UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x
|
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
|
|
|
|
|
For the
quarterly period ended June 30, 2008
|
OR
o
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|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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|
|
|
|
|
For the
transition period from to
|
Commission file number
033-91432
NEW WORLD BRANDS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
|
|
02-0401674
|
(State or
Other Jurisdiction of
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
No.)
|
|
|
|
340 West
Fifth Street, Eugene, Oregon
|
|
97401
|
(Address
of Principal Executive Offices)
|
|
(Zip Code)
|
(541) 868-2900
(Registrants Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
(Do not
check if a smaller reporting company.)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the last practicable date: As of August 7, 2008, there were 418,479,673
shares of the issuers common stock, $0.01 par value per share, outstanding.
PART I FINANCIAL INFORMATION
|
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ITEM 1. FINANCIAL STATEMENTS
|
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|
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New World Brands, Inc. and Subsidiary
|
Condensed Consolidated Balance Sheets
|
as of June 30, 2008 (unaudited)
|
and December 31, 2007
|
|
|
|
|
|
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|
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June 30,
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December 31,
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2008
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2007
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(unaudited)
|
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|
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|
ASSETS
|
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|
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Current Assets
|
|
|
|
|
|
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|
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
|
|
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1,291,919
|
|
|
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744,654
|
Prepaid
expenses
|
|
|
478,123
|
|
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244,157
|
Other
current assets
|
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|
382,158
|
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|
507,012
|
|
|
|
|
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|
Total Current Assets
|
|
|
4,951,788
|
|
|
|
4,562,197
|
Property and Equipment, net
|
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1,520,973
|
|
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1,421,806
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Other Assets:
|
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|
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Deposits
and other assets
|
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|
583,345
|
|
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|
668,750
|
|
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|
|
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|
Total Long-Term
Assets
|
|
|
2,104,318
|
|
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|
2,090,556
|
|
|
|
|
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|
Total Assets
|
|
$
|
7,056,106
|
|
|
$
|
6,652,753
|
|
|
|
|
|
|
|
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|
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The accompanying notes are an integral part of these condensed consolidated financial
statements.
|
|
|
|
|
|
|
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3
|
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
|
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2007
|
|
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(unaudited)
|
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|
LIABILITIES
& STOCKHOLDERS EQUITY
|
|
|
|
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Liabilities
|
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|
|
|
|
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Current
Liabilities
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Accounts
payable
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$
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2,356,462
|
|
|
$
|
1,564,299
|
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Accrued
expenses
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|
498,131
|
|
|
|
406,910
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Customer
deposits
|
|
|
7,095
|
|
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|
121,874
|
|
Advances
from stockholders
|
|
|
188
|
|
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Capital
leases, current portion
|
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|
110,899
|
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181,731
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Notes payable, current portion
|
|
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14,633
|
|
|
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|
|
|
|
|
|
|
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Total
Current Liabilities
|
|
|
2,987,408
|
|
|
|
2,274,814
|
|
|
|
|
|
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Long-Term
Liabilities
|
|
|
|
|
|
|
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|
Notes
payable
|
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|
1,073,330
|
|
|
|
500,000
|
|
Capital
leases, net of current portion
|
|
|
123,767
|
|
|
|
31,317
|
|
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
|
1,197,097
|
|
|
|
531,317
|
|
|
|
|
|
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Total
Liabilities
|
|
|
4,184,505
|
|
|
|
2,806,131
|
|
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Commitments and contingencies
|
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Stockholders
Equity
|
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|
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Preferred
stock, $0.01 par value, 1,000 shares
|
|
|
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authorized,
200 shares designated as Series A preferred stock
|
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Series
A preferred stock $0.01 par value, no shares issued
|
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|
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Common
stock, $0.01 par value, 600,000,000 shares
|
|
|
|
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|
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.
|
|
|
|
|
|
|
|
|
|
4
|
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)
|
|
|
|
|
|
|
|
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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.
|
|
|
|
|
|
|
|
|
|
5
|
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.
|
|
|
|
|
|
|
|
|
|
6
|
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.
7
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.
|
|
|
|
|
|
|
|
|
|
8
|
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
) and should be read in conjunction with the Companys 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 managements
knowledge of the Companys business operations during the period presented,
are necessary to present fairly the Companys 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 Companys 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 Companys 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 Companys Current Report on Form
8-K, filed with the SEC on February 22, 2008, and the Companys 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 Companys fiscal year end changed from May 31 to December 31.
9
NEW WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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 InformationItem 1. Financial StatementsNote
GDiscontinued OperationsIP 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 parents 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.
10
NEW WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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 entitys
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 Companys consolidated financial position and results of operations.
In May 2008,
the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contractsan 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 Companys 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 issuers 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
NEW WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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.
