730,643
|
|
7.91
|
%
|
|
31.59
|
%
|
Q3
|
|
$
|
42,517
|
|
$
|
149,038
|
|
4.18
|
%
|
|
27.28
|
%
|
|
Q3
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
n/a
|
|
Q4
|
|
$
|
(106,989
|
)
|
$
|
397,333
|
|
(19.21
|
)%
|
|
29.63
|
%
|
|
Q4
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
70,382
|
|
$
|
632,925
|
|
1.99
|
%
|
|
29.84
|
%
|
|
2008
|
|
$
|
42,304
|
|
$
|
1,089,475
|
|
3.88
|
%
|
|
30.20
|
%
|
The
majority of our TELES product sales since the sale of out IP Gear, Ltd.
subsidiary have been of TELES’s mobile fixed wireless application gateways,
marketed under the iGate and vGate product lines. TELES mobile gateways
provide
a consolidated mobile, public switched telephone network (PSTN) and VoIP
gateway
solution to carriers and corporate network customers seeking to connect
their
private branch exchange (PBX) to mobile and VoIP services, and can be added
to
integrated services digital network (ISDN) and internet protocol (IP)
environments for least cost routing and other advanced call routing and
rerouting applications. While this has remained a strong market for us
in the
first quarter of 2008, it is possible that market demand will slow in the
near
future, depending on whether VoIP networks in our key markets continue
to expand
using iGate and vGate technology.
Our
exclusive distribution rights for TELES equipment are contingent upon reaching
certain minimum purchase thresholds (meaning, the amount of TELES equipment
we
purchase from TELES). For the fifteen month period ending September 30,
2008,
the purchase threshold was $1,000,000.
For
the
nine month period from July 1, 2007 to March 31, 2008, our TELES purchases
(for
inventory received from TELES) totaled approximately $3,282,384.
For
the
twelve month period from July 1, 2007 to June 30, 2008, our TELES purchases
(for
inventory received from TELES) totaled approximately $4.8 million.
Initially,
our TELES sales orders outpaced TELES’s ability to supply certain products,
particularly fixed wireless gateways, potentially constraining sales growth
and
negatively impacting customer relations and brand acceptance. However,
towards
the end of the first quarter of 2008 TELES was able to increase production
and
enable us to fill a number of pending orders, and we did not experience
material
supply delay on shortages in the second quarter. We believe time-to-market
is a
critical component of success for technology product sales, both in terms
of
product delivery and product innovation. We remain confident in TELES’s ability
to meet current product demand and continue product innovation in key product
lines, such as fixed wireless gateways and customer premise VoIP equipment.
However, we do not control production of any of the products we distribute
and
sell.
All
products purchased from TELES are per contract quoted in the base currency
used
by TELES, the Euro. NWB Networks 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. For more
than
the past year, the Euro has increased substantially relative to the U.S.
dollar,
and it appears likely that the Euro may increase further. Currently our
exposure
to dollar devaluation relative to the Euro is limited, but as our purchase
volume from TELES and other Euro-based manufacturers increases relative
to our
total revenue, and as the amount of our Euro-based inventory on hand increases,
our exposure to currency risk will increase.
NWB
Telecom division revenue, gross profit and gross profit margin
.
Our
wholesale VoIP services business, which formerly operated under the name
“IP
Gear Connect,” has been renamed “
NWB
Telecom
.”
Revenue
and cost of goods for the IP Gear Connect division (wholesale VoIP services)
for
the three and six month periods ended June 30, 2007 and 2008 were as
follows:
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
2,870,997
|
|
|
$
|
3,038,548
|
|
|
5.84
|
%
|
June
30
|
|
$
|
2,589,778
|
|
|
|
3,949,644
|
|
|
52.51
|
%
|
September
30
|
|
$
|
2,617,632
|
|
|
|
n/a
|
|
|
n/a
|
|
December
31
|
|
$
|
3,365,108
|
|
|
|
n/a
|
|
|
n/a
|
|
Year-to-Date
June 30
|
|
$
|
5,460,775
|
|
|
$
|
6,988,192
|
|
|
27.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
461,535
|
|
|
$
|
330,216
|
|
|
-28.45
|
%
|
June
30
|
|
$
|
309,911
|
|
|
|
567,339
|
|
|
83.07
|
%
|
September
30
|
|
$
|
317,900
|
|
|
|
n/a
|
|
|
n/a
|
|
December
31
|
|
$
|
503,896
|
|
|
|
n/a
|
|
|
n/a
|
|
Year-to-Date
June 30
|
|
$
|
771,446
|
|
|
$
|
897,555
|
|
|
16.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
|
|
|
|
|
|
|
|
|
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
16.08
|
%
|
|
|
10.87
|
%
|
|
-32.40
|
%
|
June
30
|
|
|
11.97
|
%
|
|
|
14.36
|
%
|
|
19.97
|
%
|
September
30
|
|
|
12.14
|
%
|
|
|
n/a
|
|
|
n/a
|
|
December
31
|
|
|
14.97
|
%
|
|
|
n/a
|
|
|
n/a
|
|
Year-to-Date
June 30
|
|
|
14.13
|
%
|
|
|
12.84
|
%
|
|
-9.13
|
%
|
The
comparative periods’ increase in gross profit resulted primarily from higher
revenues and a short-term recovery from the loss of one of our key suppliers
in
the first quarter. We remain focused on higher margin niche markets and
longer-term vendor relationships, and our increased selectivity has slowed
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 periods ended June 30, 2008, NWB Telecom continued to rely
upon
a concentration of foreign termination service from two vendors (and their
affiliates). The following table illustrates, for the three month periods
ended
June 30, 2008 and March 31, 2008, the revenue generated from resale of
service
purchased from these two 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
|
|
|
|
June
30, 2008
|
|
Two
Significant Vendors
|
Revenue
(generated from resale of service purchased from vendors)
|
|
$
|
3,092,883
|
|
Gross
Profit (earned from resale of service purchased from
vendors)
|
|
$
|
412,158
|
|
Revenue
as Portion of NWB Telecom Division Revenue
|
|
|
78.31
|
%
|
Revenue
as Portion of Company-Wide Revenue
|
|
|
46.84
|
%
|
Gross
Profit as Portion of NWB Telecom Division Profit
|
|
|
72.65
|
%
|
Gross
Profit as Portion of Company-Wide Profit
|
|
|
20.31
|
%
|
3 Months Ended
March 31, 2008
|
|
Two Significant Vendors
|
Revenue
(generated from resale of service purchased from vendors)
|
|
$
|
2,410,899
|
|
Gross
Profit (earned from resale of service purchased from
vendors)
|
|
$
|
201,231
|
|
Revenue
as Portion of NWB Telecom Division Revenue
|
|
|
79.34
|
%
|
Revenue
as Portion of Company-Wide Revenue
|
|
|
47.45
|
%
|
Gross
Profit as Portion of NWB Telecom Division Revenue
|
|
|
60.94
|
%
|
Gross
Profit as Portion of Company-Wide Revenue
|
|
|
28.57
|
%
|
We
remain
at risk of interruption of supply of certain high-margin termination routes
from
one of the two significant vendors, potentially negatively impacting revenue
and
gross profits for the NWB Telecom division. We can identify the risk of
supply
interruptions from these and other vendors, and we believe it is likely
that
supply interruptions will recur, but we
are
not
able to forecast such interruptions with any degree of certainty. To mitigate
this risk we continue to seek to increase the number and diversity of vendors,
but also to continue to improve the quality and stability of supply. However,
our revenues and gross profits remain subject to risk of supply fluctuations,
and under current circumstances we are unable to predict the timing or
severity
of such fluctuations.
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 daily or weekly 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.
We
also
experienced a customer concentration during the three months ending June
30,
2008. The following table illustrates, for the three month period ended
June 30,
2008, the revenue generated from sales of NWB Telecom services purchased
by our
largest customer, and the related gross profit, in comparison to the gross
profit and associated revenue of all other NWB Telecom customers during
the
period:
3
Months Ended
|
|
|
|
|
June
30, 2008
|
|
Significant
Customer
|
|
|
|
Revenue
(generated from resale of service to customer)
|
|
$
|
1,545,072
|
|
Revenue
as Portion of NWB Telecom Division Revenue
|
|
|
39.12
|
%
|
Revenue
as Portion of Company-Wide Revenue
|
|
|
22.10
|
%
|
This
customer is under no enforceable obligation to continue to purchase services
from us in any particular quality or quantity, and we are under no obligation
to
sell, other than on a daily or weekly basis. The market for the type of
service
we provide to this customer is extremely price-competitive, and we can
have no
assurance that if we are able to continue to provide services to this customer,
we will continue to earn our current level of gross profits. Loss of this
significant customer 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.
Summary:
company-wide and divisional revenue, gross profit and gross profit margin,
on a
quarterly and year-end basis, for 2008 year to date
.
The
following tables duplicate information presented elsewhere in this Item
2, but
we believe that the following presentation of that information in a summary
format may be helpful to shareholders and potential investors. Reference
is made
to similar tables showing quarterly and year end results of operations
for the
year ending December 31, 2007, in the Company’s Form 10-KSB/A filed with the SEC
on May 13, 2008, under Item 6, “Management’s Discussion and Analysis or Plan of
Operation — Summary: company-wide and divisional revenue, gross profit and gross
profit margin, on a quarterly and year-end basis, for 2007.” The following
presentation is not intended to substitute for any other portion of this
Item
2.
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
NWB
|
|
%
of
|
|
|
NWB
|
|
%
of
|
|
|
|
Revenue
|
|
Revenue
|
|
Company-
|
|
|
Networks
|
|
Company-
|
|
|
Networks
|
|
Company-
|
|
|
|
Company
|
|
NWB
|
|
Wide
|
|
|
(non-
|
|
Wide
|
|
|
(TELES
|
|
Wide
|
|
2008
|
|
Wide
|
|
Telecom
|
|
Revenue
|
|
|
TELES)
|
|
Revenue
|
|
|
only)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
5,080,949
|
|
$
|
3,038,548
|
|
59.80
|
%
|
|
$
|
748,150
|
|
14.72
|
%
|
|
$
|
1,294,250
|
|
25.47
|
%
|
Q2
|
|
|
6,603,386
|
|
|
3,949,644
|
|
59.81
|
%
|
|
|
340,896
|
|
5.16
|
%
|
|
|
2,312,847
|
|
35.03
|
%
|
Q3
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
Q4
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
11,684,335
|
|
$
|
6,988,192
|
|
59.81
|
%
|
|
$
|
1,089,046
|
|
9.32
|
%
|
|
$
|
3,607,097
|
|
30.87
|
%
|
|
|
|
|
|
|
|
|
%
of
|
|
|
Gross
|
|
%
of
|
|
|
Gross
|
|
%
of
|
|
|
|
Gross
|
|
Gross
|
|
Company-
|
|
|
Profit
NWB
|
|
Company-
|
|
|
Profit
NWB
|
|
Company-
|
|
|
|
Profit
|
|
Profit
|
|
Wide
|
|
|
Networks
|
|
Wide
|
|
|
Networks
|
|
Wide
|
|
|
|
Company
|
|
NWB
|
|
Gross
|
|
|
(non-
|
|
Gross
|
|
|
(TELES
|
|
Gross
|
|
2008
|
|
Wide
|
|
Telecom
|
|
Profit
|
|
|
TELES)
|
|
Profit
|
|
|
only)
|
|
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
704,390
|
|
$
|
330,216
|
|
46.88
|
%
|
|
$
|
15,342
|
|
2.18
|
%
|
|
$
|
358,832
|
|
50.94
|
%
|
Q2
|
|
|
1,324,944
|
|
|
567,339
|
|
42.82
|
%
|
|
|
26,962
|
|
2.03
|
%
|
|
|
730,643
|
|
55.15
|
%
|
Q3
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
Q4
|
|
|
n/a
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
|
|
n/a
|
|
n/a
|
|
Year
|
|
$
|
2,029,334
|
|
$
|
897,555
|
|
44.23
|
%
|
|
$
|
42,304
|
|
2.08
|
%
|
|
$
|
1,089,475
|
|
53.69
|
%
|
|
|
|
|
|
|
|
|
Gross
Profit Margin
|
|
|
|
|
|
|
Gross
Profit Margin
|
|
|
Gross
Profit Margin
|
|
|
NWB
Networks
|
|
|
Gross
Profit Margin
|
|
2008
|
|
Company
Wide
|
|
|
NWB
Telecom
|
|
|
(non-TELES)
|
|
|
(TELES
only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
13.86
|
%
|
|
10.87
|
%
|
|
2.05
|
%
|
|
27.73
|
%
|
Q2
|
|
20.06
|
%
|
|
14.36
|
%
|
|
7.91
|
%
|
|
31.59
|
%
|
Q3
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Q4
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Year
|
|
17.37
|
%
|
|
12.84
|
%
|
|
3.88
|
%
|
|
30.20
|
%
|
Total
Company expenses
.
Total
Company expenses (sales, marketing, general and administrative) for the
following periods ended June 30, 2007 and 2008 were as follows:
Total
Company Expenses
for
3 Months Ending and Year-to-Date
Continuing
Operations Only
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
1,129,526
|
|
$
|
1,550,777
|
|
37.29
|
%
|
June
30
|
|
|
1,095,310
|
|
|
1,529,051
|
|
39.60
|
%
|
Year
to Date June 30
|
|
$
|
2,224,836
|
|
$
|
3,079,829
|
|
38.43
|
%
|
The
substantial increase in total expenses for the comparative three month
periods
is due primarily to increases in bad debt write-offs, trade show and travel,
legal and litigation, increased payroll and accounting services. We note
that
the above figures are based upon financial statements for the periods ended
June
30, 2008 and 2007, segregating the 2007 figures for our former subsidiary,
IP
Gear, Ltd. (an Israeli company), 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
.
Interest
(Company wide)
for
3 Months Ending and Year-to-Date
Continuing
Operations Only
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
51,082
|
|
$
|
17,515
|
|
-65.71
|
%
|
June
30
|
|
|
32,026
|
|
|
18,130
|
|
-43.39
|
%
|
Year
to Date June 30
|
|
$
|
83,108
|
|
$
|
35,645
|
|
-57.11
|
%
|
The
change over both periods is due primarily to fluctuations in the principal
amount of the P&S Term Loan, the P&S Credit Line and the BoA Loan, and
differences in interest rates between the loans. (The P&S Term Loan and the
P&S Credit Line have been smaller principal amounts at a lower interest rate
than the BoA Loan.)
Amortization
and depreciation
.
Amortization
and Depreciation (Company wide)
for
3 Months Ending and Year-to-Date
Continuing
Operations Only
|
|
2007
|
|
2008
|
|
Change
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
108,547
|
|
$
|
116,280
|
|
7.12
|
%
|
June
30
|
|
|
107,613
|
|
|
142,165
|
|
32.11
|
%
|
Year
to Date June 30
|
|
$
|
216,160
|
|
$
|
258,445
|
|
19.56
|
%
|
Amortization
and depreciation for the Company for continuing operations increased in
the
second quarter of 2008 as a reflection of the steadily increasing capital
investment of the company in switching, routing, and tracking equipment
and
technology utilized in relation to our NWB Telecom VoIP service business.
Our
U.S.-based operations have had 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 the three and six
month
periods ended June 30, 2008. 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 2007, 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 periods
ended 2008 and 2007, shown both excluding and including discontinued operations,
are as follows:
Continuing
Operations Only
Net
Loss (Company wide)
for
3 Months Ending and Year-to-Date
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
(530,517
|
)
|
|
$
|
(833,121
|
)
|
|
-57.04
|
%
|
June
30
|
|
|
(661,079
|
)
|
|
|
(141,900
|
)
|
|
78.54
|
%
|
Year
to Date
|
|
$
|
(1,191,596
|
)
|
|
$
|
(975,020
|
)
|
|
18.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
and Discontinued Operations
Net
Loss (Company wide)
for
3 Months Ending and Year-to-Date
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
(1,049,217
|
)
|
|
$
|
(833,121
|
)
|
|
20.60
|
%
|
June
30
|
|
|
(4,012,738
|
)
|
|
|
(141,900
|
)
|
|
96.46
|
%
|
Year
to Date
|
|
$
|
(5,061,955
|
)
|
|
$
|
(975,020
|
)
|
|
80.74
|
%
|
The
difference between net loss from continuing operations only, as compared
to the
net loss for continuing and discontinued (meaning, IP Gear, Ltd.), illustrates
the impact of the Company’s former subsidiary, IP Gear, Ltd., on the Company’s
financial performance. The impact on net loss resulting from the sale of
IP
Gear, Ltd., is also illustrated, in part, above in “Part I. Financial
Information—Item 1. Financial Statements—Note G—Discontinued
Operations.”
Following
is a summary of total company expenses, interest, amortization and depreciation,
other income/expense, and resultant net profit/loss, allocated among our
two
operating divisions, NWB Telecom and NWB Networks, and showing NWB Networks
results for the six month period ending June 30, 2008:
|
|
Company-
|
|
|
|
|
|
|
NWB
|
|
|
NWB
|
|
Jan
1 - June 30, 2008
|
|
Wide
|
|
|
Corporate
|
|
|
Telecom
|
|
|
Networks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
2,029,335
|
|
|
|
n/a
|
|
|
$
|
897,556
|
|
|
$
|
1,131,780
|
|
SG&A
Expense
(1)
|
|
$
|
(3,079,828
|
)
|
|
$
|
(1,457,042
|
)
(2)
|
|
$
|
(975,625
|
)
|
|
$
|
(647,161
|
)
|
Interest
|
|
$
|
(35,645
|
)
|
|
$
|
(28,078
|
)
|
|
$
|
(7,541
|
)
|
|
$
|
(26
|
)
|
Depreciation/Amortization
|
|
$
|
(258,445
|
)
|
|
$
|
(88,930
|
)
|
|
$
|
(169,652
|
)
|
|
$
|
137
|
|
Other
Income (Expense)
|
|
$
|
75,472
|
|
|
$
|
60,675
|
|
|
$
|
14,774
|
|
|
$
|
23
|
|
2008
Net Loss
|
|
$
|
(975,020
|
)
|
|
$
|
(1,396,368
|
)
|
|
$
|
(63,295
|
)
|
|
$
|
484,643
|
|
(1)
|
|
Includes
management’s determination of sales, general and administrative expenses
directly allocable to each division or line of
business.
|
|
|
|
(2)
|
|
Includes
indirectly allocable expenses, which include, for example, legal
and
accounting fees, costs of SEC compliance, costs of leasing and
operating
our facilities in Eugene, Oregon, and certain executive-level
management
costs.
|
Liquidity
and Capital Resources
The
Company’s year-end cash balance and ratio of current assets to current
liabilities as of December 31, 2007 and June 30, 2008 are as
follows:
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,038,635
|
|
$
|
1,396,696
|
Current
Assets
|
|
$
|
4,562,197
|
|
$
|
4,951,788
|
Current
Liabilities
|
|
$
|
2,274,814
|
|
$
|
2,987,408
|
Current
Ratio (current assets to current liabilities)
|
|
|
2.01:1
|
|
|
1.66:1
|
Quick
Ratio (cash and accounts receivable to current
liabilities)
|
|
|
1.35:1
|
|
|
0.94:1
|
The
Company’s cash utilization rates (meaning, amount of cash used in operations)
for both Continuing Operations and Discontinued Operations for the six
months
ended June 30, 2008 and 2007 were, respectively, $(641,939) and $(1,977,579).
However, the Company’s cash utilization rate for Continuing Operations only for
the six months ending June 30, 2008 and 2007 was $(641,938) and $(537,900)
is a
more direct comparison of the change in our cash position year over year.
The
biggest element of differentiation between the two years’ numbers is the amount
of funds raised from the issue of debt or equity. There was over $200,000
more
in cash inflow from these sources in 2007 than in 2008. We actually were
better
off by approximately $300,000 in change in cash from operations in 2008
than in
2007. The cash needed to fund operations has significantly reduced compared
to
the same period a year ago. However, the company’s liquidity or ability to pay
its current obligations from current assets or exclusively from cash has
reduced
compared to the same time a year ago as indicated in the ratios
above.
Our
ability to draw on additional capital resources has reduced in 2008 from
the
same time in 2007 due to the company having drawn fully on one if its credit
facilities. We borrowed a net $550,000 during the first six months of 2008
and
have used all of our facility with P & S Spirit. No capital was raised in
the period from equity sources. We still have the full amount of the second
of
our lines of credit, the TELES Loan which we have not yet drawn any funds
on.
Its availability to us is contingent upon the completion of the Qualmax
merger.
Capital
expenditures.
In
2008
New World Brands increased it investment in increased switching capacity
for its
NWB Telecom unit. In the past, the Company’s primary investment in capital had
been focused on funding the R&D efforts of our IP Gear, Ltd. subsidiary. In
the first six months of 2007, the Company made investments in this subsidiary,
until it was sold on July 1, 2007. These capital expenditures are referred
to as
“Discontinued Operations” in our current financial statements. Capital
expenditures by the Company for equipment providing the infrastructure
of our
telecom services division, NWB Telecom, are referred to as “Continuing
Operations” in our current financial statements. Capital expenditures of
Continuing Operations for 2007 also include certain expenditures associated
with
equity-based financing activities. The following chart provides a comparative
representation of the capital expenditures and disposals for Continuing
Operations over the last six quarters:
Capital
Expenditures of Continuing Operations of New World
Brands
|
|
|
|
|
|
Additions
and Disposals over the Last Six Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
2007
|
|
|
142,810
|
|
|
-
|
|
|
|
142,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2
|
|
2007
|
|
|
1,809
|
|
|
(12,609
|
)
|
|
|
(10,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
|
|
2007
|
|
|
20,449
|
|
|
(95,730
|
)
|
|
|
(75,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4
|
|
2007
|
|
|
227,314
|
|
|
-
|
|
|
|
227,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
2008
|
|
|
147,746
|
|
|
(60,928
|
)
|
|
|
86,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2
|
|
2008
|
|
|
272,400
|
|
|
(1,606
|
)
|
|
|
270,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparative
Six Month Ending June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
144,619
|
|
|
(12,609
|
)
|
|
|
132,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
420,146
|
|
|
(62,534
|
)
|
|
|
357,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
(%)
|
|
|
|
|
|
|
|
|
170.90
|
%
|
|
The
Company has been steadily increasing the amount invested in capital expenditures
for continuing operations over the last six quarters. An increase of almost
double our 2007 investment reflects our decision to increase total switching
capacity and also incorporates hardware and software we have acquired to measure
and improve the quality of our services. The dispositions represent the
replacement of older technology with newer equipment and/or equipment that
is
better suited to our business’ needs. We are committed to funding the NWB
Telecom unit for its capital needs to maintain its position as a leading
edge
VOIP telecom carrier. A significant portion of those funds have already
been
invested and we are starting to see some return in the 3 months ended June
30,
2008 and feel that it will continue into future quarters.
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 in 2008, and we believe
the
Company is now better positioned to achieve positive cash flow. As a result,
management expects that in 2008 it will be able to focus its efforts on
restructuring operations and cultivating high margin sales opportunities,
rather
than on raising capital and restructuring to fund or reduce operational
losses.
Current
capital expenditures are primarily related to investments made in the switching
equipment used to operate the NWB Telecom division. We may also increase
capital
expenditures in relation to expansion of our customer and vendor support
and
training services provided in relation to sales and distribution of TELES
products. However, the Company’s ability to pursue its current business plan
without seeking additional debt- or equity-based capital is entirely dependent
on management’s ability to increase revenues at current or higher gross margins,
while decreasing overall Company costs relative to gross profits, and there
can
be no assurance that current market conditions will continue or that management
will achieve its goals. In addition, management may recommend seeking additional
debt- or equity-based capital to grow or maintain current operations, including
without limitation additional build-out of our VoIP services network and
infrastructure, or to pursue new lines of business or ventures, if market
conditions appear to support additional investment.
Technology
Since
selling our IP Gear, Ltd. subsidiary, we have focused our investment in
technology on our NWB Telecom VoIP service business, through the purchase
or
lease of switching and routing equipment, and the expansion of our technical
staff and support contractors. We expect to continue to invest in the expansion
of our NWB Telecom business, including potentially the implementation of
new or
enhanced billing and tracking software, and additional technical support
and
service staff. In addition, we expect to expand the customer support services
offered by our NWB Networks division, by investing in additional staff
and
equipment. However, at this time, our investment in technology does not
include
the development of significant proprietary intellectual
property.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are
subject to the risk of fluctuating interest rates in the normal course of
business, primarily as a result of our short-term borrowing and investment
activities, which generally bear interest at variable rates. We invest cash
balances in excess of operating requirements in short-term securities, generally
with maturities of 90 days or less. In addition, our credit facility provides
for borrowings which bear interest at variable rates based on the prime rate.
We
believe that the effect, if any, of reasonably possible near-term changes
in
interest rates on our financial position, results of operations and cash
flows
should not be material.
Foreign
currency fluctuations may affect the prices of our products and impact our
gross
profit. Our prices for TELES products are denominated in Euros, but otherwise
our sales prices are primarily denominated in U.S. Dollars. Our revenues
are
therefore affected by fluctuations in the Euro/Dollar exchange rate. To the
extent that the Dollar continues to lose value relative to the Euro, our
pricing
strength and gross margins will be negatively affected: the currency of most
of
our customers and our fixed costs (Dollars) would become less valuable relative
to the currency of our primary equipment vendor, TELES (Euros).
NO
CHANGE IN NAME, BUSINESS, JOBS, MANAGEMENT OR PHYSICAL
LOCATION
The
address of the Company and Qualmax is 340 West Fifth Avenue, Eugene, Oregon
97401, and the telephone number is (541) 868-2900. The Merger will not result
in
any change in name, headquarters, business, jobs, management, location of any
of
the Company’s offices or facilities, number of employees, assets, liabilities or
net worth (other than the costs which are incident to the Merger, which are
immaterial). Following the Merger, the Company’s management and members of the
Company’s Board will remain in the same positions they currently hold with the
Company. In addition, the Company’s certificate of incorporation and bylaws will
not change as a result of the Merger. The Company will not enter into any new
employment agreements with the executive officers, directors or employees of
the
Company. Following the Merger, the terms and conditions of all employee benefit,
stock option and employee stock purchase plans of the Company will remain the
same as currently in effect. Other employee benefit arrangements of the Company
will also be continued by upon the terms and subject to the conditions currently
in effect. We believe that the Merger will not affect any of the Company’s
material contracts with any third parties.
INTERESTS
OF OFFICERS AND DIRECTORS FOLLOWING THE MERGER
The
table
below reflects the number of shares of common stock of Qualmax held by our
officers and directors, as of June 30, 2008, and the number of shares of the
Company to be issued to our officers and directors pursuant to the Merger in
exchange for the Qualmax stock owned by each. The table shows the actual direct
ownership of shares of Qualmax stock and does not show beneficial or indirect
ownership.
Officer or Director
|
|
Qualmax Shares Owned
(1)
|
|
Shares of Common Stock
Issuable on Merger
(2)
|
|
|
|
|
|
|
|
M.
David Kamrat
|
|
|
4,307,225
|
|
|
59,488,149
|
|
Noah
Kamrat
|
|
|
4,414,326
|
|
|
60,967,347
|
|
Selvin
Passen
|
|
|
349,650
|
|
|
4,829,103
|
|
Oregon
Spirit, LLC
(3)
|
|
|
524,475
|
|
|
7,243,654
|
|
P&S
Spirit, LLC
(4)
|
|
|
3,827,655
|
|
|
52,864,689
|
|
Shehryar
Wahid
|
|
|
0
|
|
|
0
|
|
|
(1)
|
Shares
of common stock of Qualmax, Inc. owned by the officer or director
as of
June 30, 2008.
|
|
(2)
|
Shares
of Common Stock of the Company issuable based upon an assumed effective
date of merger of May 14, 2008. The actual effective date of the
merger
may change, and the number of Qualmax shares outstanding as of that
date
may change potentially resulting in an increase or decrease in the
number
of shares of Common Stock issuable to each Qualmax shareholder as
a result
of the merger.
|
|
(3)
|
Oregon
Spirit, LLC is 100% owned by Selvin Passen, who is a director of
the
Company.
|
|
(4)
|
P&S
Spirit, LLC is owned 50% by Selvin Passen and 50% by Jacob Schorr,
both of
whom are directors of the
Company.
|
Additional
detail regarding ownership of the common stock of the Company and of Qualmax,
and the number of shares of Common Stock issuable to officers, directors,
and
certain shareholders as a result of the Merger, and including a pro forma
post-Merger beneficial ownership table, is provided below under “Security
Ownership of Certain Beneficial Owners and Management.”
CONVERSION
OF SHARES
OF
QUALMAX INTO THE COMPANY’S SHARES
In
connection with the Merger, each issued and outstanding share of Qualmax Stock
immediately prior to the Effective Time of the Merger (excluding any shares
of
Qualmax Stock held in the treasury immediately prior to the Effective Time,
which shall cease to be outstanding, be canceled and retired without payment
of
any consideration therefor, and shall cease to exist), will be converted into
a
number of shares of Common Stock equal to the total number of shares of Qualmax
Stock issued and outstanding immediately prior to the Effective Time, divided
by
the Exchange Ratio. Except as described above and provided for in the Merger
Agreement, any other shares of capital stock or options, warrants or other
securities convertible or exercisable into shares of capital stock of Qualmax,
whether vested or unvested, shall automatically be cancelled and retired and
shall cease to exist.
Change
of Control
.
The
Purchase Acquisition was treated as a reverse acquisition for accounting
purposes. As a result of the Purchase Acquisition, Qualmax was deemed to acquire
the company for accounting purposes, thereby effecting a change of control
of
the Company. As of September 15, 2006, the Company’s consolidated
financial statements reflected the financial information of Qualmax and its
wholly owned subsidiary. The Merger will not result in a change of control
of
the Company, because the Qualmax stockholders, who prior to the Merger control
the Company through their indirect beneficial ownership of the Qualmax Shares
will control the Company through their direct beneficial ownership of the Common
Stock following the Merger. The beneficial owners of the Common Stock will
not
change as a result of the Merger, but only the nature of their ownership of
the
Common Stock will change, from indirect ownership to direct
ownership.
No
Changes to Financial Statements
.
The
Merger will not result in any changes to the Company’s financial
statements.
No
Dilutive Effect
.
Because
the Merger will cause the exchange of already issued shares held by Qualmax
for
new shares issued directly to Qualmax stockholders, the issuance of shares
of
Common Stock to Qualmax stockholders in exchange for Qualmax’s Common Stock
pursuant to the Merger will not result in any dilution to the Company’s
stockholders. However, also pursuant to the Merger certain warrants to purchase
Qualmax stock (the “Qualmax Warrants”) will be converted into warrants to
purchase stock of the Company, in the following amounts and subject to the
following terms:
Warrants
Issued
|
|
Exercise
Price
|
|
Expiration
Date
|
|
|
|
|
|
|
|
1,479,778
|
|
$
|
0.20
|
|
|
December 31, 2010
|
|
5,149,316
|
|
$
|
0.07
|
|
|
June 30,
2010
|
|
However,
because the Qualmax Warrants’ exercise price is higher than the current reported
trading price of the Company’s stock, the conversion of the Qualmax Warrants
does not have a currently dilutive effect.
FINANCIAL
INFORMATION
For
the
Company’s financial data, see “Part I. Financial Information—Item 1. Financial
Statements” in the Company’s Form 10-Q for the quarter ended March 31,
2008, filed with the SEC on May 15, 2008, and incorporated herein by
reference.
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER
The
following summarizes certain material U.S. federal income tax consequences
of
the Merger to the Company, Qualmax, the stockholders of the Company and the
stockholders of Qualmax. This summary is based upon the Code, judicial
decisions, Treasury Regulations and rulings in existence on the date hereof,
all
of which are subject to change, possibly with retroactive effect. No tax ruling
has been or will be sought from the U.S. Internal Revenue Service or any other
taxing authority, and no opinion of counsel has been or will be sought, with
respect to the tax consequences of the Merger. This summary also does not
discuss all of the tax consequences that may be relevant to a particular
stockholder of the Company or Qualmax or to stockholders of the Company or
Qualmax that are subject to special treatment under the U.S. federal income
tax
laws.
The
following U.S. federal income tax consequences should result from the
Merger:
|
·
|
No
gain or loss should be recognized by the Company as a result of the
Merger;
|
|
·
|
No
gain or loss should be recognized by the stockholders of the Company
as a
result of the Merger;
|
|
·
|
No
gain or loss should be recognized by the stockholders of Qualmax
upon
receipt of the Common Stock solely in exchange for the Qualmax
Stock;
|
|
·
|
The
aggregate tax basis of the shares of Common Stock received by the
stockholders of Qualmax in exchange for the Qualmax Stock in the
Merger
should be the same as the aggregate tax basis of the Qualmax Stock
exchanged; and
|
|
·
|
The
holding period for shares of Common Stock received by the stockholders
of
Qualmax in the Merger should include the holding period of the Qualmax
Stock exchanged.
|
ANY
DISCUSSION CONTAINED IN THIS PROXY STATEMENT AS TO FEDERAL, STATE OR LOCAL
TAX
MATTERS IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE
PURPOSE OF AVOIDING U.S. FEDERAL, STATE, OR LOCAL TAX PENALTIES. THIS DISCUSSION
IS WRITTEN IN CONNECTION WITH THE MATTERS ADDRESSED HEREIN. YOU SHOULD SEEK
ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX
ADVISOR.
REGULATORY
APPROVAL
To
the
Company’s knowledge, the only required regulatory or governmental approval or
filing necessary in connection with the consummation of the Merger will be
the
filing of the Certificate of Merger with the Secretary of State of the State
of
Delaware.
REQUIRED
VOTE
Proposal No.
Two requires the affirmative vote of a majority of the votes cast on the
proposal. Stockholders may vote “
FOR
”
or
“
AGAINST
”
the
proposal, or they may abstain from voting on the proposal. Abstentions will
have
effect of voting “
AGAINST
”
the
proposal, but broker non-votes will not have any effect on the outcome of this
proposal. In the event the stockholders do not approve this proposal, the Merger
will not be effected.
APPRAISAL
OR DISSENTERS’ RIGHTS
Under
Delaware law, the Company’s stockholders will not be entitled to appraisal
rights in the Merger. This means that such stockholders are entitled to have
the
value of their shares determined by the Delaware Court of Chancery and to
receive payment based on that valuation, together with a fair rate of interest,
if any, as determined by the court.
ACTION
2:
THE
BOARD
RECOMMENDS A VOTE
“FOR”
THE
APPROVAL
OF THE MERGER
OF
QUALMAX WITH AND INTO THE COMPANY
RELATED
PARTY TRANSACTIONS
Relationship
with Selvin Passen
To
fund
operations in the past, we have had to rely on loans from Dr. Selvin Passen,
a
Board member and a substantial stockholder (directly and beneficially, as
described in more detail above in “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters”). As of
September 15, 2006, none of those prior loans remained.
Dr.
Passen has invested substantially in the Company since September 15,
2006:
|
·
|
Via
Oregon Spirit, LLC, Dr. Passen invested $1,500,000 on September 14,
2006
in relation to the Reverse Acquisition (as described in more detail
in the
Company’s 2006 Annual Report on Form 10-KSB Report in Item 5, “Market for
Common Equity and Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities—Recent Sales of Unregistered
Securities”).
|
|
·
|
Via
P&S Spirit, LLC, Dr. Passen invested $1,500,000 (based upon Dr.
Passen’s 50% ownership therein) on December 29, 2006, pursuant to the
P&S Subscription Agreement, as described in more detail in the
Company’s 2006 Annual Report on Form 10-KSB Report in Item 5, “Market for
Common Equity and Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities—Recent Sales of Unregistered
Securities.”
|
|
·
|
Via
P&S Spirit, LLC, Dr. Passen loaned $500,000 (based upon Dr. Passen’s
50% ownership therein) on March 30, 2007, pursuant to the P&S Term
Loan Agreement, as described in more detail in the Company’s 2006 Annual
Report on Form 10-KSB Report in Item 6, “Management’s Discussion and
Analysis or Plan of Operation—Liquidity and Capital Resources.” $250,000
of Dr. Passen’s loan pursuant to the P&S Term Loan Agreement was
repaid on August 9, 2007, as described in more detail in the Company’s
Current Reports on Form 8-K filed with the SEC August 1, 2007 and
August
9, 2007. The remaining $250,000 of Dr. Passen’s loan pursuant to the
P&S Term Loan Agreement was repaid in February 2008, as disclosed on
the Company’s Current Report on Form 8-K, filed with the SEC on February
27, 2008.
|
|
·
|
Via
P&S Spirit, LLC, Dr. Passen invested an additional $500,000 (based
upon Dr. Passen’s 50% ownership therein), and loaned an additional
$525,000, on May 31, 2006, pursuant to the P&S Subscription Agreement
and Credit Line Agreement, as described in more detail in the Company’s
Current Report on Form 8-K filed with the SEC June 6,
2007.
|
Relationship
with Jacob Schorr
Jacob
Schorr, Ph.D., serves on our Board and is a substantial stockholder
(beneficially, as described in more detail above in “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters”). Dr.
Schorr’s investments in the Company are as follows:
|
·
|
Via
P&S Spirit, LLC, Dr. Schorr invested $1,500,000 (based upon Dr.
Schorr’s 50% ownership therein) on December 29, 2006, pursuant to the
P&S Subscription Agreement, as described in more detail in the
Company’s 2006 Annual Report on Form 10-KSB Report in Item 5, “Market for
Common Equity and Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities—Recent Sales of Unregistered
Securities.”
|
|
·
|
Via
P&S Spirit, LLC, Dr. Schorr loaned $500,000 (based upon Dr. Schorr’s
50% ownership therein) on March 30, 2007, pursuant to the P&S Term
Loan Agreement, as described in more detail in the Company’s 2006 Annual
Report on Form 10-KSB Report in Item 6, “Management’s Discussion and
Analysis or Plan of Operation—Liquidity and Capital Resources.” $250,000
of Dr. Schorr’s loan pursuant to the P&S Term Loan Agreement was
repaid on August 9, 2007, as described in more detail in the Company’s
Current Reports on Form 8-K filed with the SEC August 1, 2007 and
August
9, 2007.
|
|
·
|
Via
P&S Spirit, LLC, Dr. Schorr invested an additional $500,000 (based
upon Dr. Schorr’s 50% ownership therein), and loaned an additional
$525,000, on May 31, 2006, pursuant to the P&S Subscription Agreement
and Credit Line Agreement, as described in more detail in the Company’s
Current Report on Form 8-K filed with the SEC June 6,
2007.
|
Transactions
with Selvin Passen, Jacob Schorr, and M. David Kamrat and
Noah
Kamrat
Since
September 15, 2006 the Company has entered into various additional transactions
with Dr. Passen, and his affiliates, as well as with Dr. Schorr and his
affiliates, M. David Kamrat, the Company’s Chief Executive Officer and Chairman
of the Board and Noah R. Kamrat, the Company’s former President and a former
director. Reference is made to the description of each these related party
transactions in the 2006 Annual Report on Form 10-KSB, in Item 1, “Description
of Business—Background and Recent Developments,” Item 5, “Market for Common
Equity and Related Stockholder Matters and Small Business Issuer Purchases
of
Equity Securities—Recent Sales of Unregistered Securities,” and Item 12,
“Certain Relationships and Related Transactions, and Director
Independence.”
Noah
Kamrat resigned from the Board effective August 20, 2007.
Relationship
and Transactions with BOS
As
a
result of our acquisition on December 31, 2005 of certain assets of BOS, BOS
became a principal stockholder of the Company. Reference is made to
the description of related party transactions with BOS in Item 1, “Description
of Business—BOS Debt Conversion,” and in Item 5, “Market for Common Equity and
Related Stockholder Matters and Small Business Issuer Purchases of Equity
Securities—Recent Sales of Unregistered Securities.”
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth the compensation of the named executive officers
of
the Company for the Company’s last two completed fiscal years:
Name and Principal Position
|
|
Year
|
|
Annual
Salary
($)
|
|
Bonuses
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
M. David Kamrat
(1)
|
|
|
2007
|
|
$
|
150,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
150,000
|
|
CEO
, President & Chairman
|
|
|
2006
|
|
$
|
120,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noah
Kamrat
(2)
|
|
|
2007
|
|
$
|
140,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
140,000
|
|
CTO,
Former President & Director
|
|
|
2006
|
|
$
|
120,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian
R. Richardson
(3)
|
|
|
2007
|
|
$
|
120,000
|
|
$
|
20,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
140,000
|
|
Former
Vice President, General Counsel
|
|
|
2006
|
|
$
|
120,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duy
Tran
(4)
|
|
|
2007
|
|
$
|
120,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
120,000
|
|
Former
Vice President, Secretary
|
|
|
2006
|
|
$
|
120,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shehryar
Wahid
(5)
|
|
|
2007
|
|
$
|
110,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
110,000
|
|
Chief
Financial Officer & COO
|
|
|
2006
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Rudden
(6)
|
|
|
2007
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Former
Chief Executive Officer
|
|
|
2006
|
|
$
|
111,700
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
111,700
|
|
(1)
|
The
executive officer has served in such capacity since September 15,
2006,
the date on which the Company consummated the acquisition of the
Qualmax
business (as further discussed above under Item 1, “Description of
Business - Background and Recent Developments, Change in Business
from
Wine Distribution to VoIP
Technology”).
|
(2)
|
Mr.
Kamrat served as the Company’s President Chief Operating Officer from
September 15, 2000 until January 24, 2007, and since January 24,
2007 has
served as the Company’s Chief Technology Officer and Vice President of
Operations.
|
(3)
|
Mr.
Richardson served as Chief Financial Officer of the Company from
September
15, 2006 to January 31, 2007, and from September 15, 2006 until August
1,
2007 served as General Counsel and Vice
President.
|
(4)
|
Mr.
Tran served as the Company’s Vice President and Secretary from September
15, 2006 until August 1, 2007.
|
(5)
|
Mr.
Wahid did not become an officer until February 1, 2007, and therefore
did
not receive any compensation as an officer during fiscal year 2006.
|
(6)
|
Mr.
Rudden served as Chief Executive Officer from November 10, 2005 until
his
resignation on September 14, 2006.
|
Outstanding
Equity Awards at 2007 Fiscal Year-End
|
|
OPTION AWARDS
|
|
STOCK AWARDS
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units or
Other Rights
That Have Not Vested
(#)
|
|
Equity
Incentive Plan
Awards:
Market or
Payout Value
of
Unearned
Shares, Units
or
Other
Rights
That
Have Not
Vested
(#)
|
|
M. David Kamrat
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
n/a
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Noah
Kamrat
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
n/a
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Ian
Richardson
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
n/a
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Duy
Tran
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
n/a
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Shehryar
Wahid
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
0
|
|
|
n/a
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
2007
Compensation to Directors
|
|
Name
|
|
Fees
Earned or
Paid in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Non-Qualified
Deferred
Compensation
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
M. David Kamrat
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Noah
Kamrat
(1)
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Jacob
Schorr, Ph.D.
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
(1)
|
Mr.
Kamrat resigned from the Board effective August 20, 2007.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CURRENT
(PRE-MERGER) BENEFICIAL OWNERSHIP OF NEW
WORLD BRANDS, INC.
The
following table sets forth certain information as of June 30, 2008, with respect
to (i) those persons known to us to beneficially own more than 5% of our voting
securities, (ii) each of our directors, (iii) each of our executive officers,
and (iv) all directors and executive officers as a group. The information is
determined in accordance with Rule 13d-3 promulgated under the Exchange Act.
Except as indicated below, the beneficial owners have sole voting and
dispositive power with respect to the shares beneficially
owned.
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
|
|
Percentage of
|
|
Title of Class
|
|
Name and Address of Beneficial Owner
(1)
|
|
Number
of Shares
|
|
Class
|
|
Total
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Qualmax,
Inc.
|
|
|
298,673,634
|
|
|
71.37
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.
David Kamrat
(2)
|
|
|
27,777,778
|
(3)
|
|
6.22
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noah
Kamrat
(4)
|
|
|
|
(5)
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&S
Spirit LLC
(6)
c/o
Oregon Spirit LLC
2019
SW 20
th
Street, Suite 108
Fort
Lauderdale, FL 33315
|
|
|
83,333,333
|
(7)
|
|
18.67
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Selvin Passen
(8)
2019
SW 20
th
Street, Suite 108
Fort
Lauderdale, FL 33315
|
|
|
103,383,333
|
(9)
|
|
23.08
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob
Schorr, Ph.D.
(10)
|
|
|
|
(11)
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian
T. Richardson
(12)
|
|
|
0
|
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shehryar
Wahid
(13)
|
|
|
0
|
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
directors and executive officers as a group
|
|
|
131,161,111
|
|
|
27.57
|
%
|
|
|
%
|
(1)
|
Except
as otherwise indicated, the address of each Beneficial Owner is 340
West
Fifth Avenue, Eugene, Oregon 97401.
|
(2)
|
M.
David Kamrat serves as our President and Chief Executive Officer,
and our
Chairman of the Board. Mr. Kamrat is also a director and a principal
stockholder of Qualmax, Inc.
|
(3)
|
Represents:
(a) direct ownership of a warrant to purchase 13,888,889 shares of
Common Stock exercisable within the next 60 days and (b) indirect
beneficial ownership of a warrant to purchase 13,888,889 shares of
Common
Stock based upon Mr. Kamrat’s son’s direct ownership of a warrant to
purchase shares of Common Stock.
|
(4)
|
Noah
Kamrat serves as our Chief Technology Officer, and until August 20,
2007,
served as a director. Mr. Kamrat is also a director and a principal
stockholder of Qualmax, Inc.
|
(5)
|
Represents:
(a) direct ownership of a warrant to purchase 13,888,889 shares of
Common
Stock exercisable within the next 60 days and (b) indirect beneficial
ownership of a warrant to purchase 13,888,889 shares of Common Stock
based
upon Mr. Kamrat’s father’s direct ownership of a warrant to purchase
shares of Common Stock.
|
(6)
|
P&S
Spirit is owned equally by Dr. Selvin Passen and Jacob Schorr, Ph.D.,
both
of whom are directors of the
Company.
|
(7)
|
Represents:
(a) 55,555,555 shares of Common Stock owned directly by P&S Spirit
and (b) a warrant, owned directly by P&S Spirit, to purchase
27,777,778 shares of Common Stock exercisable within the next 60
days.
|
(8)
|
Dr.
Passen serves as a director of the Company.
|
(9)
|
Represents:
(a) 10,000,000 shares of Common Stock directly owned by Dr. Passen;
(b)
800,000 shares of Common Stock indirectly beneficially owned by Dr.
Passen
based upon certain of his children’s direct ownership of Common Stock; (c)
7,500,000 shares of Common Stock indirectly beneficially owned based
upon
Dr. Passen’s ownership of Oregon Spirit LLC, an entity controlled by Dr.
Passen, as a result of Oregon Spirit’s direct ownership of 7,500,000
shares of Common Stock; (d) 55,555,555 shares of Common Stock
indirectly beneficially owned by Dr. Passen based on his direct ownership
interest in P&S Spirit LLC, as a result of P&S Spirit’s direct
ownership of 55,555,555 shares of Common Stock; (e)direct ownership
of warrants and options to purchase 1,750,000 shares of Common Stock
exercisable within the next 60 days and (g) indirect beneficial
ownership of a warrant to purchase 27,777,778 shares of Common Stock,
exercisable within the next 60 days, based upon Dr. Passen’s direct
ownership interest in P&S Spirit, as a result of P&S Spirit’s
direct ownership of warrants to purchase 27,777,778 shares of Common
Stock.
|
(10)
|
Dr.
Schorr serves as a director of the Company.
|
(11)
|
Represents:
(a) 55,555,555 shares of Common Stock indirectly beneficially owned
by Dr. Passen based on his direct ownership interest in P&S Spirit
LLC, as a result of P&S Spirit’s direct ownership of 55,555,555 shares
of Common Stock; and (b) indirect beneficial ownership of a warrant
to purchase 27,777,778 shares of Common Stock, exercisable within
the next
60 days, based upon Dr. Schorr’s direct ownership interest in P&S
Spirit, as a result of P&S Spirit’s direct ownership of warrants to
purchase 27,777,778 shares of Common
Stock.
|
(12)
|
Mr.
Richardson served as Vice President and interim Chief Financial Officer
from September 15, 2006 until January 31, 2007 and from September
15, 2006
to July 31, 2007 served as Vice President and General Counsel to
the
Company.
|
(13)
|
Mr.
Wahid has served as the Company’s Chief Financial Officer since February
1, 2007, and as the Company’s Chief Operations Officer since January 24,
2008, and has served as a director of the
Company.
|
CURRENT
(PRE-MERGER) ACTUAL OWNERSHIP OF NEW WORLD BRANDS INC.
The
following table sets forth certain information as of June 30, 2008, with
respect
to shares of our voting securities owned directly by (i) those persons known
to
us to directly own more than 5% of our voting securities, (ii) each of our
directors, (iii) each of our executive officers, and (iv) each entity controlled
by or under common control by each of our directors and executive officers
(meaning, each entity owned at least 50% by our directors or
officers).
Shareholder
|
|
Shares
Directly
Owned
|
|
Warrants/Options
Directly Owned
|
|
|
|
|
|
M.
David Kamrat
|
|
0
|
|
13,888,889
|
|
|
|
|
|
Jane
Kamrat
|
|
0
|
|
0
|
|
|
|
|
|
Noah
Kamrat
|
|
0
|
|
13,888,889
|
|
|
|
|
|
Tracy
Habecker
|
|
0
|
|
0
|
|
|
|
|
|
Selvin
Passen
|
|
10,000,000
|
|
1,750,000
|
|
|
|
|
|
Oregon
Spirit, LLC
|
|
7,500,000
|
|
0
|
|
|
|
|
|
Other
Passen Family Members
|
|
800,000
|
|
0
|
|
|
|
|
|
P&S
Spirit, LLC
|
|
55,555,555
|
|
27,777,778
|
|
|
|
|
|
Jacob
Schorr
|
|
0
|
|
0
|
|
|
|
|
|
Shehryar
Wahid
|
|
0
|
|
0
|
|
|
|
|
|
Qualmax,
Inc.
|
|
298,673,634
|
|
0
|
|
|
|
|
|
Other
Shareholders
|
|
45,950,484
|
|
3,745,000
|
|
|
|
|
|
TOTAL
|
|
418,479,673
|
|
61,050,556
|
CURRENT
(PRE-MERGER) ACTUAL OWNERSHIP OF QUALMAX, INC.
The
following table sets forth certain information as of June 30, 2008, with
respect
to shares of the common stock of Qualmax directly owned by (i) each of
our
directors, (ii) each of our executive officers, and (iii) each entity controlled
by or under common control by each of our directors and executive officers
(meaning, each entity owned at least 50% by our directors or
officers).
Qualmax
Shareholder
|
|
Shares
Directly Owned
|
|
|
|
M.
David Kamrat
|
|
4,307,225
|
|
|
|
Jane
Kamrat
|
|
703,129
|
|
|
|
Noah
Kamrat
|
|
4,414,326
|
|
|
|
Tracy
Habecker
|
|
596,029
|
|
|
|
Selvin
Passen
|
|
349,650
|
|
|
|
Oregon
Spirit, LLC
|
|
524,475
|
|
|
|
P&S
Spirit, LLC
|
|
3,827,655
|
|
|
|
Jacob
Schorr
|
|
0
|
|
|
|
Shehryar
Wahid
|
|
0
|
|
|
|
Other
Shareholders
|
|
6,902,903
|
|
|
|
TOTAL
|
|
21,625,392
|
PRO
FORMA EXCHANGE RATIO
The
following table shows the calculation of the Exchange Ratio, based upon
ownership of shares of our Common Stock and of shares of the common stock
of
Qualmax:
Shares
of New World Brands, Inc. Common Stock owned by Qualmax:
|
298,673,484
|
Total
shares of Qualmax, Inc. common stock currently
outstanding:
|
21,625,392
|
|
|
Number
of shares of New World Brands, Inc. Common Stock to be
|
|
issued
to Qualmax shareholders in exchange for each share of
|
|
Qualmax,
Inc. common stock:
|
13.81124717
|
Note:
The
number of shares of common stock of Qualmax, Inc. is shown as of July 1,
2008.
In the event that additional shares of Qualmax, Inc. stock are issued prior
to
the effective date of the merger, the number of shares of common stock of
New
World Brands, Inc. issuable for each share of common stock of Qualmax, Inc.
will
be reduced (meaning, the exchange ratio will be reduced).
PRO
FORMA EXCHANGE OF QUALMAX, INC. SHARES FOR SHARES OF NEW WORLD BRANDS.
INC.
The
following table shows the effect of the exchange of shares of Qualmax common
stock for Common Stock of the Company, pursuant to the Merger, on a pro forma
basis based upon ownership of Qualmax and Company stock as of June 30, 2008,
with respect to shares of the common stock of Qualmax directly owned by (i)
each
of our directors, (ii) each of our executive officers, and (iii) each entity
controlled by or under common control by each of our directors and executive
officers (meaning, each entity owned at least 50% by our directors or
officers).
Qualmax,
Inc. Shareholder
|
|
Qualmax,
Inc. Shares Directly Owned
|
|
New
World Brands, Inc. Shares Issuable per Pro Forma Conversion
Ratio
|
|
|
|
|
|
M.
David Kamrat
|
|
4,307,225
|
|
59,488,149
|
|
|
|
|
|
Jane
Kamrat
|
|
703,129
|
|
9,711,088
|
|
|
|
|
|
Noah
Kamrat
|
|
4,414,326
|
|
60,967,347
|
|
|
|
|
|
Tracy
Habecker
|
|
596,029
|
|
8,231,904
|
|
|
|
|
|
Selvin
Passen
|
|
349,650
|
|
4,829,103
|
|
|
|
|
|
Oregon
Spirit, LLC
|
|
524,475
|
|
7,243,654
|
|
|
|
|
|
P&S
Spirit, LLC
|
|
3,827,655
|
|
52,864,689
|
|
|
|
|
|
Jacob
Schorr
|
|
0
|
|
0
|
|
|
|
|
|
Shehryar
Wahid
|
|
0
|
|
0
|
|
|
|
|
|
Other
Shareholders
|
|
6,902,903
|
|
95,337,700
|
|
|
|
|
|
TOTAL
|
|
21,625,392
|
|
298,673,634
|
PRO
FORMA POST-MERGER BENEFICIAL OWNERSHIP OF NEW WORLD BRANDS,
INC.
The
following table shows the effect of the exchange of shares of Qualmax common
stock for Common Stock of the Company, pursuant to the Merger, on a pro forma
basis based upon ownership of Qualmax and Company stock as of June 30, 2008,
with respect to (i) those persons known to us to beneficially own more than
5%
of our voting securities, (ii) each of our directors, (iii) each of our
executive officers, and (iv) all directors and executive officers as a group.
The information is determined in accordance with Rule 13d-3 promulgated under
the Exchange Act. Except as indicated below, the beneficial owners have sole
voting and dispositive power with respect to the shares beneficially
owned.
|
|
Beneficial
Ownership
|
|
|
|
Percentage
of
|
Title
of Class
|
Name
and Address of Beneficial Owner
(1)
|
Number
of
Shares
|
Class
|
Total
Outstanding
|
|
|
|
|
|
Common
Stock
|
M.
David Kamrat
|
166,176,267
(2)
|
37.24%
|
37.24%
|
|
|
|
|
|
|
Noah
Kamrat
|
166,176,267
(3)
|
37.24%
|
37.24%
|
|
|
|
|
|
|
P&S
Spirit LLC
(4)
c/o
Oregon Spirit LLC
2019
SW 20
th
Street, Suite 108
Fort
Lauderdale, FL 33315
|
83,333,333
(5)
|
18.67%
|
18.67%
|
|
|
|
|
|
|
Dr.
Selvin Passen
2019
SW 20
th
Street, Suite 108
Fort
Lauderdale, FL 33315
|
168,320,779
(6)
|
37.57%
|
37.57%
|
|
|
|
|
|
|
Jacob
Schorr, Ph.D.
|
136,198,022
(7)
|
30.52%
|
30.52%
|
|
|
|
|
|
|
Ian
T. Richardson
|
0
|
0%
|
0%
|
|
|
|
|
|
|
Shehryar
Wahid
|
0
|
0%
|
0%
|
|
|
|
|
|
|
B.O.S.
Better Online Solutions Ltd.
Beit
Rabin, Teradyon Industrial Park
Misgav
20170 Israel
|
71,040,519
(8)
|
16.98%
|
16.98%
|
|
|
|
|
|
|
Total
directors and executive officers as a group
|
334,497,045
|
70.30%
|
70.30%
|
|
|
|
|
|
(1)
|
Except
as otherwise indicated, the address of each Beneficial Owner is
340 West
Fifth Avenue, Eugene, Oregon 97401.
|
(2)
|
Represents:
(a) 59,488,149 shares of Common Stock directly issued to Mr. Kamrat
pursuant to the Merger as a result of Mr. Kamrat’s direct ownership
interest in Qualmax, Inc.; (b) indirect beneficial ownership of
78,910,340
shares of Common Stock directly issued to Mr. Kamrat’s wife, son and
daughter-in-law pursuant to the Merger as a result of their direct
ownership interests in Qualmax, Inc.; (c) direct ownership of a
warrant to
purchase 13,888,889 shares of Common Stock exercisable within the
next 60
days; and (d) indirect beneficial ownership of a warrant to purchase
13,888,889 shares of Common Stock based upon Mr. Kamrat’s son’s direct
ownership of a warrant to purchase shares of Common
Stock.
|
(3)
|
Represents:
(a) 60,967,347 shares of Common Stock directly issued to Mr. Kamrat
pursuant to the Merger as a result of Mr. Kamrat’s direct ownership
interest in Qualmax, Inc.; (b) indirect beneficial ownership of
77,431,142
shares of Common Stock directly issued to Mr. Kamrat’s wife, father and
mother pursuant to the Merger as a result of their direct ownership
interests in Qualmax, Inc.; (c) direct ownership of a warrant to
purchase
13,888,889 shares of Common Stock exercisable within the next 60
days; and
(d) indirect beneficial ownership of a warrant to purchase 13,888,889
shares of Common Stock based upon Mr. Kamrat’s father’s direct ownership
of a warrant to purchase shares of Common
Stock.
|
(4)
|
P&S
Spirit is owned equally by Dr. Selvin Passen and Jacob Schorr,
Ph.D., both
of whom are directors of the
Company.
|
(5)
|
Represents:
(a) 55,555,555 shares of Common Stock owned directly by P&S Spirit;
and (b) a warrant, owned directly by P&S Spirit, to purchase
27,777,778 shares of Common Stock exercisable within the next 60
days.
|
(6)
|
Represents:
(a) 10,000,000 shares of Common Stock directly owned by Dr. Passen;
(b)
800,000 shares of Common Stock indirectly beneficially owned by
Dr. Passen
based upon certain of his children’s direct ownership of Common Stock; (c)
7,500,000 shares of Common Stock indirectly beneficially owned
based upon
Dr. Passen’s ownership of Oregon Spirit LLC, as a result of Oregon
Spirit’s direct ownership of shares of Common Stock; (d) 4,829,103 shares
of Common Stock issued to Dr. Passen pursuant to the Merger based
on his
direct ownership interest in Qualmax, Inc.; (e) 7,243,654 shares
of Common
Stock indirectly beneficially owned by owned by Dr. Passen based
on his
ownership interest in Oregon Spirit LLC, issued to Oregon Spirit,
LLC
pursuant to the Merger as a result of Oregon Spirit’s direct ownership
interest in Qualmax, Inc.; (f) 55,555,555 shares of Common Stock
indirectly beneficially owned by Dr. Passen based on his direct
one-half
ownership interest in P&S Spirit LLC; (g) direct ownership of warrants
and options to purchase 1,750,000 shares of Common Stock exercisable
within the next 60 days; (h) indirect beneficial ownership of a
warrant to
purchase 27,777,778 shares of Common Stock, exercisable within
the next 60
days, based upon Dr. Passen’s direct one-half ownership interest in
P&S Spirit, as a result of P&S Spirit’s direct ownership of
warrants to purchase shares of Common Stock; and (i) indirect beneficial
ownership of 52,864,689 shares of Common Stock based upon Dr. Passen’s
direct one-half ownership interest in P&S Spirit, issued to P&S
Spirit pursuant to the Merger as a result of P&S Spirit’s direct
ownership interest in Qualmax, Inc.
|
(7)
|
Represents:
(a) 55,555,555 shares of Common Stock indirectly beneficially owned
by Dr.
Schorr based on his direct one-half ownership interest in P&S Spirit
LLC; (b) indirect beneficial ownership of a warrant to purchase
27,777,778
shares of Common Stock, exercisable within the next 60 days, based
upon
Dr. Schorr’s direct one-half ownership interest in P&S Spirit, as a
result of P&S Spirit’s direct ownership of warrants to purchase shares
of Common Stock; and (c) indirect beneficial ownership of 52,864,689
shares of Common Stock based upon Dr. Schorr’s direct one-half ownership
interest in P&S Spirit, issued to P&S Spirit pursuant to the
Merger as a result of P&S Spirit’s direct ownership interest in
Qualmax, Inc.
|
(8)
|
Represents:
(a) direct ownership of 16,446,544 shares of Common Stock; (b)
direct
ownership of 53,384,683 shares of Common Stock issued to BOS pursuant
to
the Merger as a result of BOS’s direct ownership interest in Qualmax,
Inc.; and (c) indirect beneficial ownership of 1,209,282 shares
of Common
Stock based on BOS’s ownership of options to purchase shares of common
stock of Qualmax, Inc. exercisable within the next 60 days, granted
to BOS
pursuant to the Merger as a result of BOS’s direct ownership of warrants
to purchase stock of Qualmax, Inc.
|
WHERE
TO FIND ADDITIONAL INFORMATION
We
file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any document we file at the SEC’s public
reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
Please call the SEC at 1−800−SEC−0330 for further information on the public
reference room. Our SEC filings are also available to the public at the SEC’s
website at
http://www.sec.gov
.
You
should rely only on the information contained or incorporated by reference
in
this Information Statement to vote your shares at the Special Meeting. We have
not authorized anyone to provide you with information that is different from
what is contained in this Information Statement. This Information Statement
is
dated May 20, 2008. You should not assume that the information contained in
this
Information Statement is accurate as of any date other than that date, and
the
mailing of this Information Statement to stockholders does not create any
implication to the contrary.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
TABLE
OF CONTENTS
|
Page
|
|
FOR
FISCAL YEAR ENDED DECEMBER 31,
2007
|
F-2
|
|
|
Report
of independent registered public accounting firm
|
F-3
|
|
|
Financial
statements:
|
|
Consolidated
balance sheets
|
F-4
|
Consolidated
statements of comprehensive loss
|
F-6
|
Consolidated
statements of changes in stockholders’ equity
|
F-7
|
Consolidated
statements of cash flows
|
F-8
|
Notes
to consolidated financial statements
|
F-10
|
|
|
|
FOR
FISCAL YEAR ENDED DECEMBER 31,
2006
|
F-25
|
|
|
Report
of independent registered public accounting firm
|
F-26
|
|
|
Financial
statements:
|
|
Consolidated
balance sheets
|
F-27
|
Consolidated
statements of comprehensive loss
|
F-29
|
Consolidated
statements of changes in stockholders’ equity
|
F-30
|
Consolidated
statements of cash flows
|
F-32
|
Notes
to consolidated financial statements
|
F-34
|
FOR
QUARTER ENDED JUNE 30, 2008
|
F-65
|
|
|
Financial
statements:
|
|
Condensed
consolidated balance sheets
|
F-66
|
Condensed
consolidated statements of operations
|
F-68
|
Condensed
consolidated statements of cash flows
|
F-70
|
Notes
to condensed consolidated financial statements
|
F-72
|
FOR
QUARTER ENDED MARCH
31, 2008
|
F-80
|
|
|
Financial
statements:
|
|
Condensed
consolidated balance sheets
|
F-81
|
Condensed
consolidated statements of operations
|
F-83
|
Condensed
consolidated statements of cash flows
|
F-84
|
Notes
to condensed consolidated financial statements
|
F-85
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL
STATEMENTS
DECEMBER
31, 2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Audit Committee and Stockholders
New
World
Brands, Inc. and Subsidiary
Eugene,
Oregon
We
have
audited the accompanying consolidated balance sheet of New World Brands,
Inc.
and Subsidiary as of December 31, 2007 and the related consolidated statements
of comprehensive loss, changes in stockholders’ equity and cash flows for the
years ended December 31, 2007 and 2006. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to
express an opinion on the consolidated financial statements based on our
audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. The company is not required
to
have, nor were we engaged to perform, an audit of its internal control
over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of New World
Brands, Inc. and Subsidiary as of December 31, 2007, and the consolidated
results of its operations and its cash flows for the years ended December
31,
2007 and 2006 in conformity with accounting principles generally accepted
in the
United States of America.
BERENFELD,
SPRITZER, SHECHTER & SHEER, LLP
Coral
Gables, Florida
April
15,
2008
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
DECEMBER
31, 2007
ASSETS
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,038,635
|
|
Accounts
receivable, net
|
|
|
1,027,739
|
|
Inventories,
net
|
|
|
744,654
|
|
Prepaid
expenses
|
|
|
244,157
|
|
Other
current assets
|
|
|
507,012
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
4,562,197
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
1,421,806
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Deposits
and other assets
|
|
|
668,750
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
6,652,753
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
DECEMBER
31, 2007
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
|
$
|
1,564,299
|
|
Accrued
expenses
|
|
|
406,910
|
|
Customer
deposits
|
|
|
121,874
|
|
Capital
leases, current portion
|
|
|
181,731
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
2,274,814
|
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
31,317
|
|
Note
payable
|
|
|
500,000
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
531,317
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,806,131
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
Preferred
stock, $.01 par value, 1,000 shares authorized, 200 shares designated
as Series A preferred stock
|
|
|
|
|
Series
A preferred stock, $.01 par value, no shares issued.
|
|
|
-
|
|
Common
stock, $.01 par value, 600,000,000 shares authorized,
414,979,673
shares issued and outstanding
|
|
|
4,149,797
|
|
Additional
paid-in capital
|
|
|
33,641,557
|
|
Accumulated
deficit
|
|
|
(33,944,732
|
)
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
3,846,622
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
6,652,753
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 2007 AND
2006
|
|
2007
|
|
2006
|
|
Net
Sales
|
|
|
|
|
|
Hardware
|
|
$
|
5,657,689
|
|
$
|
6,307,644
|
|
Carrier
Services
|
|
|
11,443,514
|
|
|
11,230,284
|
|
|
|
|
17,101,203
|
|
|
17,537,928
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
Hardware
|
|
|
(4,954,381
|
)
|
|
(5,317,852
|
)
|
Carrier
Services
|
|
|
(9,850,272
|
)
|
|
(10,382,726
|
)
|
|
|
|
(14,804,653
|
)
|
|
(15,700,578
|
)
|
Gross
Profit
|
|
|
2,296,550
|
|
|
1,837,350
|
|
Sales,
General and Administrative Expenses
|
|
|
(4,630,863
|
)
|
|
(4,434,396
|
)
|
Loss
from Continuing Operations Before Other Income
|
|
|
(2,334,313
|
)
|
|
(2,597,046
|
)
|
Other
Income
|
|
|
|
|
|
|
|
Interest
and Bank Charges
|
|
|
(129,346
|
)
|
|
(178,967
|
)
|
Other
Income
|
|
|
109,157
|
|
|
24,448
|
|
|
|
|
(20,189
|
)
|
|
(154,519
|
)
|
Loss
From Continuing Operations Before Income Taxes
|
|
|
(2,354,502
|
)
|
|
(2,751,565
|
)
|
|
|
|
|
|
|
|
|
(Provision)
Benefit for Income Taxes
|
|
|
(403,995
|
)
|
|
472,905
|
|
Net
Loss From Continuing Operations
|
|
|
(2,758,497
|
)
|
|
(2,278,660
|
)
|
|
|
|
|
|
|
|
|
Loss
From Discontinued Operations
|
|
|
(3,949,395
|
)
|
|
(3,147,014
|
)
|
Gain
from Sale of Discontinued Operations
|
|
|
4,706
|
|
|
-
|
|
|
|
|
(3,944,689
|
)
|
|
(3,147,014
|
)
|
Net
Loss
|
|
$
|
(6,703,186
|
)
|
$
|
(5,425,674
|
)
|
|
|
|
|
|
|
|
|
Net
Loss Per Share From Continuing Operations (Basic)
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
Net
Loss Per Share From Continuing Operations (Diluted)
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
Net
Loss Per Share from Discontinued Operations (Basic)
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
Net
Loss Per Share from Discontinued Operations (Diluted)
|
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
Net
loss per Share (Basic)
|
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
Net
Loss per Share (Diluted)
|
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding During the Year
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
433,592,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
433,592,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss:
|
|
|
(6,703,186
|
)
|
|
(5,425,674
|
)
|
Net
Loss
|
|
|
|
|
|
|
|
Gain
(Loss) on Foreign Currency Translation, Net of Income Tax
Benefit
|
|
|
40,556
|
|
|
(49,295
|
)
|
Comprehensive
Loss
|
|
$
|
(6,662,630
|
)
|
$
|
(5,474,969
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 2007 AND 2006
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
Accumulated
Other
Comprehensive
|
|
Retained
Earnings
(Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2006
|
|
|
-
|
|
$
|
-
|
|
|
271,431,841
|
|
$
|
2,714,317
|
|
$
|
2,332,791
|
|
$
|
-
|
|
$
|
1,064,647
|
|
$
|
6,111,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of stock - 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
common stock issued in consideration of asset
acquisition
|
|
|
-
|
|
|
-
|
|
|
5,806,633
|
|
|
58,066
|
|
|
594,321
|
|
|
-
|
|
|
-
|
|
|
652,387
|
|
Issuance
of common stock for cash
|
|
|
-
|
|
|
-
|
|
|
13,315,856
|
|
|
133,159
|
|
|
1,206,841
|
|
|
-
|
|
|
-
|
|
|
1,340,000
|
|
Issuance
of common stock in exchange for partial repayments of principal
on note payable
|
|
|
-
|
|
|
-
|
|
|
5,981,070
|
|
|
59,811
|
|
|
540,189
|
|
|
-
|
|
|
-
|
|
|
600,000
|
|
Issuance
of stock for equipment
|
|
|
-
|
|
|
-
|
|
|
2,138,235
|
|
|
21,382
|
|
|
193,118
|
|
|
-
|
|
|
-
|
|
|
214,500
|
|
Recapitalization
of Qualmax common stock as a result of the reverse
acquisition
|
|
|
-
|
|
|
-
|
|
|
(298,673,635
|
)
|
|
(2,986,735
|
)
|
|
2,986,735
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
of New World Brands as a result of the reverse
acquisition
|
|
|
-
|
|
|
-
|
|
|
44,303,939
|
|
|
443,040
|
|
|
24,278,035
|
|
|
-
|
|
|
(22,921,075
|
)
|
|
1,800,000
|
|
Issuance
of Series A preferred stock as a result of the reverse
acquisition
|
|
|
100
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of Series A preferred stock for cash
|
|
|
11.160454
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
Cost
of raising capital
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(150,000
|
)
|
|
-
|
|
|
-
|
|
|
(150,000
|
)
|
Issuance
of Series A preferred stock in exchange for partial repayment
of note payable, accrued royalties and outsourcing expenses,
and release of obligations from operating
agreements
|
|
|
5.50652
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,480,189
|
|
|
-
|
|
|
-
|
|
|
1,480,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss - 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,425,674
|
)
|
|
(5,425,674
|
)
|
Loss
on foreign currency translation, net of tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(49,295
|
)
|
|
-
|
|
|
(49,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
|
116.666974
|
|
$
|
1
|
|
|
44,303,939
|
|
$
|
443,040
|
|
$
|
36,462,218
|
|
$
|
(49,295
|
)
|
$
|
(27,282,102
|
)
|
$
|
9,573,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of series A preferred stock to common stock April 24, 2007
|
|
|
(116.6666974
|
)
|
|
(1
|
)
|
|
348,453,512
|
|
|
3,484,535
|
|
|
(3,484,534
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
22,222,222
|
|
|
222,222
|
|
|
663,873
|
|
|
|
|
|
|
|
|
886,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of subsidiary
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,706
|
|
|
4,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,295
|
|
|
(3,949,395
|
)
|
|
(3,900,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on foreign currency translation, net of tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,556
|
|
|
40,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from continuing operations for the twelve months ended December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,758,497
|
)
|
|
(2,758,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
414,979,673
|
|
$
|
4,149,797
|
|
$
|
33,641,557
|
|
$
|
-
|
|
$
|
(33,944,732
|
)
|
$
|
3,846,622
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(2,758,497
|
)
|
|
(2,278,660
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
406,152
|
|
|
296,110
|
|
Issuance
of stock for royalties and outsourcing expenses
|
|
|
-
|
|
|
356,817
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
-
Accounts receivable
|
|
|
76,118
|
|
|
410,648
|
|
-
Change in allowance for doubtful accounts
|
|
|
(15,046
|
)
|
|
129,046
|
|
-
Inventories
|
|
|
141,098
|
|
|
795,743
|
|
-
Prepaid expenses
|
|
|
(121,362
|
)
|
|
112,919
|
|
-
Income tax refund receivable
|
|
|
|
|
|
(403,995
|
)
|
-
Deferred tax asset
|
|
|
-
|
|
|
45,467
|
|
-
Other current assets
|
|
|
(368,139
|
)
|
|
(134,934
|
)
|
-
Deposits and other assets
|
|
|
(568,750
|
)
|
|
253,142
|
|
-
Accounts payable
|
|
|
1,122,665
|
|
|
(383,701
|
)
|
-
Accrued expenses
|
|
|
(678,032
|
)
|
|
299,346
|
|
-
Customer deposits
|
|
|
62,249
|
|
|
(23,712
|
)
|
-
Deferred income taxes
|
|
|
-
|
|
|
(111,540
|
)
|
-
Other liabilities
|
|
|
-
|
|
|
(1,746,040
|
)
|
Net
cash used in operating activities
|
|
|
(2,297,549
|
)
|
|
(2,384,342
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(284,044
|
)
|
|
1,186,902
|
|
Net
cash acquired from the reverse acquisition
|
|
|
-
|
|
|
1,800,000
|
|
Net
cash provided by (used in) investing activities
|
|
|
(284,044
|
)
|
|
2,986,902
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
1,000,000
|
|
|
-
|
|
Payments
of principal on notes payable
|
|
|
(1,484,323
|
)
|
|
(460,000
|
)
|
Payments
of principal on capital lease obligations
|
|
|
(131,301
|
)
|
|
(141,153
|
)
|
Net
repayment of advances from shareholders
|
|
|
(53,479
|
)
|
|
(75,245
|
)
|
Sales
of common and preferred stock
|
|
|
886,095
|
|
|
2,136,459
|
|
Foreign
currency translation
|
|
|
(29,740
|
)
|
|
29,740
|
|
Net
cash provided by financing activities
|
|
|
187,252
|
|
|
1,489,801
|
|
Net
cash flow from continuing operations
|
|
|
(2,394,341
|
)
|
|
2,092,362
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
Total
cash flows from discontinued operations
|
|
|
(1,160,828
|
)
|
|
(274,529
|
)
|
Net
investing activities from discontinued operations
|
|
|
2,197,187
|
|
|
(410,689
|
)
|
Net
cash flow from discontinued operations
|
|
|
1,036,358
|
|
|
(685,218
|
)
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash
equivalents
|
|
|
(1,357,983
|
)
|
|
1,407,144
|
|
Cash
and cash equivalents, beginning of year
|
|
|
3,396,617
|
|
|
1,989,473
|
|
Cash
and cash equivalents, end of year
|
|
$
|
2,038,634
|
|
$
|
3,396,617
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Supplemental
Disclosures of Cash Flow Information:
|
|
2007
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
-
Income taxes
|
|
$
|
-
|
|
$
|
-
|
|
-
Interest
|
|
$
|
129,346
|
|
$
|
178,168
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Issuance
of common stock for asset acquisition
|
|
|
|
|
|
|
|
-
Inventories
|
|
$
|
|
|
$
|
79,179
|
|
-
Property and equipment
|
|
|
|
|
|
573,208
|
|
-
Additional paid-in capital
|
|
$
|
|
|
$
|
(652,387
|
)
|
|
|
|
|
|
|
|
|
Issuance
of stock for payment of note payable
|
|
|
|
|
|
|
|
-
Note payable
|
|
$
|
|
|
$
|
600,000
|
|
-
Additional paid-in capital
|
|
$
|
|
|
$
|
(600,000
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of common stock for property and equipment
|
|
|
|
|
|
|
|
-
Fair value of property and equipment acquired
|
|
$
|
|
|
$
|
214,500
|
|
-
Additional paid-in capital
|
|
|
|
|
|
(214,500
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of preferred stock for partial repayment of note payable,
accrued
royalties and outsourcing expenses, and release
of obligations from
operating agreements
|
|
|
|
|
|
|
|
-
Note payable
|
|
$
|
|
|
$
|
400,000
|
|
-
Royalties and outsourcing expenses
|
|
|
|
|
|
356,817
|
|
-
Property and equipment
|
|
|
|
|
|
723,372
|
|
-
Additional paid-in capital
|
|
|
|
|
|
(1,480,189
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Acquisition
of property and equipment through capital lease
obligations
|
|
|
|
|
|
|
|
-
Fair value of property and equipment acquired
|
|
$
|
|
|
$
|
387,384
|
|
-
Capital lease obligations incurred
|
|
$
|
|
|
$
|
(387,384
|
)
|
|
|
$
|
-
|
|
$
|
-
|
|
Issuance
of Common Stock for Preferred Stock
|
|
|
|
|
|
|
|
-
Common Stock
|
|
$
|
3,706,757
|
|
$
|
-
|
|
- Preferred
Stock
|
|
|
(1
|
)
|
|
-
|
|
- Paid
in Capital
|
|
|
(3,706,756
|
)
|
|
-
|
|
|
|
$
|
-
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization
and Basis of Presentation
New
World
Brands, Inc. (“
New
World Brands
”,
the
“
Company
”,
“
we
”,
“
us
”
or
“
our
”)
is a
Delaware corporation that until September 15, 2006 was an importer of wine
and
spirits beverages for sale and distribution throughout the United
States. On September 15, 2006, we sold our wine and spirits business,
and, by way of a reverse acquisition, acquired all of the assets and assumed
all
of the liabilities of Qualmax, Inc., a Delaware corporation (“
Qualmax
”
and
the
reverse acquisition the “
Reverse
Acquisition
”).
As
a
result of the Reverse Acquisition we are no longer in the wine and spirits
business, and instead we are now a telecommunications, sales, and service
company, focusing on products and services utilizing voice over internet
protocol (“
VoIP
”)
technology. We provide wholesale long distance carrier termination
services. We are also a reseller of VoIP related telecommunications
equipment, and a reseller of wholesale VoIP telephony service.
Our
acquisition of Qualmax and its wholly owned subsidiary IP Gear, Ltd. was
accounted for as a reverse acquisition. Although New World Brands was
the company that made the acquisition, Qualmax was treated as the surviving
company for accounting purposes. As a result, the accompanying
financial statements reflect the results of operations and cash flows of
Qualmax
and IP Gear, Ltd. prior to September 15, 2006, and the financial position,
results of operations, and cash flows of New World Brands, Qualmax, and
IP Gear,
Ltd. from and after September 15, 2006.
All
inter-company accounts and transactions have been eliminated in
consolidation.
On
September 15, 2006 the Company changed its fiscal year end from May 31
to
December 31, which is Qualmax’s fiscal year end. The change in fiscal
year results from the acquisition of Qualmax and IP Gear, Ltd., which was
accounted for as a reverse acquisition.
On
July
1, 2007 we sold the IP Gear Ltd subsidiary in a transaction that is explained
in
full detail in “Note B—Sale of Discontinued Operations—IP Gear,
Ltd.”
This
subsidiary was sold for cash and other consideration. The impact of the
sale on
the presentation of the financial statements and other financial information
is
to have all 2007 and comparative 2006 information(where applicable) restated
to
be presented in a format where all discontinued operations are moved from
continuing operations and listed separately. Comparative prior year information
is also restated to remove the discontinued operations from the ongoing
business.
Reverse
Acquisition Accounting
In
June
2006, the Company decided to change its business plan by selling its wine
and
spirits business for the sum of $500,000 (the “
Sale
Transaction
”),
selling 7,500,000 shares of its common stock (the “
Common
Stock
”)
for
$1,500,000 (the “
Private
Equity Investment
”),
and
acquiring substantially all of the assets of Qualmax, Inc. (“
Qualmax
”)
in
exchange for shares of the Company’s Series A Convertible, par value $0.01 per
share (the “
Preferred
Stock
”
and
the
transaction, the “
Reverse
Acquisition
”).
The
Private Equity Investment was consummated on September 14, 2006, and the
Sale
Transaction and Reverse Acquisition were consummated on September 14 and
15,
2006, respectively. As a result of the Sale Transaction and Reverse Acquisition,
the Company is no longer in the wine and spirits business, and the business
formerly operated by Qualmax is now operated by the Company, meaning that
New
World Brands, Inc. is now a specialized internet protocol (IP) communications
solutions provider, equipment reseller, and Voice over Internet Protocol
(“
VoIP
”)
service provider, focused on the deployment of best of breed VoIP networks,
virtual private networks, turnkey network design, wireless connectivity
and
direct call traffic routing.
In
furtherance of treating the Sale Transaction and Acquisition as a reverse
acquisition for accounting purposes, the board of directors of the Company
(the “
Board
”)
and
the board of directors of Qualmax (collectively, the “
Boards
”)
have
agreed that for accounting purposes they have treated the transactions
as a
reverse acquisition of Qualmax by the Company, and have since the time
of the
consummation, intended the transaction to ultimately result in a downstream
merger of the Company and Qualmax, and, in furtherance thereof, the Boards
have
each determined that Qualmax will merge with and into the Company (the
“
Merger
”),
and
in connection with the Merger, the separate corporate existence of Qualmax
will
cease.
The
Boards agreed that certain events (the “
Merger
Events
”)
were
required to occur in order to effectively consummate the transactions
contemplated, including, without limitation, certain amendments to the
Certificate of Incorporation of the Company to, among other things, increase
the
authorized number of shares of Common Stock of the Company, the resultant
conversion of the Preferred Stock into shares of the Company’s Common Stock,
make any filings necessary to complete the Merger, and receive approval by
the stockholders of the Company and Qualmax. During 2007, the number of
authorized shares was increased from 50 million shares to 600 million shares
to
allow for a sufficient number of authorized shares to convert the existing
Preferred shares to common. All preferred shares were then converted to
common
stock as a further step towards the completion of the merger.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Under
generally accepted accounting principles in the United States of America
(“
GAAP
”),
the
acquisition of Qualmax has been accounted for as a reverse acquisition
and
Qualmax has been treated as the acquiring entity for accounting and financial
reporting purposes. As such, the Company’s consolidated financial
statements have been and will be presented as a continuation of the operations
of Qualmax and not New World Brands, Inc. Effective on the
acquisition date of September 15, 2006, New World Brands’ consolidated balance
sheet included the assets and liabilities of Qualmax and its wholly owned
subsidiary IP Gear, Ltd. and its consolidated equity accounts were recapitalized
to reflect the combined equity of New World Brands, Qualmax and IP Gear,
Ltd.
Also, as a result of the Reverse Acquisition, the Company’s fiscal year changed
from May 31 to December 31.
Accordingly,
the accompanying financial statements consist of the balance sheet of both
the
Company and Qualmax as of December 31, 2007, and the results of operations
and
cash flows of Qualmax for the years ended December 31, 2007 and 2006, and
the
Company for the year ended December 31, 2007 and for the period from September
16, 2006 to December 31, 2006.
Basis
of Accounting and Revenue Recognition
The
accompanying consolidated financial statements have been prepared using
the
accrual method of accounting. Revenues from our VoIP telephony
services division have been recognized as services are
rendered. Revenue from the sale of products from our exclusive
distributorship of VoIP equipment or reseller equipment is recognized as
our
customers take delivery of our products. Any amounts received from
our customers in advance are recorded as customer deposits and classified
as
other current liabilities.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and the reported amounts
of
revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments in debt instruments purchased
with original maturities of three months or less to be cash
equivalents.
Accounts
Receivable
Accounts
receivable are presented at net realizable value, which is comprised of
total
accounts receivable less any allowances for uncollectible
accounts. The Company provides an allowance for potentially
uncollectible accounts based upon a periodic review and analysis of outstanding
accounts receivable balances. The resulting estimate of uncollectible
receivables is charged to an allowance for doubtful
accounts. Recoveries of accounts previously written off are used to
offset the allowance account in the periods in which the recoveries are
made. Accordingly, accounts receivable has been written down to its
estimated net realizable value. The results of operations for the years
ended
December 31, 2007 and 2006 include charges of approximately $323,000 and
$437,000, respectively. The allowance for doubtful accounts as of December
31, 2007 was approximately $114,000.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis. Market represents the lower of replacement
cost or net realizable value on inventories as a whole. Inventories
are made up primarily of high technology telephone switching and VoIP routing
equipment and their parts. All year ending inventories
consisted of finished goods for resale that were purchased from other
manufacturers. Due to rapid technological advancements in the
industry, inventories may, from time to time, be subject to impairment
and
obsolescence. We record an allowance for slow-moving and obsolete
inventories based upon a periodic review and analysis of inventories on
hand. We perform a periodic comparison of this slow moving and
obsolete inventory to determine if its value is below its cost in our records
and reduce the value on our records if the cost is above the current
value. Accordingly, the allowance for obsolete inventories as of
December 31, 2007 was approximately $75,000.
Concentration
of Deposit Risk
From
time
to time, the Company has cash in financial institutions in excess of federally
insured limits. However, the Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk
on its cash balances. Cash exceeding federally insured limits
amounted to approximately $1,762,000 as of December 31, 2007.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Business
Concentrations
We
had
one supplier during the year ended December 31, 2007 that exceeded 10%
of our
total cost of sales. They accounted for 17% of the total purchases made
by New
World Brands during 2007. The top three vendors collectively represent
31% of
purchases. We did not have any single supplier that represented more than
ten
percent of purchases or any single customer that represented more than
ten
percent of sales during the year ended December 31,
2006.
We
had no
customers in 2007 that made up a sufficiently large amount of our sales
to be
considered a concentration risk on the revenue side of our
business.
Impairment
of Long-Lived Assets and Long-Lived Assets Subject to
Disposal
We
review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, in
accordance with Statement of Financial Accounting Standards (“
SFAS
”)
No.
144. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash
flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount
by
which the carrying an amount of the assets exceeds its fair
value. Assets subject to disposal are reported at the lower of the
carrying amount or fair value less costs to sell. We did have an
impairment of a long lived asset during the year that was written down
and
subsequently sold in 2007. See “Note B—Sale of Discontinued Operations—IP Gear,
Ltd.” We had no impairment in 2006.
Property
and Equipment
Property
and equipment are recorded at cost. For financial statement purposes,
depreciation of software, furniture and equipment is computed using the
straight-line method over their estimated useful lives of the assets while
leasehold improvements are amortized over the shorter of their estimated
useful
lives or the terms of their respective leases. Expenditures for
replacements, maintenance and repairs that do not extend the lives of the
assets
are charged to operations as the expenses are incurred. When assets
are retired, sold or otherwise disposed of, their costs and related accumulated
depreciation are removed from the accounts and resulting gains or losses
are
reflected in the year of disposal.
Stock
Options
Effective
January 1, 2006, we adopted the fair value method of accounting for awards
of
employee stock and options in accordance with SFAS No. 123, “Accounting for
Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation, Transition and Disclosure,” and SFAS No. 123R,
“Share-Based Payment.” These standards require the cost associated with employee
services in exchange for equity instruments based on the grant date fair
value
of the award, be recognized over the period during which the employee is
required to provide services in exchange for the award. No compensation
cost is
recognized for awards for which employees do not render the requisite service.
Because the Company changed its method of accounting from the intrinsic
method
as per APB Opinion No. 25, upon adoption, the grant date fair value of
employee
share options was estimated using the Black-Scholes model. Compensation
cost for
the unvested portion of equity awards granted prior to January 1, 2006,
will be
recognized over the remaining vesting periods. Due to the prospective adoption
of SFAS No. 123R, results of operations for prior periods have not been
restated.See “Note G—Stock Option Plans.”
Software
Costs
Certain
computer software development costs are capitalized in the accompanying
consolidated balance sheet in accordance with SFAS No. 86,
“Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Capitalization ceases and
amortization of capitalized costs begins when the software product is
commercially available for general release to customers. Amortization of
capitalized computer software development costs is included in general
and
administrative expenses and is provided using the straight-line method
over the
remaining estimated economic life of the product, not to exceed three
years. Much of the software that we had in past years was related to the
development of equipment in our IP Gear Ltd subsidiary that is not considered
as
part our “continuing operations.” Net unamortized software costs as of December
31, 2007 amounted to approximately $ 1,000. Amortization of software
costs for the years ended December 31, 2007 and 2006 was approximately
$20,000
and $ 18,000, respectively.
Segment
Information
Our
business consisted of three operating segments: (i) proprietary hardware,
which
is our VoIP technology development and equipment manufacturing subsidiary
that
is located in Israel, IP Gear, Ltd.; (ii) resale hardware, which is the
sale and
distribution of VoIP and other telephony equipment and related professional
services via our U.S.-based business operated under the name “IP Gear”; and
(iii) wholesale carrier services, which is telephony service resale and
direct
call routing via our U.S.-based VoIP service business operated under the
name
“IP Gear Connect.” The proprietary hardware segment, IP Gear Ltd. was
discontinued as at June 30, 2007 and subsequently sold on July 1 2007.
See “Note
B—Sale of Discontinued Operations—IP Gear, Ltd.” for further information
regarding this transaction. Our continuing business was subsequently organized
into two segments, the resale hardware operating under the name “NWB Networks”
and the carrier segment operating under the name “NWB Telecom.” Please see “Note
N—Business Segment Reporting.”
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Reclassification
Certain
reclassifications of amounts previously reported have been made to the
accompanying consolidated financial statements in order to maintain consistency
and comparability between periods presented.
In
June
2007, the Company sold IP Gear, Ltd. (
See
“Note
B—Sale of Discontinued Operations—IP Gear, Ltd.”
)
For
purposes of comparability, the results of these operations have been
reclassified from continuing operations to discontinued operations for
all years
presented in the accompanying consolidated statements of
operations.
Fair
Value of Financial Instruments
Our
financial instruments consist primarily of cash, certificates of deposit,
accounts receivable, accounts payable, accrued liabilities and notes
payable. The carrying amounts of such financial instruments
approximate their respective estimated fair values due to the short-term
maturities and approximate market interest rates of these
instruments. The estimated fair values are not necessarily indicative
of the amounts we would realize in a current market exchange or from future
earnings or cash flows.
Earnings
per Share
Net
income per share is computed in accordance with SFAS No. 128, “Earnings per
Share.” Basic net income per share is based upon the weighted average number of
common shares outstanding during the period. Diluted net income per share
is
based upon the weighted average number of common shares outstanding and
dilutive
common stock equivalents outstanding during the period. Common stock equivalents
are options and warrants granted by the Company and are calculated under
the
treasury stock method. Common equivalent shares from unexercised stock
options
and warrants are excluded from the computation when there is a loss as
their
effect is antidilutive, or if the exercise price of such options and warrants
is
greater than the average market price of the stock for the
period. See “Note G—Stockholders’ Equity” for the computation of
basic and diluted share data.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109,
“Accounting
for Income Taxes,”
which
requires recognition of deferred tax assets and liabilities for expected
future
tax consequences of events that have been included in the consolidated
financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates
in
effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets amounts expected to be
realized. U.S. income taxes are not provided on
undistributed earnings, which are expected to be permanently reinvested
by the
foreign subsidiary, unless the earnings can be repatriated in a tax-free
or
cash-flow neutral manner.
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(the “FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in
Income Taxes” and FSP FIN 48-1, which amended certain provisions of FIN 48. FIN
48 clarifies the accounting for uncertainty in income taxes recognized
in
financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a
tax
position taken or expected to be taken in a tax return. FIN 48 requires
that the
Company determine whether the benefits of the Company’s tax positions are more
likely than not of being sustained upon audit based on the technical merits
of
the tax position. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods and disclosure.
In
connection with our adoption of FIN No. 48, we analyzed the filing
positions in all of the federal and state jurisdictions where we are required
to
file income tax returns, as well as all open tax years in these jurisdictions.