12
NEW WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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.
13
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 BOSs 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 Companys Quarterly
Reports on Form 10-QSB filed with the SEC on November 19, August 20, and May 21,
2007, and the Companys 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 companys 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
GDiscontinued 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 Companys subsidiary, IP Gear Ltd., to TELES in exchange for
cash on closing and further payments over a period of time. The Companys 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.
14
NEW WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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
Boards 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 Companys former subsidiary, IP Gear Ltd.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Statements of Operations
|
|
Three Months
|
|
Six Months
|
Data for the Companys
|
|
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
|
)
|
15
NEW WORLD BRANDS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
ITEM 2.
MANAGEMENTS DISCUSSION
AND ANALYSIS
General
References
in this Quarterly Report on Form 10-Q (the
Report
) to
the
Company
, we, us, our and similar words are to New World Brands, Inc., commencing with the acquisition
of Qualmax, Inc., a Delaware corporation (
Qualmax
), and,
with respect to prior historical financial information, to Qualmax. The results
of operations of the Companys former subsidiary, IP Gear, Ltd. (
IP Gear, Ltd
.) are reported as discontinued operations, as a result
of our sale of IP Gear, Ltd. effective July 1, 2007.
The following
discussion and analysis provides information that management believes is relevant
to an assessment and understanding of our results of operations and financial operations.
This discussion should be read in conjunction with the condensed consolidated financial
statements and notes thereto appearing elsewhere herein, and with our Annual Report
on Form 10-KSB/A, filed with the SEC on May 13, 2008 and our other prior filings
with the SEC.
We entered
into a transaction with Qualmax on September 15, 2006, discussed in more detail
below, that constituted a substantial change in our business, from wine and spirits
distribution to telecommunications technology development, sales and services. We
therefore recommend that you review with particular attention our filings with the
SEC from June 2006 forward, to the extent they describe the change in our business
and related recent activities.
Disclosure Regarding Forward-Looking
Statements
We caution
readers that this Report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, written, oral or otherwise, are based on the Companys 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 Companys 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, under Item 1, Description of BusinessCertain Risk Factors, and other factors set forth in this Report, and in our other SEC filings,
including, without limitation, the following:
|
|
|
A downturn
in the market for, or supply of, our core products and services, could reduce our
revenue and gross profit margin by placing downward pressure on prices and sales
volume, and we may not accurately anticipate changing supply and demand conditions.
|
|
|
|
|
|
|
|
We have a
limited backlog, or pipeline, of product and services sales, and we
do not control the manufacturing of the core products we distribute and sell, exposing
our future revenues and profits to fluctuations and risks of 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.
|
|
|
|
|
17
|
|
|
|
We derive
a relatively large amount of our revenue and gross profit from sales to a small
number of customers, and from resale of 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-term
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.
|
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 Companys 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
,
18
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 organizations 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 Companys 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 Qualmaxs core legacy business, and the Companys 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 Companys 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 Companys 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.
Company History
Company history prior to 2006 acquisition
of Qualmax, Inc
.
New World
Brands, Inc. was incorporated in Delaware in May 1986 under the name Oak Tree Construction
Computers, Inc. From 1986 through 1990, we were engaged in the sale of computer
systems for the construction
19
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 Companys business changed direction to wine and spirits distribution.
In conjunction with this change in business direction, in December 2001, we changed
our name to New World Brands, Inc.
2006 reverse acquisition of Qualmax, Inc
.
On September
15, 2006, we sold our subsidiary, International Importers, Inc., and acquired, by
way of the Reverse Acquisition, all of the assets and assumed all of the liabilities
of Qualmax. The Reverse Acquisition marked a change in direction for the Company,
away from wine and spirits distribution, to the VoIP technology industry. The transaction was accounted for as a reverse acquisition, with Qualmax being the acquiring
party for accounting purposes. The accounting rules for reverse acquisitions require
that beginning with the date of the transaction, September 15, 2006, our balance
sheet had to include the assets and liabilities of Qualmax, and our equity accounts
had to be recapitalized to reflect the net equity of New World Brands, Inc. Our
historical operating results will be the operating results of Qualmax. In conjunction
with the Reverse Acquisition, in September 2006, we moved our headquarters from
Florida to Eugene, Oregon, which were previously the headquarters of Qualmax.
Qualmax, Inc. history.
As Qualmax,
we were founded in 2002 as a reseller of VoIP-related telecommunications equipment
from companies such as Cisco Systems, Quintum and Adtran, and as a reseller of VoIP
telephony service, primarily selling wholesale international service to telecom
service providers. In December 2005, we expanded beyond our reseller business by
acquiring a VoIP technology research and development division based in Israel, which
we reorganized as a wholly-owned subsidiary and rebranded under the name IP Gear,
Ltd. From December 31, 2005 through July 1, 2007 we developed, manufactured, and
sold our own line of VoIP technology products via our Israel-based IP Gear, Ltd.
subsidiary, while continuing to resell additional VoIP products of a variety of
other manufacturers via our U.S.-based IP Gear VAR division.