There was no impact on our condensed consolidated financial statements
upon
adoption of FIN No. 48 on January 1, 2007. The Company did not have
any unrecognized tax benefits and there was no effect on the financial
condition
or results of operations for the year ended December 31, 2007 as a result
of
implementing FIN 48, or FIN 48-1. In accordance with FIN48, the Company
adopted
the policy of recognizing interest and penalties, if any, related to
unrecognized tax positions as income tax expense. The tax years 2004 -
2007
remain subject to examination by major tax jurisdictions.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Advertising
and Promotional Costs
We
expense advertising and promotional costs as incurred. Advertising
and promotional expenses amounted to approximately $45,000 and $107,000
for the
years ended December 31, 2007 and 2006, respectively.
Leases
We
account for leases in accordance with SFAS No.13,
“Accounting
for Leases,” under which we perform a review of each newly acquired lease to
determine whether it should be treated either as a capital or an operating
lease. A capital lease asset is capitalized and depreciated over the
term of the initial lease. A liability equal to the present value of
the aggregated lease payments is recorded utilizing the stated lease interest
rate. If an interest rate is not stated, we will determine our
estimated incremental borrowing rate.
Foreign
Currency Translation
As
of the
year end at December 31, 2007, New World Brands did not have any balances
or
transactions in a foreign currency. All amounts on the consolidated balance
sheets are reported in their native currency, the US dollar.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which establishes a framework for measuring fair value in GAAP terms and
expands
disclosures about fair value measurements. While SFAS 157 does not require
any new fair value measurements, it may change the application of fair
value
measurements embodied in other accounting standards. SFAS 157 will be
effective at the beginning of the Company’s 2008 fiscal year. The Company is
currently assessing the effect of this pronouncement on its consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—including an Amendment of FASB
Statement No. 115”, which is effective for fiscal years beginning after
November 15, 2007. SFAS 159 permits an entity to choose to measure many
financial instruments and certain other items at fair value at specified
election dates. Subsequent unrealized gains and losses on items for which
the
fair value option has been elected will be reported in earnings. The Company
is
currently evaluating the potential impact, if any, that SFAS 159 will have
on
its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business
Combinations” (
“SFAS
141(R)”
).
SFAS
141(R) retains the fundamental requirements of the original pronouncement
requiring that the purchase method be used for all business combinations.
SFAS
141(R) defines the acquirer as the entity that obtains control of one or
more
businesses in the business combination, establishes the acquisition date
as the
date that the acquirer achieves control and requires the acquirer to recognize
the assets acquired, liabilities assumed and any non-controlling interest
at
their fair values as of the acquisition date. SFAS 141(R) also requires
that
acquisition-related costs be recognized separately from the acquisition.
SFAS
141(R) is effective for the Company in 2009. The Company is currently evaluating
the potential impact, if any, that SFAS 141(R) will have on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51.”
SFAS 160 establishes accounting and reporting standards pertaining to
ownership interests in subsidiaries held by parties other than the parent;
the
amount of net income attributable to the parent and to the noncontrolling
interest; changes in a parent’s ownership interest; and the valuation of any
retained noncontrolling equity investment when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is required to be adopted prospectively for
the first annual reporting period after December 15, 2008. The Company is
currently reviewing this statement and has not yet determined the impact,
if
any, on its consolidated financial statements.
NOTE
B
|
SALE
OF DISCONTINUED OPERATIONS - IP GEAR,
LTD.
|
New
World
Brands completed the sale of its Israeli subsidiary IP Gear, Ltd. as of
an
effective date of July 1, 2007 for accounting purposes. The company agreed
to
sell all the outstanding shares of the Company’s subsidiary, IP Gear Ltd., to
TELES A.G. of Germany in exchange for cash on closing and further payments
over
a period of time. New World Brands’ consideration, as determined by the final
agreement, calls for four elements: a fixed price of $1,500,000 as part
of
closing; an earn out over four years paid quarterly of not less than $750,000
over the four years; a minimum of $400,000 over two years defined as marketing
support; and an interest bearing loan credit facility up to $1,000,000
repayable
over four years. (See “Note O—Subsequent Events and Other Matters” for further
details). The Earn Outs are to be paid at the greater of $46,875 or 10%
of the
“CPE” product line revenue for the quarter to be paid within 90 days of the end
of the quarter. The Company also received a return of working capital invested
during the transition period.
With
certain exceptions, commencing on the date of the closing and for a certain
period of time (as specified in the Final Agreement), the Company agreed
not to,
or cause any of its affiliates to, engage in any research and development
or
manufacturing activities competitive with those conducted by IP Gear, Ltd.,
and
not to, or cause any of its affiliates to, engage in the sale,
distribution, marketing, and services of products that may compete with
certain
products of TELES. In addition, with certain exceptions, commencing
one year after the date of closing, and effective for a period of time
and
within certain geographic regions relative to the grant of exclusive
distribution and sale rights to the Company pursuant to the partner contract
described below, the Company agreed not to, or cause any of its affiliates
to,
engage in the sale, distribution, marketing, and services of products that
may
compete with products of IP Gear, Ltd.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
B
|
SALE
OF DISCONTINUED OPERATIONS - IP GEAR, LTD.
(CONTINUED)
|
In
accordance with the Final Agreement, the Company and TELES entered into
a
partner contract relating to the promotion, marketing, sale, and support
of
certain products of TELES and IP Gear, Ltd., pursuant to which the Company
became the exclusive distributor of products of TELES and IP Gear, Ltd.
in North
America (including the United States, Canada, Mexico, all Caribbean nations,
Guatemala, and Honduras) and non-exclusive distributor in other
markets.
TELES
assumed responsibility for all the liabilities and obligations of IP Gear,
Ltd.
except those specifically outlined in the agreement. The two items excluded
are
any past potential liability that IP Gear, Ltd. may have to the Office
of the
Chief Scientist of Israel and under a contract with one of IP Gear, Ltd.’s
vendors, Piecom Tech. (See “Note O—Subsequent Events and Other
Matters.”)
New
World
Brands’ management was authorized by the board to complete the sale to TELES of
its IP Gear, Ltd. (Israel) subsidiary. A preliminary agreement was reached
July
18 2007 and the closing occurred on July 26, 2007. The final agreement
for the
sale of the subsidiary was approved by our Board’s consent and by Teles’
Supervisory board on July 25, 2007
The
condensed statement of operations for the 12 months ended December 31,
2007
below represent the reclassified discontinued operations of New World Brands
as
a result of the sale of IP Gear Ltd. It also shows the loss recorded at
the end
of the second quarter due to the revaluation of our investment in IP Gear
Ltd
down to its net realizable value as defined by the then pending transaction
to
sell IP Gear Ltd.
|
|
Selected
Statements of Operations
Data
for
the Company’s
Discontinued
Operations
for
12
Months Ended December 31
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$
|
998,981
|
|
$
|
2,592,543
|
|
|
|
|
|
|
|
|
|
Pre
Tax Loss from Discontinued Operations
|
|
|
(1,407,911
|
)
|
|
(3,147,014
|
)
|
Income
Tax Provision
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations
|
|
|
(1,407,911
|
)
|
|
(3,147,014
|
)
|
|
|
|
|
|
|
|
|
Pre-Tax
Impairment Loss
|
|
|
(2,462,448
|
)
|
|
-
|
|
Gain
from Sale of Discontinued Operations
|
|
|
4,706
|
|
|
-
|
|
Income
Tax Provision
|
|
|
-
|
|
|
-
|
|
Loss
from Discontinued Operations, net of Tax
|
|
$
|
(3,944,689
|
)
|
$
|
(3,147,014
|
)
|
As
a
result of the impairment, the Company reported a loss of $3,949,394 at
the end
of the second quarter in accordance with FASB No. 144, “Accounting for
Impairment of and Disposal of Long-Lived Assets,” and recorded a gain on
disposal of $4,706 by the end of the year due to gains from the Earn Out
portion
of the sale in excess of the minimums by an amount of $28,681. These losses
and
gains are recorded on the Company’s financial statements in the income
statements for the years ended 2007 and 2006, in the line items “Loss from
Discontinued Operations” and “Gain From Sale of Discontinued Operations,”
respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Inventories
as of December 31,
2007
consisted of the following:
|
|
Resale
Hardware
|
|
Total
Inventories
|
|
$
|
819,654
|
|
Less
allowance for obsolete inventories
|
|
|
(75,000
|
)
|
Inventories,
net
|
|
$
|
744,654
|
|
NOTE
D
|
PROPERTY
AND
EQUIPMENT
|
As
of
December 31,
2007,
our
property and equipment consisted of the following:
|
|
|
|
Useful
Lives
(In Years)
|
|
Operating
Equipment
|
|
$
|
1,804,175
|
|
5
|
|
Rental
Equipment
|
|
|
44,928
|
|
5
|
|
Leasehold
improvements
|
|
|
227,922
|
|
15
|
|
Computer
software
|
|
|
189,256
|
|
3
- 5
|
|
Furniture
and fixtures
|
|
|
30,419
|
|
3
- 5
|
|
Other
|
|
|
4,100
|
|
5
|
|
Total
property and equipment
|
|
|
2,300,800
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
878,994
|
|
|
|
|
Property
and equipment, net
|
|
$
|
1,421,806
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
equipment acquired under capital leases
|
|
$
|
456,197
|
|
|
|
|
Less
accumulated amortization
|
|
|
167,181
|
|
|
|
|
|
|
$
|
289,016
|
|
|
|
|
Depreciation
and amortization expense of continuing operations amounted to approximately
$406,000 and $296,000 for the years ended December 31, 2007 and 2006,
respectively. Amortization of leased equipment, which has been
included in depreciation expense on the accompanying financial statements,
was
approximately $ 90,000 and $ 77,000 for the years ended December 31, 2007
and
2006, respectively.
Bank
of America and P & S Spirit.
At
the
start of 2007, New World Brands maintained a loan outstanding to the Bank
of
America in the amount of approximately $98,000. This term loan was due
by March
31, 2007. New World Brands repaid this loan with the proceeds of a new
term loan
it obtained from P & S Spirit on March 30, 2007. On and effective March 30,
2007, we entered into a term loan and security agreement with P&S Spirit
(the “
P&S
Term Loan
”). The
principal amount of the P&S Loan is $1,000,000. Monthly payments
of interest only at two percent over the Wall Street Journal Prime Rate
payable
in arrears are due commencing on May 1, 2007. The interest rate on
this loan at December 31, 2007 was 9.25%. The principal balance of the
P&S
Loan and any unpaid accrued interest up to that date becomes due in full
on
January 2, 2009. The P&S Loan includes certain covenants,
including a financial reporting requirement which is due forty-five days
after
the close of a calendar quarter, and requirements that we maintain a ratio
of
current assets to current liabilities of at least 1.2 to 1 and a total
liabilities to tangible net worth ratio not exceeding 2.5 to 1. The company
was
in compliance with both of these ratios as at December 31, 2007.
The
P&S Loan also grants P&S Spirit a first position security interest with
respect to all of the Company’s assets. The P&S Loan is also
backed by a guaranty by Qualmax (which, pending completion of the contemplated
merger of Qualmax into the Company, holds a controlling interest in the
Company), a security interest in the assets of Qualmax (consisting solely
of 100
shares of series A convertible preferred stock of the Company, par value
$0.01
per share, which stock is convertible into 298,673,634 shares of the Company’s
common stock, par value $0.01 per share), and by the personal guaranty
of M.
David Kamrat, Chairman of the Board of Directors and Chief Executive Officer
of
the Company, and a director and executive officer of Qualmax. M.
David Kamrat’s personal Guaranty is limited to the sum of $1,000,000, although
the guaranteed obligations include indemnification for certain claims against
P&S Spirit relating to the P&S Term Loan.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
E
|
NOTES
PAYABLE
(CONTINUED)
|
The
Loan
proceeds were used by the Company to repay all outstanding principal, interest
and fees due on our note payable with B of A, and to pay certain professional
fees associated with preparation and negotiation of the P&S Term
Loan.
On
August
10, 2007, $500,000 of the principal balance of the P & S Term Loan was
repaid by the company. The balance at December 31, 2007 was $500,000. This
remaining balance of $500,000 was paid off in February 2008 closing out
the P
& S Spirit Term Loan. Please see “Note O—Subsequent Events and Other
Matters” for further activity associated with these loans.
On
May
31, 2007, the company entered into another agreement with P & S Spirit, a
Credit line and Security Agreement( P & S Credit Line), for a line of credit
facility in the amount of $1,050,000. The terms of the loan facility are
an
interest rate of Prime plus 2% (as reported in the Wall Street Journal),
payments are to be interest only in arrears commencing July 1, 2007. The
P &
S Credit Line is secured by a corporate guaranty by Qualmax(which pending
completion of the merger of Qualmax into the company, holds a controlling
interest in the company) and a security interest in the assets of
Qualmax(consisting solely of 298,673,634 shares of common stock of the
company).
The company must meet covenants of a ratio of current assets to current
liabilities of at least 1.2 :1.0 and a total liabilities to net worth ratio
not
exceeding 2.5:1.0. The maturity date of the loan is June 1, 2011 when all
principal and any outstanding interest payments are due. As of December
31,
2007, we had not drawn any funds from this loan facility. The Company was
in
compliance with the convenants as of December 31, 2007.
The
principals of P&S Spirit include Dr. Selvin Passen, who is a director and
shareholder of the Company, as well as its former Chief Executive Officer,
and
Dr. Jacob Schorr, who is a director of the Company
Total
maturities of notes payable as of December 31, 2007 were as
follows:
Total
notes payable as at Dec 31, 2007
|
|
$
|
500,000
|
|
|
|
|
|
|
Notes
payable, current portion
|
|
|
0
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
$
|
500,000
|
|
Interest
expense on the notes payable was approximately $119,000 and $142,000 for
the
years ended December 31, 2007 and 2006, respectively.
NOTE
F
|
CAPITAL
LEASE
OBLIGATIONS
|
We
currently lease equipment pursuant to four capital lease agreements. In
conjunction therewith, the Company has capitalized the cost of the equipment
in
the amount of $87,683, which is the present value of the lease payments.
Interest expense on the capital lease obligations amounted to approximately
$10,000 and $36,000 for the years ended December 31, 2007 and 2006,
respectively. Future minimum lease payments required under the capital
leases as
of December 31, 2007 were as follows:
2008
|
|
$
|
181,731
|
|
2009
|
|
|
19,929
|
|
2010
|
|
|
11,388
|
|
|
|
|
6,024
|
|
|
|
|
3,012
|
|
|
|
|
222,084
|
|
Less:
amounts representing interest
|
|
|
9,036
|
|
|
|
|
|
|
Present
value of net minimum lease payments
|
|
|
213,048
|
|
|
|
|
|
|
Capital
lease obligations, current portion
|
|
|
181,731
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
$
|
31,317
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
G
|
STOCKHOLDERS’
EQUITY
|
Capitalization
The
Company’s authorized capital stock consists of 600,000,000 shares of common
stock, $.01 par value per share, and 1,000 shares of preferred stock, $.01
par
value. There were 414,979,673 shares of common stock and no shares of
Series A Convertible Preferred Stock issued and outstanding as of December
31, 2007.
The
board
of directors has the authority, without action by the Company’s stockholders, to
provide for the issuance of preferred stock in one or more classes or series
and
to designate the rights, preferences and privileges of each class or series,
which may be greater than the rights of the common stock.
Common
Stock
As
of
December 31, 2006, our total number of authorized common stock, $.01 par
value,
was 50 million shares, with 44,303,909 shares issued and
outstanding. On February 1, 2007 our board acted to increase the
number of authorized common stock to 600 million shares. The additional
common
stock was created to allow for the conversion of all outstanding preferred
shares to common stock. This conversion was authorized by board consent
on
January 31, 2007 and become effective on April 24, 2007 resulting in the
conversion of all Series A Convertible Preferred Shares to common shares
at a
ratio of 2,986,736 common shares for every one preferred share. Approximately
116.67 Series A Preferred Shares were converted into approximately 348
million
common shares. This transaction was another step in the planned sequence
of
transactions that will conclude in the completion of the merger of New
World
Brands Inc. with Qualmax Inc.
On
May
31, 2007, the company issued as converted 22,222,222 shares of common stock
to
P & S Spirit, in exchange for an investment of $886,093 (net of
all costs) in the company. The gross amount of the purchase price prior
to any
costs was $1,000,000. These shares of common stock will be issued without
registration under the Securities Act of 1933, as amended, and are subject
to
the lock out agreement signed by Qualmax, the Kamrats, P & S
Spirit and certain affiliates of the Kamrats and P & S Spirit
filed with the SEC on June 6, 2007.
Stockholders’
equity transactions prior to the New World Brands/Qualmax, Inc. merger
date have
been retroactively restated for the equivalent number of shares received
in the
merger after giving effect to any difference in par value of the issuer’s and
acquirer’s stock with an offset to paid-in capital.
Preferred
Stock
As
of
December 31, 2007, we had 1,000 shares of authorized preferred stock, $.01
par
value. There was no issued or outstanding preferred stock at December
31, 2007.
Common
Stock Warrants
Warrants
for the purchase of our common stock were granted during the 12 months
ending
December 31, 2007. Common stock warrants were issued in exchange for all
outstanding preferred stock warrants concurrent with the conversion of
all
preferred stock to common as mentioned in the common stock segment of the
notes
to the financial statements at the same ratio as the common stock conversion
or
2,986,736 common stock warrants in exchange for each preferred stock warrant.
A
total of 18.600756 preferred stock warrants were converted into 55,555,548
common stock warrants at this time with a strike price of $0.09. The warrants
expire on December 31, 2011.
Common
stock warrant activity for the year was as follows:
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Balance
granted at December 31, 2006
|
|
|
2,320,000
|
|
$
|
0.49
|
|
Granted
in 2007
|
|
|
55,555,548
|
|
$
|
0.09
|
|
Exercised
in 2007
|
|
|
-
|
|
$
|
-
|
|
Balance
granted at December 31, 2007
|
|
|
57,875,548
|
|
$
|
0.12
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
G
|
STOCKHOLDERS’
EQUITY
(CONTINUED)
|
Preferred
Stock Warrants
All
preferred stock warrants that had been outstanding at the start of 2007
were
cancelled during the year. There were no preferred stock warrants outstanding
at
December 31, 2007.
Preferred
stock warrant activity for the year was as follows:
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Balance
granted at December 31, 2006
|
|
|
18,600758
|
|
$
|
-
|
|
(As
converted to common stock)
|
|
|
55,555,548
|
|
$
|
0.09
|
|
Cancelled
during 2007
|
|
|
18.600758
|
|
|
|
|
Balance
granted at December 31, 2007
|
|
|
0
|
|
|
|
|
Computation
of Basic and Diluted Share Data
The
following tables set forth the computation of basic and diluted share data
for
2007 and 2006 (rounded to the nearest thousand):
Weighted
average number of shares outstanding during 2006:
|
|
|
|
Basic
(common)
|
|
|
39,044,000
|
|
Preferred
(as converted to common)
|
|
|
86,148,000
|
|
Total
|
|
|
125,192,000
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
- options and warrants
|
|
|
-
|
|
Preferred
- options and warrants
|
|
|
-
|
|
Total
|
|
|
-
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
125,192,000
|
|
Weighted
average of options and warrants not included
above (anti-diluted):
|
|
|
|
|
Basic
(common)
|
|
|
4,478,000
|
|
Preferred
(as converted to common)
|
|
|
55,556,000
|
|
Total
|
|
|
60,034,000
|
|
Weighted
average number of shares outstanding during 2007:
|
|
|
|
Basic
(common)
|
|
|
433,592,000
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
- options and warrants
|
|
|
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
433,592,000
|
|
Weighted
average of options and warrants not included
above (anti-dilutive)
|
|
|
43,851,000
|
|
Lock-Up
Agreement
In
connection with the transactions contemplated by the Subscription Agreement,
the
Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
P&S Spirit entered into an Amended and Restated Lock-Up Agreement (the
“
Lock-Up
Agreement
”),
pursuant to which each such party agreed to certain restrictions on transfer
on
certain shares of capital stock (and securities convertible into share
of
capital stock) of the Company on the terms set forth therein. A copy of
the
Amended and Restated Lock-Up Agreement is filed as Exhibit 10.3 to the
Company’s
Current Report on Form 8-K filed with the SEC on January 8, 2007. In
particular, the parties agreed to restrict their ability to transfer shares
of
capital stock in the Company for up to two years without the prior approval
of
the other stockholders party thereto (meaning, both the Kamrats and P&S
Spirit must seek the consent of the other to sell subject shares during
the term
of the Lock-Up Agreement). Also, in connection with the transactions
contemplated by the BOS Agreement BOS agreed to be subject to the Lock-Up
Agreement, restricting the ability of BOS to transfer shares of capital
stock in
the Company and Qualmax for up to two years without the prior approval
of the
other stockholders party thereto.
NOTE
H
|
STOCK
OPTION
PLANS
|
Performance
Equity Plan
We
have a
Performance Equity Plan (the “
Performance
Equity Plan
”)
under
which we may grant incentive and nonqualified stock options, stock appreciation
rights, restricted stock awards, deferred stock, stock reload options,
and other
stock-based awards to purchase up to 600,000 shares of Common Stock to
officers,
directors, key employees, and consultants. The Company may not grant any
options
with a purchase price less than fair market value of Common Stock as of
the date
of grant. No options or other stock-based rights were issued under
the Performance Equity Plan during 2007 and 2006, and none were exercised
or exercisable during 2007 and 2006.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
H
|
STOCK
OPTION PLANS
(CONTINUED)
|
Stock
Option Plan
In
October 2001, we adopted a stock option plan (the “
2001
Option Plan
”)
whereby we have reserved 5,000,000 shares of its Common Stock for purposes
of
granting options to purchase such shares pursuant to the 2001 Stock Option
Plan. Options are granted to officers and employees of the Company by
the Board of Directors and to members of the Board on a non-discretionary
basis,
provided that the exercise price of the options is equal or greater than
the
fair market price of our Common Stock on the date the option is granted.
The
2001 Stock Option Plan terminates 10 years from its effective date. A
total of 2,945,000 of options (“the New World Brands options”), granted under
the 2001 Option Plan to purchase our Common Stock in exchange for services
rendered, were vested and exercisable as of December 31, 2007. There were
no
issuances, exercises or forfeitures in 2007 or 2006.. The employees
and consultant performed services related to product promotion, general
business, financing, and public/investor relations. These
options were granted prior to September 15, 2006.
Employee
compensation expense for the New World Brands stock options was not recognized
in 2006 in the accompanying consolidated statements of income as the options
were granted and fully exercisable on September 14, 2006, prior to the
merger
date. The consolidated statements of income include the results of operations
of
New World Brands from the date of the merger, September 15, 2006, to December
31, 2006. As of December 31, 2006, there was approximately $41,610 of
total unrecognized compensation cost related to unvested stock options
granted
under our stock option plan. That cost is expected to be recognized over
a
weighted average of 4 years. There are 1,755,000 shares of common stock
available for future issuance, as of December 31, 2007. The following
table summarizes stock option plan as of December 31, 2007:
|
|
Exercise
Price
|
|
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
Options
Exercisable
|
|
|
|
$ 0.18
|
|
|
1,000,000
|
|
4.9
|
|
|
1,000,000
|
|
|
|
$ 0.18
|
|
|
1,000,000
|
|
4.9
|
|
|
1,000,000
|
|
|
|
$ 0.18
|
|
|
250,000
|
|
4.9
|
|
|
250,000
|
|
|
|
$ 0.18
|
|
|
100,000
|
|
4.9
|
|
|
100,000
|
|
|
|
$ 0.18
|
|
|
100,000
|
|
4.9
|
|
|
100,000
|
|
|
|
$ 0.18
|
|
|
100,000
|
|
4.9
|
|
|
100,000
|
|
|
|
$ 0.50
|
|
|
300,000
|
|
3.5
|
|
|
-
|
|
|
|
$ 0.25
|
|
|
325,000
|
|
1.75
|
|
|
325,000
|
|
|
|
$ 0.10
|
|
|
70,000
|
|
5.5
|
|
|
70,000
|
|
|
|
|
|
|
3,245,000
|
|
|
|
|
2,945,000
|
|
Income
tax consisted of the following for the years ended December 31, 2007 and
2006:
|
|
2007
|
|
2006
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
)
|
$
|
403,995
|
|
Deferred
|
|
|
|
|
|
579,475
|
|
State:
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
-
|
|
Deferred
|
|
|
|
|
|
51,130
|
|
Subtotal
|
|
|
(403,995
|
)
|
|
1,034,600
|
|
Change
in valuation allowance
|
|
|
|
|
|
(561,695
|
)
|
Benefit
(provision) for income taxes
|
|
$
|
(403,995
|
)
|
$
|
472,905
|
|
The
effective tax rate varies from the federal statutory maximum rate for the
year
ended December 31, 2007 and 2006 principally due to the following:
|
|
2007
|
|
2006
|
|
|
|
34
%
|
|
34
%
|
|
Loss
from foreign subsidiary
|
|
(8)
%
|
|
(19)
%
|
|
Benefit
of net operating loss carryback
|
|
|
|
(7)
%
|
|
State
tax rate, net of federal tax benefit
|
|
6
%
|
|
1
%
|
|
Book
vs tax loss on sale of subsidiary
|
|
11
%
|
|
-
|
|
Other
|
|
2
%
|
|
|
|
Total
|
|
(6)
%
|
|
8
%
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
I
|
INCOME
TAXES
(CONTINUED)
|
Significant
portions of the deferred tax assets and liabilities results from the tax
effects
of temporary differences, which of December 31, 2007, were as
follows:
Deferred
tax assets
(short-term):
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
1,829,437
|
|
Capital
loss from sale of subsidiary
|
|
|
1,772,929
|
|
Allowance
for doubtful accounts receivable
|
|
|
43,726
|
|
Allowance
for inventory obsolescence
|
|
|
28,767
|
|
Depreciation
& amortization
|
|
|
21,607
|
|
Allowance
for disputes
|
|
|
4,219
|
|
Accruals
|
|
|
3,836
|
|
Deferred
tax assets
(long-term):
|
|
|
|
|
Charitable
contributions carry forward
|
|
|
775
|
|
Net
deferred tax assets before valuation allowance
|
|
|
3,705,296
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(3,705,296
|
)
|
|
|
|
|
|
Net
deferred tax asset after valuation
|
|
$
|
-
|
|
As
of
December 31, 2007, the Company had net operating losses of approximately
$4.8
million that can be carried forward for up to twenty years and deducted
against
future taxable income. The net operating loss carry forwards expire in
2026 and
2027. The company also has a capital loss carry forward of approximately
$4.6
million that can be carried forward for five years and deducted against
future
capital gain income. The capital loss carry forward expires in
2012.
NOTE
J
|
RELATED
PARTY
TRANSACTIONS
|
Loans
from Shareholders
The
Company received $1,000,000 in a term loan from P & S Spirit, a stockholder
of the company and a company controlled by two stockholders and members
of the
Board of Directors of New World Brands. The terms of this loan are listed
in
detail in note E - Notes Payable.
NOTE
K
|
COMMITMENTS
AND
CONTINGENCIES
|
Operating
Leases
We
have
entered into various operating leases for our facilities and
equipment. The future minimum annual rental payments due on these
operating leases as of December 31, 2007 for each of the next 5 years are
as
follows:
Year
ending December 31:
|
|
|
|
2008
|
|
$
|
291,371
|
|
2009
|
|
|
68,260
|
|
2010
|
|
|
50,230
|
|
2011
|
|
|
49,780
|
|
2012
|
|
|
14,880
|
|
|
|
|
|
|
|
|
$
|
477,121
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
K
|
COMMITMENTS
AND CONTINGENCIES
(CONTINUED)
|
Our
U.S.
operations are headquartered in Eugene, Oregon in leased commercial
premises in
two buildings, and the total rental expense for the years ended December
31,
2007 and 2006 was approximately $68,000 and $77,000, respectively.
We have made substantial leasehold improvements to our rental
premises.
The
MPI Litigation
As
a
result of the Reverse Acquisition the Company assumed the liabilities of
Qualmax. Qualmax was named as a defendant in certain litigation filed
in France before the Trade Tribunal of Nanterre against BOS by Media Partners
International (“
MPI
,”
and
the “
MPI
Litigation
”),
a
former distributor of BOS, whose contract with BOS allegedly related to
certain
distribution rights for the product division Qualmax purchased from BOS
on
December 31, 2005. Pursuant to the asset purchase agreement between
Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless from
liability, without limitation, arising from the claims raised in the MPI
Litigation, and BOS has undertaken defense of Qualmax at BOS’s
expense. The litigation remains in its early stages, and at last
report from counsel the French court had not yet made definitive rulings
on
defendant’s motion to change venue and jurisdiction from France to
Israel.
Initial
hearings on a motion for change of venue were concluded in February 2007.
Additional hearings were conducted in late April 2007. The Company has
been
preliminarily informed that a decision from the French court to maintain
venue
in France was made in September 2007, and that defendants have filed an
appeal
of that decision, but that no ruling has been made on the appeal as of
the date
of this filing. At present, based upon the limited progress of the matter
and
without the benefit of the completion of factual discovery, management
believes
this litigation does not pose a significant financial risk to the
Company.
Former
Employee Litigation
The
lawsuit brought by a former employee of the company, Fred Singer, relating
to
stock options and prior compensation, was settled on April 10, 2007,
the company
agreeing that the plaintiff, Mr. Singer, is the holder of options to
purchase
70,000 shares of the company’s common stock.
The
Blackstone Litigation
Qualmax
was named as a defendant in a lawsuit entitled Capital Securities, LLC
and
Blackstone Communications Company v. Carlos Bertonnatti, Worldwide PIN
Payment
Corp. and Qualmax, Inc., Case No. 2006-15824-CA-01, in the Circuit Court
of the
11th Judicial Circuit in and for Miami-Dade County, Florida, filed August
10,
2006. The facts underlying the proceeding relate to a contract
between defendant Worldwide PIN Payment Corp. and plaintiffs, and a third
party,
to plaintiff’s allegations of misappropriation of trade secrets and corporate
opportunity, and to claims that defendants, or some of them, tortiously
interfered with plaintiffs’ contract with a third party. Plaintiffs’
seek monetary damages. Management believes it is not entirely clear
from the pleadings filed to date whether plaintiffs claim that Qualmax
misappropriated trade secrets, or tortiously interfered with a third party
contract, or is liable under some other theory.
This
litigation was settled on April 1, 2008 between New World Brands and Blackstone.
The details are provided in the subsequent events section of the notes
- Note
M
Credit
Facility with Pacific Continental Bank
The
company entered into an agreement for the use of various credit services
with
Pacific Continental Bank in February 2007. The conditions of this
agreement require the deposit of $250,000 with the bank as security for
the
services. The terms and balance remain unchanged at December 31, 2007.
The
deposit is in the company’s money market account with the bank and is reported
on the balance sheet as part of cash and cash equivalents.
Piecom
Tech
As
part
of the agreement to sell our IP Gear Ltd. subsidiary to Teles A.G. (see
“Note
B—
Sale
of
Discontinued Operations—IP Gear, Ltd.”
),
we
have accepted any liabilities and or any amounts recovered as a result
of any
claims from/against Piecom to/from IP Gear Ltd. in the future, beyond the
date
of closing the sale of our subsidiary. Piecom Tech had been a vendor to
IP Gear
Ltd and was contracted to provide outsourced contract manufacturing services.
There is currently a deposit held by Piecom of $214,000 towards the production
of equipment not yet delivered and an amount in escrow of $32,000 pending
resolution of this matter. There is currently no expectation of any liability
arising from this commitment to the company.
NOTE
L
|
REGULATORY
MATTERS
|
The
telecommunications industry is subject to federal, state and local
regulation. Any changes in the regulations or enforcement could
impact the Company’s ability to continue its current operations.
NOTE
M
|
DEFINED
CONTRIBUTION
PLAN
|
In
May
2005, we adopted a Savings Incentive Match Plan for Employees (SIMPLE)
(the
“Plan”) for the benefit of our employees who are reasonably expected to receive
at least $5,000 in compensation during a calendar year. We have
elected to contribute to each eligible employee’s simple individual retirement
account a matching contribution equal to the employee’s elective salary
reduction contributions, up to a limit of three percent of the employee’s
compensation for the calendar year. Total expense for the years ended
December 31, 2007 and 2006 was approximately $ 23,000 and $11,000
respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
N
|
BUSINESS
SEGMENT
REPORTING
|
The
following presents our segmented financial information by business line
for the
years ended December 31, 2007 and 2006. We are currently focused on
two principal lines of businesses: (i) new and resale hardware, which is
the
sale and distribution of VoIP and other telephony equipment and related
professional services via our U.S.-based business operated under the names
“Teles USA” and “Qualmax”); and (ii) wholesale carrier services, which is
telephony service resale and direct call routing via our U.S.-based VoIP
service
business operated under the name “NWB Telecom.”
Segmented
Financial Information by Business Line For New World Brands
Inc.:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
$
|
11,443,514
|
|
$
|
11,230,284
|
|
Resale
Hardware
|
|
|
5,657,689
|
|
|
6,307,644
|
|
Total
|
|
|
17,101,203
|
|
|
17,537,928
|
|
|
|
|
|
|
|
|
|
Cost
of Sales:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
9,850,272
|
|
|
10,382,726
|
|
Resale
Hardware
|
|
|
4,954,381
|
|
|
5,317,852
|
|
Total
|
|
|
14,804,653
|
|
|
15,700,578
|
|
|
|
|
|
|
|
|
|
Gross
Profit:
|
|
|
|
Wholesale
Carrier Services
|
|
|
1,593,242
|
|
|
847,558
|
|
Resale
Hardware
|
|
|
703,308
|
|
|
989,792
|
|
Total
|
|
|
2,296,550
|
|
|
1,837,350
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
236,519
|
|
|
199,335
|
|
Resale
Hardware
|
|
|
2,417
|
|
|
90,514
|
|
Corporate
|
|
|
177,504
|
|
|
6,260
|
|
Total
|
|
|
416,440
|
|
|
296,109
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
1,259,716
|
|
|
1,451,158
|
|
Resale
Hardware
|
|
|
1,012,687
|
|
|
1,023,097
|
|
Corporate
|
|
|
1,942,020
|
|
|
1,664,032
|
|
Total
|
|
|
4,214,423
|
|
|
4,138,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Contining Operations Before Income Taxes:
|
|
|
|
|
|
|
|
Wholesale
Carrier Services
|
|
|
97,007
|
|
|
(802,935
|
)
|
Resale
Hardware
|
|
|
(311,797
|
)
|
|
(123,819
|
)
|
Corporate
|
|
|
(2,119,524
|
)
|
|
(1,470,292
|
)
|
Total
|
|
$
|
(2,334,313
|
)
|
$
|
(2,397,046
|
)
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE
O
|
SUBSEQUENT
EVENTS AND OTHER
MATTERS
|
Term
Loan and Repayment of Note Payable with P & S
Spirit
On
February 21, 2008, effective February 15, 2008, the Company repaid all
outstanding obligations under the P&S Term Loan Agreement, in the amount of
$500,000. We made a draw of $500,000 against the P & S credit line facility
to obtain the fund to pay the P & S term loan.
Teles
AG Loan Agreement
On
February 21, 2008, New World Brands, Inc., and TELES AG Informationstechnologien
(“
TELES
”),
entered into a Term Loan and Security Agreement, effective February 15,
2008,
pursuant to which, from time to time prior to February 1, 2009 or the earlier
termination in full of the, the Company may obtain advances from TELES
up to the
amount of the outstanding Commitment. Amounts borrowed may not be
reborrowed, notwithstanding any payments thereunder. The outstanding
balance of the TELES Loan will be due and payable on or before February
1,
2012. The outstanding principal amount of the TELES Loan will be
payable in 12 quarterly installments commencing May 1, 2009. Interest
on the outstanding principal amount of the TELES Loan shall be
paid quarterly commencing May 1, 2008, at the per annum interest rate of
7%, compounded quarterly
Blackstone
Litigation
On
April
1, 2008, effective as of March 31, 2008, the Company entered into a settlement
agreement in relation to
a
lawsuit
entitled
Capital
Securities, LLC and Blackstone Communications Company v. Carlos Bertonnatti,
Worldwide PIN Payment Corp. and Qualmax, Inc.
,
Case
No. 2006-15824-CA-01, filed August 10, 2006 in the Circuit Court of the
11
th
Judicial
Circuit in and for Miami-Dade County, Florida (the “
Blackstone
Litigation
”).
As
disclosed in the Company’s Quarterly Reports on Form 10-QSB filed with the SEC
on November 19, August 20, and May 21, 2007, and the Company’s Annual Report on
Form 10-KSB filed with the SEC on April 17, 2007, the facts underlying
the
Blackstone Litigation relate to a contract between defendant Worldwide
PIN
Payment Corp. and plaintiffs, and a third party, to plaintiffs’ allegations of
misappropriation of trade secrets and corporate opportunity, and to claims
that
defendants, or some of them, tortiously interfered with plaintiffs’ contract
with a third party.
Pursuant
to the settlement agreement, the Company has agreed to pay plaintiffs the
sum of
$50,000 toward plaintiffs’ costs of litigation, and in exchange, plaintiffs have
released the Company from all claims asserted by plaintiffs or otherwise
arising
against the Company; all claims against the Company were dismissed with
prejudice.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL
STATEMENTS
DECEMBER
31,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Audit Committee and Stockholders
New
World
Brands, Inc. and Subsidiary
Eugene,
Oregon
We
have
audited the accompanying consolidated balance sheet of New World
Brands, Inc.
and Subsidiary as of December 31, 2006 and the related consolidated
statements
of income, changes in stockholders’ equity and cash flows for the years ended
December 31, 2006 and 2005. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements
based on our audit.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether
the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform,
an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis
for
designing audit procedures that are appropriate in the circumstances,
but not
for the purpose of expressing an opinion on the effectiveness of
the company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements,
assessing the accounting principles used and significant estimates
made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above
present fairly,
in all material respects, the consolidated financial position of
New World
Brands, Inc. and Subsidiary as of December 31, 2006, and the consolidated
results of its operations and its cash flows for the years ended
December 31,
2006 and 2005 in conformity with accounting principles generally
accepted in the
United States of America.
BERENFELD,
SPRITZER, SHECHTER & SHEER
April
14,
2007
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
DECEMBER
31, 2006
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,396,617
|
|
Accounts
receivable, net
|
|
|
1,496,865
|
|
Inventories,
net
|
|
|
1,817,824
|
|
Prepaid
expenses
|
|
|
175,367
|
|
Income
tax refund receivable
|
|
|
403,995
|
|
Other
current assets
|
|
|
220,802
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
7,511,470
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
5,839,651
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Deposits
and other assets
|
|
|
153,411
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
13,504,532
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
DECEMBER
31, 2006
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Note
payable, current portion
|
|
$
|
984,323
|
|
Capital
lease obligations, current portion
|
|
|
169,202
|
|
Accounts
payable
|
|
|
1,238,551
|
|
Accrued
expenses
|
|
|
1,196,746
|
|
Customer
deposits
|
|
|
59,625
|
|
Advances
from shareholders
|
|
|
53,665
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
3,702,112
|
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
175,147
|
|
Other
|
|
|
53,411
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
228,558
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,930,670
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
Preferred
stock, $.01 par value, 1,000 shares authorized, 200
shares designated as Series A preferred
stock
|
|
|
-
|
|
Series
A preferred stock, $.01 par value, 200
shares
authorized 116.666974 shares issued and
outstanding
|
|
|
1
|
|
Common
stock, $.01 par value, 50,000,000 shares
authorized, 44,303,939 shares issued and
outstanding
|
|
|
443,040
|
|
Additional
paid-in capital
|
|
|
36,462,218
|
|
Accumulated
other comprehensive loss
|
|
|
(49,295
|
)
|
Accumulated
deficit
|
|
|
(27,282,102
|
)
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
9,573,862
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
13,504,532
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
Resale
and proprietary hardware
|
|
$
|
8,800,437
|
|
|
$
|
9,810,314
|
|
Wholesale
carrier service
|
|
|
11,330,034
|
|
|
|
8,227,222
|
|
|
|
|
20,130,471
|
|
|
|
18,037,536
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
Resale
and proprietary hardware
|
|
|
(7,508,726
|
)
|
|
|
(8,126,649
|
)
|
Wholesale
carrier service
|
|
|
(10,382,726
|
)
|
|
|
(7,411,035
|
)
|
|
|
|
(17,891,452
|
)
|
|
|
(15,537,684
|
)
|
Gross
profit on sales
|
|
|
2,239,019
|
|
|
|
2,499,852
|
|
Selling
general and administrative
expenses
|
|
|
(7,880,960
|
)
|
|
|
(2,286,127
|
)
|
Income
(loss) from operations
|
|
|
(5,641,941
|
)
|
|
|
213,725
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
64,286
|
|
|
|
232,340
|
|
Interest
and other expenses
|
|
|
(320,924
|
)
|
|
|
(123,831
|
)
|
|
|
|
(256,638
|
)
|
|
|
108,509
|
|
Income
(loss) before income
taxes
|
|
|
(5,898,579
|
)
|
|
|
322,234
|
|
Benefit
(provision) for income
taxes
|
|
|
472,905
|
|
|
|
(118,229
|
)
|
Net
income (loss)
|
|
$
|
(5,425,674
|
)
|
|
$
|
204,005
|
|
Basic
earnings (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
Diluted
earnings (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
125,192,000
|
|
|
|
166,861,000
|
|
Diluted
|
|
|
125,192,000
|
|
|
|
250,387,000
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5,425,674
|
)
|
|
$
|
204,005
|
|
Loss
on foreign currency translation,
net of income tax benefit
|
|
|
(49,295
|
)
|
|
|
-
|
|
Comprehensive
income (loss)
|
|
$
|
(5,474,969
|
)
|
|
$
|
204,005
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2005
|
|
|
-
|
|
|
$
|
-
|
|
|
|
107,767,034
|
|
|
$
|
1,077,670
|
|
|
$
|
(1,077,670
|
)
|
|
$
|
-
|
|
|
$
|
860,642
|
|
|
$
|
860,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of stock - 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options in exchange for existing common stock
shares
|
|
|
-
|
|
|
|
-
|
|
|
|
79,827,423
|
|
|
|
798,274
|
|
|
|
(798,274
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of stock option
|
|
|
-
|
|
|
|
-
|
|
|
|
1,995,686
|
|
|
|
19,957
|
|
|
|
(3,622
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
16,335
|
|
Issuance
of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
1,995,686
|
|
|
|
19,957
|
|
|
|
85,043
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,000
|
|
Issuance
of stock for equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
7,982,742
|
|
|
|
79,827
|
|
|
|
170,173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
Issuance
of common stock from recapitalization
|
|
|
-
|
|
|
|
-
|
|
|
|
17,105,876
|
|
|
|
171,059
|
|
|
|
(171,059
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock resulting from dilutive provisions of
recapitalization
|
|
|
-
|
|
|
|
-
|
|
|
|
7,127,449
|
|
|
|
71,274
|
|
|
|
(71,274
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
2,075,214
|
|
|
|
20,752
|
|
|
|
165,244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
185,996
|
|
Issuance
of common stock for asset acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
45,554,731
|
|
|
|
455,547
|
|
|
|
4,044,453
|
|
|
|
-
|
|
|
|
|
|
|
|
4,500,000
|
|
Return
of capital in settlement of related
party receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,223
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - 2005
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
204,005
|
|
|
|
204,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
|
-
|
|
|
|
-
|
|
|
|
271,431,841
|
|
|
|
2,714,317
|
|
|
|
2,332,791
|
|
|
|
-
|
|
|
|
1,064,647
|
|
|
|
6,111,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of stock - 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
common stock issued in consideration of asset
acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
5,806,633
|
|
|
|
58,066
|
|
|
|
594,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
652,387
|
|
Issuance
of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
13,315,856
|
|
|
|
133,159
|
|
|
|
1,206,841
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,340,000
|
|
Issuance
of common stock in exchange for partial repayments of principal
on note payable
|
|
|
-
|
|
|
|
-
|
|
|
|
5,981,070
|
|
|
|
59,811
|
|
|
|
540,189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
Issuance
of stock for equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
2,138,235
|
|
|
|
21,382
|
|
|
|
193,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
214,500
|
|
Recapitalization
of Qualmax common stock as a result of the reverse
acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(298,673,635
|
)
|
|
|
(2,986,735
|
)
|
|
|
2,986,735
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of stock - 2006 (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
of New World Brands as a result of the reverse
acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
44,303,939
|
|
|
|
443,040
|
|
|
|
24,278,035
|
|
|
|
-
|
|
|
|
(22,921,075
|
)
|
|
|
1,800,000
|
|
Issuance
of Series A preferred stock as a result of the reverse
acquisition
|
|
|
100
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of Series A preferred stock for cash
|
|
|
11.160454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000,000
|
|
Cost
of raising capital
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
Issuance
of Series A preferred stock in exchange for partial repayment
of note payable, accrued royalties and outsourcing expenses,
and release of obligations from operating
agreements
|
|
|
5.50652
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,480,189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,480,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss - 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,425,674
|
)
|
|
|
(5,425,674
|
)
|
Loss
on foreign currency translation, net of tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,295
|
)
|
|
|
|
|
|
|
(49,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116.666974
|
|
|
$
|
1
|
|
|
|
44,303,939
|
|
|
$
|
443,040
|
|
|
$
|
36,462,218
|
|
|
$
|
(49,295
|
)
|
|
$
|
(27,282,102
|
)
|
|
$
|
9,573,862
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5,425,674
|
)
|
$
|
204,005
|
|
Adjustments
to reconcile net income (loss) to net
cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,164,602
|
|
|
182,097
|
|
Issuance
of stock for royalties and outsourcing
expenses
|
|
|
356,817
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
-
Accounts receivable
|
|
|
59,894
|
|
|
(1,114,127
|
)
|
-
Inventories
|
|
|
663,672
|
|
|
(1,131,040
|
)
|
-
Prepaid expenses
|
|
|
112,919
|
|
|
(240,669
|
)
|
-
Income tax refund receivable
|
|
|
(403,995
|
)
|
|
-
|
|
-
Deferred tax asset
|
|
|
45,467
|
|
|
-
|
|
-
Other current assets
|
|
|
(158,605
|
)
|
|
(39,097
|
)
|
-
Deposits and other assets
|
|
|
229,788
|
|
|
(358,199
|
)
|
-
Accounts payable
|
|
|
266,341
|
|
|
348,374
|
|
-
Accrued expenses
|
|
|
541,484
|
|
|
530,006
|
|
-
Customer deposits
|
|
|
(23,712
|
)
|
|
83,337
|
|
-
Income taxes payable
|
|
|
-
|
|
|
(301,776
|
)
|
-
Deferred
income
taxes
|
|
|
(111,540
|
)
|
|
(11,588
|
)
|
-
Other liabilities
|
|
|
53,411
|
|
|
(2,500
|
)
|
Net
cash used in operating activities
|
|
|
(1,629,131
|
)
|
|
(1,851,177
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(1,277,327
|
)
|
|
(385,004
|
)
|
Net
cash acquired from the reverse acquisition
|
|
|
1,800,000
|
|
|
-
|
|
Net
cash provided by (used in) investing
activities
|
|
|
522,673
|
|
|
(385,004
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
-
|
|
|
3,444,323
|
|
Payments
of principal on notes payable
|
|
|
(1,460,000
|
)
|
|
(551,711
|
)
|
Payments
of principal on capital lease obligations
|
|
|
(141,153
|
)
|
|
(5,298
|
)
|
Net
repayment of advances from shareholders
|
|
|
(75,245
|
)
|
|
100,972
|
|
Sales
of common and preferred stock
|
|
|
4,190,000
|
|
|
290,996
|
|
Exercise
of stock options
|
|
|
-
|
|
|
16,335
|
|
Net
cash provided by financing activities
|
|
|
2,513,602
|
|
|
3,295,617
|
|
Net
increase in cash and cash equivalents
|
|
|
1,407,144
|
|
|
1,059,436
|
|
Cash
and cash equivalents, beginning of
year
|
|
|
1,989,473
|
|
|
930,037
|
|
Cash
and cash equivalents, end of year
|
|
$
|
3,396,617
|
|
$
|
1,989,473
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
2006
|
|
|
2005
|
|
Supplemental
disclosures of
cash flow information:
|
|
|
|
|
|
|
Cash
paid during the
year for:
|
|
|
|
|
|
|
-
Income taxes
|
|
$
|
-
|
|
|
$
|
469,573
|
|
-
Interest
|
|
$
|
178,168
|
|
|
$
|
123,831
|
|
Non-cash
investing and
financing activities:
|
|
|
|
|
|
|
|
|
Issuance
of common stock
for asset acquisition
|
|
|
|
|
|
|
|
|
-
Inventories
|
|
|
79,179
|
|
|
$
|
800,000
|
|
-
Property and
equipment
|
|
|
573,208
|
|
|
|
3,700,000
|
|
-
Additional paid-in
capital
|
|
|
(652,387
|
)
|
|
|
(4,500,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance
of stock for
payment of note
payable
|
|
|
|
|
|
|
|
|
-
Note payable
|
|
$
|
600,000
|
|
|
$
|
-
|
|
-
Additional paid-in
capital
|
|
|
(600,000
|
)
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance
of common stock
for property
and equipment
|
|
|
|
|
|
|
|
|
-
Fair value of
property and
equipment acquired
|
|
$
|
214,500
|
|
|
$
|
250,000
|
|
-
Additional paid-in
capital
|
|
|
(214,500
|
)
|
|
|
(250,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance
of preferred
stock for partial
repayment of
note payable,
accrued
royalties and
outsourcing expenses,
and release of
obligations from
operating agreements
|
|
|
|
|
|
|
|
|
-
Note payable
|
|
$
|
400,000
|
|
|
$
|
-
|
|
-
Royalties and
outsourcing expenses
|
|
|
356,817
|
|
|
|
|
|
-
Property and
equipment
|
|
|
723,372
|
|
|
|
-
|
|
-
Additional paid-in
capital
|
|
|
(1,480,189
|
)
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Acquisition
of property and
equipment through
capital lease
obligations
|
|
|
|
|
|
|
|
|
-
Fair value of
property and
equipment acquired
|
|
$
|
387,384
|
|
|
$
|
103,416
|
|
-
Capital lease
obligations incurred
|
|
|
(387,384
|
)
|
|
|
(103,416
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Reclassification
of related party
transactions
|
|
|
|
|
|
|
|
|
-
Advances from
shareholders
|
|
$
|
-
|
|
|
$
|
(10,223
|
)
|
-
Additional paid-in
capital
|
|
|
-
|
|
|
|
10,223
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING
POLICIES
|
Organization
and Basis of Presentation
New
World
Brands, Inc. (“
New World Brands
”, the
“
Company
”, “
we
”,
“
us
” or “
our
”) is a Delaware
corporation that until September 15, 2006 was an importer of wine
and spirits
beverages for sale and distribution throughout the United States. On
September 15, 2006, we sold our wine and spirits business, and, by
way of a
reverse acquisition, acquired all of the assets and assumed all of
the
liabilities of Qualmax, Inc., a Delaware corporation
(“
Qualmax
” and the reverse acquisition the
“
Reverse Acquisition
”).
As
a
result of the Reverse Acquisition we are no longer in the wine and
spirits
business, and instead we are now a telecommunications research and
development,
sales, and service company, focusing on products and services utilizing
voice
over internet protocol (“
VoIP
”)
technology. We develop, manufacture and sell our own line of VoIP
technology products through our wholly owned subsidiary, IP Gear,
Ltd., an
Israeli corporation (“
IP Gear, Ltd.
”). We
are also a reseller of VoIP related telecommunications equipment,
and a reseller
of wholesale VoIP telephony service.
Our
acquisition of Qualmax and its wholly owned subsidiary IP Gear, Ltd.
was
accounted for as a reverse acquisition. Although New World Brands was
the company that made the acquisition, Qualmax was treated as the
surviving
company for accounting purposes. As a result, the accompanying
financial statements reflect the results of operations and cash flows
of Qualmax
and IP Gear, Ltd. prior to September 15, 2006, and the financial
position,
results of operations, and cash flows of New World Brands, Qualmax,
and IP Gear,
Ltd. from and after September 15, 2006.
All
inter-company accounts and transactions have been eliminated in
consolidation.
On
September 15, 2006 the Company changed its fiscal year end from May
31 to
December 31, which is Qualmax’s fiscal year end. The change in fiscal
year results from the acquisition of Qualmax and IP Gear, Ltd., which
was
accounted for as a reverse acquisition.
Reverse
Acquisition Accounting
In
June
2006, New World Brands determined to change its business plan by
selling its
wine and spirits business for the sum of $500,000 (the “
Sale
Transaction
”), issuing 7,500,000 shares of common stock for
$1,500,000 (the “
Private Equity Investment
”), and
merging with Qualmax and its wholly owned subsidiary IP Gear, Ltd.
under
the Reverse Acquisition. The Sale Transaction and Private Equity
Investment each took place on September 14, 2006, after which New
World Brands
assets consisted solely of cash in the
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
amount
of
$2,000,000, and certain contract rights under the Reverse Acquisition
agreement
with Qualmax. The Reverse Acquisition was completed on September 15,
2006, subject to shareholder ratification and certain filings and
amendments
that are necessary to finalize the merger.
Pursuant
to the Reverse Acquisition, New World Brands issued 100 shares of
its Series A
Convertible Preferred Stock (the “
Preferred Stock
”) to
Qualmax. The preferred stock was issued because New World Brands did
not have sufficient authorized and available common stock shares
to issue on
September 15, 2006 when the Reverse Acquisition was consummated. The
Preferred Stock represented, as of September 15, 2006, the right
to vote
approximately eighty-six percent (86%) of the issued and outstanding
shares of
our capital stock, calculated under the premise that the Preferred
Stock had
been converted to the appropriate number of shares of our common
stock (meaning,
on an “as-converted” basis).
The
Boards of Directors of New World Brands and Qualmax (the
“
Boards
”) have each agreed that Qualmax will
be merged
with the Company (the “
Merger
”), after which the
separate corporate existence of Qualmax shall cease.
The
Boards have agreed that the following events (the “
Merger
Events
”) must occur in order to complete the Merger.
|
1.
|
Any
filings that may be necessary to complete the
Merger.
|
|
2.
|
The
stockholders of New World Brands and Qualmax must approve
the
Merger. Qualmax, in its capacity as the holder of Preferred
Stock currently holding (as of the date of these financial
statements) the
right to vote approximately seventy-six percent (76%) of
the issued and
outstanding shares of our capital stock, calculated on
an as-converted
basis, has agreed to vote its shares in favor of the Merger,
and Qualmax
will cease to exist once the Merger is
completed.
|
The
acquisition of Qualmax resulted in a change of control of New World
Brands. As a result of the reverse acquisition accounting treatment,
Qualmax is deemed to be the acquiring company for accounting
purposes. Effective on the acquisition date of September 15, 2006,
New World Brands’ consolidated balance sheet included the assets and liabilities
of Qualmax and its wholly owned subsidiary IP Gear, Ltd. and its
consolidated
equity accounts were recapitalized to reflect the combined equity
of New World
Brands, Qualmax and IP Gear, Ltd. Consolidated financial statements
for the year
ended December 31, 2005 are those of Qualmax and IP Gear, Ltd.
only.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Basis
of Accounting and Revenue Recognition
The
accompanying consolidated financial statements have been prepared
using the
accrual method of accounting. Revenues from our VoIP telephony
services division have been recognized as services are
rendered. Revenue from the sale of products from our own line of VoIP
equipment or reseller equipment is recognized as our customers take
delivery of
our products. Any amounts received from our customers in advance are
recorded as customer deposits and classified as other current
liabilities.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with
accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and the reported
amounts of
revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments in debt instruments
purchased
with original maturities of three months or less to be cash
equivalents.
Accounts
Receivable
Accounts
receivable are presented at net realizable value, which is comprised
of total
accounts receivable less any allowances for uncollectible
accounts. The Company provides an allowance for potentially
uncollectible accounts based upon a periodic review and analysis
of outstanding
accounts receivable balances. The resulting estimate of uncollectible
receivables is charged to an allowance for doubtful
accounts. Recoveries of accounts previously written off are used to
offset the allowance account in the periods in which the recoveries
are
made. Accordingly, as of December 31, 2006 and 2005, accounts
receivable has been written down to its estimated net realizable
value, and
results of operations for the year ended December 31, 2006 and 2005
include
corresponding charges of approximately $437,000 and $144,000,
respectively. The allowance for doubtful accounts as of December 31, 2006
was approximately $143,000.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis. Market represents the lower of replacement
cost or net realizable value on inventories as a whole. Inventories
are made up primarily of high technology telephone switching and
VoIP routing
equipment and their parts. Some of these inventories are manufactured
and may include finished goods, work in process or unassembled
components. The majority of inventories are finished goods for resale
that were purchased from other manufacturers. Due to rapid
technological advancements in the industry, inventories may, from
time to time,
be subject to impairment and obsolescence. We record an allowance for
slow-moving and obsolete inventories based upon a periodic review
and analysis
of inventories on hand. During 2006, we segregated our obsolete and
slow-moving inventories, which were comprised of outdated telephone
switching
and VoIP routing equipment. Accordingly, the allowance for obsolete
inventories as of December 31, 2006 was approximately $246,000.
Concentration
of Credit Risk
From
time
to time, the Company has cash in financial institutions in excess
of federally
insured limits. However, the Company has not experienced any losses
in such accounts and believes it is not exposed to any significant
credit risk
on its cash balances. Cash exceeding federally insured limits
amounted to approximately $3,170,000 as of December 31, 2006.
Business
Concentrations
We
did
not have any single supplier that represented more than ten percent
of purchases
or any single customer that represented more than ten percent of
sales during
the year ended December 31, 2006. We had three major suppliers that
accounted for 48% of our purchases but no single customer that represented
more
than ten percent of sales during the year ended December 31, 2005.
Impairment
of Long-Lived Assets and Long-Lived Assets Subject to
Disposal
We
review
our long-lived assets for impairment whenever events or changes in
circumstances
indicate that the carrying amount of an asset may not be recoverable,
in
accordance with Statement of Financial Accounting Standards
(“
SFAS
”) No. 144. Recoverability of assets
to be held and used is measured by a comparison of the carrying
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Impairment
of Long-Lived Assets and Long-Lived Assets Subject to Disposal
(Continued)
amount
of
an asset to future undiscounted cash flows expected to be generated
by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the
assets exceeds its fair value. Assets subject to disposal are
reported at the lower of the carrying amount or fair value less costs
to
sell. We had no impairment of our long-lived assets during the years
ended December 31, 2006 or 2005.
Property
and Equipment
Property
and equipment are recorded at cost. For financial statement purposes,
depreciation of software, furniture and equipment is computed using
the
straight-line method over their estimated useful lives of the assets
while
leasehold improvements are amortized over the shorter of their estimated
useful
lives or the terms of their respective leases. Expenditures for
replacements, maintenance and repairs that do not extend the lives
of the assets
are charged to operations as the expenses are incurred. When assets
are retired, sold or otherwise disposed of, their costs and related
accumulated
depreciation are removed from the accounts and resulting gains or
losses are
reflected in the year of disposal.
Stock
Options
Effective
January 1, 2006, we adopted the fair value method of accounting for
awards of
employee stock and options in accordance with SFAS No. 123, “Accounting for
Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation, Transition and Disclosure,” and SFAS No. 123R,
“Share-Based Payment.” These standards require the cost associated with employee
services in exchange for equity instruments based on the grant date
fair value
of the award, be recognized over the period during which the employee
is
required to provide services in exchange for the award. No compensation
cost is
recognized for awards for which employees do not render the requisite
service.
Because the Company changed its method of accounting from the intrinsic
method
as per APB Opinion No. 25, upon adoption, the grant date fair value
of employee
share options was estimated using the Black-Scholes model. Compensation
cost for
the unvested portion of equity awards granted prior to January 1,
2006, will be
recognized over the remaining vesting periods. Due to the prospective
adoption
of SFAS No. 123R, results of operations for prior periods have not
been
restated.
Prior
to
2006, the Company applied the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting
for stock
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Stock
Options (Continued)
issued
to Employees,
and related interpretations including FASB Interpretation No.
44,
Accounting for Certain Transactions involving Stock Compensation—an
interpretation of APB Opinion No. 25,
issued in March 2000, to account for
its fixed-plan stock options. Under this method, compensation expense
was
recorded on the date of grant only if the current market price of
the underlying
stock exceeded the exercise price. SFAS No. 123,
Accounting for Stock-Based
Compensation,
established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company elected to continue
to apply the
intrinsic-value-based method of accounting described above, and had
adopted only
the disclosure requirements of SFAS No. 123. See Note G, Stock Option
Plans.
Software
Costs
Certain
computer software development costs are capitalized in the accompanying
consolidated balance sheet in accordance with SFAS No. 86,
Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed
.
Capitalization of computer software development costs begins upon
the
establishment of technological feasibility. Capitalization ceases
and
amortization of capitalized costs begins when the software product
is
commercially available for general release to customers. Amortization
of
capitalized computer software development costs is included in general
and
administrative expenses and is provided using the straight-line method
over the
remaining estimated economic life of the product, not to exceed three
years. Net unamortized software costs as of December 31, 2006
amounted to approximately $4,080,000. Amortization of software costs
for the years ended December 31, 2006 and 2005 was approximately
$1,815,000 and
$0, respectively.
Segment
Information
Our
business consists of three operating segments: (i) proprietary hardware,
which
is our VoIP technology development and equipment manufacturing subsidiary
that
is located in Israel, IP Gear, Ltd.; (ii) resale hardware, which
is the sale and
distribution of VoIP and other telephony equipment and related professional
services via our U.S.-based business operated under the name "IP
Gear"; and
(iii) wholesale carrier services, which is telephony service resale
and direct
call routing via our U.S.-based VoIP service business operated under
the name
"IP Gear Connect". See Note P – Business Segment
Reporting.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Fair
Value of Financial Instruments
Our
financial instruments consist primarily of cash, certificates of
deposit,
accounts receivable, accounts payable, accrued liabilities and notes
payable. The carrying amounts of such financial instruments
approximate their respective estimated fair values due to the short-term
maturities and approximate market interest rates of these
instruments. The
estimated
fair values are not necessarily indicative of the amounts we would
realize in a
current market exchange or from future earnings or cash flows.
Earnings
per Share
Net
income per share is computed in accordance with SFAS No. 128, “Earnings per
Share.” Basic net income per share is based upon the weighted average number
of
common shares outstanding during the period. Diluted net income per
share is
based upon the weighted average number of common shares outstanding
and dilutive
common stock equivalents outstanding during the period. Common stock
equivalents
are options and warrants granted by the Company and are calculated
under the
treasury stock method. Common equivalent shares from unexercised
stock options
and warrants are excluded from the computation when there is a loss
as their
effect is antidilutive, or if the exercise price of such options and warrants
is
greater than the average market price of the stock for the
period. See Note F for the computation of basic and diluted
share data.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109
“Accounting for
Income Taxes”
,
which requires recognition of deferred tax
assets and liabilities for expected future tax consequences of events
that have
been included in the consolidated financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement
and tax bases
of assets and liabilities using enacted tax rates in effect for the
year in
which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets amounts
expected to
be realized. IP Gear, Ltd. files an individual income tax return in
Israel. U.S. income taxes are not provided on undistributed earnings,
which are expected to be permanently reinvested by the foreign subsidiary,
unless the earnings can be repatriated in a tax-free or cash-flow
neutral
manner.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Advertising
and Promotional Costs
We
expense advertising and promotional costs as incurred. Advertising
and promotional expenses amounted to approximately $283,000 and $88,000
for the
years ended December 31, 2006 and 2005, respectively.
Leases
We
account for leases in accordance with SFAS No.13
“Accounting for
Leases”
, under which we perform a review of each newly acquired lease
to
determine as whether it should be treated either as a capital or
an operating
lease. A capital lease asset is capitalized and depreciated over the
term of the initial lease. A liability equal to the present value of
the aggregated lease payments is recorded utilizing the stated lease
interest
rate. If an interest rate is not stated, we will determine our
estimated incremental borrowing rate.
Foreign
Currency Translation
IP
Gear,
Ltd.’s functional currency is the New Israeli Shekel, which is its local
currency. Accordingly, balance sheet accounts are translated at the
exchange
rate in effect at the end of the year and income statement accounts
are
translated at the average exchange rate for the year. Translation
gains and losses are included as a separate component of stockholders’ equity as
cumulative translation adjustments. Foreign currency transaction
gains and losses are included in operations as other income and
expenses. For the years ended December 31, 2006 and 2005, foreign
currency transaction losses were approximately $30,000 and
$0,
respectively.
Comprehensive
Income (Loss)
Comprehensive
income is comprised of net income and other comprehensive income.
Other
comprehensive income includes certain changes in equity that are
excluded from
net income. As of December 31, 2006, the Company’s net accumulated
other comprehensive loss of approximately $49,000 was comprised of
the
cumulative foreign currency translation loss in the amount of approximately
$79,000 less deferred tax benefit on the foreign currency translation
loss of
approximately $30,000. As of December 31, 2005, there were no
components of comprehensive income other than net income.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities
. SFAS No. 159 permits entities to choose to
measure eligible financial instruments at fair values. The unrealized
gains and losses on items for which the fair value option has been
elected
should be reported in earnings. The decision to elect the fair value
options is determined on an instrument by instrument basis, should
be applied to
an entire instrument, and is irrevocable. Assets and liabilities
measured at fair values pursuant to the fair value option should
be reported
separately in the balance sheet from those instruments measured using
other
measurement attributes. SFAS No. 159 is effective as of the
beginning of the
first
fiscal year that begins after November 15, 2007. We are
currently analyzing the potential impact of adoption of SFAS No. 159 on our
consolidated financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108,
Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year
Financial
Statements
. SAB 108 provides guidance on the consideration of
effects of the prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The SEC
staff believes registrants must quantify errors using both a balance
sheet and
income statement approach and evaluate whether either approach results
in
quantifying a misstatement that, when all relevant quantitative and
qualitative
factors are considered, is material. SAB 108 was effective for the
first annual period ending after November 15, 2006 with early application
encouraged. We adopted the provisions of SAB 108 in 2006 and the
impact of adoption was not material to our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements
. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles
and expands disclosures about fair value measurements. SFAS No. 157
is effective
for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. We do not anticipate that the adoption of this standard will
have a material impact on our consolidated financial statements.
In
June
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes-an interpretation of SFAS 109,
(“FIN 48”). FIN
48 provides interpretive guidance for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a
tax
return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are reviewing the impact of adopting FIN
No. 48, but we do not anticipate that the impact will be material to
our
consolidated financial statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
A –
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
Accounting Pronouncements (Continued)
In
March
2006, the FASB issued SFAS No. 156,
Accounting for Servicing of
Financial Assets
, which will be effective for fiscal years that begin after
December 15, 2006. This statement amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement 125,
or
SFAS No. 140
,
regarding (1) the circumstances under which a
servicing asset or servicing liability must be recognized, (2) the initial
and subsequent measurement of recognized servicing assets and liabilities,
and
(3) information required to be disclosed relating to servicing assets
and
liabilities. We do not anticipate that the adoption of this standard
will have a material impact on our consolidated financial
statements.
In
February 2006, the FASB issued SFAS No. 155,
Accounting for Certain
Hybrid Financial Instruments,
or SFAS No. 155, which will be effective for
fiscal years that begin after December 15, 2006. This statement
amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
, to narrow the scope exception for interest-only and
principal-only strips on debt instruments to include only such strips
representing rights to receive a specified portion of the contractual
interest
or principal cash flows. SFAS No.
155 also
amends SFAS No.
140 to allow qualifying special-purpose
entities to hold a passive derivative financial instrument pertaining
to
beneficial interests that are derivative financial instruments. We do
not anticipate adoption of this standard will have a material impact
on our
consolidated financial statements.
In
May
2005, the FASB issued SFAS No. 154,
Accounting Changes and Error
Corrections,
which was adopted effective January 1,
2006. This statement addresses the retrospective application of such
changes and corrections and will be followed if and when necessary.
Adoption of
this standard did not have a material impact on our consolidated
financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
Inventories
as of December 31,
2006
consisted
of the following:
|
|
Resale
Hardware
|
|
|
Proprietary
Hardware
|
|
|
Total
|
|
Raw
materials
|
|
$
|
-
|
|
|
$
|
313,200
|
|
|
$
|
313,200
|
|
Work-in
progress
|
|
|
-
|
|
|
|
145,221
|
|
|
|
145,221
|
|
Finished
goods
|
|
|
979,727
|
|
|
|
625,316
|
|
|
|
1,605,043
|
|
Total
inventories
|
|
|
979,727
|
|
|
|
1,083,737
|
|
|
|
2,063,464
|
|
Less
allowance for obsolete inventories
|
|
|
(93,975
|
)
|
|
|
(151,665
|
)
|
|
|
(245,640
|
)
|
Inventories,
net
|
|
$
|
885,752
|
|
|
$
|
932,072
|
|
|
$
|
1,817,824
|
|
NOTE
C –
|
PROPERTY
AND EQUIPMENT
|
As
of
December 31,
2006,
our
property and equipment consisted of the following:
|
|
|
|
|
Useful
Lives
(In
Years)
|
|
|
|
|
|
|
|
|
Operating
equipment
|
|
$
|
1,483,898
|
|
|
|
5
|
|
Rental
equipment
|
|
|
101,056
|
|
|
|
5
|
|
Leasehold
improvements
|
|
|
232,519
|
|
|
|
15
|
|
Computer
software
|
|
|
6,297,206
|
|
|
|
3
-
5
|
|
Furniture
and fixtures
|
|
|
62,206
|
|
|
|
5
-
10
|
|
Other
|
|
|
4,100
|
|
|
|
5
|
|
Total
property and equipment
|
|
|
8,180,985
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
2,341,334
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
5,839,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
equipment acquired under capital leases
|
|
$
|
489,007
|
|
|
|
|
|
Less
accumulated amortization
|
|
|
(82,527
|
)
|
|
|
|
|
|
|
$
|
406,480
|
|
|
|
|
|
Depreciation
and amortization expense amounted to approximately $2,165,000 and
$182,000 for
the years ended December 31, 2006 and 2005,
respectively. Amortization of
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
C –
|
PROPERTY
AND EQUIPMENT
(CONTINUED)
|
leased
equipment, which has been included in depreciation expense on the
accompanying
financial statements, was approximately $77,000 and $6,000 for the
years ended
December 31, 2006 and 2005, respectively.
Bank
of America, N.A.
We
maintained a line of credit facility with Bank of America, N.A. (“
B
of A
”) during 2006. In September 2006, the line of
credit was converted into a term loan in the amount of approximately
$985,000
that was due on March 31, 2007. Interest only was payable monthly at
B of A’s prime rate (B of A prime was 8.25% at December 31, 2006) plus
3%. As of December 31, 2006, the outstanding principal balance on the
note payable was $984,323.
The
loan
was secured by the assets of the Company, and as a condition of the
note
payable,
B of A
required us to maintain a current
assets to current liabilities ratio of at least 1.2 to 1 and a total
liabilities
to tangible net worth ratio that is not to exceed 2.5 to 1. For the
year ended December 31, 2006, the Company was in compliance with
these ratios,
and with all other terms of the loan.
The
entire principal balance was subsequently paid on March 30, 2007,
in a
transaction described in more detail in Note L, Subsequent Events
and Other
Matters, under the heading “Term Loan and Repayment of Line of Credit with B of
A.”
Total
maturities of notes payable as of December 31, 2006 were as
follows:
2007
|
|
$
|
984,323
|
|
|
|
|
|
|
Total
notes payable
|
|
|
984,323
|
|
|
|
|
|
|
Notes
payable, current portion
|
|
|
984,323
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
$
|
-
|
|
Interest
expense on the notes payable was approximately $142,000 and $109,000
for the
years ended December 31, 2006 and 2005, respectively.
B.O.S.
Better Online Systems Ltd.
In
December 2005, we acquired certain assets of Better Online Solutions
Ltd.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
D –
|
NOTES
PAYABLE (CONTINUED)
|
B.O.S.
Better Online Systems Ltd. (Continued)
(“
BOS
”)
and contributed them into our wholly owned Israeli subsidiary, IP
Gear,
Ltd. As a condition of the acquisition by Qualmax of the BOS VoIP and
GSM product lines and related technology, BOS agreed to lend to the
Company a
total of $1,000,000 on December 31, 2005 (the “
BOS
Loan
”). The entire principal and interest balance of
the BOS Loan was repaid during 2006 in three portions, each by the
issuance of
capital stock. The first two such issuances, as payment of principal
in the amounts of $350,000 on June 30, 2006 and $250,000 on July
31, 2006, were
of the common stock of Qualmax. The final such issuance, in the
principal amount of $400,000 and all remaining unpaid interest, effective
December 31, 2006, was of the Preferred Stock of the Company, and
as of December
31, 2006 the Company was no longer indebted to BOS in any amount. The
December 31, 2006 issuance of Preferred Stock in exchange for release
from the
BOS Loan and other obligations is discussed in more detail in Note
F,
Stockholders’ Equity, under the heading “Preferred Stock.”
NOTE
E –
|
CAPITAL
LEASE OBLIGATIONS
|
We
currently lease equipment pursuant to seven capital lease
agreements. In conjunction therewith, the Company has capitalized the
cost of the equipment in the amount of $489,000, which is the present
value of
the lease payments. Interest expense on the capital lease
obligations amounted to approximately $36,000 and $1,700 for the
years ended
December 31, 2006 and 2005, respectively. Future minimum lease
payments required under the capital leases as of December 31, 2006
were as
follows:
2007
|
|
$
|
194,049
|
|
2008
|
|
|
176,566
|
|
2009
|
|
|
7,027
|
|
|
|
|
|
|
Total
|
|
|
377,642
|
|
|
|
|
|
|
Less:
amounts representing interest
|
|
|
(33,293
|
)
|
|
|
|
|
|
Present
value of net minimum lease payments
|
|
|
344,349
|
|
|
|
|
|
|
Capital
lease obligations, current portion
|
|
|
169,202
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
$
|
175,147
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY
|
Capitalization
The
Company’s authorized capital stock consists of 50,000,000 shares of common
stock, $.01 par value per share, and 1,000 shares of preferred stock,
$.01 par
value. There were 44,303,939 shares of common stock and 116.666974
shares of Series A Convertible Preferred Stock outstanding as of December
31, 2006.
The
board
of directors has the authority, without action by the Company’s stockholders, to
provide for the issuance of preferred stock in one or more classes
or series and
to designate the rights, preferences and privileges of each class
or series,
which may be greater than the rights of the common stock.
Common
Stock
As
of
December 31, 2006, our total number of authorized common stock, $.01
par value,
was 50 million shares, with 44,303,909 shares issued and
outstanding. On February 1, 2007 our board acted to increase the
number of authorized common stock to 600 million shares. The additional
common
stock shares will become available upon the effectiveness, by shareholder
action, of an amendment to our certificate of incorporation.
Upon
authorization of the additional common shares, all Series A Convertible
Preferred Shares will automatically convert to common shares at a
ratio of
2,986,736 common shares for every one preferred share.
Stockholders’
equity transactions prior to the New World Brands/Qualmax, Inc. merger
date have
been retroactively restated for the equivalent number of shares received
in the
merger after giving effect to any difference in par value of the
issuer’s and
acquirer’s stock with an offset to paid-in capital.
Preferred
Stock
As
of
December 31, 2006, we had 1,000 shares of authorized preferred stock,
$.01 par
value. In connection with the transactions contemplated by the
Reverse Acquisition, the Board authorized the creation and issuance
of shares of
voting preferred stock designated as “Series A Convertible Preferred Stock” (the
“
Preferred Stock
”). The terms, rights,
preferences and privileges of the Preferred Stock are set forth in
a Certificate
of Designation filed with the Secretary of State of the State of
Delaware on
August 30, 2006, as amended on January 8, 2007 to increase the authorized
number
of shares of Preferred Stock from 100 to 200 (the “
Certificate of
Designation
”). Pursuant to the Reverse Acquisition, the
Company issued 100 shares of Preferred Stock to Qualmax, which shares
of
Preferred Stock are convertible into 298,673,634 shares of Common
Stock and
which represent more than a majority of the voting power of the Company’s issued
and
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY (CONTINUED)
|
Preferred
Stock (Continued)
outstanding
shares of capital stock (on an as-converted basis). Pursuant to the
Certificate of Designation, the shares of Preferred Stock will be
automatically
converted into shares of Common Stock upon the filing of the Charter
Amendments
described below.
During
2006, we issued 116.666974 shares of our Series A Convertible Preferred
Stock,
as follows:
Pursuant
to the Reverse Acquisition, New World Brands issued 100 shares of
Preferred
Stock, convertible into 298,673,634 shares of our common stock, to
Qualmax.
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,
LLC, a Nevada limited liability company (“
P&S
Spirit
”) pursuant to which P&S Spirit agreed to invest between
$3 million and $5 million by purchasing shares of the Company’s Series A
Convertible Preferred stock in three stages, at a price of $268,806.27
per share
of Preferred Stock (equivalent to $0.09 per share of common stock,
par value
$0.01 per share (the “
Common Stock
”), on an
as-converted basis): (i) on December 29, 2006, an
investment
of $3,000,000 by purchase of 11.160454 shares of Preferred Stock
of the Company,
convertible into 33,333,333 shares of Common Stock; and (ii) after
the second
fiscal quarter of 2007, subject to certain conditions set forth in
the
Subscription Agreement and summarized below, an additional investment
of
$1,000,000 (the “
Second Tranche
”) by purchase of
3.720151 shares of Preferred Stock, convertible into 11,111,111 shares
of Common
Stock; and (iii) after the third fiscal quarter of 2007, subject
to certain
conditions set forth in the Subscription Agreement and summarized
below, an
additional investment of $1,000,000 (the “
Third
Tranche
”) by purchase of 3.720151 shares of Preferred Stock,
convertible into 11,111,111 shares of Common Stock.
The
Second Tranche is only payable by P&S Spirit in the event that the Company’s
consolidated unaudited financial statements as filed on Form 10-QSB
(or, Form
10-Q, if applicable) for the second quarter ending June 30, 2007
reflect EBITDA
of: (A) $543,000 or greater for the three month period ending June
30, 2007; or
(B) $618,000 or greater for the six month period ending June 30,
2007. Therefore, if the foregoing conditions are met, the Second
Tranche payment could be required no sooner than 5 days after the
filing of the
Company’s quarterly report on Form 10-QSB for the quarter ending June 30,
2007.
The
Third
Tranche is only payable by P&S Spirit in the event the Company’s
consolidated unaudited financial statements as filed on Form 10-QSB
(or, Form
10-Q, if applicable) for the third quarter ending September 30, 2007
reflect
EBITDA of: (A) $885,000 or greater for the three month period ending
September
30, 2007; or (B) $1,503,000 or greater for the nine month period
ending
September 30, 2007. Therefore, if the foregoing conditions
are
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY (CONTINUED)
|
Preferred
Stock (Continued)
met,
the
Third Tranche payment could be required no sooner than 5 days after
the filing
of the Company’s quarterly report on Form 10-QSB for the quarter ending
September 30, 2007. Also, if the Second Tranche is not payable at the
time the Third Tranche becomes payable, the Second Tranche payment
must be made
simultaneously with the Third Tranche payment.
Effective
December 31, 2006 we entered into an agreement with Better Online
Solutions,
Ltd. (“
BOS
”) (the “
BOS
Agreement
”). Under the terms of the BOS Agreement, we
converted outstanding obligations under the BOS agreement in the
amount of
$1,480,189 into 5.50652 shares of Preferred Stock at a common stock
equivalent
price of $.09 per share, which was the prevailing market price of
our common
stock on the date of the BOS Agreement. The Preferred Stock held by
BOS is automatically convertible into 16,446,544 shares of our common
stock, as
noted below. The total amount converted consisted of the remaining
principal and accrued interest on our note payable to BOS, accrued
royalties and
outsourcing expenses incurred, and the release of any other obligations
under
the terms of the BOS Operating Agreements. In addition, BOS granted
to us, contingent upon certain conditions, the right to purchase
up to thirty
percent (30%) of all of BOS’s shares of our Series A Preferred Stock or our
common stock, at a price ranging from $0.12 to $0.24 per share on
a common stock
equivalent basis.
Conversion
of Series A Convertible Preferred Stock into shares of our common
stock will
take place automatically upon the effectiveness of an amendment to
our
certificate of incorporation authorizing an increase in the number
of
outstanding shares of our common
stock
from 50 million shares to 600 million shares, which we expect to
occur during
the second quarter of 2007. Each share of Series A Preferred Stock
will convert into 2,986,736.34 shares of our common stock.
Common
Stock Warrants
No
warrants for the purchase of our common stock were granted during
the 12 months
ending December 31, 2006.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY (CONTINUED)
|
Common
Stock Warrants (Continued)
Common
stock warrant activity for the year was as follows:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance
granted at December 31, 2005
|
|
|
2,320,000
|
|
|
$
|
0.49
|
|
Granted
in 2006
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
in 2006
|
|
|
-
|
|
|
$
|
-
|
|
Balance
granted at December 31, 2006
|
|
|
2,320,000
|
|
|
$
|
0.49
|
|
Preferred
Stock Warrants
Effective
December 29, 2006, we issued two warrants, one jointly to M. David
Kamrat and
Noah Kamrat, each of whom are directors and officers of the Company,
and one to
P&S Spirit. Each warrant will allow for the purchase of up to a
total of 9.300378 shares of our Series A Preferred Stock at $268,806.27
per
share. The warrants expire on December 31, 2011.
Upon
the
automatic conversion of our Series A Preferred Stock to common stock,
the
warrants, if not previously exercised, will be cancelled and we will
issue two
new warrants, one jointly to M. David Kamrat and Noah Kamrat, and
one to P&S
Spirit, that each will allow for the purchase of up to 27,777,778
shares of our
common stock at $.09 per share.
Preferred
stock warrant activity for the year was as follows:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance
granted at December 31, 2005
|
|
|
-
|
|
|
$
|
-
|
|
Granted
in 2006
|
|
|
18.600756
|
|
|
|
|
|
(as
converted to common shares)
|
|
|
55,555,548
|
|
|
$
|
0.09
|
|
Balance
granted at December 31, 2006
|
|
|
18.600756
|
|
|
|
|
|
(as
converted to common shares)
|
|
|
55,555,548
|
|
|
$
|
0.09
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY (CONTINUED)
|
Computation
of Basic and Diluted Share Data
The
following tables set forth the computation of basic and diluted share
data for
2006 and 2005 (rounded to the nearest thousand):
Weighted
average number of shares outstanding during
2005:
|
|
|
|
Basic
(common)
|
|
|
166,861,000
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
- options and warrants
|
|
|
86,526,000
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
253,387,000
|
|
Weighted
average of options and warrantes not included
above (anti-dilutive)
|
|
|
1,530,000
|
|
Weighted
average number of shares outstanding
during 2006:
|
|
|
|
Basic
(common)
|
|
|
39,044,000
|
|
Preferred
(as converted to common)
|
|
|
86,148,000
|
|
Total
|
|
|
125,192,000
|
|
Effect
of dilutive securities
|
|
|
|
|
Common
- options and warrants
|
|
|
-
|
|
Preferred
- options and warrants
|
|
|
-
|
|
Total
|
|
|
-
|
|
Weighted
average number of shares outstanding
- diluted
|
|
|
125,192,000
|
|
Weighted
average of options and warrantes
not included
above (anti-diluted):
|
|
|
|
|
Basic
(common)
|
|
|
4,478,000
|
|
Preferred
(as converted to common)
|
|
|
55,556,000
|
|
Total
|
|
|
60,034,000
|
|
The
basic
and diluted share data for 2005 have been adjusted retroactively
in a manner
similar to a stock split to reflect the recapitalization of the
Company.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY (CONTINUED)
|
Lock-Up
Agreement
In
connection with the transactions contemplated by the Subscription
Agreement, the
Company, the Kamrats, P&S Spirit and certain affiliates of the Kamrats and
P&S Spirit entered into an Amended and Restated Lock-Up Agreement (the
“
Lock-Up Agreement
”), pursuant to which each such
party agreed to certain restrictions on transfer on certain shares
of capital
stock (and securities convertible into share of capital stock) of
the Company on
the terms set forth therein. A copy of the Amended and Restated Lock-Up
Agreement is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed with the SEC on January 8, 2007. In particular, the parties
agreed to restrict their ability to transfer shares of capital stock
in the
Company for up to two years without the prior approval of the other
stockholders
party thereto (meaning, both the Kamrats and P&S Spirit must seek the
consent of the other to sell subject shares during the term of the
Lock-
Up
Agreement). Also, in connection with the transactions contemplated by
the BOS Agreement BOS agreed to be subject to the Lock-Up Agreement,
restricting
the ability of BOS to transfer shares of capital stock in the Company
and
Qualmax for up to two years without the prior approval of the other
stockholders
party thereto.
Conversion
of BOS Debt to Qualmax Common Stock
In
connection with the acquisition of the BOS VoIP and GSM product lines
and
related technology (Note D), we entered into a $1,000,000 loan
agreement. During 2006, we entered into the following separate
agreements with BOS through which the following amounts owed by us
to BOS were
converted into Qualmax pre-merger common shares:
|
·
|
In
April 2006 we converted $350,000 of our note payable to
BOS into 244,755
shares of Qualmax common stock (3,488,958 shares of New
World Brands
common stock on an as-converted basis) at a price of $1.43
per common
share.
|
|
·
|
In
June 2006 we converted $250,000 of our note payable to
BOS into 174,825
shares of Qualmax common stock (2,492,112 shares of New
World Brands
common stock on an as-converted basis) at a price of $1.43
per common
share.
|
Merger
and Share Exchange Agreement with Bench Group, Inc
On
June
24, 2005, Qualmax entered into an agreement and plan of share exchange
with
Bench Group, Inc. (“Bench”), a Delaware corporation. Bench was a
non-operating publicly traded company, in existence since 1983. Under
the agreement, Bench acquired all of Qualmax’s stock from the Qualmax
stockholders (the “
Original Qualmax stockholders
”) in exchange for
14,000,000 newly issued shares (the “
Bench Exchange Shares
”) of Bench’s
Common Stock (the “
Share Exchange
”). The Bench Exchange
Shares were issued to the
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
F –
|
STOCKHOLDERS’
EQUITY (CONTINUED)
|
Merger
and Share Exchange Agreement with Bench Group, Inc
(Continued)
original
Qualmax stockholders on a pro rata basis, in proportion to the ratio
of the
number of Qualmax shares held by each original Qualmax stockholder
to the total
number of Qualmax shares held by all original Qualmax stockholders
as of the
closing date.
At
the
closing, Qualmax became a wholly-owned subsidiary of
Bench. Immediately following the closing, Bench filed an Agreement
and Plan of Merger whereby Qualmax merged with and into Bench, with
Bench as the
surviving entity (“the Upstream Merger”). Although Bench was the
surviving corporation in the Upstream Merger, the Share Exchange
and Upstream
Merger were accounted for as a “reverse acquisition” for accounting and
financial reporting purposes, wherein Qualmax was deemed the
surviving
entity
for such purposes. The Bench Exchange shares were known as “new
Qualmax stock”.
The
original stockholders of Bench retained their ownership interests
in the
surviving entity, and received an equivalent number of shares of
new Qualmax
common stock as a result of the Share Exchange and the Upstream
Merger.
The
share
exchange agreement contained a dilutive provision whereby additional
shares of
new Qualmax stock were issued to prevent the dilutive effect of stock
transactions that took place between the date of the agreement and
final closing
(“the delay stock transactions”). There was a significant delay
between the agreement date and the final closing, so an addendum
to the share
exchange agreement was established and agreed to upon which an additional
991,673 shares of new Qualmax stock was issued to the original Qualmax
stockholders to prevent the dilutive effect of the delay stock
transactions. The 991,673 shares were allocated to the original
Qualmax stockholders based on the proportion of their original pre-merger
stockholdings to total Qualmax shares outstanding prior to the merger
agreement
date.
NOTE
G –
|
STOCK
OPTION PLANS
|
Performance
Equity Plan
We
have a
Performance Equity Plan (the “
Performance Equity
Plan
”) under which we may grant incentive and nonqualified
stock
options, stock appreciation rights, restricted stock awards, deferred
stock,
stock reload options, and other stock-based awards to purchase up
to 600,000
shares of Common Stock to officers, directors, key employees, and
consultants.
The Company may not grant any options with a purchase price less
than fair
market value of Common Stock as of the date of grant. No options or
other stock-based rights were issued under the Performance Equity
Plan during
2006, and none were exercised or exercisable during 2006.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
G –
|
STOCK
OPTION PLANS
(CONTINUED)
|
Stock
Option Plan
In
October 2001, we adopted a stock option plan (the “
2001 Option
Plan
”) whereby we have reserved 5,000,000 shares of its
Common
Stock for purposes of granting options to purchase such shares pursuant
to the
2001 Stock Option Plan. Options are granted to officers and employees
of the Company by the Board of Directors and to members of the Board
on a
non-discretionary basis, provided that the exercise price of the
options is
equal or greater than the fair market price of our Common Stock on
the date the
option is granted. The 2001 Stock Option Plan terminates 10 years
from its
effective date. A total of 2,945,000 of options (“the New World
Brands options”), granted under the 2001 Option Plan to purchase our Common
Stock in exchange for services rendered, were vested and exercisable
as of
December 31, 2006. The employees and consultant performed services
related to product promotion, general business, financing, and public/investor
relations. These options were granted prior to September 15,
2006.
Employee
compensation expense for the New World Brands stock options was not
recognized
in 2006 in the accompanying consolidated statements of income as
the options
were granted and fully exercisable on September 14, 2006, prior to
the merger
date. The consolidated statements of income include the results of
operations of
New World Brands from the date of the merger, September 15, 2006,
to December
31, 2006. As of December 31, 2006, there was approximately $41,610 of
total unrecognized compensation cost related to unvested stock options
granted
under our stock option plan. That cost is expected to be recognized
over a
weighted average of 4 years. There are 1,755,000 shares of common
stock
available for future issuance, as of December 31, 2006. The following
table summarizes stock option plan as of December 31, 2006:
Exercise
Price
|
|
Options
Outstanding
|
|
Weighted
Average
Remaining
Contratual
Life
(in Years)
|
|
Options
Exercisable
|
$ 0.18
|
|
1,000,000
|
|
4.9
|
|
1,000,000
|
$ 0.18
|
|
1,000,000
|
|
4.9
|
|
1,000,000
|
$ 0.18
|
|
250,000
|
|
4.9
|
|
250,000
|
$ 0.18
|
|
100,000
|
|
4.9
|
|
100,000
|
$ 0.18
|
|
100,000
|
|
4.9
|
|
100,000
|
$ 0.18
|
|
100,000
|
|
4.9
|
|
100,000
|
$ 0.50
|
|
300,000
|
|
3.5
|
|
-
|
$ 0.25
|
|
325,000
|
|
1.75
|
|
325,000
|
$ 0.10
|
|
70,000
|
|
5.5
|
|
70,000
|
|
|
3,245,000
|
|
|
|
2,945,000
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
Income
tax consisted of the following for the years ended December 31, 2006
and
2005:
|
|
2006
|
|
2005
|
|
Federal:
|
|
|
|
|
|
Current
|
|
$
|
403,995
|
|
$
|
(107,423
|
)
|
Deferred
|
|
|
579,475
|
|
|
9,676
|
|
State:
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
(22,394
|
)
|
Deferred
|
|
|
51,130
|
|
|
1,912
|
|
Subtotal
|
|
|
1,034,600
|
|
|
(118,229
|
)
|
Change
in valuation allowance
|
|
|
(561,695
|
)
|
|
-
|
|
Benefit
(provision) for income taxes
|
|
$
|
(472,905
|
)
|
$
|
(118,229
|
)
|
The
effective tax rate varies from the federal statutory maximum rate
for the year
ended December 31, 2006 and 2005 principally due to the following:
|
|
2006
|
|
2005
|
|
Federal
tax rate
|
|
|
34
|
%
|
|
34
|
%
|
Loss
from foreign subsidiary
|
|
|
-19
|
%
|
|
-
|
|
Benefit
of net operating loss carryback
|
|
|
-7
|
%
|
|
-
|
|
State
tax rate, net of federal tax benefit
|
|
|
1
|
%
|
|
3
|
%
|
O
ther
|
|
|
-
1
|
%
|
|
-
|
|
Total
|
|
|
8
|
%
|
|
37
|
%
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
H –
|
INCOME
TAXES (CONTINUED)
|
Significant
portions of the deferred tax assets and liabilities results from
the tax effects
of temporary differences, which of December 31, 2006, were as
follows:
Deferred
tax assets (short-term):
|
|
|
|
Allowance
for doubtful accounts receivable
|
|
$
|
10,930
|
|
Allowance
for inventory obsolescence
|
|
|
48,033
|
|
Net
operating loss carryforwards
|
|
|
538,825
|
|
|
|
|
|
|
|
|
|
597,788
|
|
Deferred
tax assets (long-term):
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
29,741
|
|
Total deferred
tax
assets
|
|
|
627
,
529
|
|
|
|
|
|
|
Deferred
tax liabilities (long-term):
|
|
|
|
|
Depreciation
|
|
|
(65,834
|
)
|
Net
Deferred taxes assets before valuation
allowance
|
|
|
561,695
|
|
Valuatio
n
allowance
|
|
|
(561,695
|
)
|
|
|
|
|
|
Net
deferred
tax
asset
after
valuation
|
|
$
|
-
|
|
As
of
December 31, 2006, the Company had net operating losses approximately
$1,400,000
that can be carried forward for up to twenty years and deducted against
future taxable income. The net operating loss carryforward expires in
2026.