2007 sale of IP Gear, Ltd. subsidiary
.
Effective
July 1, 2007, we sold our wholly-owned subsidiary, IP Gear, Ltd., an Israeli limited
liability company, to TELES, as reported in more detail in the Companys Current
Reports on Form 8-K filed with the SEC on July 20, August 1, and August 9, 2007,
and as discussed in more detail below under Recent Developments. The
sale of our IP Gear, Ltd. subsidiary represented a refocusing of our business plan
away from research and development and direct manufacturing, and toward our historical
core strengths of sales and service. As a result of the sale, we currently base
all our operations at our headquarters in Eugene, Oregon.
By the sale
of IP Gear, Ltd. to TELES, we divested ourselves of our manufacturing, research
and development activities, and have now rededicated our efforts to distribution,
sale, service and support of VoIP-related telecommunications equipment and services.
As a part of the sale of IP Gear, Ltd., we became the exclusive distributor for
both TELES products and IP Gear, Ltd. products in North America and have therefore
focused our telecommunications equipment sales and distribution plan on TELES and
IP Gear, Ltd. products.
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.
Recent Developments
The following
important Company developments occurring in 2008 to date, and related prior developments,
are described below.
20
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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
21
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 years $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 Companys 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 Companys 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 Companys 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;
|
22
|
|
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
Companys 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
Companys 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 Companys 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 Companys 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 Companys shares
of IP Gear, Ltd., and, the sale of the Companys IP Gear, Ltd. shares without
P&S Spirits 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 Spirits 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
23
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 Companys Current Report on Form 8-K,
filed with the SEC on February 22, 2008, and the Companys 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 Companys 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:
24
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 Companys 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 Companys 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
|
%
|
25
|
|
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 lines performance.
Sale of IP Gear, Ltd. subsidiary
.
As
described above in Recent DevelopmentsSale 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 Companys 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
|
%
|
26
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 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 Companys
decision to focus more of its resources on the TELES equipment line. Gross profits
in our legacy equipment business also continue to remain low, but 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 Companys NWB Networks division continuing
businesses in equipment distribution and resale for the following periods in 2007
and 2008:
27
|
|
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 TELESs 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 is $1,000,000. 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 TELESs 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 TELESs 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.
28
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 period ended June 30, 2008, NWB Telecom has continued to rely upon
a concentration of foreign termination service from two vendors (and their affiliates).
The following table illustrates, for the three month period ended June 30, 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
|
%
|
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
29
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 Companys Form 10-KSB/A filed with the SEC on May 13,
2008, under Item 6, Managements 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
|
%
|
30
|
|
|
|
|
|
|
|
% 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 Companys continuing businesses in equipment distribution
and resale, and telephony service.
31
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 Companys 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 Companys 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 Companys 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
|
%
|
32
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 Companys former subsidiary, IP Gear, Ltd., on the Companys
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 InformationItem 1. Financial StatementsNote GDiscontinued 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 managements 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 Companys 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 Companys 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 Companys 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 companys 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 Companys 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Dispositions
|
|
Net Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
33
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 Companys ability to pursue its current business plan without seeking additional
debt- or equity-based capital is entirely dependent on managements 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.
ITEM 3.
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).
ITEM 4T.
CONTROLS AND PROCEDURES
As
of the end of the period covered by this Report, we have evaluated under the supervision
and with the participation of our management, including our chief executive officer
and chief financial officer, and based on the framework for
Internal Control
Integrated Framework
set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934 (the
Exchange Act
). Based upon that evaluation, our chief executive officer and chief
financial officer concluded that, as of June 30, 2008, our disclosure controls and
procedures are reasonably effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our principal executive and
financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure and to present the Companys
financial statements fairly. As a result of the Reverse Acquisition, the Companys former controls and procedures have been replaced with those formerly of
Qualmax, and this Item 4 describes evaluation and operation of the controls and
procedures formerly of Qualmax. There has been no change in our internal controls
over financial reporting during the three month period ended June 30, 2008 that
has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
All
internal controls over financial reporting, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention of overriding
of controls. Therefore, even effective internal control over financial reporting
can provide only reasonable, and not absolute, assurance with respect to financial
statement preparation and presentation. Further, because of changes in conditions,
the effectiveness of internal controls over financial reporting may vary over time.
Because of its inherent limitations, internal control over financial reporting may
also fail to prevent or detect misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance of achieving their control
objectives.