NOTE
I –
|
RELATED
PARTY TRANSACTIONS
|
Advances
from Shareholders
The
Company received and repaid advances from its shareholders during
2006, and as
of December 31, 2006 there was $53,665 in loans from shareholders
payable by the
Company. During 2006, approximately $65,000 were repaid to these
shareholders.
Management
Agreement
The
Company entered into an agreement with a related party to provide
management and
financial services. Management fees paid to this related party for
the years ended December 31, 2006 and 2005 amounted to $71,785 and
$95,017,
respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
I –
|
RELATED
PARTY TRANSACTIONS
(CONTINUED)
|
Investment
in Qualmax
Dr.
Selvin Passen (“
Passen
”) and Oregon Spirit, LLC
(“
Oregon Spirit
”) invested a total of $1,250,000 in
Qualmax in three tranches prior to September 15, 2006, $500,000 on
January 30,
2006, $500,000 on March 22, 2006, and $250,000 on June 22, 2006,
in exchange for
shares of Qualmax's common stock.
On
April
10, 2006, Qualmax acquired certain assets of the CLP Group, LLC,
a New York
limited liability company, valued by the parties at $225,000, in
exchange for
shares of Qualmax's common stock.
NOTE
J –
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
We
have
entered into various operating leases for our facilities and transportation
equipment. The future minimum annual rental payments due on these
operating leases as of December 31, 2006 for each of the next 5 years
are as
follows:
Year
ending December 31:
|
|
|
|
2007
|
|
$
|
265,000
|
|
2008
|
|
|
144,000
|
|
2009
|
|
|
110,000
|
|
2010
|
|
|
104,000
|
|
2011
|
|
|
18,000
|
|
|
|
|
|
|
|
|
$
|
641,000
|
|
Rent
expense for the years ended December 31, 2006 and 2005 was approximately
$143,000 and $68,000, respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
J –
|
COMMITMENTS
AND CONTINGENCIES
(CONTINUED)
|
The
Former Employee Litigation
We
are a
defendant in a lawsuit filed by a former employee who has made claims
for unpaid
salary and for certain previously granted stock options. Via
mediation on February 7, 2007, we have settled this lawsuit, and
as part of the
settlement, we agreed that Mr. Singer holds options to purchase up
to 70,000
shares of the Company’s Common Stock at a price of $0.10 per share, which
options were issued to Mr. Singer during his association with the
Company prior
to 2002. As of the time of the filing of this Report we have not
received
final documentation dismissing the lawsuit and settling and releasing
claims,
but we expect to conclude final settlement documentation within a
matter of
weeks.
The
MPI Litigation
As
a
result of the Reverse Acquisition the Company assumed the liabilities
of
Qualmax. Qualmax was named as a defendant in certain litigation filed
in France before the Trade Tribunal of Nanterre against BOS by Media
Partners
International (“
MPI
,” and the “
MPI
Litigation
”), a former distributor of BOS, whose contract with
BOS
allegedly related to certain distribution rights for the product
division
Qualmax purchased from BOS on December 31, 2005. Pursuant to the
asset purchase agreement between Qualmax and BOS, BOS agreed to indemnify
and
hold Qualmax harmless from liability, without limitation, arising
from the
claims raised in the MPI Litigation, and BOS has undertaken defense
of Qualmax
at BOS’s expense. The litigation remains in its early stages, and at
last report from counsel the French court had not yet made definitive
rulings on
defendant’s motion to change venue and jurisdiction from France to
Israel. Initial hearings on the motion for change of venue were
concluded in February, 2007, and we are advised that final hearing
will be
conducted in late April, 2007, and a decision likely rendered in
May,
2007. If venue is in fact moved to Israel that decision may have a
material impact on the plaintiff’s willingness to continue the litigation, due
to increased expense, but the outcome of the venue hearings, and
the impact of
that outcome on plaintiff’s claims, is purely speculative at this
point. At present, based upon the limited progress in the matter and
without the benefit of 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. and plaintiffs, and
a third party,
to plaintiff’s allegations of misappropriation of trade secrets and corporate
opportunity, and to claims that defendants, or some of them,
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
J –
|
COMMITMENTS
AND CONTINGENCIES
(CONTINUED)
|
The
Blackstone Litigation (Continued)
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.
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 Worldwide PIN Payment Corp.
(“
WPP
”), and 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 of the Company on
March 27, 2007, followed by a second request on April 10, 2007. The
Company has not yet been required to file any responsive pleadings,
and has not
provided materials responsive the plaintiff’s 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
K –
|
REGULATORY
MATTERS
|
The
telecommunications industry is subject to federal, state and local
regulation. Any changes in the regulations or enforcement could
impact the Company's ability to continue its current
operations.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
L –
|
SUBSEQUENT
EVENTS AND OTHER
MATTERS
|
Term
Loan and Repayment of Note Payable with B of A
On
and
effective March 30, 2007, we entered into a term loan and security
agreement
with P&S Spirit (the “
P&S
Loan
”). The principal amount of the P&S Loan is
$1,000,000. Monthly payments of interest only at two percent over the
Wall Street Journal Prime Rate payable in arrears are due commencing
on May 1,
2007. The 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 forty-five days after the close of a calendar
quarter,
and requirements that we maintain a ratio of current assets to current
liabilities of at least 1.2 to 1 and a total liabilities to tangible
net worth
ratio not exceeding 2.5 to 1.
The
P&S Loan also grants P&S Spirit a first position security interest with
respect to all of the Company’s assets. The P&S Loan is also
backed by a guaranty by Qualmax (which, pending completion of the
contemplated
merger of Qualmax into the Company, holds a controlling interest
in the
Company), a security interest in the assets of Qualmax (consisting
solely of 100
shares of series A convertible preferred stock of the Company, par
value $0.01
per share, which stock is convertible into 298,673,634 shares of
the Company’s
common stock, par value $0.01 per share), and by the personal guaranty
of M.
David Kamrat, Chairman of the Board of Directors and Chief Executive
Officer of
the Company, and a director and executive officer of Qualmax. M.
David Kamrat’s personal Guaranty is limited to the sum of $1,000,000, although
the guaranteed obligations include indemnification for certain claims
against
P&S Spirit relating to the P&S Loan.
The
Loan
proceeds were used by the Company to repay all outstanding principal,
interest
and fees due on our note payable with B of A (Note D), and to pay
certain
professional fees associated with preparation and negotiation of
the P&S
Loan.
The
principals of P&S Spirit include Dr. Selvin Passen, who is a director and
shareholder of the Company, as well as its former Chief Executive
Officer, and
Dr. Jacob Schorr, who is a director of the Company
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.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
L –
|
SUBSEQUENT
EVENTS AND OTHER MATTERS
(CONTINUED)
|
Amendment
to Certificate of Incorporation
On
January 31, 2007 we filed an Information Statement with the Securities
and
Exchange Commission on Schedule 14C, to provide information with
respect to the
approval of the actions set forth below that were approved by the
board of
directors of the Company and by written consent of the Company’s stockholders
(the “
Written Consent
”) in lieu of a special meeting
of stockholders:
ACTION
ONE:
Approval of the amendment and restatement of our
Certificate of Incorporation to: (i) increase our authorized number
of shares of
Common Stock by five hundred fifty million (550,000,000) shares;
(ii) implement
a staggered board of directors with three classes; and (iii) make
such other
changes to the
Certificate
of Incorporation as are necessary and incidental to the foregoing
(the
“
Charter Amendments
”); and
ACTION
TWO:
Approval of the appointment of Noah R. Kamrat as a Class
II
director and the appointment of M. David Kamrat and Jacob Schorr,
Ph.D. as Class
III directors (the “
Election of
Directors
”).
The
Written Consent was executed by the holders of at least a majority
of the issued
and outstanding shares of (i) preferred stock, (ii) common stock
and (iii) the
issued and outstanding shares of capital stock of the Company entitled
to vote
on the matters set forth herein. The actions approved by the Written
Consent, if not revoked or terminated, will not become effective
until twenty
(20) calendar days after April 2, 2007, the date we first sent a
definitive
Information Statement to our stockholders.
NOTE
M –
|
JOINT
VENTURE WITH WORLD WIDE PIN PAYMENT,
LLC
|
On
February 1, 2006, Qualmax entered into an LLC unit purchase agreement
to acquire
51 units of member interest in World Wide Pin Payment, LLC
(“
WPP
”) (the joint venture “
WPP-TPP
LLC
”), a Florida limited liability company engaged in the
design
and development of computer software systems, and entered into a
related
software license agreement with WPP-TPP LLC for the WPP-TPP LLC transaction
platform. The transaction involved a contingent assumption by Qualmax
of the obligations of WPP-TPP LLC to perform under an Agreement of
Co-operation
with Siemens S.A.
On
August
10, 2006, a lawsuit was filed against both WPP and Qualmax, alleging
among other
things that the intellectual property involved in the WPP software
was in fact
owned
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
M –
|
JOINT
VENTURE WITH WORLD WIDE PIN PAYMENT, LLC
(CONTINUED)
|
by
third
parties and that we lacked the legal right to use the software, and
further that
our involvement with WPP had damaged the third party owners of the
software (see
Note J, Commitments and Contingencies, under the heading “The Blackstone
Litigation”). As a result, the joint venture agreement with WPP, and
all other related agreements were terminated (including without limitation
any
Agreement of Co-Operation with Siemens S.A., which was rescinded),
and the joint
venture dissolved, and each of WPP and the Company retained their
respective
assets previously used in connection with the joint venture. We
believe the Company has no further obligations relating to the joint
venture,
other than obligations that may arise in relation to the Blackstone
Litigation.
NOTE
N –
|
ASSET
PURCHASE AGREEMENT, CAPITALIZATION OF
WHOLLY-OWNED
|
SUBSIDIARY,
AND ROYALTY PAYMENT AGREEMENT
Effective
December 31, 2005, the Company acquired certain assets of BOS. The
purchased
assets were used to capitalize IP Gear, Ltd., an Israeli company
and
wholly-owned subsidiary of the Company. The BOS purchase agreement
called for certain contingent obligations affecting the Company,
including: (i)
a royalty initially equal to 4% of the sales generated by the IP
Gear, Ltd.
business (the “
BOS Royalty
”); (ii) a loan in the
principal amount of $1 million (the “
BOS Loan
”); (iii)
an outsourcing agreement by which BOS provided certain services to
IP Gear, Ltd.
during a period of transition (including, for example, office space,
office
equipment, and certain personnel) (the “
Outsourcing
Agreement
”); and (iv) an obligation of BOS to pay certain third
party royalties and related amounts on behalf of IP Gear, Ltd.
Payments
of BOS Loan principal totaling $600,000 were made on June 30, 2006,
and July 31,
2006, in the amounts of $350,000 and $250,000, respectively, by issuance
of the
stock of Qualmax.
Effective
December 31, 2006, the entire remaining BOS Loan balance (including
principal,
interest, and any fees), the entire remaining obligation to pay the
BOS Royalty,
and all then-outstanding amounts payable under the Outsourcing Agreement
or as
reimbursement for payment of third party royalties, totaling $1,480,189,
was
repaid, retired and released by the issuance of 5.50652 shares of
Preferred
Stock (convertible into 16,446,544 shares of our common stock) at
a common stock
equivalent price (as-converted) of $.09 per share.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
O –
|
DEFINED
CONTRIBUTION PLAN
|
In
May
2005, we adopted a Savings Incentive Match Plan for Employees (SIMPLE)
(the
“Plan”) for the benefit of our employees who are reasonably expected to
receive
at least $5,000 in compensation during a calendar year. We have
elected to contribute to each eligible employee’s simple individual retirement
account a matching contribution equal to the employee’s elective salary
reduction contributions, up to a limit of three percent of the employee’s
compensation for the calendar year. Total expense for the years ended
December 31, 2006 and 2005 was approximately $11,000 and $6,000,
respectively.
NOTE
P –
|
BUSINESS
SEGMENT REPORTING
|
The
following presents our segmented financial information by business
line for the
years ended December 31, 2006 and 2005. We are currently focused on
three principal lines of businesses: (i) proprietary hardware, which
is our VoIP
technology development and equipment manufacturing subsidiary that
is located in
Israel, IP Gear, Ltd.; (ii) resale hardware, which is the sale and
distribution
of VoIP and other telephony equipment and related professional services
via our
U.S.-based business operated under the name "IP Gear"); and (iii)
wholesale
carrier services, which is telephony service resale and direct call
routing via
our U.S.-based VoIP service business operated under the name "IP
Gear
Connect".
|
|
2006
|
|
|
2005
|
|
Net
sales:
|
|
|
|
|
|
|
Wholesale
carrier service
|
|
$
|
11,230,284
|
|
|
$
|
8,227,222
|
|
Resale
hardware
|
|
|
6,307,644
|
|
|
|
9,810,314
|
|
Proprietary
hardware
|
|
|
2,592,543
|
|
|
|
-
|
|
|
|
|
20,130,471
|
|
|
|
18,037,536
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
Wholesale
carrier service
|
|
|
10,382,726
|
|
|
|
7,411,035
|
|
Resale
hardware
|
|
|
5,317,852
|
|
|
|
8,126,649
|
|
Proprietary
hardware
|
|
|
2,190,874
|
|
|
|
-
|
|
|
|
|
17,891,452
|
|
|
|
15,537,684
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
NOTE
P –
|
BUSINESS
SEGMENT REPORTING
(CONTINUED)
|
|
|
2006
|
|
|
2005
|
|
Gross
profit:
|
|
|
|
|
|
|
Wholesale
carrier service
|
|
|
847,558
|
|
|
|
1,683,665
|
|
Resale
hardware
|
|
|
989,792
|
|
|
|
816,187
|
|
Proprietary
hardware
|
|
|
401,669
|
|
|
|
-
|
|
|
|
|
2,239,019
|
|
|
|
2,499,852
|
|
Sales,
general and administrative expenses:
|
|
Wholesale
carrier service
|
|
|
1,650,493
|
|
|
|
780,635
|
|
Resale
hardware
|
|
|
1,113,611
|
|
|
|
1,077,946
|
|
Proprietary
hardware
|
|
|
3,519,489
|
|
|
|
-
|
|
Unallocated
corporate overhead
|
|
|
1,597,367
|
|
|
|
427,546
|
|
|
|
|
7,880,960
|
|
|
|
2,286,127
|
|
Income
(loss) from operations:
|
|
|
|
|
|
|
|
|
Wholesale
carrier service
|
|
|
(802,935
|
)
|
|
|
903,030
|
|
Resale
hardware
|
|
|
(123,819
|
)
|
|
|
(261,759
|
)
|
Properietary
hardware
|
|
|
(3,117,820
|
)
|
|
|
-
|
|
Unallocated
corporate overhead
|
|
|
(1,597,367
|
)
|
|
|
(427,546
|
)
|
|
|
$
|
(5,641,941
|
)
|
|
$
|
213,725
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL
STATEMENTS
JUNE
30,
2008
New
World Brands, Inc. and
Subsidiary
|
Condensed
Consolidated Balance
Sheets
|
as
of June 30, 2008 (unaudited)
|
and
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
1,396,696
|
|
|
$
|
2,038,635
|
Accounts
receivable: Trade and
other receivables, net of allowance for uncollectible accounts
of $74,800
in 2008 and $180,525 in 2007
|
|
|
1,402,892
|
|
|
|
1,027,739
|
Inventories,
net
|
|
|
1,291,919
|
|
|
|
744,654
|
Prepaid
expenses
|
|
|
478,123
|
|
|
|
244,157
|
Other
current
assets
|
|
|
382,158
|
|
|
|
507,012
|
|
|
|
|
|
|
Total
Current
Assets
|
|
|
4,951,788
|
|
|
|
4,562,197
|
Property
and Equipment, net
|
|
|
1,520,973
|
|
|
|
1,421,806
|
Other
Assets:
|
|
|
|
|
|
|
|
Deposits
and other
assets
|
|
|
583,345
|
|
|
|
668,750
|
|
|
|
|
|
|
Total
Long-Term Assets
|
|
|
2,104,318
|
|
|
|
2,090,556
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
7,056,106
|
|
|
$
|
6,652,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
New
World Brands, Inc. and
Subsidiary
|
Condensed
Consolidated Balance
Sheets
|
as
of June 30, 2008 (unaudited)
|
and
December 31, 2007
|
|
|
June
30,
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
LIABILITIES
&
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,356,462
|
|
|
$
|
1,564,299
|
|
Accrued
expenses
|
|
|
498,131
|
|
|
|
406,910
|
|
Customer
deposits
|
|
|
7,095
|
|
|
|
121,874
|
|
Advances
from
stockholders
|
|
|
188
|
|
|
|
—
|
|
Capital
leases, current
portion
|
|
|
110,899
|
|
|
|
181,731
|
|
Notes
payable, current
portion
|
|
|
14,633
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Total
Current
Liabilities
|
|
|
2,987,408
|
|
|
|
2,274,814
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
1,073,330
|
|
|
|
500,000
|
|
Capital
leases, net of current
portion
|
|
|
123,767
|
|
|
|
31,317
|
|
|
|
|
|
|
|
|
Total
Long-Term
Liabilities
|
|
|
1,197,097
|
|
|
|
531,317
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
4,184,505
|
|
|
|
2,806,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and
contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par
value, 1,000 shares
|
|
|
|
|
|
|
|
|
authorized,
200 shares
designated as Series A preferred stock
|
|
|
|
|
|
|
|
|
Series
A preferred stock $0.01
par value, no shares issued
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.01 par value,
600,000,000 shares
|
|
|
|
|
|
|
|
|
authorized,
418,479,673 and
414,979,673 shares issued and outstanding as of June 30, 2008
and December
31, 2007
|
|
|
4,184,796
|
|
|
|
4,149,797
|
|
Additional
paid-in
capital
|
|
|
33,606,557
|
|
|
|
33,641,557
|
|
Accumulated
deficit
|
|
|
(34,919,752
|
)
|
|
|
(33,944,732
|
)
|
|
|
|
|
|
|
|
Total
Stockholders’
Equity
|
|
|
2,871,601
|
|
|
|
3,846,622
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
7,056,106
|
|
|
$
|
6,652,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
June
30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
2,653,742
|
|
|
$
|
966,991
|
|
Carrier
Services
|
|
|
3,949,644
|
|
|
|
2,589,778
|
|
|
|
|
|
|
|
|
|
|
|
6,603,386
|
|
|
|
3,556,769
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
Hardware
|
|
|
(1,896,137
|
)
|
|
|
(854,593
|
)
|
Carrier
Services
|
|
|
(3,382,305
|
)
|
|
|
(2,279,866
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,278,442
|
)
|
|
|
(3,134,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
1,324,944
|
|
|
|
422,310
|
|
|
|
|
|
|
|
|
|
|
Sales,
General and Administrative Expenses
|
|
|
(1,529,053
|
)
|
|
|
(1,095,311
|
)
|
|
|
|
|
|
|
|
Loss
from Continuing Operations Before Other Income
|
|
|
(204,109
|
)
|
|
|
(673,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
|
|
|
Interest
and Bank
Charges
|
|
|
2,201
|
|
|
|
8,048
|
|
Other
Income
|
|
|
60,005
|
|
|
|
3,880
|
|
|
|
|
|
|
|
|
|
|
|
62,206
|
|
|
|
11,928
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations Before Income
Taxes
|
|
|
(141,903
|
)
|
|
|
(661,073
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for Income
Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
(141,903
|
)
|
|
|
(661,073
|
)
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations
|
|
|
—
|
|
|
|
(3,351,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(141,903
|
)
|
|
$
|
(4,012,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share from Continuing Operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share from Discontinued Operations
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share (basic)
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share (diluted)
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding During the
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
417,186,195
|
|
|
|
406,134,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
417,186,195
|
|
|
|
406,134,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Six Months Ended
|
June
30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
4,696,143
|
|
|
$
|
2,195,015
|
|
Carrier
Services
|
|
|
6,988,193
|
|
|
|
5,460,774
|
|
|
|
|
|
|
|
|
|
|
|
11,684,336
|
|
|
|
7,655,789
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
Hardware
|
|
|
(3,564,363
|
)
|
|
|
(1,973,602
|
)
|
Carrier
Services
|
|
|
(6,090,638
|
)
|
|
|
(4,689,328
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,655,001
|
)
|
|
|
(6,662,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,029,355
|
|
|
|
992,859
|
|
|
|
|
|
|
|
|
|
|
Sales,
General and Administrative Expenses
|
|
|
(3,079,828
|
)
|
|
|
(2,224,836
|
)
|
|
|
|
|
|
|
|
Loss
from Continuing Operations Before Other Income
|
|
|
(1,050,493
|
)
|
|
|
(1,231,977
|
)
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
|
|
|
Interest
and Bank
Charges
|
|
|
5,395
|
|
|
|
21,339
|
|
Other
Income
|
|
|
70,078
|
|
|
|
19,047
|
|
|
|
|
|
|
|
|
|
|
|
75,473
|
|
|
|
40,386
|
|
|
|
|
|
|
|
|
Loss
From Continuing Operations Before Income
Taxes
|
|
|
(975,920
|
)
|
|
|
(1,191,591
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for Income
Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Net
Loss From Continuing Operations
|
|
|
(975,020
|
)
|
|
|
(1,191,591
|
)
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations
|
|
|
—
|
|
|
|
(3,870,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(975,020
|
)
|
|
$
|
(5,061,950
|
)
|
|
|
|
|
|
|
|
Net
Loss Per Share from Continuing Operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Net
Loss Per Share from Discontinued Operations
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
Net
Loss Per Share (basic)
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
Net
Loss Per Share (diluted)
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
416,095,058
|
|
|
|
402,370,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
416,095,058
|
|
|
|
402,370,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Six Months Ended
|
June
30, 2008 and
2007
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss from continuing
operations
|
|
$
|
(975,020
|
)
|
|
$
|
(1,191,591
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
258,445
|
|
|
|
216,160
|
|
Allowance
for doubtful
accounts
|
|
|
(52,000
|
)
|
|
|
39,954
|
|
Changes
in operating assets
and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(331,497
|
)
|
|
|
(54,370
|
)
|
Inventory
|
|
|
(547,265
|
)
|
|
|
133,540
|
|
Prepaid
expenses
|
|
|
(233,966
|
)
|
|
|
(16,847
|
)
|
Other
current
asset
|
|
|
124,853
|
|
|
|
(5,000
|
)
|
Other
Long-Term
Assets
|
|
|
93,750
|
|
|
|
—
|
|
Accounts
payable
|
|
|
732,065
|
|
|
|
17,884
|
|
Accrued
expenses and other
liabilities
|
|
|
151,506
|
|
|
|
(408,543
|
)
|
Customer
deposits
|
|
|
(114,779
|
)
|
|
|
36,895
|
|
|
|
|
|
|
|
|
Total
net change in operating
assets and liabilities
|
|
|
(177,333
|
)
|
|
|
(296,441
|
)
|
|
|
|
|
|
|
|
Net
cash used in operating
activities
|
|
|
(893,908
|
)
|
|
|
(1,231,918
|
)
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and
equipment
|
|
|
(248,765
|
)
|
|
|
(132,010
|
)
|
|
|
|
|
|
|
|
Net
cash used in investing
activities
|
|
|
(248,765
|
)
|
|
|
(132,010
|
)
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
payments on line of
credit
|
|
|
—
|
|
|
|
(984,323
|
)
|
Proceeds
from note
payable
|
|
|
1,087,627
|
|
|
|
1,000,000
|
|
Payments
of note
payable
|
|
|
(586,893
|
)
|
|
|
(51,742
|
)
|
Sale
of common and preferred
stock
|
|
|
—
|
|
|
|
886,093
|
|
Net
repayment of advances from
shareholders
|
|
|
—
|
|
|
|
(24,000
|
)
|
|
|
|
|
|
|
|
Net
cash provided by financing
activities
|
|
|
500,734
|
|
|
|
826,028
|
|
|
|
|
|
|
|
|
Net
cash from continuing
operations
|
|
|
(641,939
|
)
|
|
|
(537,900
|
)
|
|
|
|
|
|
|
|
Cash
Flows from Discontinued
Operations
|
|
|
|
|
|
|
|
|
Net
change in operating cash
flows
|
|
|
—
|
|
|
|
(7,834,869
|
)
|
Net
change in investing cash
flows
|
|
|
—
|
|
|
|
6,204,786
|
|
|
|
|
|
|
|
|
Cash
Flows from Discontinued
Operations
|
|
|
—
|
|
|
|
(1,630,083
|
)
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash
Equivalents
|
|
|
(641,939
|
)
|
|
|
(2,167,983
|
)
|
|
|
|
|
|
|
|
Cash
and Cash
Equivalents at Beginning of Period
|
|
|
2,038,635
|
|
|
|
3,396,617
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of
Period
|
|
$
|
1,396,696
|
|
|
$
|
1,228,635
|
|
|
|
|
|
|
|
|
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 Six Months Ended
|
June
30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
35,645
|
|
|
$
|
83,108
|
|
Income
taxes
paid
|
|
|
—
|
|
|
|
300
|
|
Supplemental
disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
Property
and
Equipment
|
|
|
108,847
|
|
|
$
|
—
|
|
Notes
Payable
|
|
|
108,847
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2008
NOTE
A ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
consolidated unaudited interim
financial statements of New World Brands, Inc. and Subsidiary (the
“
Company
,” “
we
,”
“
us
,”
or
“
our
”)
were prepared,
without audit, pursuant to the rules and regulations of the Securities
and
Exchange Commission (the “
SEC
”) and should be read in
conjunction with the Company’s annual, quarterly and current reports on Forms
10-K and 10-KSB, Forms 10-Q and 10-QSB, and Form 8-Ks, filed with the
SEC by the
Company. 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 six months ended June 30, 2008
are not
necessarily indicative of the results of operations for the full
year.
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 Reverse
Acquisition, we are no longer in the wine and spirits business, and are
now a
telecommunications sales, and service company, focusing on products and
services
utilizing voice over internet protocol (“
VoIP
”)
technology. We provide wholesale long distance carrier termination services
as a
reseller of VoIP telephony services. We are also a reseller of VoIP related
telecommunications equipment.
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.
The
Boards agreed that certain
events (the “
Merger Events
”) were required to occur in
order to effectively consummate the transactions contemplated, including,
without limitation, certain amendments to the Certificate of Incorporation
of
the Company to, among other things, increase the authorized number of
shares of
Common Stock of the Company, the resultant conversion of the Preferred
Stock
into shares of the Company’s Common Stock, make any filings necessary to
complete the Merger, and receive approval by the stockholders of the
Company and
Qualmax.
During
2007, the number of
authorized shares was increased from 50 million shares to 600 million
shares to
allow for a sufficient number of authorized shares to convert the existing
Preferred shares to Common shares. All Preferred Stock was then converted
into
Common Stock as a further step towards the completion of the
Merger.
On
February 18, 2008, the Company
and Qualmax entered into an agreement by which Qualmax will be merged
with and
into the Company (the “
Merger Agreement
”). As of the
date of the filing of this Quarterly Report on Form 10-Q, the Merger
had not
been completed. Reference is made to the Company’s Current Report on Form 8-K,
filed with the SEC on February 22, 2008, and the Company’s Preliminary Schedule
14C Information Statement, filed with the SEC on May 20, 2008, for additional
information and documentation concerning the Merger and the Merger
Agreement.
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 a result of
the
Reverse Acquisition, the Company’s fiscal year end changed from May 31 to
December 31.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
NOTE
A ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 we believe that the disclosures are adequate to
make the
information presented not misleading, we suggest that these financial
statements
be read in conjunction with the year-end and interim financial statements
and
notes thereto, and additional information included in our prior annual,
quarterly and current reports on Forms 10-KSB, 10-QSB and 8-K, respectively,
as
filed with the SEC.
Reclassification
Certain
reclassifications of amounts
previously reported have been made to the accompanying condensed consolidated
financial statements in order to maintain consistency and comparability
between
periods presented.
In
July 2007, the Company sold all
the issued and outstanding common stock of IP Gear, Ltd. For purposes
of
comparability, the results of these operations have been reclassified
from
continuing operations to discontinued operations for the six months ended
June
30, 2007 presented in the accompanying condensed consolidated statements
of
operations. See “Part I. Financial Information—Item 1. Financial Statements—Note
G—Discontinued Operations—IP Gear, Ltd.”
Recent
Accounting Pronouncements
In
September 2006, the Financial
Accounting Standards Board (the “
FASB
”) issued Statement
of Financial Accounting Standards (“
SFAS
”) No. 157,
“Fair Value Measurements” (“
SFAS 157
”). This Statement
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
The
FASB deferred the effective date of SFAS 157 until fiscal years beginning
after
November 15, 2007 as it relates to the fair value measurement requirements
for
non-financial assets and liabilities that are initially measured at fair
value,
but not measured at fair value in subsequent periods. These non-financial
assets
include goodwill and other intangible assets with indefinite lives which
are
included within other assets. The Company has adopted the provisions
of SFAS 157
with respect to non-financial assets effective January 1, 2008 and its
adoption
did not have a material impact on our results of operations or our financial
condition.
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 has adopted the provisions of SFAS 159 and does not expect it
having a
material impact on our financial statements.
In
December 2007, the FASB issued
SFAS No. 141R (revised 2007), “Business Combinations”
(“SFAS
141R”)
. SFAS 141R replaces SFAS 141 and establishes principles
and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, including goodwill, the
liabilities
assumed and any non-controlling interest in the acquiree. SFAS 141R also
establishes disclosure requirements to enable users of the financial
statements
to evaluate the nature and financial effects of the business combination.
This
statement is effective for fiscal years beginning after December 15,
2008. We
are currently evaluating the impact the adoption of SFAS 141R will have
on our
financial position and consolidated results of operations.
In
December 2007, the FASB issued
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”
(“SFAS 160”)
. SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable
to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained noncontrolling equity investments
when a
subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. This standard is effective for fiscal years beginning after December
15,
2008. We are currently evaluating the impact the adoption of SFAS 160
will have
on our financial position and consolidated results of operations.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
NOTE
A ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
In
March 2008, the FASB issued SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“
SFAS 161
”), an amendment of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“
SFAS
133
”). SFAS 161 amends and expands the disclosure requirement
for
SFAS 133 by requiring enhanced disclosure about (i) how and why an entity
uses
derivative instruments, (ii) how derivative instruments and related hedged
items
are accounted for under SFAS 133 and its related interpretations, and
(iii) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 is effective
for the
Company as of January 1, 2009.
In
April 2008, the FASB issued FASB
Staff Position ( “
FSP
”) 142-3, “Determination of the
Useful Life of Intangible Assets” (“
FSP 142-3
”). FSP
142-3 amends the factors that should be considered in developing renewal
or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP
142-3 is effective for fiscal years beginning after December 15, 2008.
The
Company is currently assessing the impact of FSP 142-3 on its consolidated
financial position and results of operations.
In
May 2008, the FASB issued SFAS
No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
(“
SFAS 162
”). SFAS 162 identifies the sources of
accounting principles and provides entities with a framework for selecting
the
principles used in preparation of financial statements that are presented
in
conformity with GAAP. The current GAAP hierarchy has been criticized
because it
is directed to the auditor rather than the entity; it is complex; and
it ranks
FASB Statements of Financial Accounting Concepts, which are subject to
the same
level of due process as FASB SFAS, below industry practices that are
widely
recognized as generally accepted but that are not subject to due process.
The
Board believes the GAAP hierarchy should be directed to entities because
it is
the entity (not its auditors) that is responsible for selecting accounting
principles for financial statements that are presented in conformity
with GAAP.
The adoption of SFAS 162 is not expected to have a material impact on
the
Company’s consolidated financial position and results of
operations.
In
May 2008, the FASB issued SFAS
No. 163, “Accounting for Financial Guarantee Insurance Contracts—an
interpretation of FASB Statement No. 60” (“
SFAS 63
”).
Under FASB SFAS No. 60, “Accounting and Reporting by Insurance Enterprises”
(“
SFAS 60
”), diversity exists in practice in accounting
for financial guarantee insurance contracts by insurance enterprises,
which
diversity results in inconsistencies in the recognition and measurement
of claim
liabilities. SFAS 63 requires that an insurance enterprise recognize
a claim
liability prior to an event of default (an insured event) when there
is evidence
that credit deterioration has occurred in an insured financial obligation.
SFAS
63 requires expanded disclosures about financial guarantee insurance
contracts.
The accounting and disclosure requirements of SFAS 63 will improve the
quality
of information provided to users of financial statements. The adoption
of SFAS
163 is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In
May 2008, the FASB issued FSP APB
14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)” (“
ABP
14-1
”). APB 14-1 requires the issuer to separately account for
the
liability and equity components of convertible debt instruments in a
manner that
reflects the issuer’s nonconvertible debt borrowing rate. The guidance will
result in companies recognizing higher interest expense in the statement
of
operations due to amortization of the discount that results from separating
the
liability and equity components. APB 14-1 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008
and for
interim periods within those fiscal years. The Company is currently evaluating
the impact of adopting APB 14-1 on its consolidated financial
statements.
NOTE
B INVENTORIES
Inventories
as of June 30, 2008 and
December 31, 2007 consisted of the following:
|
|
June
30,
|
|
December
31,
|
Resale
Hardware
|
|
2008
|
|
2007
|
|
|
|
|
|
Finished
Goods inventories
|
|
$
|
1,343,819
|
|
|
$
|
819,654
|
|
Less
allowance for obsolete inventories
|
|
|
(51,900
|
)
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
1,291,919
|
|
|
$
|
744,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
NOTE
C NOTES
PAYABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
from P&S Spirit
|
|
|
|
|
|
|
|
|
On
and effective March 30, 2007, we
entered into a term loan and security agreement with P&S Spirit (the
“
P&S Term Loan”
). The principal amount of the
P&S Term Loan was $1,000,000. Monthly payments of interest at two percent
over the Wall Street Journal Prime Rate payable in arrears were due commencing
on May 1, 2007.
On
May 30, 2007, the Company entered
into another agreement with P&S Spirit, a Credit Line and Security Agreement
(the “
P&S Credit Line”
), for a line of credit
facility in the amount of $1,050,000. The terms of the credit facility
are an
interest rate of Prime plus 2% (as reported in the Wall Street Journal),
payments are to be interest only in arrears commencing July 1, 2007.
The P&S
Credit Line is secured by a corporate guaranty by Qualmax (which pending
completion of the merger of Qualmax into the Company, holds a controlling
interest in the Company) and a security interest in the assets of Qualmax
(consisting solely of 298,673,634 shares of common stock of the company).
The
Company must meet covenants of a ratio of current assets to current liabilities
of at least 1.2:1.0 and a total liabilities to net worth ratio not exceeding
2.5:1.0. The maturity date of the credit facility is June 1, 2011 when
all
principal and any outstanding interest payments are due. The company
was in
compliance with all its covenants as of June 30, 2008 and December 31,
2007.
The
Company paid $500,000 towards
the balance of the P&S Term Loan on August 13, 2007. This reduced the
balance of the loan to $500,000. On February 21, 2008, effective February
15,
2008, the Company repaid all outstanding obligations under the P&S Term Loan
Agreement, in the amount of $500,000. This was accomplished by a $500,000
draw
against the P&S Credit Line facility to pay the P&S Term Loan. A further
draw was made on the P&S Credit Line in two equal amounts of $275,000 each
for a total of $550,000 on May 22 and May 23, 2008. As of June 30, 2008,
the
Company had paid off the full amount of the P&S Term Loan and had drawn the
maximum amount or a total of $1,050,000 against the P&S Credit Line. The
interest rate on the P&S Credit Line on June 30, 2008 was
7.00%.
The
principals of P&S Spirit
include Dr. Selvin Passen, who is a director and shareholder of the Company,
as
well as its former Chief Executive Officer, and Dr. Jacob Schorr, who
is a
director of the Company.
TELES
AG Loan Agreement
On
February 21, 2008, TELES AG
Informationstechnologien (“
TELES
”), granted the Company
a line of credit effective February 15, 2008, in the amount of $1,000,000
under
a Term Loan and Security Agreement (the “
Teles Loan
”).
The Teles Loan is available for the company to draw upon from time to
time prior
to February 1, 2009, subject to the condition of the Company having completed
the “Merger” ( as per note A - Organization, Capitalization And Summary Of
Significant Accounting Policies). Amounts borrowed may not be reborrowed,
notwithstanding any payments thereunder. The outstanding balance of the
TELES
Loan will be due and payable on or before February 1, 2012. The outstanding
principal amount of the TELES Loan will be payable in twelve (12) quarterly
installments commencing May 1, 2009. Interest on the outstanding principal
amount of the TELES Loan is payable quarterly at an interest rate equal
to 7%
per annum, compounded quarterly. The company has not drawn on any funds
from
this loan facility as of June 30, 2008 nor is it eligible until the completion
of the merger of the Company and Qualmax.
Total
maturities of all notes
payable as of June 30, 2008 were as follows:
|
|
|
|
|
2008
|
|
$
|
7,279
|
2009
|
|
|
14,694
|
2010
|
|
|
14,184
|
2011
|
|
|
1,806
|
2012
|
|
|
1,050,000
|
|
|
|
Total
notes payable
|
|
|
1,087,963
|
|
|
|
|
Notes
payable, current portion
|
|
|
14,633
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
$
|
1,073,330
|
|
|
|
For
comparison, the interest expense
the Company incurred on the above notes payable was approximately $28,000
and
$76,000 for the six months ended June 30, 2008 and 2007,
respectively.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
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 six months ended
June 30,
2008 and 2007:
Weighted
average number of shares outstanding as at June 30,
2007:
|
|
|
|
|
|
Basic
(Common Stock)
|
|
402,370,578
|
Preferred
Stock (as converted to Common Stock)
|
|
—
|
|
|
|
Total
|
|
402,370,578
|
|
|
|
Effect
of dilutive securities
|
|
|
Common
Stock - options and warrants
|
|
—
|
Preferred
Stock - options and warrants
|
|
—
|
|
|
|
Total
|
|
—
|
|
|
|
Weighted
average number of shares outstanding (diluted)
|
|
402,370,578
|
|
|
|
Weighted
average of options and warrants not included above
(anti-diluted):
|
|
|
Basic
(Common Stock)
|
|
5,495,000
|
Preferred
Stock (as converted to Common Stock)
|
|
66,666,659
|
|
|
|
Total
|
|
474,532,237
|
|
|
|
Weighted
average number of shares outstanding as at June 30,
2008:
|
|
|
Basic
(Common Stock)
|
|
416,095,058
|
|
|
|
Total
|
|
416,095,058
|
|
|
|
Effect
of dilutive securities
|
|
|
Common
Stock - options and warrants
|
|
—
|
Preferred
Stock - options and warrants
|
|
—
|
|
|
|
Total
|
|
—
|
|
|
|
Weighted
average number of shares outstanding (diluted)
|
|
416,095,058
|
|
|
|
Weighted
average of options and warrants not included above
(anti-diluted):
|
|
|
Basic
(Common Stock)
|
|
61,050,556
|
Preferred
Stock (as converted to Common Stock)
|
|
—
|
|
|
|
Total
|
|
477,145,614
|
|
|
|
NOTE
E INCOME
TAXES
In
May 2007, the FASB issued FASB
Staff Position 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 (1) the
tax
position is not considered more likely than not to be sustained solely
on the
basis of its technical merits and (2) the statute of limitations remain
open.
FSP FIN 48-1 should be applied upon the initial adoption of FIN 48. The
impact
of our 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 our consolidated
financial statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
NOTE
F COMMITMENTS AND
CONTINGENCIES
The MPI Litigation
As
a result of the Reverse
Acquisition the Company assumed the liabilities of Qualmax. Qualmax was
named as
a defendant in certain litigation filed in France before the Trade Tribunal
of
Nanterre against Better Online Systems (“
BOS
”) by Media
Partners International (“
MPI
,” and the “
MPI
Litigation
”), a former distributor of BOS, whose contract with BOS
allegedly related to certain distribution rights for the product division
Qualmax purchased from BOS on December 31, 2005. Pursuant to the asset
purchase
agreement between Qualmax and BOS, BOS agreed to indemnify and hold Qualmax
harmless from liability, without limitation, arising from the claims
raised in
the MPI Litigation, and BOS has undertaken defense of Qualmax at BOS’s expense.
Initial hearings on a motion for a change in venue were concluded in
February
2007. Additional hearings were conducted in late April 2007 and September
2007.
Management does not believe this litigation poses any significant financial
risk
to the Company.
Initial
hearings on a motion for
change of venue were concluded in February 2007. Additional hearings
were
conducted in late April 2007. The Company has been preliminarily informed
that a
decision from the French court to maintain venue in France was made in
September
2007, and that the defendants have filed an appeal of that decision,
but that no
ruling has been made on the appeal as of the date of this filing. At
present,
based upon the limited progress of the matter and without the benefit
of the
completion of factual discovery, management believes this litigation
does not
pose a significant financial risk to the Company.
The
Blackstone Litigation
On
April 1, 2008, effective as of
March 31, 2008, the Company entered into a settlement agreement in relation
to a
lawsuit entitled Capital Securities, LLC and Blackstone Communications
Company
v. Carlos Bertonnatti, Worldwide PIN Payment Corp. and Qualmax, Inc.,
Case No.
2006-15824-CA-01, filed August 10, 2006 in the Circuit Court of the
11
th
Judicial Circuit in and for Miami-Dade County, Florida (the
“
Blackstone Litigation
”). As disclosed in the Company’s
Quarterly Reports on Form 10-QSB filed with the SEC on November 19, August
20,
and May 21, 2007, and the Company’s Annual Report on Form 10-KSB filed with the
SEC on April 17, 2007, the facts underlying the Blackstone Litigation
relate to
a contract between defendant Worldwide PIN Payment Corp. and plaintiffs,
and a
third party, to plaintiffs’ allegations of misappropriation of trade secrets and
corporate opportunity, and to claims that defendants, or some of them,
tortiously interfered with plaintiffs’ contract with a third party.
Pursuant
to the settlement
agreement, the Company has paid plaintiffs the sum of $50,000 toward
plaintiffs’
costs of litigation, and in exchange, plaintiffs have released the Company
from
all claims asserted by plaintiffs or otherwise arising against the Company;
all
claims against the Company were dismissed with prejudice.
Credit
Facility with Pacific Continental
Bank
The
Company entered into an
agreement for the use of various credit services with Pacific Continental
Bank
in February 2007. The conditions of this agreement require the deposit
of
$250,000 with the bank as security for the services. The terms and balance
remain unchanged at June 30, 2008. The deposit is in the company’s money market
account with the bank and is reported on the balance sheet as part of
cash and
cash equivalents.
Piecom
Tech
As
part of the agreement to sell our
IP Gear Ltd. subsidiary to TELES (see “—Note G—Discontinued Operations”), we
have accepted any liabilities and or any amounts recovered as a result
of any
claims from/against Piecom Tech (“Piecom”) to/from IP Gear Ltd. in the future,
beyond the date of closing the sale of our subsidiary. Piecom had been
a vendor
to IP Gear Ltd and was contracted to provide outsourced contract manufacturing
services. There is currently a deposit held by Piecom of $214,000 towards
the
production of equipment not yet delivered and an amount in escrow of
$32,000
pending resolution of this matter. Release of the escrow funds of $32,000
depends upon the outcome of pending litigation between Piecom and IP
Gear, Ltd.
Neither of these amounts is represented on the balance sheet of the Company.
On
preliminary motions, argued in May of 2008, the Court ruled in favor
of IP Gear,
Ltd. A mediation hearing is scheduled for August, 2008. Management believes
that, at present, this litigation does not pose a material or significant
financial risk to the Company.
NOTE
G
DISCONTINUED
OPERATIONS – IP GEAR, LTD.
We
completed the sale of IP Gear,
Ltd., our Israeli subsidiary, as of an effective date of July 1, 2007
for
accounting purposes. The Company agreed to sell all the outstanding shares
of
the Company’s subsidiary, IP Gear Ltd., to TELES in exchange for cash on closing
and further payments over a period of time. The Company’s 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 payable over four years. The Earn Out is to be paid at the
greater of
$46,875 or 10% of the “CPE” product line revenue for the quarter to be paid
within 90 days of the end of the quarter. The Company also received a
return of
working capital invested during the transition period.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
NOTE
G
DISCONTINUED
OPERATIONS – IP GEAR, LTD. (continued)
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 relating
to the
promotion, marketing, sale, and support of certain products of TELES
and IP
Gear, Ltd., pursuant to which the Company became the exclusive distributor
of
products of TELES and IP Gear, Ltd. in North America (including the United
States, Canada, Mexico, all Caribbean nations, Guatemala, and Honduras)
and
non-exclusive distributor in other markets.
TELES
assumed responsibility for all
the liabilities and obligations of IP Gear, Ltd. except those specifically
outlined in the agreement. The two items excluded are any past potential
liability that IP Gear, Ltd. may have to the Office of the Chief Scientist
of
Israel and under a contract with one of IP Gear, Ltd.’s vendors,
Piecom.
New
World Brands’ management was
authorized by the board to complete the sale of IP Gear, Ltd. to TELES.
A
preliminary agreement was reached July 18 2007 and the closing occurred
on July
26, 2007. The final agreement for the sale was approved by our Board’s consent
and by Teles’ Supervisory board on July 25, 2007.
Following
is a comparative statement
of selected financial data resulting from the discontinued operations
of the
Company’s former subsidiary, IP Gear Ltd.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Statements of Operations
|
|
Three
Months
|
|
Six
Months
|
Data
for the Company’s
|
|
Ended
|
|
Ended
|
Discontinued
Operations
|
|
June
30,
|
|
June
30,
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$
|
-
|
|
|
$
|
421,244
|
|
|
$
|
-
|
|
$
|
998,981
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax
Loss from Discontinued
|
|
|
-
|
|
|
|
(3,351,659
|
)
|
|
|
-
|
|
|
(3,870,359
|
)
|
Income
Tax Provision Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations
|
|
|
-
|
|
|
|
(3,351,659
|
)
|
|
|
-
|
|
|
(3,870,359
|
)
|
Pre-Tax
Impairment Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Income
Tax Provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations, Net of Tax
|
|
$
|
-
|
|
|
$
|
(3,351,659
|
)
|
|
$
|
-
|
|
$
|
(3,870,359
|
)
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
JUNE
30, 2008
(continued)
NOTE
H
BUSINESS
SEGMENT REPORTING
The
following presents our segmented
financial information by business line for the six months ended June
30, 2008,
and 2007. As a result of the sale of a wholly-owned subsidiary, IP Gear,
Ltd. we
are 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
.”
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
$
|
6,988,193
|
|
|
$
|
5,460,774
|
|
|
|
|
|
|
|
|
|
|
NWB
Networks
|
|
|
4,696,143
|
|
|
|
2,195,015
|
|
|
|
|
|
|
|
|
|
|
|
11,684,336
|
|
|
|
7,655,789
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
(6,090,638
|
)
|
|
|
(4,689,328
|
)
|
|
|
|
|
|
|
|
|
|
NWB
Networks
|
|
|
(3,564,363
|
)
|
|
|
(1,973,607
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,655,001
|
)
|
|
|
(6,662,931
|
)
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
|
897,555
|
|
|
|
771,446
|
|
|
|
|
|
|
|
|
|
|
NWB
Networks
|
|
|
1,131,780
|
|
|
|
221,408
|
|
|
|
|
|
|
|
|
|
|
|
2,029,335
|
|
|
|
992,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
MARCH
31, 2008
New
World
Brands, Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
as
of
March 31, 2008 (unaudited)
and
December 31, 2007
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
1,221,620
|
|
$
|
2,038,635
|
|
Accounts
receivable, net
|
|
1,029,597
|
|
1,027,739
|
|
Inventories,
net
|
|
1,473,826
|
|
744,654
|
|
Prepaid
expenses
|
|
233,156
|
|
244,157
|
|
Other
current
assets
|
|
300,695
|
|
507,012
|
|
|
|
|
|
|
|
Total
Current
Assets
|
|
4,258,895
|
|
4,562,197
|
|
|
|
|
|
|
|
Property
and
equipment, net
|
|
1,392,344
|
|
1,421,806
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
Deposits
and
other assets
|
|
678,953
|
|
668,750
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
6,330,191
|
|
$
|
6,652,753
|
|
The
accompanying
notes are an integral part of these condensed consolidated financial
statements.
New
World
Brands, Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
as
of
March 31, 2008 (unaudited)
and
December 31, 2007
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,203,398
|
|
$
|
1,564,299
|
|
Accrued
expenses
|
|
418,874
|
|
406,910
|
|
Customer
deposits
|
|
24,185
|
|
121,874
|
|
Capital
leases, current portion
|
|
146,554
|
|
181,731
|
|
Total
Current
Liabilities
|
|
2,793,012
|
|
2,274,814
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
Notes
payable
|
|
500,000
|
|
500,000
|
|
Capital
leases, net of current portion
|
|
23,678
|
|
31,317
|
|
Total
Long-Term Liabilities
|
|
523,678
|
|
531,317
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
3,316,690
|
|
2,806,131
|
|
Stockholders
Equity
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000 shares authorized, 200
shares designated as
Series A preferred stock
|
|
|
|
|
|
Series A
preferred stock $0.01 par value, no shares issued
|
|
—
|
|
—
|
|
Common
stock,
$0.01 par value, 600,000,000 shares authorized, 414,979,673
shares issued
and outstanding
|
|
4,149,796
|
|
4,149,797
|
|
Additional
paid-in capital
|
|
33,641,557
|
|
33,641,557
|
|
Accumulated
loss
|
|
(34,777,862
|
)
|
(33,944,732
|
)
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
3,013,501
|
|
3,846,622
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
6,330,191
|
|
$
|
6,652,753
|
|
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
March 31,
2008 (unaudited) and 2007
(unaudited)
|
|
2008
|
|
2007
|
|
Net
Sales
|
|
(unaudited)
|
|
(unaudited)
|
|
Hardware
|
|
$
|
2,042,400
|
|
$
|
1,228,024
|
|
Carrier
Services
|
|
3,038,549
|
|
2,870,997
|
|
|
|
5,080,949
|
|
4,099,021
|
|
Cost
of
Sales
|
|
|
|
|
|
Hardware
|
|
(1,668,226
|
)
|
(1,119,009
|
)
|
Carrier
Services
|
|
(2,708,332
|
)
|
(2,409,462
|
)
|
|
|
(4,376,558
|
)
|
(3,528,471
|
)
|
|
|
|
|
|
|
Gross
Profit
|
|
704,391
|
|
570,550
|
|
|
|
|
|
|
|
Sales,
General and Administrative Expenses
|
|
(1,550,777
|
)
|
(1,129,526
|
)
|
Loss
from
Continuing Operations Before Other Income
|
|
(846,386
|
)
|
(558,976
|
)
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
Interest
and
Bank Charges
|
|
3,193
|
|
13,292
|
|
Other
Income
|
|
10,072
|
|
15,167
|
|
|
|
13,265
|
|
28,459
|
|
Loss
From Continuing Operations Before Income
Taxes
|
|
(833,121
|
)
|
(530,517
|
)
|
|
|
|
|
|
|
Provision
for
Income Taxes
|
|
—
|
|
|
|
Net
Loss From Continuing Operations
|
|
(833,121
|
)
|
(530,517
|
)
|
|
|
|
|
|
|
Loss
from
Discontinued Operations
|
|
—
|
|
(518,700
|
)
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(833,121
|
)
|
$
|
(1,049,217
|
)
|
|
|
|
|
|
|
Net
Loss Per
Share from Continuing Operations
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Net
Loss Per
Share from Discontinued Operations
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Net
Loss per
Share (basic)
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Net
Loss per
Share (diluted)
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
414,979,673
|
|
387,497,116
|
|
|
|
|
|
|
|
Diluted
|
|
414,979,673
|
|
387,497,116
|
|
|
|
|
|
|
|
|
|
|
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
Three Months Ended
March 31,
2008 (unaudited) and 2007
(unaudited)
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Cash
Flows
from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from
continuing operations
|
|
$
|
(833,121
|
)
|
$
|
(530,517
|
)
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
116,280
|
|
108,547
|
|
Allowance
for
doubtful accounts
|
|
24,700
|
|
—
|
|
Changes
in
operating assets and liabilities
|
|
|
|
|
|
Accounts
receivable
|
|
(36,761
|
)
|
2,456
|
|
Inventory
|
|
(729,172
|
)
|
157,103
|
|
Prepaid
expenses
|
|
11,002
|
|
(190,260
|
)
|
Other
current
asset
|
|
206,317
|
|
(26,500
|
)
|
Accounts
payable
|
|
631,816
|
|
(4,852
|
)
|
Accrued
expenses and other liabilities
|
|
19,274
|
|
(109,849
|
)
|
Customer
deposits
|
|
(97,689
|
)
|
(13,814
|
)
|
Net
cash used
in operating activities
|
|
(687,381
|
)
|
(607,687
|
)
|
Cash
flows
from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of
property and equipment
|
|
(86,818
|
)
|
(142,810
|
)
|
Net
cash used
in investing activities
|
|
(86,818
|
)
|
(142,810
|
)
|
Cash
Flows
from Financing Activities
|
|
|
|
|
|
Net
payments
on line of credit
|
|
—
|
|
(984,323
|
)
|
Proceeds
from
note payable
|
|
—
|
|
1,000,000
|
|
Payments
of
note payable
|
|
(42,815
|
)
|
(8,304
|
)
|
Net
repayment
of advances from shareholders
|
|
—
|
|
(6,000
|
)
|
Net
cash
(used in) provided by financing activities
|
|
(42,815
|
)
|
1,373
|
|
Net
cash from
continuing operations
|
|
(817,014
|
)
|
(749,124
|
)
|
Cash
Flows
from Discontinued Operations
|
|
|
|
|
|
Net
change in
operating cash flows
|
|
—
|
|
(453,854
|
)
|
Net
change in
investing cash flows
|
|
—
|
|
(420,637
|
)
|
Net
change in
financing cash flows
|
|
—
|
|
—
|
|
Cash
Flows
from Discontinued Operations
|
|
—
|
|
(874,491
|
)
|
Net
Change in
Cash and Cash Equivalents
|
|
(817,014
|
)
|
(1,623,615
|
)
|
Cash
and Cash
Equivalents at Beginning of Period
|
|
2,038,635
|
|
3,396,617
|
|
Cash
and Cash
Equivalents at End of Period
|
|
$
|
1,221,620
|
|
$
|
1,773,002
|
|
The
accompanying
notes are an integral part of these condensed consolidated financial
statements.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
The
consolidated
unaudited interim financial statements of New World Brands, Inc. and
Subsidiary (the “Company,” “we,” “us,” or “our”) 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
months ended
March 31, 2008 and 2007 are not necessarily indicative of the results
of
operations for the full year.
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
Reverse Acquisition, we are no longer in the wine and spirits
business, and are
now a telecommunications sales, and service company, focusing
on products and
services utilizing voice over internet protocol (“
VoIP
”)
technology. We provide wholesale long distance carrier termination
services as a reseller of VoIP telephony services. We are also a reseller
of VoIP related telecommunications equipment.
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.
The
Boards agreed
that certain events (the “
Merger Events
”) were required
to occur in order to effectively consummate the transactions contemplated,
including, without limitation, certain amendments to the Certificate
of
Incorporation of the Company to, among other things, increase
the authorized
number of shares of Common Stock of the Company, the resultant
conversion of the
Preferred Stock into shares of the Company’s Common Stock, make any filings
necessary to complete the Merger, and receive approval by the stockholders
of the Company and Qualmax.
During
2007, the
number of authorized shares was increased from 50 million shares
to 600 million
shares to allow for a sufficient number of authorized shares
to convert the
existing Preferred shares to Common shares. All Preferred shares
were then
converted into Common shares as a further step towards the completion
of the
merger.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(continued)
|
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, our condensed 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 the Company and Qualmax
as of
March 31, 2008 and December 31, 2007, and the results of operations of
the Company and Qualmax for the three months ended March 31, 2008 and
March 31, 2007. As a result of the Reverse Acquisition, the Company’s
fiscal year end 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 we believe that the disclosures
are adequate to make the information presented not misleading,
we suggest that
these financial statements be read in conjunction with the year-end
and interim
financial statements and notes thereto, and additional information
included in
our prior annual, quarterly and current reports on Forms 10-KSB,
10-QSB and 8-K,
respectively, as filed with the SEC.
Reclassification
Certain
reclassifications of amounts previously reported have been made
to the
accompanying consolidated financial statements in order to maintain
consistency
and comparability between periods presented.
In
July, 2007, the
Company sold all the issued and outstanding common stock of IP
Gear,
Ltd. For purposes of comparability, the results of these operations
have been reclassified from continuing operations to discontinued
operations for
the three months ended March 31, 2007 presented in the accompanying
condensed
consolidated statements of operations. See Note G – Discontinued
Operations – IP Gear, Ltd.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (the “FASB”)
issued SFAS 157, “Fair Value
Measurements”(“
SFAS 157
”). This Statement
establishes a framework for measuring fair value in generally
accepted
accounting principles and expands disclosures about fair value
measurements. The
FASB deferred the effective date of SFAS No. 157 until fiscal years
beginning after November 15, 2007 as it relates to the fair value
measurement requirements for non-financial assets and liabilities
that are
initially measured at fair value, but not measured at fair value
in subsequent
periods. These non-financial assets include goodwill and other intangible
assets with indefinite-lived which are included within other
assets. The Company
has adopted the provisions of SFAS No 157 with respect to non-financial
assets
effective January 1, 2008 and its adoption did not have a material impact
on our results of operations or our financial condition.
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 has adopted the provisions
of SFAS 159
and does not expect it having a material impact on our financial
statements.
In
December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations”
(“SFAS 141R”)
. SFAS 141R replaces SFAS 141
and establishes principles and requirements for how an acquirer
recognizes and
measures in its financial statements the identifiable assets
acquired, including
goodwill, the liabilities assumed and any non-controlling interest
in the
acquiree. SFAS 141R also establishes disclosure requirements
to enable users of
the financial statements to evaluate the nature and financial
effects of the
business combination. This statement is effective for fiscal
years beginning
after December 15, 2008. We are currently evaluating the impact the
adoption of SFAS 141R will have on our financial position and
consolidated
results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements”
(“SFAS 160”)
. SFAS
160 establishes accounting and reporting standards for ownership
interests in
subsidiaries held by parties other than the parent, the amount
of consolidated
net income attributable to the parent and to the noncontrolling
interest,
changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160
also establishes reporting requirements that provide sufficient
disclosures that
clearly identify and distinguish between the interests of the
parent and the
interests of the noncontrolling owners. This standard is effective
for fiscal
years beginning after December 15, 2008. We are currently evaluating the
impact the adoption of SFAS 160 will have on our financial position
and
consolidated results of operations.
In
March 2008,
the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities” (“
SFAS 161
”), an amendment of
FASB statement No. 133. SFAS 161 amends and expands the disclosure
requirement for FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“
SFAS 133
”). It
requires enhanced disclosure about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedged
items are accounted for under SFAS 133
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
A
|
ORGANIZATION,
CAPITALIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(continued)
|
and
its related
interpretations, and (iii) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. SFAS 161 is effective for the Company as of January 1,
2009.
Inventories
as of
March 31,
2008 and December 31, 2007 consisted of the
following:
Resale
Hardware
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
Finished
Goods inventories
|
|
$
|
1,545,326
|
|
$
|
819,654
|
|
Less
allowance for obsolete inventories
|
|
(71,500
|
|
(75,000
|
)
|
Inventories,
net
|
|
$
|
1,473,826
|
|
$
|
744,654
|
|
Loans
from P&S
Spirit
On
and effective
March 30, 2007, we entered into a term loan and security agreement
with
P&S Spirit (the “
P&S Term Loan”
). The
principal amount of the P&S Loan was $1,000,000. Monthly payments
of interest at two percent over the Wall Street Journal Prime
Rate payable in
arrears are due commencing on May 1, 2007.
On
May 30,
2007, the Company entered into another agreement with P&S Spirit, a Credit
Line and Security Agreement (the “
P&S Credit
Line”
), for a line of credit facility in the amount of
$1,050,000. The terms of the loan facility are an interest rate of Prime
plus 2% (as reported in the Wall Street Journal), payments are
to be interest
only in arrears commencing July 1, 2007. The P&S Credit Line is
secured by a corporate guaranty by Qualmax (which pending completion
of the
merger of Qualmax into the Company, holds a controlling interest
in the Company)
and a security interest in the assets of Qualmax (consisting
solely of
298,673,634 shares of common stock of the company). The Company
must meet
covenants of a ratio of current assets to current liabilities
of at least
1.2:1.0 and a total liabilities to net worth ratio not exceeding
2.5:1.0.
The maturity date of the loan is June 1, 2011 when all principal and any
outstanding interest payments are due. The company was in compliance
with all
its covenants as of March 31, 2008 and December 31, 2007.
The
Company paid
$500,000 towards the balance of the P&S Term Loan on August 13, 2007.
This reduced the balance of the loan to $500,000. On February 21,
2008, effective February 15, 2008, the Company repaid all outstanding
obligations under the P&S Term Loan Agreement, in the amount of
$500,000. We made a draw of $500,000 against the P&S Credit Line
facility to pay the P&S Term Loan. As of March 31, 2008, the Company
had paid off the full amount of the P&S Term Loan and had drawn a total of
$500,000 against the P&S Credit Line. The interest rate on the P&S
Credit Line on March 31, 2008 was 7.25%.
The
principals of
P&S Spirit include Dr. Selvin Passen, who is a director and shareholder
of the Company, as well as its former Chief Executive Officer,
and
Dr. Jacob Schorr, who is a director of the Company.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
C
|
NOTES
PAYABLE
(continued)
|
TELES
AG Loan Agreement
On
February 21, 2008, the Company and TELES AG Informationstechnologien
(“
TELES
”), entered into a Term Loan and Security
Agreement (the “TELES Loan”), effective February 15, 2008, pursuant to
which, from time to time prior to February 1, 2009, the Company may obtain
advances from TELES up to the amount of the outstanding
Commitment. Amounts borrowed may not be reborrowed, notwithstanding
any payments thereunder. The outstanding balance of the TELES Loan
will be due and payable on or before February 1, 2012. The
outstanding principal amount of the TELES Loan will be payable
in twelve (12)
quarterly installments commencing May 1, 2009. Interest on the
outstanding principal amount of the TELES Loan is payable quarterly
commencing
May 1, 2008, at an interest rate equal to 7% per annum, compounded
quarterly.
Total
maturities of
notes payable as of March 31, 2008 were as follows:
2008
|
|
$
|
—
|
|
2009
|
|
—
|
|
2010
|
|
—
|
|
2011
|
|
|
|
2012
|
|
500,000
|
|
Total
notes
payable
|
|
500,000
|
|
|
|
|
|
Notes
payable, current portion
|
|
—
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
$
|
500,000
|
|
For
comparison, the
interest expense the Company incurred on the above notes payable
was
approximately $10,243 and $27,684 for the three months ended
March 31, 2008
and 2007, respectively.
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 three
months ended March 31, 2008 and 2007:
Weighted
average
number of shares outstanding as at March 31, 2007:
Basic
(Common
Stock)
|
|
39,043,665
|
|
Preferred
Stock (as converted to Common Stock)
|
|
348,453,451
|
|
Total
|
|
387,497,116
|
|
Effect
of
dilutive securities
|
|
|
|
Common
Stock
- options and warrants
|
|
—
|
|
Preferred
Stock - options and warrants
|
|
—
|
|
Total
|
|
—
|
|
Weighted
average number of shares outstanding (diluted)
|
|
387,497,116
|
|
Weighted
average of options and warrants not included
above (anti-diluted):
|
|
|
|
Basic
(Common
Stock)
|
|
5,495,000
|
|
Preferred
Stock (as converted to Common Stock)
|
|
55,555,548
|
|
Total
|
|
448,547,664
|
|
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
D
|
STOCKHOLDERS’
EQUITY
(continued)
|
Weighted
average number of shares outstanding as at March 31,
2008:
|
|
|
|
Basic
(Common
Stock)
|
|
414,979,673
|
|
|
|
|
|
Total
|
|
414,979,673
|
|
Effect
of
dilutive securities
|
|
|
|
Common
Stock
- options and warrants
|
|
—
|
|
Preferred
Stock - options and warrants
|
|
—
|
|
Total
|
|
—
|
|
Weighted
average number of shares outstanding (diluted)
|
|
414,979,673
|
|
Weighted
average of options and warrants not included
above (anti-diluted):
|
|
|
|
Basic
(Common
Stock)
|
|
61,050,556
|
|
Preferred
Stock (as converted to Common Stock)
|
|
—
|
|
Total
|
|
476,030,229
|
|
In
May 2007,
the FASB issued FASB Staff Position FIN 48-1,(“
FSP
”)
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 (1) the tax position is not considered more
likely than not to be sustained solely on the basis of its technical
merits and
(2) the statute of limitations remain open. FSP FIN 48-1 should be
applied
upon the initial adoption of FIN 48. The impact of our 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 our consolidated financial
statements.
NOTE
F
|
COMMITMENTS
AND CONTINGENCIES
|
The
MPI Litigation
As
a result of the
Reverse Acquisition the Company assumed the liabilities of
Qualmax. Qualmax was named as a defendant in certain litigation filed
in France before the Trade Tribunal of Nanterre against BOS Better
Online
Systems (“BOS”) by Media Partners International (“
MPI
,”
and the “
MPI Litigation
”), a former
distributor of BOS,
whose contract with BOS allegedly related to certain distribution
rights for the
product division Qualmax purchased from BOS on December 31,
2005. Pursuant to the asset purchase agreement between Qualmax and
BOS, BOS agreed to indemnify and hold Qualmax harmless from liability,
without
limitation, arising from the claims raised in the MPI Litigation,
and BOS has
undertaken defense of Qualmax at BOS’s expense. The litigation
remains in its early stages, and as last reported
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
F
|
COMMITMENTS
AND
CONTINGENCIES
(continued)
|
from
counsel the
French court had not yet made definitive rulings on defendant’s motion to change
venue and jurisdiction from France to Israel.
Initial
hearings on
a motion for change of venue were concluded in February 2007.
Additional hearings were conducted in late April 2007. The Company
has been preliminarily informed that a decision from the French
court to
maintain venue in France was made in September 2007, and that defendants
have filed an appeal of that decision, but that no ruling has
been made on the
appeal as of the date of this filing. At present, based upon the limited
progress of the matter and without the benefit of the completion
of factual
discovery, management believes this litigation does not pose
a significant
financial risk to the Company.
The
Blackstone Litigation
On
April 1,
2008, effective as of March 31, 2008, the Company entered into a settlement
agreement in relation to a lawsuit entitled Capital Securities,
LLC and
Blackstone Communications Company v. Carlos Bertonnatti, Worldwide
PIN Payment
Corp. and Qualmax, Inc., Case No. 2006-15824-CA-01, filed
August 10, 2006 in the Circuit Court of the 11
th
Judicial
Circuit in and for Miami-Dade County, Florida (the “
Blackstone
Litigation
”). As disclosed in the Company’s Quarterly Reports
on Form 10-QSB filed with the SEC on November 19, August 20, and
May 21, 2007, and the Company’s Annual Report on Form 10-KSB filed
with the SEC on April 17, 2007, the facts underlying the Blackstone
Litigation relate to a contract between defendant Worldwide PIN
Payment Corp.
and plaintiffs, and a third party, to plaintiffs’ allegations of
misappropriation of trade secrets and corporate opportunity,
and to claims that
defendants, or some of them, tortiously interfered with plaintiffs’ contract
with a third party.
Pursuant
to the
settlement agreement, the Company has agreed to pay plaintiffs
the sum of
$50,000 toward plaintiffs’ costs of litigation, and in exchange, plaintiffs have
released the Company from all claims asserted by plaintiffs or
otherwise arising
against the Company; all claims against the Company were dismissed
with
prejudice.
Credit
Facility
with Pacific Continental Bank
The
Company entered
into an agreement for the use of various credit services with
Pacific
Continental Bank in February 2007. The conditions of this
agreement require the deposit of $250,000 with the bank as security
for the
services. The terms and balance remain unchanged at March 31, 2008.
The deposit is in the company’s money market account with the bank and is
reported on the balance sheet as part of cash and cash equivalents.
Piecom
Tech
As
part of the
agreement to sell our IP Gear Ltd. subsidiary to TELES (see discontinued
operations Note G), we have accepted any liabilities and or any
amounts
recovered as a result of any claims from/against Piecom to/from
IP Gear Ltd. in
the future, beyond the date of closing the sale of our subsidiary. Piecom
Tech had been a vendor to IP Gear Ltd and was contracted to provide
outsourced
contract manufacturing services. There is currently a deposit held by
Piecom of $214,000 towards the production of equipment not yet
delivered and an
amount in escrow of $32,000 pending resolution of this matter.
There is
currently no expectation of any liability arising from this commitment
to the
company.
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
G
|
DISCONTINUED
OPERATIONS – IP GEAR,
LTD.
|
We
completed the sale of IP Gear, Ltd., our Israeli subsidiary,
as of an effective
date of July 1, 2007 for accounting purposes. The Company agreed to
sell all the outstanding shares of the Company’s subsidiary, IP Gear Ltd., to
TELES in exchange for cash on closing and further payments over
a period of
time. The Company’s 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 payable over four
years. The
Earn Out is to be paid at the greater of $46,875 or 10% of the
“CPE” product
line revenue for the quarter to be paid within 90 days of the
end of the
quarter. The Company also received a return of working capital invested
during the transition period.
With
certain
exceptions, commencing on the date of the closing and for a certain
period of
time (as specified in the Final Agreement), the Company agreed
not to, or cause
any of its affiliates to, engage in any research and development
or
manufacturing activities competitive with those conducted by
IP Gear, Ltd., and
not to, or cause any of its affiliates to, engage in the sale,
distribution, marketing, and services of products that may compete
with certain
products of TELES. In addition, with certain exceptions, commencing
one year after the date of closing, and effective for a period
of time and
within certain geographic regions relative to the grant of exclusive
distribution and sale rights to the Company pursuant to the partner
contract
described below, the Company agreed not to, or cause any of its
affiliates to,
engage in the sale, distribution, marketing, and services of
products that may
compete with products of IP Gear, Ltd.
In
accordance with
the Final Agreement, the Company and TELES entered into a partner
contract
relating to the promotion, marketing, sale, and support of certain
products of
TELES and IP Gear, Ltd., pursuant to which the Company became
the exclusive
distributor of products of TELES and IP Gear, Ltd. in North America
(including
the United States, Canada, Mexico, all Caribbean nations, Guatemala,
and
Honduras) and non-exclusive distributor in other markets.
TELES
assumed responsibility for all the liabilities and obligations
of
IP Gear, Ltd. except those specifically outlined in the agreement.
The two items
excluded are any past potential liability that IP Gear, Ltd.
may have to the
Office of the Chief Scientist of Israel and under a contract
with one of IP
Gear, Ltd.’s vendors, Piecom.
New
World Brands’ management was authorized by the board to complete the
sale of IP Gear, Ltd. to TELES. A preliminary agreement was reached
July 18 2007 and the closing occurred on July 26, 2007. The
final agreement for the sale was approved by our Board’s consent and by Teles’
Supervisory board on July 25, 2007
|
|
Selected
Statements of Operations
Data for the
Company’s
Discontinued Operations for the
3 months ended March
31,
|
|
|
|
2008
|
|
2007
|
|
Total
Revenue
|
|
$
|
—
|
|
$
|
577,737
|
|
Pre-Tax
Loss
from Discontinued
|
|
—
|
|
(518,700
|
)
|
Income
Tax
Provision Operations
|
|
—
|
|
—
|
|
Loss
from
Discontinued Operations
|
|
—
|
|
(518,700
|
)
|
Pre-Tax
Impairment Loss
|
|
—
|
|
—
|
|
Income
Tax
Provision
|
|
—
|
|
—
|
|
Loss
from
Discontinued Operations, Net of Tax
|
|
$
|
—
|
|
$
|
(518,700
|
)
|
NOTE
H
|
BUSINESS
SEGMENT REPORTING
|
The
following
presents our segmented financial information by business line
for the three
months ended March 31, 2008, and 2007. As a result of the sale
of a wholly-owned subsidiary, IP Gear, Ltd. we are 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,
”
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
MARCH
31, 2008
(continued)
NOTE
H
|
BUSINESS
SEGMENT
REPORTING
(continued)
|
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
.”
|
|
2008
|
|
2007
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
$
|
3,038,549
|
|
$
|
2,870,997
|
|
|
|
|
|
|
|
NWB
Networks
|
|
2,042,400
|
|
1,228,024
|
|
|
|
5,080,949
|
|
4,099,021
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
2,708,332
|
|
2,409,462
|
|
|
|
|
|
|
|
NWB
Networks
|
|
1,668,226
|
|
1,119,009
|
|
|
|
4,376,558
|
|
3,528,471
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
NWB
Telecom
|
|
330,216
|
|
461,535
|
|
|
|
|
|
|
|
NWB
Networks
|
|
374,175
|
|
109,015
|
|
|
|
704,391
|
|
570,550
|
|
|
|
|
|
|
|
|
|
Annex
A
AGREEMENT
AND PLAN OF MERGER
BY
AND BETWEEN
NEW
WORLD BRANDS, INC.,
and
QUALMAX,
INC.
Dated
as of February 18, 2008
AGREEMENT
AND PLAN OF MERGER
This
AGREEMENT AND PLAN OF MERGER, dated as of February 18, 2008 (this “
Agreement
”),
is by
and between New World Brands, Inc., a Delaware corporation (“
the
Company
”),
and
Qualmax, Inc., a Delaware corporation (“
Qualmax
”).
RECITALS
The
Company and Qualmax are parties to that certain Asset Purchase Agreement
dated
as of June 22, 2006, as amended on August 28, 2006 (the “
Purchase
Agreement
”),
pursuant to which, at a closing that took place on September 15, 2006, among
other things, the Company acquired all of the assets of Qualmax in exchange
for
the assumption of Qualmax’s liabilities and the issuance to Qualmax of 100
shares of the Company’s Series A Convertible Preferred Stock, par value $0.01
per share, which shares of Preferred Stock were converted into 298,673,634
shares of the Company’s common stock, par value $0.01 per share (the
“
Common
Stock
”)
on
April 24, 2007 upon the filing of a Certificate of Amendment to the Company’s
certificate of incorporation with the Secretary of State of the State of
Delaware.
The
board
of directors of the Company and Qualmax have each determined that it is
advisable and in their best interests, and in the best interests of their
respective stockholders, and consistent with and in furtherance of their
respective business strategies and goals, for Qualmax to merge with and into
the
Company upon the terms and subject to the conditions set forth herein (the
“
Merger
”)
and in
accordance with the applicable provisions of the Delaware General Corporation
Law (the “
DGCL
”),
with
the Company being the surviving corporation in the Merger.
The
Company and Qualmax intend, by approving resolutions authorizing this Agreement,
to adopt this Agreement as a plan of reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder (the “
Code
”)
and
that the transactions contemplated by this Agreement be undertaken pursuant
to
such plan.
Pursuant
to the Merger, each issued and outstanding share of common stock, par value
$0.001 per share, of Qualmax (the “
Qualmax
Stock
”)
immediately prior to the effective time of the Merger, shall be converted
into
the right to receive shares of Common Stock of the Company, upon the terms
and
subject to the conditions set forth herein.
NOW,
THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements herein contained, and intending to be legally bound hereby, the
Company and Qualmax hereby agree as follows:
ARTICLE
I
DEFINITIONS
SECTION
1.01.
Defined
Terms
.
For
purposes of this Agreement, the following terms shall have the following
meanings:
“
Adjusted
Stock Right
”
is
defined in
Section
6.07(a)
.
“
Affiliates
”,
with
respect to any Person, means a Person that directly or indirectly, through
one
or more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned Person.
For
the
purpose of the definition of Affiliate, the term “control” (including the terms
“controlling” and “controlled”) means the possession, direct or indirect, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
“
Agreement
”
is
defined in the Preamble.
“
Certificate
of Merger
”
is
defined in
Section
2.02
.
“
Certificates
”
is
defined in
Section
2.06(e)
.
“
Code
”
is
defined in the Recitals.
“
Company
”
is
defined in the Preamble.
“
Company
Charter Documents
”
is
defined in
Section
4.02
.
“
Company
Stock Rights
”
is
defined in
Section
4.03(a)
.
“
Company
Rights Agreements
”
is
defined in
Section
4.03(a)
.
“
Common
Stock
”
is
defined in the Recitals.
“
DGCL
”
is
defined in the Recitals.
“
Effective
Time
”
is
defined in
Section
2.02
.
“
Exchange
Act
”
means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
of the SEC thereunder.
“
Exchange
Agent
”
is
defined in
Section
2.07(a)
.
“
Exchange
Ratio
”
is
defined in
Section
2.06(a)
.
“
Governmental
Authority
”
is
defined in
Section
3.05(b)
.
“
knowledge
”
means,
with respect to any matter in question, the actual knowledge at any time
of the
executive officers of Qualmax or the Company, as the case may be.
“
Material
Adverse Effect
”
means,
(i) with respect to Qualmax, any event, change, cause, effect or circumstance
which has a material adverse effect on the business, assets (including
intangible assets), financial condition or results of operations of Qualmax,
taken as whole, and (ii) with respect to the Company, any event, change,
cause,
effect or circumstance which has a material adverse effect on the business,
assets (including intangible assets), financial condition or results of
operations of the Company and/or its subsidiaries, taken as whole;
provided
,
however
,
that
each of the following shall be excluded from the definition of Material Adverse
Effect and from any determination as to whether a Material Adverse Effect
has
occurred or may occur: changes, effects or circumstances, that are applicable
to
(A) the industry generally in which Qualmax or the Company, as the case may
be,
operates, (B) the United States securities markets generally, (C) personnel
and other changes customarily attendant to transactions of the type contemplated
by this Agreement, including, without limitation, any disruption of customer,
supplier or employee relationships, and (D) general changes in economic,
regulatory or political conditions generally, in the case of (A) and (D)
above,
to the extent that the relevant change does not have a materially
disproportionate impact on it as compared to other similarly situated companies
in similar industries.
“
Merger
”
is
defined in the Recitals.
“
Merger
Consideration
”
is
defined in
Section
2.07(b)
.
“
Merger
Proposals
”
means
proposals for: (1) the approval and authorization of this Agreement and any
related agreements, instruments or certificates; and (2) the approval and
authorization of the consummation of the transactions contemplated by this
Agreement, including, without limitation, the Merger.
“
Qualmax
”
is
defined in the Preamble.
“
Qualmax
Charter Documents
”
is
defined in
Section
3.02
.
“
Qualmax
Preferred Stock
”
is
defined in
Section
3.03
.
“
Qualmax
Stock
”
is
defined in the Recitals.
“
Qualmax
Stock Rights
”
is
defined in
Section
2.06(c)
.
“
Qualmax
Stock Right Agreements
”
is
defined in
Section
2.06(c)
.
“
Person
”
means
an individual, corporation, partnership, association, trust, unincorporated
organization, other entity or group (as defined in Section 13(d)(3) of the
Exchange Act).
“
Post-Acquisition
SEC Documents
”
is
defined in
Section
4.07(b)
.
“
SEC
”
means
the United States Securities and Exchange Commission.
“
Securities
Act
”
means
the Securities Act of 1933, as amended, and the rules and regulations of
the SEC
thereunder.
“
subsidiary
”
or
“
subsidiaries
”
of
Qualmax, the Company or any other Person means any corporation, partnership,
joint venture or other legal entity of which Qualmax, the Surviving Corporation,
the Company or such other Person, as the case may be (either alone or through
or
together with any other subsidiary), owns, directly or indirectly, more than
50%
of the stock or other equity interests the holders of which are generally
entitled to vote for the election of the board of directors or other governing
body of such corporation or other legal entity.
“
Surviving
Corporation
”
is
defined in
Section
2.01
.
“
Termination
Date
”
is
defined in
Section
8.01(b)
.
When
reference is made in this Agreement to Qualmax or the Company, such reference
shall include their respective subsidiaries, as and to the extent the context
so
requires, whether or not explicitly stated in this Agreement.
ARTICLE
II
THE
MERGER
SECTION
2.01.
The
Merger
.
Upon
the terms and subject to the conditions set forth in this Agreement and in
accordance with the DGCL, at the Effective Time, Qualmax and the Company
shall
consummate the Merger pursuant to which (a) Qualmax shall be merged with
and
into the Company and the separate existence of Qualmax shall thereupon cease,
(b) the Company shall continue as the surviving corporation in the Merger
(hereinafter sometimes referred to as the “
Surviving
Corporation
”)
and
shall continue to be governed by the DGCL and (iii)
the
separate corporate existence of the Company with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the
Merger
SECTION
2.02.
Closing;
Effective Time
.
(a)
Unless
this Agreement shall have been terminated and the transactions herein
contemplated hereunder shall have been abandoned pursuant to
Section
8.01
hereof,
the consummation of the transactions contemplated by this Agreement (the
“
Closing
”)
shall
take place remotely at the offices of Kramer Levin Naftalis & Frankel LLP
located at 1177 Avenue of the Americas, New York, New York 10036 at 3:00
p.m.
(NY time), as promptly as practicable after the satisfaction or waiver of
the
conditions set forth in
Article
VII
.
The
date on which the Closing actually takes place is referred to in this Agreement
as the “
Closing
Date
.”
(b)
Immediately
prior to the Closing, Qualmax and the Company shall duly execute a certificate
of merger (the “
Certificate
of Merger
”)
and
file such Certificate of Merger with the Secretary of State of Delaware in
accordance with the DGCL. The Merger shall become effective at 11:59 p.m.
(NY
time) on the date of the filing of the Certificate of Merger with the Secretary
of State of Delaware or such other date as may be mutually agreed between
Qualmax and the Company and included in the Certificate of Merger (the
“
Effective
Time
”
and
the
day that includes the Effective Time the “
Effective
Date
”).
SECTION
2.03.
Effect
of the Merger
.
The
Merger shall have the effect set forth in this Agreement and in the applicable
provisions of the DGCL. Without limiting the generality of the foregoing,
and
subject thereto, at the Effective Time, all of the properties, rights,
privileges, powers and franchises of Qualmax and the Company shall vest in
the
Surviving Corporation, and all debts, liabilities and duties of Qualmax and
the
Company shall become the debts, liabilities and duties of the Surviving
Corporation, all as provided under the DGCL
SECTION
2.04.
Certificate
of Incorporation; Bylaws
.
At the
Effective Time, the certificate of incorporation of the Company (the
“
Certificate
of Incorporation
”),
as in
effect immediately prior to the Effective Time, shall be, upon effectiveness
of
the Merger, the certificate of incorporation of the Surviving Corporation
until
thereafter amended as provided by applicable law and by the terms of such
Certificate of Incorporation. The by-laws of the Company, as in effect
immediately prior to the Effective Time (the “
By-Laws
”),
shall
be, upon effectiveness of the Merger, the by-laws of the Surviving Corporation
until thereafter amended as provided by applicable law.
SECTION
2.05.
Directors
and Officers
.
The
directors of the Company immediately prior to the Effective Time shall be
the
directors of the Surviving Corporation, each to hold office in accordance
with
the Certificate of Incorporation and By-laws of the Surviving Corporation,
and
the officers of the Company immediately prior to the Effective Time shall
be the
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
SECTION
2.06.
Effect
on Capital Stock
.
At the
Effective Time, by virtue of the Merger and without any action on the part
of
the Company, Qualmax or the holders of any securities of Qualmax:
(a)
Conversion
of Securities
.
Each
share of Qualmax Stock issued and outstanding immediately prior to the Effective
Time (excluding any shares of Qualmax Stock to be canceled pursuant to
Section
2.06(b)
hereof)
shall be converted, subject to
Sections
2.06(e)
and
(f)
hereof,
into a number of shares of Common Stock determined by dividing (x) the
total number of shares of Common Stock owned by Qualmax immediately prior
to the
Effective Time by (y) the total number of shares of Qualmax Stock issued
and outstanding immediately prior to the Effective Time (such ratio, the
“
Exchange
Ratio
”),
and
except as provided in
Section
2.06(c)
hereof,
and any other shares of capital stock or options, warrants or other securities
convertible or exercisable into shares of capital stock of Qualmax, whether
vested or unvested, shall automatically be cancelled and retired and shall
cease
to exist.
(b)
Cancellation
.
At the
Effective Time, each share of Qualmax Stock held in the treasury of Qualmax
immediately prior to the Effective Time shall cease to be outstanding, be
canceled and retired without payment of any consideration therefor, and shall
cease to exist.
(c)
Stock
Options and Warrants
.
At the
Effective Time, those options or warrants to purchase shares of Qualmax Stock
(collectively, the “
Qualmax
Stock Rights
”)
listed
on
Schedule
6.07
hereto
(collectively, the “
Qualmax
Stock Right Agreements
”),
shall
be treated in accordance with
Section
6.07
hereof.
(d)
Adjustments
to Exchange Ratio
.
The
Exchange Ratio, the Merger Consideration and any other relevant amounts and
terms in this Agreement shall be appropriately adjusted to reflect fully
the
effect of: any stock split, reverse split, or stock dividend (including any
dividend or distribution of securities convertible into Common Stock); or
any
reorganization, recapitalization, reclassification, readjustment, split up,
combination or exchange of shares, or other like event with respect to the
Common Stock, in any case occurring after the date hereof and prior to the
Effective Time.
(e)
Fractional
shares of Common Stock
.
No
certificates or scrip representing less than one (1) share of Common Stock
shall
be issued in exchange for shares of Qualmax Stock upon the surrender for
exchange of a certificate which immediately prior to the Effective Time
represented issued and outstanding shares of Qualmax Stock (the “
Certificates
”).
In
lieu of any such fractional share, each holder of shares of Qualmax Stock
issued
and outstanding immediately prior to the Effective Time who would otherwise
have
been entitled to fractional shares of Common Stock upon surrender of
Certificates for exchange shall have his, her or its shares aggregated and
each
fractional share resulting from such aggregation shall be rounded up to the
nearest whole share and no cash payment shall be made.
SECTION
2.07.
Exchange
of shares of Qualmax Stock
.
(a)
Exchange
Agent
.
The
Company shall cause to be supplied to or for such bank or trust company as
shall
be designated by the Company and shall be reasonably acceptable to Qualmax
(the
“
Exchange
Agent
”),
in
trust for the benefit of the holders of shares of Qualmax Stock, as needed for
exchange in accordance with this
Section
2.07
through
the Exchange Agent, the shares of Common Stock deliverable pursuant to
Section
2.06(a)
hereof
.
(b)
Exchange
Procedures
.
(i)
As
soon
as reasonably practicable after the Effective Time, the Company will cause
the
Exchange Agent to mail to each holder of record of Certificates (i) a letter
of
transmittal (which shall specify that delivery shall be effected, and risk
of
loss and title to the Certificates shall pass, only upon proper delivery
of the
Certificates to the Exchange Agent and shall be in such form and have such
other
provisions as the Company may reasonably specify and as are consistent with
the
terms of this Agreement), and (ii) instructions to effect the surrender of
the
Certificates in exchange for the shares of Common Stock. Upon surrender of
a
Certificate for cancellation to the Exchange Agent, together with such letter
of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate shall
be
entitled to receive, in exchange therefore, that number of whole shares of
Common Stock which such holder has the right to receive in accordance with
Section
2.06(a)
hereof
in respect of the shares of Qualmax Stock formerly evidenced by such
Certificate(s) and (the Common Stock being referred to as the “
Merger
Consideration
”).
(ii)
The
holder of such Certificate, upon exchange for shares of Common Stock, shall
also
receive any dividends or other distributions to which such holder is entitled
pursuant to
Section
2.07(c)
.
Certificates surrendered shall forthwith be canceled following the Effective
Time. In the event of a transfer of ownership of shares of Qualmax Stock
which
is not registered in the transfer records of Qualmax as of the Effective
Time,
the Merger Consideration, dividends and distributions may be issued and paid
in
accordance with this
Article
II
to a
transferee if the Certificate evidencing such shares of Qualmax Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer pursuant to this
Section
2.07(b)
and by
evidence that any applicable stock transfer taxes have been paid. Until so
surrendered, each outstanding Certificate that, prior to the Effective Time,
represented shares of Qualmax Stock will be deemed from and after the Effective
Time, for all corporate purposes other than the payment of dividends or other
distributions, to evidence the ownership of the number of whole shares of
Common
Stock into which such shares of Qualmax Stock shall have been so converted
under
Section
2.06
hereof.
(iii)
Shares
of
Qualmax Stock held at the Effective Time in book-entry form shall be exchanged
for Merger Consideration in accordance with the customary procedures of The
Depository Trust Company.
(c)
Distributions
with Respect to Unexchanged shares of Qualmax Stock
.
No
dividends or other distributions declared or made after the Effective Time
with
respect to shares of Common Stock with a record date after the Effective
Time
shall be paid to the holder of any unsurrendered Certificate with respect
to the
Common Stock that such holder is entitled to receive, unless and until the
holder of such Certificate shall surrender such Certificate in accordance
with
the provisions of
Section
2.07(b)
.
Subject
to applicable law, following surrender of any such Certificate, there shall
be
paid to the record holder of the whole shares of Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount
of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Common Stock, and (ii)
on
the applicable payment date, the amount of dividends or other distributions
with
a record date after the Effective Time not yet paid on the date of surrender
of
such Certificate to be paid with respect to such whole shares of Common
Stock.
(d)
Transfers
of Ownership
.
If any
shares of Common Stock are to be delivered in a name other than that in which
the Certificate surrendered in exchange therefor is registered, it will be
a
condition of the delivery thereof that the Certificate so surrendered shall
be
properly endorsed and otherwise in proper form for transfer and that the
person
requesting such exchange shall have paid to the Company or any agent designated
by it any transfer or other taxes required by reason of the delivery of Common
Stock in any name other than that of the registered holder of the Certificate
surrendered, or shall have established to the satisfaction of the Company
or any
agent designated by it that such tax has been paid or is not
payable.
(e)
Escheat
.
The
Company, Qualmax and their respective affiliates shall not be liable to any
holder of Common Stock for any Merger Consideration delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
(f)
Withholding
Rights
.
The
Exchange Agent shall be entitled to deduct and withhold from the Merger
Consideration otherwise payable pursuant to this Agreement to any holder
of
shares of Common Stock, and from any cash dividends or other distributions
that
such holder is entitled to receive under
Section
2.07(c)
,
such
amounts as the Exchange Agent is required to deduct and withhold with respect
to
the making of such payment under the Code, and the rules and regulations
promulgated thereunder, or any provision of federal, state, local or non-United
States tax law. To the extent that amounts are so withheld by the Exchange
Agent, such portion of the Merger Consideration and other such amounts payable
under
Section
2.07(c)
that are
withheld shall be treated for all purposes of this Agreement as having been
received by the holder of the shares of Qualmax Stock in respect of which
such
deduction and withholding was made by the Exchange Agent.
(g)
Undistributed
Merger Consideration
.
Any
portion of the shares of Common Stock and the cash or other property in respect
of dividends or other distributions that the holder is entitled to receive
under
Section
2.07(c)
supplied
to the Exchange Agent which remains undistributed to the holders of the
Certificates one (1) year after the Effective Time shall be delivered to
the
Company, upon demand, and any holders of Certificates who have not theretofore
complied with this
Section
2.07
shall
thereafter look only to the Company for payment of their claim for Merger
Consideration and any dividends or distributions with respect to shares of
Common Stock.
SECTION
2.08.
Stock
Transfer Books
.
At the
Effective Time, the stock transfer books of Qualmax shall be closed, and
there
shall be no further registration of transfers of Qualmax Stock thereafter
on the
records of Qualmax.
SECTION
2.09.
No
Further Ownership Rights in Common Stock
.
The
Merger Consideration and distributions, if any, pursuant to
Section
2.07(c)
delivered upon the surrender for exchange of shares of Qualmax Stock in
accordance with the terms hereof shall be deemed to have been issued in full
and
complete satisfaction of all rights pertaining to such shares of Qualmax
Stock,
and there shall be no further registration of transfers on the records of
the
Surviving Corporation of shares of Qualmax Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this
Article
II
.