34
PART II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
MPI Litigation
As
a result of the Reverse Acquisition, the Company assumed the liabilities of Qualmax.
Qualmax was named as a defendant in certain litigation filed in France before the
Trade Tribunal of Nanterre against B.O.S. Better Online Solutions Ltd. (
BOS
) by Media Partners International (
MPI
, and the litigation thereto, the
MPI Litigation
), a former distributor of BOS, whose contract
with BOS allegedly related to certain distribution rights for the product division
Qualmax purchased from BOS on December 31, 2005. Pursuant to the asset purchase
agreement between Qualmax and BOS, BOS agreed to indemnify and hold Qualmax harmless
from liability, without limitation, arising from the claims raised in the MPI Litigation,
and BOS has undertaken defense of Qualmax at BOSs expense. The litigation
remains in its early stages.
Initial
hearings on a motion for change of venue were concluded in February 2007. Additional
hearings were conducted in late April 2007. The Company has been preliminarily informed
that a decision from the French court to maintain venue in France was made in September 2007,
and that defendants have filed an appeal of that decision, but that no ruling has
been made on the appeal as of the date of this filing. At present, based upon the
limited progress of the matter and without the benefit of the completion of factual
discovery, management believes this litigation does not pose a significant financial
risk to the Company.
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 Companys Quarterly Reports on Form 10-QSB filed with the SEC on November 19, August 20
and May 21, 2007, and the Companys 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.
Piecom Tech Litigation
As
part of the agreement to sell our IP Gear Ltd. subsidiary to TELES, we indemnified
and agreed to defend TELES and IP Gear, Ltd. against any liabilities arising from,
and will receive any amounts recovered as a result of, any claims from/against Piecom
to/from IP Gear Ltd. in the future, beyond July 1, 2007, the date of closing the
sale of IP Gear Ltd. to TELES. 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.
35
Additional Disputes
In
addition to the matters discussed above, the Company is involved in various disputes
or litigation matters that arise in the ordinary course of business.
ITEM 1A.
RISK FACTORS
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, under Item 1, Description of BusinessCertain Risk Factors, and other factors set forth in this Report, including
without limitation under Part I, Item 2, Managements Discussion and
AnalysisDisclosure Regarding Forward-Looking Statements, and in our
other SEC filings.
ITEM 2.
UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM 4.
SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
Not
applicable.
ITEM 5.
OTHER INFORMATION
Management Changes
Noah
Kamrat, formerly our President and Chief Operations Officer, resigned from those
positions effective January 24, 2008, in order to assume the position of Chief Technology
Officer. M. David Kamrat, who also serves as Chief Executive Officer and a director,
assumed the duties of President, and Shehryar Wahid, who also serves as Chief Financial
Officer, Secretary, Treasurer, and a director, assumed the duties of Chief Operations
Officer. These changes to key management positions are intended to address a potential
void in our management team resulting from the sale of our IP Gear, Ltd. subsidiary.
Upon the sale of our IP Gear, Ltd. subsidiary, we divested ourselves of our R&D
and manufacturing business, and as a result lost the core of our in-house technology
expertise in the VoIP industry, particularly with respect to new products and emerging
trends in VoIP network equipment and its deployment. Noah Kamrat is particularly
well suited to assuming the role of Chief Technology Officer due to his depth and
breadth of experience selling and operating VoIP service networks, and selling,
developing and deploying VoIP technology equipment. We believe that, in the role
of Chief Technology Officer, Mr. Kamrat will be able to better position the Company
to take advantage of emerging product and service trends, and enable the Company
to work closely with TELES to identify and serve emerging markets and uses for TELES
and IP Gear, Ltd. products.
On
and effective April 30, 2008, Abe Narkunski resigned as Vice President of Operations
of the Companys NWB Telecom division. Noah Kamrat will assume Mr. Narkunskis duties as relate to NWB Telecom and will continue to serve as the Companys Chief Technology Officer.
36
ITEM 6.
EXHIBITS
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of
2002 (*)
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of
2002 (*)
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002 (*)
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant
to Section 906 of the Sarbanes -Oxley Act of 2002 (*)
|
37
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
NEW WORLD BRANDS, INC.
|
|
|
|
|
|
|
|
|
Dated: August
14, 2008
|
|
By:
|
/s/ M. David
Kamrat
|
|
|
|
|
|
|
|
M. David Kamrat
|
|
|
|
Chief Executive
Officer and Chairman of the Board
|
|
|
|
|
|
|
|
|
Dated: August
14, 2008
|
|
By:
|
/s/ Shehryar
Wahid
|
|
|
|
|
|
|
|
Shehryar Wahid
|
|
|
|
Chief Financial
Officer
|
38
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