SECTION
2.10.
Lost,
Stolen or Destroyed Certificates
.
In the
event any Certificates shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Certificates,
upon the making of an affidavit of that fact by the holder thereof, such
Merger
Consideration and any dividends or other distributions as may be required
pursuant to this
Article
II
;
provided
,
however
,
that
the Company may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates
to
deliver a bond in such sum as it may reasonably direct as indemnity against
any
claim that may be made against the Company or the Exchange Agent with respect
to
the Certificates alleged to have been lost, stolen or destroyed.
SECTION
2.11.
Tax
Consequences
.
The
parties hereto intend that the Merger shall constitute a reorganization within
the meaning of Section 368(a) of the Code. The parties hereto hereby adopt
this
Agreement as a “plan of reorganization” within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
SECTION
2.12.
Dissenting
Shares
.
(a)
Notwithstanding any provision of this Agreement to the contrary, any shares
of
Qualmax Stock held by a holder who has demanded and perfected appraisal or
dissenters’ rights for such shares in accordance with the DGLC and who, as of
the Effective Time, has not effectively withdrawn or lost such appraisal
or
dissenters’ rights (“
Dissenting
Shares
”)
shall
not be converted into or represent a right to receive shares of Common Stock
pursuant to
Section
2.06
,
but the
holder thereof shall only be entitled to such rights as are granted by
DGCL.
(b)
Notwithstanding the provisions of subsection (a), if any holder of shares
of
Qualmax Stock who demands appraisal of such shares under the DGCL shall
effectively withdraw or lose (through failure to perfect or otherwise) the
right
to appraisal, then, as of the later of the Effective Time and the occurrence
of
such event, such holder’s shares shall automatically be converted into and
represent only the right to receive the shares of Common Stock as provided
in
Section
2.06
,
without
interest thereon, upon surrender of the Certificate representing such shares.
(c)
Qualmax shall give the Company (i) prompt notice of any written demands for
appraisal of any shares of Qualmax Stock, withdrawals of such demands, and
any
other instruments served pursuant to the DGCL and received by Qualmax and
(ii)
Qualmax agrees that, except with the prior written consent of the Company,
or as
required under the DGCL, it will not make any payment with respect to, or
settle
or offer to settle any claim, demand, or other liability with respect to
any
Dissenting Shares.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF
QUALMAX
Qualmax
hereby represents and warrants to the Company, as of the date hereof and
as of
the Closing Date, except as set forth on the written disclosure schedules
delivered by Qualmax, as follows:
SECTION
3.01.
Organization
and Qualification
.
(a)
Qualmax
is a corporation duly organized, validly existing and in good standing under
the
laws of the State of Delaware and has the requisite corporate or other power
and
authority necessary to own, lease or operate the properties it owns, leases
or
operates and to carry on its business as it is now being conducted.
(b)
Qualmax
is duly qualified or licensed as a foreign corporation to do business, and
is in
good standing, in each jurisdiction where the character of the properties
owned,
leased or operated by it or the nature of its business activities makes such
qualification or licensing necessary, except where the failure to be so duly
qualified or licensed and in good standing would not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(c)
Other
than the shares of Common Stock, Qualmax does not own any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other Person.
SECTION
3.02.
Certificate
of Incorporation and By-laws
.
The
certificate of incorporation and bylaws of Qualmax (the “
Qualmax
Charter Documents
”)
are in
full force and effect. Except as set forth in
Schedule
3.02
or as
would not reasonably be expected, individually or in the aggregate, to have
a
Material Adverse Effect, Qualmax is not in violation of any of the provisions
of
the Qualmax Charter Documents.
SECTION
3.03.
Capitalization
.
The
authorized capital stock of Qualmax consists of 40,000,000 shares of Common
Stock and 100 shares of preferred stock, par value $0.001 per share (the
“
Qualmax
Preferred Stock
”).
As of
the date hereof, (i) 21,625,392 shares of Common Stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable
(excluding treasury shares which are issued but not outstanding, all of which
are not entitled to vote), and none of which has been issued in violation
of
preemptive or similar rights, and (ii) no shares of Qualmax Preferred Stock
are
issued and outstanding.
SECTION
3.04.
Authorization;
Binding Agreement
.
(a)
Qualmax
has all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby, subject
to the
requisite approval of Qualmax’s stockholders in accordance with the DGCL. The
execution and delivery of this Agreement by Qualmax and the consummation
of the
transactions contemplated hereby by Qualmax has been duly and validly authorized
by all necessary corporate action on the part of Qualmax, and no other action
on
the part of Qualmax or, the knowledge of Qualmax, any other Person (other
than
the approval of Qualmax stockholders), is necessary to authorize the execution,
delivery and performance of this Agreement or to consummate the transactions
contemplated hereby by Qualmax. This Agreement has been duly and validly
executed and delivered by Qualmax. This Agreement constitutes (assuming this
Agreement has been duly authorized, executed and delivered by the Company)
a
valid and binding obligation of Qualmax, enforceable against Qualmax in
accordance with its terms, except as limited by (a) applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting the
enforcement of creditors’ rights generally from time to time in effect and (b)
the availability of equitable remedies (regardless of whether enforceability
is
considered in a proceeding at law or in equity).
(b)
At
a
meeting duly called and held, or by written consent in lieu of meeting, the
board of directors of Qualmax unanimously (i) determined that it is advisable
and in the best interest of Qualmax and its stockholders for Qualmax to enter
into this Agreement and to consummate the Merger upon the terms and subject
to
the conditions of this Agreement, (ii) approved this Agreement in accordance
with the applicable provisions of the DGCL, and (iii) recommended the approval
of this Agreement by holders of shares of Qualmax Stock and directed that
this
Agreement be submitted for consideration and approval by the requisite vote
of
the Qualmax stockholders.
SECTION
3.05.
No
Conflict; Required Filings and Consents
.
(a)
The
execution and delivery of this Agreement by Qualmax does not, the performance
of
this Agreement by Qualmax and the consummation by Qualmax of the transactions
contemplated hereunder, will not (with or without notice or lapse of time
or
both), (i) conflict with or violate the Qualmax Charter Documents, (ii) assuming
compliance with the matters referred to in
Section
3.05(b)
,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Qualmax or by which its properties are bound, or (iii) result
in any breach of or constitute a default (or an event that with notice or
lapse
of time or both would become a default) under, or impair Qualmax’s rights or
alter the rights or obligations of any third party under, or give to others
any
rights of, or cause any, termination, amendment, redemption, acceleration
or
cancellation of, or result in the creation of a lien or encumbrance on
(including a right to purchase) any of the properties or assets of Qualmax
pursuant to, any note, bond, mortgage, indenture, credit facility, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Qualmax is a party or by which Qualmax’s properties is bound, except,
in the case of clause (ii) or (iii), for any such conflicts, violations,
breaches, defaults or other occurrences that would not reasonably be expected,
individually or in the aggregate, to have a Material Adverse
Effect.
(b)
The
execution and delivery of this Agreement by Qualmax does not, and the
performance of this Agreement by Qualmax will not, require Qualmax to make,
seek
or obtain any consent, approval, authorization or permit of, or filing with
or
notification to, any governmental, administrative or regulatory authority,
agency or commission, domestic or foreign (each, a “
Governmental
Authority
”)
or any
other Person, except (i) for the filing and recordation of appropriate merger
or
other documents as required by the DGCL, (ii) any filings required to be
made in
connection with the issuance of the shares of Common Stock to the stockholders
of Qualmax pursuant to
Section
2.06
hereof
pursuant to, or in compliance with, the Securities Act, (iii) as disclosed
on
Schedule
3.05(b)
,
(iv)
where the failure to obtain such consents, approvals, authorizations or permits,
or to make such filings or notifications, would not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect, or (v)
as
to which any necessary consents, approvals, authorizations, permits, filings
or
notifications have heretofore been obtained or filed, as the case may be,
by
Qualmax.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF
THE
COMPANY
The
Company hereby represent and warrant to Qualmax, as of the date hereof and
as of
the Closing Date, except as set forth in the disclosure schedules, as
follows:
SECTION
4.01.
Organization
and Qualification
.
(a)
The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the requisite corporate or
other
power and authority necessary to own, lease or operate the properties it
owns,
leases or operates and to carry on its business as it is now being
conducted.
(b)
The
Company is duly qualified or licensed as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its business
activities makes such qualification or licensing necessary, except where
the
failure to be so duly qualified or licensed and in good standing would not
reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect.
SECTION
4.02.
Certificate
of Incorporation and By-laws
.
The
Certificate of Incorporation and By-laws (the “
Company
Charter Documents
”)
are in
full force. Except as would not reasonably be expected materially to interfere
with its operations, the Company is not in violation of any of the provisions
of
the Company Charter Documents.
SECTION
4.03.
Capitalization
.
(a)
The
authorized capital stock of the Company consists of 600,000,000 shares of
Common
Stock and 1,000 shares of preferred stock, par value $0.01 per share (the
“
Preferred
Stock
”).
As of
the date hereof (i) 414,979,673 shares of Common Stock are issued and
outstanding, all of which are duly authorized, validly issued, fully paid
and
non-assessable, and none of which have been issued in violation of preemptive
or
similar rights; (ii) no shares of the Preferred Stock are issued and
outstanding; and (iii) shares of Common Stock are issuable upon exercise
of
outstanding stock options, warrants and SARs (collectively, “
Company
Stock Rights
”)
issued
under any stock plans or other agreements of the Company (collectively, the
“
Company
Rights Agreements
”).
(b)
The
Common Stock to be delivered as Merger Consideration will be, upon issuance
in
accordance with the terms of this Agreement, duly authorized, validly issued
and
fully paid and nonassessable, and the issuance thereof will not be subject
to
any preemptive or other similar right.
SECTION
4.04.
Authorization;
Binding Agreement
.
(a)
The
Company has all requisite corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby, subject
to the requisite approval of the Company’s stockholders in accordance with the
DGCL. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby has been
duly and validly authorized by all necessary corporate action on the part
of the
Company and no other corporate proceedings on the part of the Company is
necessary to authorize this Agreement or to consummate the transactions so
contemplated (other than the approval of this Agreement and the Merger in
accordance with the DGCL, the Company Charter Documents, the rules of the
NASD,
and the filings and recording of appropriate merger documents as required
by the
DGCL). This Agreement constitutes (assuming this Agreement has been duly
authorized, executed and delivered by Qualmax) a valid and binding obligation
of
the Company, enforceable against the Company in accordance with its terms,
except as limited by (a) applicable bankruptcy, reorganization, insolvency,
moratorium or other similar laws affecting the enforcement of creditors’ rights
generally from time to time in effect and (b) the availability of equitable
remedies (regardless of whether enforceability is considered in a proceeding
at
law or in equity).
(b)
At
a
meeting duly called and held, or by written consent in lieu of meeting, the
board of directors of the Company has (i) determined that it is advisable
and in
the best interest of the Company and its stockholders for the Company to
enter
into this Agreement and to consummate the Merger upon the terms and subject
to
the conditions of this Agreement, (ii) approved this Agreement in accordance
with the applicable provisions of the DGCL, and (iii) recommended the approval
of this Agreement by the Company’s stockholders and directed that this Agreement
be submitted for consideration and approval by the requisite vote of the
Company’s stockholders.
SECTION
4.05.
No
Conflicts
.
(a)
The
execution and delivery of this Agreement by the Company does not, and the
performance of this Agreement by the Company will not (with or without notice
or
lapse of time or both) (i) conflict with or violate the Company Charter
Documents, (ii) assuming compliance with the matters referred to in
Section
4.05(b)
,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to the Company or any of its subsidiaries or by which its or any
of
their respective properties is bound, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair, in any material respect, the Company’s
or any of its subsidiaries’ rights or alter the rights or obligations of any
third party under, or give to others any rights of, or cause any, termination,
amendment, redemption, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on (including a right to purchase) any
of the
properties or assets of the Company or any of its subsidiaries pursuant to,
any
note, bond, mortgage, indenture, credit facility, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company or any of its subsidiaries is a party or by which the Company or
any of
its subsidiaries or its or any of their respective properties is bound, except,
in the case of clause (ii) or (iii), for any such conflicts, violations,
breaches, defaults or other occurrences that would not reasonably be expected,
individually or in the aggregate, to have a Material Adverse
Effect.
(b)
The
execution and delivery of this Agreement by the Company does not, and the
performance of this Agreement by the Company will not, require the Company
or
any of its subsidiaries to make or seek any consent, approval, authorization
or
permit of, or filing with or notification to, any Governmental Authority,
except
(i) for applicable requirements, if any of the Securities Act, the Exchange
Act,
state securities laws and the NASD and the filing and recordation of appropriate
merger or other documents as required by the DGCL, (ii) any filings required
to
be made by the Company in connection with the issuance of the shares of Common
Stock to the stockholders of Qualmax pursuant to
Section
2.06
hereof
pursuant to, or in compliance with, the Securities Act, (iii) where the failure
to obtain such consents, approvals, authorizations or permits, or to make
such
filings or notifications, would not reasonably be expected, individually
or in
the aggregate, to have a Material Adverse Effect; or (iv) as to which any
necessary consents, approvals, authorizations, permits, filings or notifications
have heretofore been obtained or filed, as the case may be, by the
Company.
ARTICLE
V
CONDUCT
OF BUSINESS PENDING THE MERGER
SECTION
5.01.
Conduct
of Business Pending the Merger
.
Each of
Qualmax and the Company covenants and agrees that, during the period from
the
date of this Agreement and continuing until the earlier of the termination
of
this Agreement or the Effective Time, unless the other shall otherwise agree
in
writing, and except as set forth in
Schedule
5.01
or as
required by law with advance notification to the other, it shall (a) conduct
its
business and shall cause the businesses of its subsidiaries to be conducted
only
in, and it and its subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice
and
(b) use commercially reasonable efforts to preserve substantially intact
its and
its subsidiaries’ business organization, to keep available the services of its
and its subsidiaries’ present officers, employees and consultants and to
preserve its and its subsidiaries’ present relationships with customers,
suppliers and other Persons with which it or any of its subsidiaries has
significant business relations. By way of amplification and not limitation,
except as contemplated by this Agreement, as set forth in
Schedule
5.01
or as
required by law with advance notification to the other, neither Qualmax nor
the
Company shall, during the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
directly or indirectly do, or publicly propose to do, any of the following
without the consent or ratification of the other:
(a)
amend
or
otherwise change the Qualmax Charter Documents or the Company Charter Documents,
as applicable;
(b)
sell,
pledge, dispose of or encumber any assets of Qualmax or the Company, as
applicable, or any of its subsidiaries except for (i) sales of assets in
the
ordinary course of business and in a manner consistent with past practice
and
(ii) dispositions of obsolete or worthless assets;
(c)
(i)
split, combine or reclassify any of its capital stock or issue or authorize
or
propose the issuance of any other securities in respect of, in lieu of or
in
substitution for shares of its capital stock; or (ii) except as required
by the
terms of any security as in effect on the date hereof, amend the terms or
change
the period of exercisability of, purchase, repurchase, redeem or otherwise
acquire, or permit any subsidiary to amend the terms or change the period
of
exercisability of, purchase, repurchase, redeem or otherwise acquire, any
of its
securities or any securities of its subsidiaries, including, without limitation,
shares of Common Stock or Qualmax Stock, as applicable, or any option, warrant
or right, directly or indirectly, to acquire any such securities;
(d)
except
as
provided in an existing obligation of Qualmax or the Company, as applicable,
and
in accordance with such obligations, (i) increase the compensation, benefits
or
severance payable or to become payable to its directors, officers, employees
or
consultants, except for increases in salary or wages of employees in accordance
with past practices, (ii) grant any severance or termination pay to, or enter
into or amend any employment or severance agreement, with any current or
prospective employee, except for new hire employees in the ordinary course
of
business, (iii) enter into any contract with any director, officer or employee,
(iv) accelerate the payment of compensation or benefits to any director,
officer, employee or consultant except as required by applicable law and
agreements in effect as of the date of this Agreement, (v) grant any option
or
other equity awards to any director, officer, employee or consultant except
pursuant to agreements in effect as of the date of this Agreement or (iv)
establish, adopt, enter into or amend any collective bargaining agreement,
benefit plan, including, without limitation, any plan that provides for the
payment of bonuses or incentive compensation, trust, fund, policy or arrangement
for the benefit of any current or former directors, officers, employees or
consultants or any of their beneficiaries, except, in each case, as may be
required by law or as would not result in a material increase in the cost
of
maintaining such collective bargaining agreement, benefit plan, trust, fund,
policy or arrangement;
(e)
purchase
any capital assets or make any capital expenditures other than those purchased
or made in the ordinary course of business and consistent with past
practice;
(f)
take
any
action to change accounting policies or procedures (including, without
limitation, procedures with respect to revenue recognition, payments of accounts
payable and collection of accounts receivable) except as required by a change
in
GAAP occurring after the date hereof;
(g)
take,
or
agree in writing or otherwise to take, any of the actions described in
Sections
5.01(a
)
through
(f)
above,
or any action which would make any of the representations or warranties of
Qualmax or the Company, as the case may be, contained in this Agreement untrue
or incorrect such that the conditions in
Section
7.02(a)
or
7.03(a)
,
as
applicable, would not be satisfied or prevent Qualmax or the Company, as
applicable, from performing or cause Qualmax or the Company, as applicable,
not
to perform its covenants hereunder such that the condition in
Section
7.02(b)
or
7.03(b)
,
as
applicable, would not be satisfied.
ARTICLE
VI
ADDITIONAL
AGREEMENTS
SECTION
6.01.
Stockholders’
Actions
.
(a)
As
promptly as practicable after the execution of this Agreement, the Company
shall
take all reasonable actions necessary to cause the approval and authorization
of
(i) the Merger Proposals and (ii) such other actions as the board of directors
of the Company may determine are necessary or appropriate, by the consent
of the
holders of a majority of the outstanding shares of Common Stock.
(b)
As
promptly as practicable after the execution of this Agreement, Qualmax shall
take all reasonable actions necessary to cause the approval and authorization
of
(i) this Agreement and any related agreements, instruments or certificates;
(ii)
the consummation of the transactions contemplated by this Agreement, including,
without limitation, the Merger; and (iii) such other actions as the board
of
directors of Qualmax may determine are necessary or appropriate, by the written
consent of the holders of a majority of the outstanding shares of Qualmax
Stock.
Promptly upon obtaining such written consent, Qualmax shall cause a notice
to be
mailed to the stockholders of Qualmax as required by Section 228(e) of the
DGCL.
SECTION
6.02.
Exemption
from Registration
.
(a)
The
shares of Common Stock to be issued in connection with the Merger are expected
to be issued in a transaction exempt from registration under the Securities
Act
by reason of Section 3(a)(10) thereof pursuant to a fairness hearing (the
“
Hearing
”)
under
Section
441-095-0030
of
the
Oregon Administrative Rules, as amended (the “
Oregon
Law
”),
and
under applicable state blue sky laws. Promptly following the execution of
this
Agreement, but in no event later than fifteen (15) business days, Qualmax
and
the Company shall prepare, and the Company shall file with the Department
of
Consumer and Business Services, Division of Finance and Corporate Securities
(the “
Department
”),
such
documents and instruments as are required under Oregon Law (the “
Hearing
Documents
”)
and a
request for the Hearing to be held by the Department to consider the terms,
conditions and fairness of the transactions contemplated by this Agreement
and
the Merger pursuant to Section
441-095-0030
of
the
Oregon Law. Qualmax and the Company will notify each other promptly of the
receipt of any comments from the Department or its staff and of any request
by
the Department or any other government officials for amendments or supplements
to any of the Hearing Documents or any other filing or for additional
information and will supply each other with copies of all correspondence
between
such party or any of its representatives, on the one hand, and the Department,
or its staff or any other government officials, on the other hand, with respect
to the filing. If at any time prior to the Effective Time any event or
information should be discovered by Qualmax and the Company which should
be set
forth in an amendment to the Hearing Documents, such party shall promptly
inform
the other. The parties shall use their respective commercially reasonable
efforts to obtain approval of the plan under Oregon Law as promptly as
practicable after the filing of the Hearing Documents and shall fully cooperate
with each other in good faith to assist in such efforts.
(b)
If
despite Qualmax’s and the Company’s commercially reasonable efforts to obtain
approval of the plan under Oregon Law, the Department refuses to set a hearing
date or approve the plan under Oregon Law, then the Company shall use all
commercially reasonable efforts to effect as soon as practicable but in no
event
later than 60 business days after events stated in this
Section
6.02(b)
a
Registration Statement (the “
Registration
Statement
”)
on
Form S-4 (or such other or successor form as shall be appropriate) with respect
to the shares of Common Stock to be issued in the Merger which complies in
form
with applicable SEC requirements and shall use all reasonable efforts to
cause
the Registration Statement to become effective as soon thereafter as
practicable. The Company agrees to request the immediate acceleration of
the
effectiveness of the Registration Statement as soon as practicable but no
less
than within three (3) business days of any notification by the SEC of its
decision not to review the Registration Statement or its determination that
it
has completed its review of the Registration Statement and has no further
comments for the Company.
SECTION
6.03.
Consents;
Approvals
.
Qualmax
and the Company shall each use reasonable best efforts to obtain and to
cooperate with one another in order to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all United States
and
non-United States governmental and regulatory rulings and approvals), and
Qualmax and the Company shall make all filings (including, without limitation,
all filings with United States and non-United States Governmental Authorities)
required in connection with the authorization, execution and delivery of
this
Agreement by Qualmax and the Company and the consummation by them of the
transactions contemplated hereby. Each of Qualmax and the Company shall furnish
all information in its possession required for any application or other filing
to be made pursuant to the rules and regulations of any United States or
non-United States Governmental Authority in connection with the transactions
contemplated by this Agreement.
SECTION
6.04.
Notification
of Certain Matters
.
Qualmax
shall give prompt notice to the Company, and the Company shall give prompt
notice to Qualmax, of (i) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would reasonably be expected to cause
any
representation or warranty contained in this Agreement to be materially untrue
or inaccurate, or (ii) any failure of Qualmax or the Company, as the case
may
be, materially to comply with or satisfy any covenant, condition or agreement
to
be complied with or satisfied by it hereunder;
provided
,
however
,
that
the delivery of any notice pursuant to this
Section
6.04
shall
not limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION
6.05.
Further
Action/Tax Treatment
.
(a)
Upon
the
terms and subject to the conditions hereof, each of the parties hereto shall
use
all reasonable efforts to take, or cause to be taken, all actions and to
do, or
cause to be done, all other things necessary, proper or advisable to consummate
and make effective as promptly as practicable the transactions contemplated
by
this Agreement, to obtain in a timely manner all necessary waivers, consents
and
approvals and to effect all necessary registrations and filings, and otherwise
to satisfy or cause to be satisfied all conditions precedent to its obligations
under this Agreement.
(b)
Notwithstanding
anything herein to the contrary, each of the Company and Qualmax shall use
its
reasonable best efforts to cause the Merger to qualify, and will not (both
before and after the Effective Time) take any actions, or fail to take any
action, which could reasonably be expected to prevent the Merger from qualifying
as a reorganization under the provisions of Section 368(a) of the Code. The
Company shall report, to the extent required by the Code or the regulations
thereunder, the Merger for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
SECTION
6.06.
Public
Announcements
.
The
Company and Qualmax shall consult with each other before issuing any press
release or making any written public statement with respect to the Merger
or
this Agreement and shall not issue any such press release or make any such
public statement without the prior consent of the other party, which shall
not
be unreasonably withheld;
provided
,
however
,
that
either party may, without the prior consent of the other, issue such press
release or make such public statement as may upon the advice of counsel be
required by applicable law, if it has used all reasonable efforts to consult
with the other party.
SECTION
6.07.
Stock
Rights
.
(a)
At
the
Effective Time, the Company shall, and shall cause its Affiliates to, take
all
action necessary to provide that each outstanding Qualmax Stock Right shall
continue to have, and be subject to, the same terms and conditions set forth
in
the relevant Qualmax Stock Right Agreement (and any related agreements not
entered into in contravention of this Agreement) immediately prior to the
Effective Time; except that (i) each Qualmax Stock Right will be
exercisable for that number of whole shares of Common Stock equal to the
product
of (x) the number of shares of Common Stock that were issuable upon exercise
of
such Qualmax Stock Right, immediately prior to the Effective Time, multiplied
by
(y) the Exchange Ratio, rounded up to the nearest whole number of shares
of
Common Stock, and (ii) the per share exercise price for the Common Stock
issuable upon exercise of such Qualmax Stock Right will be equal to the quotient
determined by dividing (x) the exercise price per share of Qualmax Stock
at
which such Qualmax Stock Right was exercisable immediately prior to the
Effective Time by (y) the Exchange Ratio, rounded down to the nearest whole
cent
(each such Qualmax Stock Right, as modified, an “
Adjusted
Stock Right
”).
(b)
The
Company will take all corporate action necessary to reserve for issuance,
as of
the Effective Time, a sufficient number of shares of Common Stock for delivery
upon exercise of the Adjusted Stock Rights and to deliver to holders of Adjusted
Stock Rights, upon the exercise of such options, shares of Common
Stock.
(c)
Not
later
than 30 days following the Effective Time, the Company (i) shall file with
the
SEC a registration statement on Form S-8 of the SEC (or any successor or
other appropriate form) with respect to the shares of Common Stock issuable
upon
the exercise of the Adjusted Stock Rights and shall use reasonable best efforts
thereafter to maintain the effectiveness of such registration statement and
(ii)
shall deliver to holders of the Adjusted Stock Rights a prospectus or
prospectuses relating to such registration statement and thereafter maintain
the
current status of such prospectus or prospectuses, until all of the Adjusted
Stock Rights have been exercised, expired or forfeited.
(d)
Prior
to
the Effective Time, the Company and Qualmax shall take all such reasonable
steps
as may be required to cause any dispositions of shares of Common Stock
(including derivative securities with respect to Common Stock) or acquisitions
of shares of Common Stock (including derivative securities with respect to
Common Stock) resulting from the transactions contemplated by this Agreement
by
each officer and director of Qualmax to be exempt under Rule 16b-3 promulgated
under the Exchange Act.
SECTION
6.08.
Compliance
with State Property Transfer Statutes
.
Qualmax
agrees that it shall use commercially reasonable efforts to comply promptly
with
all requirements of applicable state property transfer laws as may be required
by the relevant state agency and shall take all action reasonably necessary
to
cause the transactions contemplated hereby to be effected in compliance with
applicable state property transfer laws. Qualmax, after consultation with
the
Company, shall determine which actions must be taken prior to or after the
Effective Time to comply with applicable state property transfer laws, except
where the failure to so comply will not materially affect the right to use
or
enjoy any applicable property after the Effective Time. Qualmax agrees to
provide the Company with any documents required to be submitted to the relevant
state agency prior to submission. The Company shall provide to Qualmax any
assistance reasonably requested by Qualmax with respect to such
compliance.
ARTICLE
VII
CONDITIONS
TO THE MERGER
SECTION
7.01.
Conditions
to Obligation of Each Party to Effect the Merger
.
The
respective obligations of each party to effect the Merger shall be subject
to
the satisfaction at or prior to the Effective Time of the following
conditions:
(a)
Exemption
from Registration
.
Either
(i) the shares of Common Stock to be issued hereunder shall be “exempt
securities” under Section 3(a)(10) of the Securities Act or (ii) the SEC shall
have declared the Registration Statement effective, no stop order suspending
the
effectiveness of the Registration Statement or any part thereof shall have
been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Proxy Statement, shall have been initiated or threatened in writing
by
the SEC.
(b)
Stockholder
Approval
.
This
Agreement, the Merger, and the other the Merger Proposals shall, to the extent
applicable, have been approved by the requisite vote of the stockholders
of each
of Qualmax and the Company.
(c)
Governmental
Actions
.
There
shall not have been instituted and pending any action by any Governmental
Authority that is reasonably to be expected to result in an order, nor shall
there be in effect any judgment, decree or order of any Governmental Authority,
(i) preventing the consummation of the Merger or (ii) compelling the
Company or any of its subsidiaries (including the Surviving Corporation and
its
subsidiaries) to dispose of or hold separate assets which are material, in
the
aggregate, to the Company or its subsidiaries taken as a whole, or to the
Surviving Corporation and its subsidiaries taken as a whole.
(d)
Illegality
.
No
statute, rule, regulation, executive or other order, ruling or injunction
shall
have been enacted, promulgated, entered, enforced or deemed applicable to
the
Merger which makes the consummation of the Merger illegal or that prohibits,
restrains or enjoins consummation of the Merger.
SECTION
7.02.
Additional
Conditions to Obligations of the Company
.
The
obligations of the Company to effect the Merger are also subject to the
following conditions:
(a)
Representations
and Warranties
.
The
representations and warranties of Qualmax contained in this Agreement shall
be
true and correct as of the Effective Time, with the same force and effect
as if
made on and as of the Effective Time, except for (i) changes contemplated
by
this Agreement, (ii) those representations and warranties which address matters
only as of a particular date (which shall have been true and correct as of
such
date), or (iii) where the failure to be so true and correct would not reasonably
be expected, individually or in the aggregate, to have a Material Adverse
Effect
on Qualmax.
(b)
Agreements
and Covenants
.
Qualmax
shall have performed or complied in all material respects with all agreements
and covenants required by this Agreement to be performed or complied with
by it
on or prior to the Effective Time.
(c)
Consents
Obtained
.
The
Company shall have been provided with satisfactory evidence that all material
consents, waivers, approvals, authorizations or orders required to be obtained,
and all filings required to be made, by Qualmax for the authorization, execution
and delivery of this Agreement and the consummation by it of the transactions
contemplated hereby shall have been obtained and made by Qualmax, except
where
the failure to receive such consents, waivers, approvals, authorizations
or
orders or to make such filings would not reasonably be expected, individually
or
in the aggregate with all other such failures, to have a Material Adverse
Effect
on Qualmax or the Company.
(d)
Dissenting
Shares
.
The
number of Dissenting Shares shall not exceed the Designated Percentage (as
defined below) of the shares of Qualmax Stock outstanding immediately prior
to
the Effective Time. The “
Designated
Percentage
”
shall
be 5%;
provided
that if
(i) any Designated Dissenting Stockholder (as defined below) and Affiliates
thereof shall hold Dissenting Shares and (ii) the aggregate Dissenting Shares
held by stockholders of Qualmax other than any Designated Dissenting Stockholder
and Affiliates thereof are less than 5% of the shares of Qualmax Stock
outstanding immediately prior to the Effective Time, then the Designated
Percentage shall equal 15%. A “
Designated
Dissenting Stockholder
”
shall
mean any stockholder of Qualmax designated by mutual agreement of Qualmax
and
the Company.
(e)
No
Material Adverse Changes
.
There
shall not have occurred any material adverse change in the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations, results of operations or prospects of Qualmax, other
than
a change that is directly caused by the public announcement of, and the response
or reaction to, this Agreement, the Merger or any of the transactions
contemplated by this Agreement.
SECTION
7.03.
Additional
Conditions to Obligation of Qualmax
.
The
obligation of Qualmax to effect the Merger is also subject to the following
conditions:
(a)
Representations
and Warranties
.
The
representations and warranties of the Company contained in this Agreement
shall
be true and correct as of the Effective Time, with the same force and effect
as
if made on and as of the Effective time, except for (i) changes contemplated
by
this Agreement, (ii) those representations and warranties which address matters
only as of a particular date (which shall have been true and correct as of
such
date), or (iii) where the failure to be so true and correct would not reasonably
be expected, individually or in the aggregate, to have a Material Adverse
Effect
on the Company.
(b)
Agreements
and Covenants
.
The
Company shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or complied
with by them on or prior to the Effective Time.
(c)
Consents
Obtained
.
All
material consents, waivers, approvals, authorizations or orders required
to be
obtained, and all filings required to be made, by the Company for the
authorization, execution and delivery of this Agreement, and the consummation
by
them of the transactions contemplated hereby and thereby shall have been
obtained and made by the Company, except where the failure to receive such
consents, waivers, approvals, authorizations or orders or to make such filings
would not reasonably be expected, individually or in the aggregate with all
other such failures, to have a Material Adverse Effect on Qualmax or the
Company.
ARTICLE
VIII
TERMINATION
SECTION
8.01.
Termination
by Qualmax or the Company
.
This
Agreement may be terminated at any time prior to the Effective Time by either
the board of directors of Qualmax or the board of directors of the
Company:
(a)
upon
mutual written consent duly authorized by the board of directors of each
of
Qualmax and the Company; or
(b)
if
the
Merger shall not have been consummated by June 1, 2008 (the “
Termination
Date
”),
provided
,
however
,
that
the right to terminate this Agreement under this
Section
8.01(b)
shall
not be available to any party whose failure to fulfill any obligation under
this
Agreement has been the cause of, or resulted in, the failure of the Merger
to be
consummated on or prior to such date; or
(c)
if
a
court of competent jurisdiction or a Governmental Authority shall have issued
a
nonappealable final order, decree or ruling or taken any other nonappealable
final action having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger; or
(d)
the
stockholders of the Company shall not have approved the Merger;
provided
,
however
,
that
the Company may not terminate this Agreement pursuant to this
Section
8.01(d)
if the
Company has not complied with its obligations under
Section
6.01
;
or
(e)
the
stockholders of Qualmax shall have not approved this Agreement and the Merger;
provided
,
however
,
that
Qualmax may not terminate this Agreement pursuant to this
Section
8.01(e)
if
Qualmax has not complied with its obligations under
Section
6.01
.
SECTION
8.02.
Termination
by the Company
.
This
Agreement may be terminated at any time prior to the Effective Time by the
board
of directors of the Company:
(a)
if
any of
the representations and warranties of Qualmax contained in this Agreement
shall
be or shall have become inaccurate, which inaccuracy would reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect;
or
(b)
if
Qualmax has materially breached any of the covenants or agreements on the
part
of Qualmax contained in this Agreement.
SECTION
8.03.
Termination
by Qualmax
.
This
Agreement may be terminated at any time prior to the Effective Time by the
board
of directors of Qualmax:
(a)
if
any of
the representations and warranties of the Company contained in this Agreement
shall be or shall have become inaccurate, which inaccuracy would reasonably
be
expected, individually or in the aggregate, to have a Material Adverse Effect;
or
(b)
if
the
Company has materially breached any of the covenants or agreements on the
part
of the Company contained in this Agreement.
SECTION
8.04.
Effect
of Termination
.
In the
event of the termination of this Agreement pursuant to this
Article
VIII
,
this
Agreement shall forthwith become void and there shall be no liability on
the
part of any party hereto or any of its Affiliates, except that this
Section
8.04
,
Section
8.05
,
and
Article
IX
shall
survive termination indefinitely. Notwithstanding the foregoing, nothing
herein
shall relieve Qualmax or the Company from liability for any willful breach
hereof or willful misrepresentation herein (it being understood that the
provisions of
Section
8.05
do not
constitute a sole or exclusive remedy for such willful breach or
misrepresentation).
SECTION
8.05.
Fees
and Expenses
.
Each
party shall be responsible for its own fees, costs and expenses incurred
in
connection with this Agreement and the transactions contemplated
hereby.
ARTICLE
IX
GENERAL
PROVISIONS
SECTION
9.01.
Notices
.
All
notices and other communications given or made pursuant hereto shall be in
writing and shall be deemed to have been duly given or made if and when
delivered personally or by overnight courier to the parties at the addresses
set
forth on the signature pages hereto or sent by electronic transmission, with
confirmation received, to the telecopy numbers specified below (or at such
other
address or telecopy number for a party as shall be specified by like
notice)
.
SECTION
9.02.
Taking
of Necessary Action; Further Action
.
Each of
the Company and Qualmax will take, and will cause their Affiliates to take,
all
such reasonable and lawful actions as may be necessary or appropriate in
order
to effectuate the Merger and the other transactions contemplated by this
Agreement in accordance with this Agreement as promptly as possible. If,
at any
time after the Effective Time, any such further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of Qualmax, the officers and directors
of Qualmax immediately prior to the Effective Time are fully authorized in
the
name of their respective corporations or otherwise to take, and will take,
all
such lawful and necessary action.
SECTION
9.03.
Amendment
.
The
boards of directors of the parties hereto may cause this Agreement to be
amended
at any time by execution of an instrument in writing signed on behalf of
each of
the parties hereto;
provided
that an
amendment made subsequent to adoption of the Agreement by the stockholders
of
Qualmax shall not (i) alter or change the amount or kind of consideration
to be
received on conversion of the Qualmax Stock, (ii) alter or change any term
of
the Certificate of Incorporation of the Surviving Corporation to be effected
by
the Merger, or (iii) alter or change any of the terms and conditions of the
Agreement if such alteration or change would adversely affect the holders
of
Qualmax Stock.
SECTION
9.04.
Waiver
.
At any
time prior to the Effective Time, any party hereto may with respect to any
other
party hereto (a) extend the time for the performance of any of the obligations
or other acts, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or (c) waive
compliance with any of the agreements or conditions contained herein. Any
such
extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.
SECTION
9.05.
Headings
.
The
headings contained in this Agreement are for reference purposes only and
shall
not affect in any way the meaning or interpretation of this
Agreement.
SECTION
9.06.
Severability
.
If any
term or other provision of this Agreement is invalid, illegal or incapable
of
being enforced by any rule of law or public policy, all other conditions
and
provisions of this Agreement shall nevertheless remain in full force and
effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any material manner adverse to any party. Upon
a
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely
as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible.
SECTION
9.07.
Entire
Agreement
.
This
Agreement constitutes the entire agreement and supersedes all prior agreements
and undertakings, both written and oral, among the parties, or any of them,
with
respect to the subject matter hereof.
SECTION
9.08.
Assignment
.
This
Agreement shall not be assigned by operation of law or otherwise by any party
without the written consent of the other parties hereto.
SECTION
9.09.
Parties
in Interest
.
This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto, and nothing in this Agreement, express or implied, is intended to
or
shall confer upon any other Person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, including, without limitation,
by way of subrogation, other than the right of the stockholders of Qualmax
to
receive the Merger Consideration if, but only if, the Merger is consummated
and
not otherwise.
SECTION
9.10.
Failure
or Indulg
enc
e
Not
Waiver; Remedies Cumulative
.
No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein,
nor shall any single or partial exercise of any such right preclude any other
or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights
or
remedies otherwise available.
SECTION
9.11.
Governing
Law; Jurisdiction
.
(a)
All
questions concerning the construction, validity and interpretation of this
Agreement and the schedules hereto will be governed by the internal law,
and not
the law of conflicts, of the State of Delaware.
(b)
Each
of
the parties to this Agreement submits to the jurisdiction of any state or
federal court sitting in Wilmington, Delaware, in any action or proceeding
arising out of or relating to this Agreement, agrees that all claims in respect
of the action or proceeding may be heard and determined in any such court,
and
agrees not to bring any action or proceeding arising out of or relating to
this
Agreement in any other court. Each of the parties to this Agreement waives
any
defense of inconvenient forum to the maintenance of any action or proceeding
so
brought and waives any bond, surety or other security that might be required
of
any other party with respect thereto.
SECTION
9.12.
Counterparts;
Facsimile
.
This
Agreement may be executed in two or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed shall
be
deemed to be an original but all of which taken together shall constitute
one
and the same agreement. Facsimile transmission of any signed original
counterpart and/or retransmission of any signed facsimile transmission shall
be
deemed the same as the delivery of an original.
SECTION
9.13.
WAIVER
OF JURY TRIAL
.
EACH OF
THE COMPANY AND QUALMAX HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING,
OR
COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT
OF OR
RELATING TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION
9.14.
Performance
of Obligations
.
Unless
otherwise previously performed, the Company shall cause the Surviving
Corporation to perform all of its obligations set forth in this
Agreement.
SECTION
9.15.
Enforcement
.
The
parties agree that irreparable damage would occur in the event that any of
the
provisions of this Agreement were not performed in accordance with their
specific terms. It is accordingly agreed that the parties shall be entitled
to
specific performance of the terms hereof, this being in addition to any other
remedy to which they are entitled at law or in equity.
SECTION
9.16.
Disclosure
Schedules
.
Any
disclosure made with reference to one or more Sections of the disclosure
schedule, as the case may be, shall be deemed disclosed with respect to each
other section therein as to which such disclosure is relevant provided that
such
relevance is reasonably apparent on the face of such disclosure. Disclosure
of
any matter in the disclosure schedule shall not be deemed an admission that
such
matter is material.
[Signature
page follows]
IN
WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be
executed as of the date first written above by itself or its respective officers
thereunto duly authorized.
NEW
WORLD BRANDS, INC.
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By:
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/s/
M. David Kamrat
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Name:
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M.
David Kamrat
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Title:
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Chief
Executive Officer
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Address:
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QUALMAX,
INC.
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By:
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/s/
M. David Kamrat
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Name:
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M.
David Kamrat
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Title:
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Chief
Executive Officer
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Address:
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Schedule
6.07
Warrants
held by Dung LeDoan:
372,835
Qualmax shares at $0.94/share
Expiration
date: 6-30-2010
Warrants
held by B.O.S.:
107,143
Qualmax shares at $2.80/share
Expiration
date: 12-31-2010
Annex
B
NEW
WORLD BRANDS, INC.
2008
Stock Option Plan
|
ARTICLE
I
General
1.1
Purpose
The
New
World Brands, Inc. 2008 Stock Option Plan (the “
Plan
”)
is
designed to further the growth and development of New World Brands, Inc.,
a
Delaware corporation (the “
Company
”),
by
enabling eligible persons to obtain a proprietary interest in the Company
(thereby providing such persons with an added incentive to continue in
the
employ or service of the Company, and stimulating their efforts in promoting
the
growth, efficiency and profitability of the Company), and affording the
Company
a means of attracting to its service persons of outstanding
quality.
1.2
Administration
(a)
Administration
by Committee; Constitution of Committee
.
The
Plan shall be administered by the Compensation Committee of the Board
of
Directors of the Company (the “
Board
”)
or
such other committee or subcommittee as the Board may designate or as
shall be
formed by the abstention or recusal of a non-Qualified Member (as defined
below)
of such committee (the “
Committee
”).
The
members of the Committee shall be appointed by, and serve at the pleasure
of,
the Board. While it is intended that at all times that the Committee
acts in
connection with the Plan, the Committee shall consist solely of Qualified
Members, the number of whom shall not be less than two, the fact that
the
Committee is not so comprised will not invalidate any grant hereunder
that
otherwise satisfies the terms of the Plan. A “
Qualified
Member
”
is
both
a “non-employee director” within the meaning of Rule 16b-3 (“Rule 16b-3”)
promulgated under the Securities Exchange Act of 1934 (the “1934 Act”) and an
“outside director” within the meaning of section 162(m) of the Internal Revenue
Code of 1986, as amended (the “
Code
”).
If
the Committee does not exist, or for any other reason determined by the
Board,
the Board may take any action under the Plan that would otherwise be
the
responsibility of the Committee.
(b)
Committee’s
Authority
.
The
Committee shall have the authority to (i) exercise all of the powers
granted to
it under the Plan, (ii) construe, interpret and implement the Plan and
any
Option Certificates issued under the Plan, (iii) prescribe, amend and
rescind
rules and regulations relating to the Plan, including rules governing
its own
operations, (iv) make all determinations necessary or advisable in administering
the Plan, (v) correct any defect, supply any omission and reconcile any
inconsistency in the Plan, and (vi) amend the Plan to reflect changes
in
applicable law.
(c)
Committee
Action; Delegation
.
Actions
of the Committee shall be taken by the vote of a majority of its members.
Except
as otherwise required by applicable law, any action may be taken by a
written
instrument signed by a majority of the Committee members, and action
so taken
shall be fully as effective as if it had been taken by a vote at a meeting.
Notwithstanding the foregoing or any other provision of the Plan, the
Committee
(or the Board acting instead of the Committee), may delegate to one or
more
officers of the Company the authority to designate the individuals (other
than
such officer(s)), among those eligible to receive Options pursuant to
the terms
of the Plan, who will receive rights or options under the Plan and the
size of
each such grant, to the fullest extent permitted by applicable law, provided
that the Committee itself shall grant Options to those individuals who
could
reasonably be considered to be subject to the insider trading provisions
of
section 16 of the 1934 Act or whose Options could reasonably be expected
to be
subject to the deduction limitations of section 162(m) of the Code.
(d)
Determinations
Final
.
The
determination of the Committee on all matters relating to the Plan or
any Option
under the Plan shall be final, binding and conclusive.
(e)
Limit
on Committee Members’ Liability
.
No
member of the Committee shall be liable for any action or determination
made in
good faith with respect to the Plan or any Option thereunder.
1.3
Persons
Eligible for Options
The
persons eligible to receive Options under the Plan are those officers,
directors
(whether or not they are employed by the Company), and executive, managerial,
professional or administrative employees of, and consultants and advisors
to,
the Company, its subsidiaries and its joint ventures (collectively, “key
persons”) as the Committee in its sole discretion shall select. A member of the
Board of Directors may be eligible to participate in or receive or hold
options
under this Plan; provided, however, that upon the determination of the
Committee
to grant options to any Director the Committee shall so notify the holders
of
common stock of the Company, and such shareholders shall have the power
for a
period of thirty (30) days after such notice, exercisable at a meeting
of
shareholders, to reverse the determination of the Committee as to any
Director
and block the grant of options to such Director. If, thirty (30) days
after
notice to shareholders under this Section 1.3, the shareholders have
not met and
reversed the determination of the Committee, the option may, within a
period of
thirty (30) days thereafter, be granted to the Director(s) identified
in the
notice.
1.4
Types
of Options Under Plan
Options
may be made under the Plan in the form of (a) incentive stock options
and (b)
non-qualified stock options, as more fully set forth in Article II. The
term
“
Option
”
means
either of the foregoing. No incentive stock option may be granted to
a person
who is not an employee of the Company or one of its subsidiary corporations
on
the date of grant.
1.5
Shares
Available for Options; Adjustments to Options
(a)
Aggregate
Number Available; Certificate Legends
.
Subject
to adjustment as provided under
this
Section 1.5(a) and under Section 1.5
(d)(1),
the total number of shares of common stock of the Company (“
Common
Stock
”)
with
respect to which Options may be granted under the Plan (the “
Reserved
Shares
”),
shall
not exceed in the aggregate forty-one million five hundred thousand
(41,500,000). As of each January 1, beginning with January 1, 2009,
and continuing through and including January 1, 2018 (each such
January 1 a “
Calculation
Date
”),
the
number of Reserved Shares shall be increased automatically by the number,
if
any, by which the number of Reserved Shares that are authorized under
the Plan
immediately prior to the Calculation Date is less than ten percent (10%)
of the
total number of shares of Common Stock issued and outstanding immediately
prior
to the Calculation Date, provided, however, that for purposes of the
foregoing
calculation shares of Common Stock issued as a result of the exercise
of Options
granted under the Plan shall not be included in the total number of shares
of
Common Stock issued and outstanding immediately prior to the Calculation
Date.
Shares issued pursuant to the Plan may be authorized but unissued shares
of
Common Stock, authorized and issued shares of Common Stock held in the
Company’s
treasury or shares of Common Stock acquired by the Company for the purposes
of
the Plan. The Committee may direct that any stock certificate evidencing
shares
issued pursuant to the Plan shall bear a legend setting forth such restrictions
on transferability as may apply to such shares.
(b)
Individual
Limits
.
Except
as provided in this Section 1.5(b), no provision of this Plan shall be
deemed to
limit the number or value of shares otherwise available for Options under
the
Plan with respect to which the Committee may make Options to any one
eligible
person. Subject to adjustment as provided in Section 1.5 (d)(i) hereof,
the
total number of shares of Common Stock with respect to which Options
may be
granted to any one employee of the Company or a subsidiary under this
Plan shall
not exceed ten million (10,000,000) shares. Stock options granted and
subsequently canceled or deemed to be canceled in a calendar year shall
count
against this limit even after their cancellation.
(c)
Certain
Shares to Become Available Again
.
Any
shares that are subject to an Option under the Plan and that remain unissued
upon the cancellation or termination of such Option for any reason whatsoever
or
upon the settlement of such Option for cash or other medium other than
shares of
Common Stock shall again become available for Options under the
Plan.
(d)
Adjustments
to Available Shares and Existing Options Upon Changes in Common Stock
or Certain
Other Events
.
Upon
certain changes in Common Stock or other corporate events, the number
of shares
of Common Stock available for issuance with respect to Options that may
be
granted under the Plan, and that are the subject of existing Options,
shall be
adjusted or shall be adjustable, as follows:
(i)
Shares
Available for Grants
.
In the
event of any change in the number of shares of Common Stock outstanding
by
reason of any stock dividend or split, reverse stock split, recapitalization,
merger, consolidation, combination or exchange of shares or similar corporate
change, the maximum number of shares of Common Stock with respect to
which the
Committee may grant Options under paragraph (a) above, and the individual
annual
limit described in Section 1.5(b) hereof, shall be appropriately adjusted
by the
Committee. In the event of any change in the number of shares of Common
Stock
outstanding by reason of any other event or transaction, the Committee
may, but
need not, make such adjustments in the maximum number of shares of Common
Stock
with respect to which the Committee may grant Options under Section 1.5(a)
hereof, and the individual annual limit described in Section 1.5(b) hereof,
in
each case as the Committee may deem appropriate in its sole
discretion.
(ii)
Outstanding
Options -- Increase or Decrease in Issued Shares Without
Consideration
.
Subject
to any required action by the stockholders of the Company, in the event
of any
increase or decrease in the number of issued shares of Common Stock resulting
from a subdivision or consolidation of shares of Common Stock or the
payment of
a stock dividend (but only on the shares of Common Stock), or any other
increase
or decrease in the number of such shares effected without receipt of
consideration by the Company, the Committee shall proportionally adjust
the
number of shares of Common Stock subject to each outstanding option and
the
exercise price-per-share of Common Stock of each such option.
(iii)
Outstanding
Options -- Certain Mergers
.
Subject
to any required action by the stockholders of the Company, in the event
that the
Company shall be the surviving corporation in any merger or consolidation
(except a merger or consolidation as a result of which the holders of
shares of
Common Stock receive securities of another corporation or cash), each
option
outstanding on the date of such merger or consolidation shall pertain
to and
apply to the securities which a holder of the number of shares of Common
Stock
subject to such option immediately prior to such merger or consolidation
would
have received in such merger or consolidation.
(iv)
Outstanding
Options -- Certain Other Transactions
.
In the
event of (1) a dissolution or liquidation of the Company, (2) a sale
of all or
substantially all of the Company’s assets, (3) a merger or consolidation
involving the Company in which the Company is not the surviving corporation
or
(4) a merger or consolidation involving the Company in which the Company
is the
surviving corporation but the holders of shares of Common Stock receive
securities of another corporation and/or other property, including cash,
the
Committee shall, in its sole discretion, either:
(A)
cancel,
effective immediately prior to the occurrence of such event, each option
outstanding immediately prior to such event (whether or not then exercisable)
and, in full consideration of such cancellation, pay to the grantee to
whom such
option was granted an amount in cash, for each share of Common Stock
subject to
such option, equal to the excess of (x) the value, as determined by the
Committee in its absolute discretion, of the property (including cash)
received
by the holder of a share of Common Stock as a result of such event over
(y) the
exercise price of such option; or
(B)
provide
for the exchange of each option outstanding immediately prior to such
event
(whether or not then exercisable) for an option on some or all of the
property
(including cash) which a holder of the number of shares of Common Stock
subject
to such option immediately prior to such event would have received as
a result
of such event and, incident thereto, make an equitable adjustment as
determined
by the Committee in its sole discretion in the exercise price of the
option, or
the number of shares or amount of property (including cash) subject to
the
option or, if appropriate, provide for a cash payment to the grantee
to whom
such option was granted in partial consideration for the exchange of
the
option.
(v)
Outstanding
Options -- Other Changes
.
In the
event of any change in the capitalization of the Company or a corporate
change
other than those specifically referred to in Section 1.5(d)(iii), (iv)
or (v)
hereof, the Committee may, in its absolute discretion, make such adjustments
in
the number and class of shares subject to options outstanding on the
date on
which such change occurs and in the per-share exercise price of each
such option
as the Committee may consider appropriate to prevent dilution or enlargement
of
rights. In addition, if and to the extent the Committee determines it
is
appropriate, the Committee may elect to cancel each option outstanding
immediately prior to such event (whether or not then exercisable), and,
in full
consideration of such cancellation, pay to the grantee to whom such option
was
granted an amount in cash, for each share of Common Stock subject to
such
option, equal to the excess of (x) the Fair Market Value of Common Stock
on the
date of such cancellation over (y) the exercise price of such
option.
(vi)
No
Other Rights
.
Except
as expressly provided in the Plan, no grantee shall have any rights by
reason of
any subdivision or consolidation of shares of stock of any class, the
payment of
any dividend, any increase or decrease in the number of shares of stock
of any
class or any dissolution, liquidation, merger or consolidation of the
Company or
any other corporation. Except as expressly provided in the Plan, no issuance
by
the Company of shares of stock of any class, or securities convertible
into
shares of stock of any class, shall affect, and no adjustment by reason
thereof
shall be made with respect to, the number of shares of Common Stock subject
to
an Option or the exercise price of any option.
1.6
Definitions
of Certain Terms
(a)
The
“
Fair
Market Value
”
of
a
share of Common Stock on any day shall be the closing price on the New
York
Stock Exchange, American Stock Exchange or Nasdaq (whichever is applicable)
as
reported for such day in The Wall Street Journal or, if no such price
is
reported for such day, the average of the high bid and low asked price
of Common
Stock as reported for such day. If no quotation is made for the applicable
day,
the Fair Market Value of a share of Common Stock on such day shall be
determined
in the manner set forth in the preceding sentence using quotations for
the next
preceding day for which there were quotations, provided that such quotations
shall have been made within the ten (10) business days preceding the
applicable
day. Notwithstanding the foregoing, if deemed necessary or appropriate
by the
Committee, the Fair Market Value of a share of Common Stock on any day
shall be
determined by the Committee. In no event shall the Fair Market Value
of any
share of Common Stock be less than its par value.
(b)
The
term
“
incentive
stock option
”
means
an option that is intended to qualify for special federal income tax
treatment
pursuant to sections 421 and 422 of the Code as now constituted or subsequently
amended, or pursuant to a successor provision of the Code, and which
is so
designated in the applicable Option Certificate. Any option that is not
specifically designated as an incentive stock option shall under no
circumstances be considered an incentive stock option. Any option that
is not an
incentive stock option is referred to herein as a “non-qualified stock
option.”
(c)
A
grantee
shall be deemed to have a “
termination
of employment
”
upon
(i) the date the grantee ceases to be employed by, or to provide consulting
or
advisory services for, the Company, any Company subsidiary or Company
joint
venture, or any corporation (or any of its subsidiaries) which assumes
the
grantee’s Option in a transaction to which section 424(a) of the Code applies;
or (ii) the date the grantee ceases to be a Board member; provided, however,
that in the case of a grantee (x) who is, at the time of reference, both
an
employee or consultant or advisor and a Board member, or (y) who ceases
to be
engaged as an employee, consultant, advisor or Board member and immediately
is
engaged in another of such relationships with the Company, any Company
subsidiary or Company joint venture, the grantee shall be deemed to have
a
“termination of employment” upon the later of the dates determined pursuant to
clauses (i) and (ii) of this Section 1.6(c). For purposes of clause (i) of
this Section 1.6(c), a grantee who continues his or her employment, consulting
or advisory relationship with: (A) a Company subsidiary subsequent to
its sale
by the Company, or (B) a Company joint venture subsequent to the Company’s sale
of its interests in such joint venture, shall have a termination of employment
upon the date of such sale. The Committee may in its discretion determine
whether any leave of absence constitutes a termination of employment
for
purposes of the Plan and the impact, if any, of any such leave of absence
on
Options theretofore made under the Plan.
(d)
In
relation to the Company, the terms “parent corporation” and “subsidiary
corporation” shall be defined in accordance with sections 424(e) and (f) of the
Code, respectively.
(e)
The
term
“
employment
”
shall
be deemed to mean an employee’s employment with, or a consultant’s or advisor’s
provision of services to, the Company, any Company subsidiary or any
Company
joint venture and each Board member’s service as a Board member.
(f)
In
connection with a termination of employment by reason of a dismissal
for
“
cause
”:
(i)
The
term
“cause” shall mean:
(A)
to
the
extent that there is an employment, severance or other agreement governing
the
relationship between the grantee and the Company, a Company subsidiary
or a
Company joint venture, which agreement contains a definition of “cause,” cause
shall consist of those acts or omissions that would constitute “cause” under
such agreement; and
(B)
to
the
extent that there is no such agreement as provided or in subsection (f)(i)(A)
above, the grantee’s termination of employment by the Company or an affiliate on
account of any one or more of the following:
(1)
grantee’s
willful and intentional repeated failure or refusal, continuing after
notice
that specifically identifies the breach(es) complained of, to perform
substantially his or her material duties, responsibilities and obligations
(other than a failure resulting from grantee’s incapacity due to physical or
mental illness or other reasons beyond the control of grantee), and which
failure or refusal results in demonstrable direct and material injury
to the
Company;
(2)
any
willful and intentional act or failure to act involving fraud,
misrepresentation, theft, embezzlement, dishonesty or moral turpitude
(collectively, “
Fraud
”);
(3)
any
unauthorized use or disclosure by the grantee of confidential information
or
trade secrets of the Company (or any affiliated entity);
(4)
any
intentional wrongdoing by such person whether by omission or commission,
which
materially adversely affects the business or affairs of the Company (or
any
affiliated entity); and
(5)
conviction
of (or a plea of nolo contendere to) an offense which is a felony in
the
jurisdiction involved or which is a misdemeanor in the jurisdiction involved
but
which involves Fraud.
(ii)
For
purposes of determining whether cause exists:
(A)
to
the
extent that there is an employment, severance or other agreement governing
the
relationship between the grantee and the Company, a Company subsidiary
or a
Company joint venture, which agreement contains a definition of “cause” and
provides a procedure for the determination of whether cause exists, the
determination of whether a grantee’s employment is (or is deemed to have been)
terminated for cause for purposes of the Plan or any Option hereunder
shall be
made in accordance with such agreement; and
(B)
to
the
extent that there is no such agreement as provided for in Section 1.6(f)(ii)(A)
hereof:
(1)
the
determination of whether a grantee’s employment is (or is deemed to have been)
terminated for cause for purposes of the Plan or any Option hereunder
shall be
made by the Committee in its sole discretion;
(2)
any
rights the Company may have hereunder in respect of the events giving
rise to
cause shall be in addition to the rights the Company may have under any
other
agreement with a grantee or at law or in equity;
(3)
if,
subsequent to a grantee’s voluntary termination of employment or involuntary
termination of employment without cause, it is discovered that the grantee’s
employment could have been terminated for cause, the Committee may deem
such
grantee’s employment to have been terminated for cause; and
(4)
a
grantee’s termination of employment for cause shall be effective as of the date
of the occurrence of the event giving rise to cause, regardless of when
the
determination of cause is made.
ARTICLE
II
Options
Under the Plan
2.1
Agreements
Evidencing Options
Each
Option granted under the Plan shall be evidenced by a written agreement
(an
“
Option
Agreement
”)
which
shall contain such provisions as the Committee may in its sole discretion
deem
necessary or desirable. By accepting an Option pursuant to the Plan,
a grantee
thereby agrees that the Option shall be subject to all of the terms and
provisions of the Plan and the applicable Option Certificate.
2.2
Terms
of Stock Options
(a)
Stock
Option Grants
.
The
Committee may grant incentive stock options and non-qualified stock options
(collectively, “
options
”)
to
purchase shares of Common Stock from the Company, to such key persons,
and in
such amounts and subject to such vesting and forfeiture provisions and
other
terms and conditions, as the Committee shall determine in its sole discretion,
subject to the provisions of the Plan.
(b)
Option
Exercise Price
.
Each
Option Certificate with respect to an option shall set forth the amount
(the
“
option
exercise price
”)
payable by the grantee to the Company upon exercise of the option evidenced
thereby. Subject to the provisions of Section 2.2(g) hereof, the option
exercise
price per share shall be determined by the Committee in its sole discretion;
provided, however, that the option exercise price shall be at least one
hundred
percent (100%) of the Fair Market Value of a share of Common Stock on
the date
the option is granted, and provided further that in no event shall the
option
exercise price be less than the par value of a share of Common
Stock.
(c)
Exercise
Period
.
Each
Option Certificate with respect to an option shall set forth the periods
during
which the Option evidenced thereby shall be exercisable, whether in whole
or in
part. Such periods shall be determined by the Committee in its sole discretion,
subject to the provisions of Section 2.2(g) hereof and the following:
(i)
Ten-Year
Limit
.
No
stock option shall be exercisable more than ten (10) years after the
date of
grant.
(ii)
Beginning
of Exercise Period
.
Unless
the applicable Option Certificate otherwise provides, an option shall
become
exercisable with respect to a number of whole shares as close as possible
to
twenty percent (20%) of the shares subject to such option on each of
the first
five anniversaries of the date of grant.
(iii)
End
of
Exercise Period
.
Unless
the applicable Option Certificate otherwise provides, once an installment
becomes exercisable, it shall remain exercisable until the earlier of
(A) the
tenth (10
th
)
anniversary of the date of grant of the Option or (B) the expiration,
cancellation or termination of the Option.
(iv)
Timing
and Extent of Exercise
.
Unless
the applicable Option Certificate otherwise provides, an option may be
exercised
from time to time as to all or part of the shares as to which such Option
is
then exercisable.
(v)
Termination
of Employment -- Generally
.
Except
as otherwise provided below, a grantee who incurs a termination of employment
may exercise any outstanding option on the following terms and conditions:
(A)
exercise may be made only to the extent that the grantee was entitled
to
exercise the Option on the termination of employment date; and (B) exercise
must
occur within thirty (30) days after termination of employment but in
no event
after the original expiration date of the Option.
(vi)
Dismissal
for Cause
.
If a
grantee incurs a termination of employment as the result of a dismissal
for
cause, all options not theretofore exercised shall terminate upon the
commencement of business on the date of the grantee’s termination of
employment.
(vii)
Disability
.
If a
grantee incurs a termination of employment by reason of a disability
(as defined
below), then any outstanding option shall be exercisable on the following
terms
and conditions: (A) exercise may be made only to the extent that the
grantee was
entitled to exercise the Option on the termination of employment date;
and
(B) exercise must occur by the earlier of (I) ninety (90) days after the
grantee’s termination of employment, or (II) the original expiration date of
the
Option. For this purpose “disability” shall mean: (x) except in connection with
an incentive stock option, any physical or mental condition that would
qualify a
grantee for a disability benefit under the long-term disability plan
maintained
by the Company or, if there is no such plan, a physical or mental condition
that
prevents the grantee from performing the essential functions of the grantee’s
position (with or without reasonable accommodation) for a period of six
consecutive months and (y) in connection with an incentive stock option,
a
disability described in section 422(c)(6) of the Code. The existence
of a
disability shall be determined by the Committee in its sole
discretion.
(viii)
Death
.
(A)
Termination
of Employment as a Result of Grantee’s Death
.
If a
grantee incurs a termination of employment as the result of death, then
any
outstanding option shall be exercisable on the following terms and conditions:
(I) exercise may be made only to the extent that the grantee was entitled
to
exercise the Option on the date of death; and (II) exercise must occur
by the
earlier of (1) ninety (90) days after the grantee’s termination of employment,
or (2) the original expiration date of the Option.
(B)
Death
Subsequent to a Termination of Employment
.
If a
grantee dies subsequent to incurring a termination of employment but
prior to
the expiration of the exercise period with respect to a stock option,
then the
Option shall remain exercisable until the earlier to occur of (I) ninety
(90)
days after the grantee’s death, or (II) the original expiration date of the
Option.
(C)
Restrictions
on Exercise Following Death
.
Any
such exercise of an Option following a grantee’s death shall be made only by the
grantee’s executor or administrator or other duly appointed representative
reasonably acceptable to the Committee, unless the grantee’s will specifically
disposes of such Option, in which case such exercise shall be made only
by the
recipient of such specific disposition. If a grantee’s personal representative
or the recipient of a specific disposition under the grantee’s will shall be
entitled to exercise any Option pursuant to the preceding sentence, such
representative or recipient shall be bound by all the terms and conditions
of
the Plan and the applicable Option Certificate which would have applied
to the
grantee.
(ix)
Special
Rules for Incentive Stock Options
.
No
option that remains exercisable for more than ninety (90) days following
a
grantee’s termination of employment for any reason other than death (including
death within ninety (90) days after the termination of employment or
within one
year after a termination due to disability) or disability, or for more
than one
year following a grantee’s termination of employment as the result of
disability, may be treated as an incentive stock option.
(x)
Election
of Company to Accelerate
.
The
Committee, at any time and in its sole discretion, may by written notice
to
some, one, any or all grantees accelerate and shorten the time for exercise
of
any option then exercisable, whether an incentive stock option or a
non-qualified stock option, provided, however, that the time for exercise
may
not be shortened pursuant to this paragraph to less than thirty (30)
days after
the date of the notice. If a grantee who is provided with written notice
pursuant to this paragraph fails to exercise the option in accordance
with the
provisions of the written notice and any applicable provisions of Plan
or option
agreement, the option shall thereafter terminate and be extinguished
and no
longer be exercisable.
(xi)
Committee
Discretion
.
The
Committee, in its sole discretion, in the applicable Option Certificate,
may
waive or modify the application of one or more of the provisions of Sections
2.2(e)(v) through and including (viii) hereof.
(d)
Incentive
Stock Options: $100,000 Limitation
.
To the
extent that the aggregate Fair Market Value (determined as of the time
the
option is granted) of the stock with respect to which incentive stock
options
are first exercisable by any employee during any calendar year shall
exceed one
hundred thousand dollars ($100,000), or such higher amount as may be
permitted
from time to time under section 422 of the Code, such options shall be
treated
as non-qualified stock options.
(e)
Incentive
Stock Options: 10% Owners
.
Notwithstanding the foregoing provisions of this Section 2.2, an incentive
stock
option may not be granted under the Plan to an individual who, at the
time the
option is granted, owns stock possessing more than ten percent (10%)
of the
total combined voting power of all classes of stock of his or her employer
or of
its parent or subsidiary (as such ownership may be determined for purposes
of
section 422(b)(6) of the Code) unless (i) at the time such incentive
stock
option is granted the option exercise price is at least one hundred ten
percent
(110%) of the Fair Market Value of the shares subject thereto and (ii)
the
incentive stock option by its terms is not exercisable after the expiration
of
five (5) years from the date it is granted.
2.3
Exercise
of Options
Subject
to the other provisions of this Article II, each option granted under
the Plan
shall be exercisable as follows:
(a)
Notice
of Exercise
.
An
option shall be exercised by the filing of a written notice with the
Company or
the Company’s designated exchange agent (the “exchange agent”), on such form and
in such manner as the Committee shall prescribe.
(b)
Payment
of Exercise Price
.
Any
written notice of exercise of an option shall be accompanied by payment
for the
shares being purchased. Such payment shall be made: (i) by certified
or official
bank check (or the equivalent thereof acceptable to the Company or its
exchange
agent) for the full option exercise price; or (ii) with the prior written
consent of the Committee, by delivery of shares of Common Stock owned
by the
grantee (whether acquired by option exercise or otherwise, provided that
if such
shares were acquired pursuant to the exercise of a stock option, they
were
acquired at least six months prior to the option exercise date or such
other
period as the Committee may from time to time determine in its sole discretion)
having a Fair Market Value (determined as of the exercise date) equal
to all or
part of the option exercise price and a certified or official bank check
(or the
equivalent thereof acceptable to the Company or its exchange agent) for
any
remaining portion of the full option exercise price; or (iii) at the
sole
discretion of the Committee and to the extent permitted by law, by such
other
provision, consistent with the terms of the Plan, as the Committee may
from time
to time prescribe.
(c)
Delivery
of Certificates Upon Exercise
.
Promptly after receiving payment of the full option exercise price, the
Company
or its exchange agent shall deliver to the grantee or to such other person
as
may then have the right to exercise the Option, certificate or certificates
for
the shares of Common Stock for which the Option has been exercised. If
the
method of payment employed upon option exercise so requires, and if applicable
law permits, a grantee may direct the Company, or its exchange agent,
as the
case may be, to deliver the stock certificate(s) to the grantee’s
stockbroker.
(d)
No
Stockholder Rights
.
No
grantee of an option (or other person having the right to exercise such
Option)
shall have any of the rights of a stockholder of the Company with respect
to
shares subject to such Option until the issuance of a stock certificate
to such
person for such shares. Except as otherwise provided in Section 1.5(d)
hereof,
no adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities or
other
property) for which the record date is prior to the date such stock certificate
is issued.
2.4
Compensation
in Lieu of Exercise of an Option
Upon
written application of the grantee of an option, the Committee in its
sole
discretion may determine to substitute, for the exercise of such option,
compensation to the grantee not in excess of the difference between the
option
exercise price and the Fair Market Value of the shares covered by such
written
application on the date of such application. Such compensation shall
be in
shares of Common Stock, and the payment thereof may be subject to conditions,
all as the Committee shall determine in its sole discretion. In the event
compensation is substituted pursuant to this Section 2.4 for the exercise,
in
whole or in part, of an option, the number of shares subject to the option
shall
be reduced by the number of shares for which such compensation is
substituted.
2.5
Transferability
of Options
Except
as
otherwise provided in an applicable Option Certificate evidencing an
option,
during the lifetime of a grantee, each option granted to a grantee shall
be
exercisable only by the grantee and no option shall be assignable or
transferable otherwise than by will or by the laws of descent and distribution.
The Committee may, in any applicable Option Certificate evidencing an
option
(other than an incentive stock option to the extent inconsistent with
the
requirements of section 422 of the Code applicable to incentive stock
options),
permit a grantee to transfer all or some of the options to (A) the grantee’s
spouse, children or grandchildren (“immediate family members”), (B) a trust or
trusts for the exclusive benefit of such immediate family members, or
(C) other
parties approved by the Committee in its sole discretion. Following any
such
transfer, any transferred options shall continue to be subject to the
same terms
and conditions as were applicable immediately prior to the
transfer.
ARTICLE
III
Miscellaneous
3.1
Amendment
of the Plan; Modification of Options
(a)
Amendment
of the Plan
.
The
Board may from time to time suspend, discontinue, revise or amend the
Plan in
any respect whatsoever, except that no such amendment shall materially
impair
any rights or materially increase any obligations under any Option theretofore
made under the Plan without the consent of the grantee (or, upon the
grantee’s
death, the person having the right to exercise the Option). For purposes
of this
Section 3.1, any action of the Board or the Committee that in any way
alters or
affects the tax treatment of any Option or that in the sole discretion
of the
Board is necessary to prevent an Option from being subject to tax under
Section
409A of the Code shall not be considered to materially impair any rights
of any
grantee. The Board shall determine, in its sole discretion, whether to
submit
any amendment of the Plan to stockholders for approval; in making such
determination it is expected that the Board will take into account the
requirements of any exchange or inter-dealer quotation system on which
the
Common Stock of the Company is listed, the prerequisites for favorable
tax
treatment to the Company and grantees of Options made under the Plan,
and such
other considerations as the Board deems relevant.
(b)
Modification
of Options
.
The
Committee in its sole discretion may cancel any Option under the Plan.
The
Committee in its sole discretion also may amend any outstanding Option
Certificate, including, without limitation, by amendment which would:
(i)
accelerate the time or times at which the Option may be exercised; (ii)
waive or
amend any goals, restrictions or conditions set forth in the Option Certificate;
or (iii) waive or amend any applicable provision of the Plan or Option
Certificate with respect to the termination of the Option upon termination
of
employment, provided however, that no such amendment may lower the exercise
price of an outstanding option. However, any such cancellation or amendment
(other than an amendment pursuant to Section 1.5(d) hereof) that materially
impairs the rights or materially increases the obligations of a grantee
under an
outstanding Option shall be made only with the consent of the grantee
(or, upon
the grantee’s death, the person having the right to exercise the
Option).
3.2
Consent
Requirement
(a)
No
Plan Action Without Required Consent
.
If the
Committee shall at any time determine that any consent (as hereinafter
defined)
is necessary or desirable as a condition of, or in connection with, the
granting
of any Option under the Plan, the issuance or purchase of shares or exercise
of
other rights hereunder, or the taking of any other action hereunder (each
such
action being hereinafter referred to as a “Plan action”), then such Plan action
shall not be taken or permitted, in whole or in part, unless and until
such
consent shall have been effected or obtained to the full satisfaction
of the
Committee.
(b)
Consent
Defined
.
The
term “consent” as used herein with respect to any Plan action means (i) any and
all listings, registrations or qualifications in respect thereof upon
any
securities exchange or under any federal, state or local law, rule or
regulation; (ii) any and all written agreements and representations by
the
grantee with respect to the disposition of shares, or with respect to
any other
matter, which the Committee shall in its sole discretion deem necessary
or
desirable to comply with the terms of any such listing, registration
or
qualification or to obtain an exemption from the requirement that any
such
listing, qualification or registration be made; and (iii) any and all
consents, clearances and approvals in respect of a Plan action by any
governmental or other regulatory bodies.
3.3
Nonassignability
Except
as
expressly provided herein or by the terms of an Option Certificate: (a)
no
Option or right granted to any person under the Plan or under any Option
Certificate shall be assignable or transferable other than by will or
by the
laws of descent and distribution; and (b) all rights granted under the
Plan or
any Option Certificate shall be exercisable during the life of the grantee
only
by the grantee or the grantee’s legal representative.
3.4
Requirement
of Notification Upon Disqualifying Disposition Under Section 421(b) of
the
Code
Each
grantee of an incentive stock option shall notify the Company of any
disposition
of shares of Common Stock issued pursuant to the exercise of such option
under
the circumstances described in section 421(b) of the Code (relating to
certain
disqualifying dispositions), within ten (10) days of such
disposition.
3.5
Withholding
Taxes
(a)
With
Respect to Cash Payments
.
Whenever cash is to be paid pursuant to an Option under the Plan, the
Company
shall be entitled to deduct therefrom an amount sufficient in its opinion
to
satisfy all federal, state and other governmental tax withholding requirements
related to such payment.
(b)
With
Respect to Delivery of Common Stock
.
Whenever shares of Common Stock are to be delivered pursuant to an Option
under
the Plan, the Company shall be entitled to require as a condition of
delivery
that the grantee remit to the Company an amount sufficient in the opinion
of the
Company to satisfy all federal, state and other governmental tax withholding
requirements related thereto. With the approval of the Committee, which
the
Committee shall have sole discretion whether or not to give, the grantee
may
satisfy the foregoing condition by electing to have the Company withhold
from
delivery shares having a value equal to the amount of tax to be withheld.
Such
shares shall be valued at their Fair Market Value as of the date on which
the
amount of tax to be withheld is determined. Fractional share amounts
shall be
settled in cash. Such a withholding election may be made with respect
to all or
any portion of the shares to be delivered pursuant to an Option.
3.6
Limitations
Imposed by Section 162(m)
Notwithstanding
any other provision of the Plan, if and to the extent that the Committee
reasonably determines the Company’s federal tax deduction in respect of an
Option may be limited as a result of section 162(m) of the Code, the
Committee
in its sole discretion may delay the exercise until 30 days following
the
grantee’s termination of employment, but in any event during the same calendar
year as such termination of employment. In the event that a grantee exercises
an
option at a time when the grantee is a 162(m) covered employee, and the
Committee determines to delay the exercise or payment, as the case may
be, in
respect of any such Option, the Committee shall credit cash or, in the
case of
an amount payable in Common Stock, the Fair Market Value of the Common
Stock as
of the date of such exercise, payable to the grantee to a book account.
The
grantee shall have no rights in respect of such book account and the
amount
credited thereto shall not be transferable by the grantee other than
by will or
the laws of descent and distribution. The Committee may in its sole discretion
credit additional amounts to such book account as it may determine in
its sole
discretion. Any book account created hereunder shall represent only an
unfunded,
unsecured promise by the Company to pay the amount credited thereto to
the
grantee in the future.
3.7
Right
of Discharge Reserved
Nothing
in the Plan or related agreement or any option or right granted pursuant
thereto
shall restrict the Company’s ability to terminate any grantee’s employment with
the Company, or confer upon any grantee any right to be continued in
the
employment of the Company, a Parent or any Subsidiary of the Company,
or to
remain a director thereof or a consultant thereto, or to interfere in
any way
with the right of the Company, a Parent or any Subsidiary, in its sole
discretion, to terminate such grantee’s employment or relationship with the
Company, at will, at any time, or to remove the grantee as a director
or
consultant at any time.
3.8
Nature
of Payments
(a)
Consideration
for Services Performed
.
Any and
all grants of Options and issuances of shares of Common Stock under the
Plan
shall be in consideration of services performed for the Company by the
grantee.
(b)
Not
Taken into Account for Benefits
.
All
such grants and issuances shall constitute a special incentive payment
to the
grantee and shall not be taken into account in computing the amount of
salary or
compensation of the grantee for the purpose of determining any benefits
under
any pension, retirement, profit-sharing, bonus, life insurance or other
benefit
plan of the Company or under any agreement between the Company and the
grantee,
unless such plan or agreement specifically otherwise provides.
3.9
Non-Uniform
Determinations
The
Committee’s determinations under the Plan need not be uniform and may be made by
it selectively among persons who receive, or who are eligible to receive,
Options under the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, the Committee shall
be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective Option Certificates, as to
(a) the
persons to receive Options under the Plan, (b) the terms and provisions
of
Options under the Plan, and (c) the treatment of leaves of absence pursuant
to
Section 1.6(c) hereof.
3.10
Other
Payments or Options
Nothing
contained in the Plan shall be deemed in any way to limit or restrict
the
Company from making any Option or payment to any person under any other
plan,
arrangement or understanding, whether now existing or hereafter in
effect.
3.11
Headings
Any
section, subsection, paragraph or other subdivision headings contained
herein
are for the purpose of convenience only and are not intended to expand,
limit or
otherwise define the contents, meaning or interpretation of any
thereof.
3.12
Effective
Date and Term of Plan
(a)
Adoption
.
The
Plan was adopted by the Board on ____________, 2008, subject to approval
by the
Company’s stockholders. All Options under the Plan prior to such a stockholder
approval are subject in their entirety to such approval. If such approval
is not
obtained prior to the first anniversary of the adoption of the Plan,
the Plan
and all Options thereunder shall terminate on that date.
(b)
Termination
of Plan
.
Unless
sooner terminated by the Board, the provisions of the Plan with respect
to the
grant of any Option pursuant to which shares of Common Stock will be
granted
shall terminate on the tenth (10
th
)
anniversary of the adoption of the Plan by the Board, and no such Options
shall
thereafter be made under the Plan. All Options made under the Plan prior
to its
termination shall remain in effect until such Options have been satisfied
or
terminated in accordance with the terms and provisions of the Plan and
the
applicable Option Certificates.
3.13
Restriction
on Issuance of Stock Pursuant to Options
The
Company shall not permit any shares of Common Stock to be issued pursuant
to
Options granted under the Plan unless such shares of Common Stock are
fully paid
and non-assessable under applicable law.
3.14
Governing
Law
Except
to
the extent preempted by any applicable federal law, the Plan will be
construed
and administered in accordance with the laws of Delaware, without giving
effect
to principles of conflict of laws.
Certified
by the undersigned Shehryar Wahid, Secretary, effective as of
__________________, 2008.
/s/
Shehryar Wahid
|
|
Shehryar
Wahid, Secretary
|
|
Annex
C
DELAWARE
GENERAL CORPORATION LAW
CHAPTER
8
§
262. Appraisal rights.
(a)
Any
stockholder of a corporation of this State who holds shares of stock
on the date
of the making of a demand pursuant to subsection (d) of this section
with
respect to such shares, who continuously holds such shares through
the effective
date of the merger or consolidation, who has otherwise complied with
subsection
(d) of this section and who has neither voted in favor of the merger
or
consolidation nor consented thereto in writing pursuant to § 228 of this title
shall be entitled to an appraisal by the Court of Chancery of the fair
value of
the stockholder’s shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the
word
“stockholder” means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words “stock” and “share” mean
and include what is ordinarily meant by those words and also membership
or
membership interest of a member of a nonstock corporation; and the
words
“depository receipt” mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof,
solely of
stock of a corporation, which stock is deposited with the
depository.
(b)
Appraisal rights shall be available for the shares of any class or
series of
stock of a constituent corporation in a merger or consolidation to
be effected
pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this
title), § 252, § 254, § 257, § 258, § 263 or § 264 of this title:
(1)
Provided, however, that no appraisal rights under this section shall
be
available for the shares of any class or series of stock, which stock,
or
depository receipts in respect thereof, at the record date fixed to
determine
the stockholders entitled to receive notice of and to vote at the meeting
of
stockholders to act upon the agreement of merger or consolidation,
were either
(i) listed on a national securities exchange or (ii) held of record
by more than
2,000 holders; and further provided that no appraisal rights shall
be available
for any shares of stock of the constituent corporation surviving a
merger if the
merger did not require for its approval the vote of the stockholders
of the
surviving corporation as provided in subsection (f) of § 251 of this
title.
(2)
Notwithstanding paragraph (1) of this subsection, appraisal rights
under this
section shall be available for the shares of any class or series of
stock of a
constituent corporation if the holders thereof are required by the
terms of an
agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263
and 264 of this title to accept for such stock anything except:
a.
Shares
of stock of the corporation surviving or resulting from such merger
or
consolidation, or depository receipts in respect thereof;
b.
Shares
of stock of any other corporation, or depository receipts in respect
thereof,
which shares of stock (or depository receipts in respect thereof) or
depository
receipts at the effective date of the merger or consolidation will
be either
listed on a national securities exchange or held of record by more
than 2,000
holders;
c.
Cash
in lieu of fractional shares or fractional depository receipts described
in the
foregoing subparagraphs a. and b. of this paragraph; or
d.
Any
combination of the shares of stock, depository receipts and cash in
lieu of
fractional shares or fractional depository receipts described in the
foregoing
subparagraphs a., b. and c. of this paragraph.
(3)
In
the event all of the stock of a subsidiary Delaware corporation party
to a
merger effected under § 253 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be available
for the
shares of the subsidiary Delaware corporation.
(c)
Any
corporation may provide in its certificate of incorporation that appraisal
rights under this section shall be available for the shares of any
class or
series of its stock as a result of an amendment to its certificate
of
incorporation, any merger or consolidation in which the corporation
is a
constituent corporation or the sale of all or substantially all of
the assets of
the corporation. If the certificate of incorporation contains such
a provision,
the procedures of this section, including those set forth in subsections
(d) and
(e) of this section, shall apply as nearly as is practicable.
(d)
Appraisal rights shall be perfected as follows:
(1)
If a
proposed merger or consolidation for which appraisal rights are provided
under
this section is to be submitted for approval at a meeting of stockholders,
the
corporation, not less than 20 days prior to the meeting, shall notify
each of
its stockholders who was such on the record date for such meeting with
respect
to shares for which appraisal rights are available pursuant to subsection
(b) or
(c) hereof that appraisal rights are available for any or all of the
shares of
the constituent corporations, and shall include in such notice a copy
of this
section. Each stockholder electing to demand the appraisal of such
stockholder’s
shares shall deliver to the corporation, before the taking of the vote
on the
merger or consolidation, a written demand for appraisal of such stockholder’s
shares. Such demand will be sufficient if it reasonably informs the
corporation
of the identity of the stockholder and that the stockholder intends
thereby to
demand the appraisal of such stockholder’s shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand
as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify
each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger
or
consolidation of the date that the merger or consolidation has become
effective;
or
(2)
If
the merger or consolidation was approved pursuant to § 228 or § 253 of this
title, then either a constituent corporation before the effective date
of the
merger or consolidation or the surviving or resulting corporation within
10 days
thereafter shall notify each of the holders of any class or series
of stock of
such constituent corporation who are entitled to appraisal rights of
the
approval of the merger or consolidation and that appraisal rights are
available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section.
Such
notice may, and, if given on or after the effective date of the merger
or
consolidation, shall, also notify such stockholders of the effective
date of the
merger or consolidation. Any stockholder entitled to appraisal rights
may,
within 20 days after the date of mailing of such notice, demand in
writing from
the surviving or resulting corporation the appraisal of such holder’s shares.
Such demand will be sufficient if it reasonably informs the corporation
of the
identity of the stockholder and that the stockholder intends thereby
to demand
the appraisal of such holder’s shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i)
each such constituent corporation shall send a second notice before
the
effective date of the merger or consolidation notifying each of the
holders of
any class or series of stock of such constituent corporation that are
entitled
to appraisal rights of the effective date of the merger or consolidation
or (ii)
the surviving or resulting corporation shall send such a second notice
to all
such holders on or within 10 days after such effective date; provided,
however,
that if such second notice is sent more than 20 days following the
sending of
the first notice, such second notice need only be sent to each stockholder
who
is entitled to appraisal rights and who has demanded appraisal of such
holder’s
shares in accordance with this subsection. An affidavit of the secretary
or
assistant secretary or of the transfer agent of the corporation that
is required
to give either notice that such notice has been given shall, in the
absence of
fraud, be prima facie evidence of the facts stated therein. For purposes
of
determining the stockholders entitled to receive either notice, each
constituent
corporation may fix, in advance, a record date that shall be not more
than 10
days prior to the date the notice is given, provided, that if the notice
is
given on or after the effective date of the merger or consolidation,
the record
date shall be such effective date. If no record date is fixed and the
notice is
given prior to the effective date, the record date shall be the close
of
business on the day next preceding the day on which the notice is
given.
(e)
Within 120 days after the effective date of the merger or consolidation,
the
surviving or resulting corporation or any stockholder who has complied
with
subsections (a) and (d) of this section hereof and who is otherwise
entitled to
appraisal rights, may commence an appraisal proceeding by filing a
petition in
the Court of Chancery demanding a determination of the value of the
stock of all
such stockholders. Notwithstanding the foregoing, at any time within
60 days
after the effective date of the merger or consolidation, any stockholder
who has
not commenced an appraisal proceeding or joined that proceeding as
a named party
shall have the right to withdraw such stockholder’s demand for appraisal and to
accept the terms offered upon the merger or consolidation. Within 120
days after
the effective date of the merger or consolidation, any stockholder
who has
complied with the requirements of subsections (a) and (d) of this section
hereof, upon written request, shall be entitled to receive from the
corporation
surviving the merger or resulting from the consolidation a statement
setting
forth the aggregate number of shares not voted in favor of the merger
or
consolidation and with respect to which demands for appraisal have
been received
and the aggregate number of holders of such shares. Such written statement
shall
be mailed to the stockholder within 10 days after such stockholder’s written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery
of
demands for appraisal under subsection (d) of this section hereof,
whichever is
later. Notwithstanding subsection (a) of this section, a person who
is the
beneficial owner of shares of such stock held either in a voting trust
or by a
nominee on behalf of such person may, in such person’s own name, file a petition
or request from the corporation the statement described in this
subsection.
(f)
Upon
the filing of any such petition by a stockholder, service of a copy
thereof
shall be made upon the surviving or resulting corporation, which shall
within 20
days after such service file in the office of the Register in Chancery
in which
the petition was filed a duly verified list containing the names and
addresses
of all stockholders who have demanded payment for their shares and
with whom
agreements as to the value of their shares have not been reached by
the
surviving or resulting corporation. If the petition shall be filed
by the
surviving or resulting corporation, the petition shall be accompanied
by such a
duly verified list. The Register in Chancery, if so ordered by the
Court, shall
give notice of the time and place fixed for the hearing of such petition
by
registered or certified mail to the surviving or resulting corporation
and to
the stockholders shown on the list at the addresses therein stated.
Such notice
shall also be given by 1 or more publications at least 1 week before
the day of
the hearing, in a newspaper of general circulation published in the
City of
Wilmington, Delaware or such publication as the Court deems advisable.
The forms
of the notices by mail and by publication shall be approved by the
Court, and
the costs thereof shall be borne by the surviving or resulting
corporation.
(g)
At
the hearing on such petition, the Court shall determine the stockholders
who
have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an
appraisal
for their shares and who hold stock represented by certificates to
submit their
certificates of stock to the Register in Chancery for notation thereon
of the
pendency of the appraisal proceedings; and if any stockholder fails
to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h)
After
the Court determines the stockholders entitled to an appraisal, the
appraisal
proceeding shall be conducted in accordance with the rules of the Court
of
Chancery, including any rules specifically governing appraisal proceedings.
Through such proceeding the Court shall determine the fair value of
the shares
exclusive of any element of value arising from the accomplishment or
expectation
of the merger or consolidation, together with interest, if any, to
be paid upon
the amount determined to be the fair value. In determining such fair
value, the
Court shall take into account all relevant factors. Unless the Court
in its
discretion determines otherwise for good cause shown, interest from
the
effective date of the merger through the date of payment of the judgment
shall
be compounded quarterly and shall accrue at 5% over the Federal Reserve
discount
rate (including any surcharge) as established from time to time during
the
period between the effective date of the merger and the date of payment
of the
judgment. Upon application by the surviving or resulting corporation
or by any
stockholder entitled to participate in the appraisal proceeding, the
Court may,
in its discretion, proceed to trial upon the appraisal prior to the
final
determination of the stockholders entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder’s certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights
under this
section.
(i)
The
Court shall direct the payment of the fair value of the shares, together
with
interest, if any, by the surviving or resulting corporation to the
stockholders
entitled thereto. Payment shall be so made to each such stockholder,
in the case
of holders of uncertificated stock forthwith, and the case of holders
of shares
represented by certificates upon the surrender to the corporation of
the
certificates representing such stock. The Court’s decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such
surviving
or resulting corporation be a corporation of this State or of any
state.
(j)
The
costs of the proceeding may be determined by the Court and taxed upon
the
parties as the Court deems equitable in the circumstances. Upon application
of a
stockholder, the Court may order all or a portion of the expenses incurred
by
any stockholder in connection with the appraisal proceeding, including,
without
limitation, reasonable attorney’s fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to
an
appraisal.
(k)
From
and after the effective date of the merger or consolidation, no stockholder
who
has demanded appraisal rights as provided in subsection (d) of this
section
shall be entitled to vote such stock for any purpose or to receive
payment of
dividends or other distributions on the stock (except dividends or
other
distributions payable to stockholders of record at a date which is
prior to the
effective date of the merger or consolidation); provided, however,
that if no
petition for an appraisal shall be filed within the time provided in
subsection
(e) of this section, or if such stockholder shall deliver to the surviving
or
resulting corporation a written withdrawal of such stockholder’s demand for an
appraisal and an acceptance of the merger or consolidation, either
within 60
days after the effective date of the merger or consolidation as provided
in
subsection (e) of this section or thereafter with the written approval
of the
corporation, then the right of such stockholder to an appraisal shall
cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery
shall be dismissed as to any stockholder without the approval of the
Court, and
such approval may be conditioned upon such terms as the Court deems
just;
provided, however that this provision shall not affect the right of
any
stockholder who has not commenced an appraisal proceeding or joined
that
proceeding as a named party to withdraw such stockholder’s demand for appraisal
and to accept the terms offered upon the merger or consolidation within
60 days
after the effective date of the merger or consolidation, as set forth
in
subsection (e) of this section.
(l)
The
shares of the surviving or resulting corporation to which the shares
of such
objecting stockholders would have been converted had they assented
to the merger
or consolidation shall have the status of authorized and unissued shares
of the
surviving or resulting corporation. (8 Del. C. 1953, § 262; 56 Del. Laws, c. 50;
56 Del. Laws, c. 186, § 24; 57 Del. Laws, c. 148, §§ 27-29; 59 Del. Laws, c.
106, § 12; 60 Del. Laws, c. 371, §§ 3-12; 63 Del. Laws, c. 25, § 14; 63 Del.
Laws, c. 152, §§ 1, 2; 64 Del. Laws, c. 112, §§ 46-54; 66 Del. Laws, c. 136, §§
30-32; 66 Del. Laws, c. 352, § 9; 67 Del. Laws, c. 376, §§ 19, 20; 68 Del. Laws,
c. 337, §§ 3, 4; 69 Del. Laws, c. 61, § 10; 69 Del. Laws, c. 262, §§ 1-9; 70
Del. Laws, c. 79, § 16; 70 Del. Laws, c. 186, § 1; 70 Del. Laws, c. 299, §§ 2,
3; 70 Del. Laws, c. 349, § 22; 71 Del. Laws, c. 120, § 15; 71 Del. Laws, c. 339,
§§ 49-52; 73 Del. Laws, c. 82, § 21; 76 Del. Laws, c. 145, §§
11-16.)
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