Table of Contents
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 September 30, 2009
|
|
OR
|
|
|
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
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)
|
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Identification
No.)
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|
|
|
340
West Fifth Avenue, Eugene, Oregon
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|
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 has submitted electronically and posted on its corporate
website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
o
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 November 16, 2009, there were 450,716,257
shares of the issuers common stock, $0.01 par value per share, outstanding.
Table of Contents
NEW WORLD BRANDS, INC.
FORM 10-Q
For the quarterly period ended September 30, 2009
TABLE OF
CO
NTENTS
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
New World Brands, Inc.
and Subsidiary
Condensed
Consolidated Balance Sheets
as of September 30,
2009 (unaudited)
and December 31,
2008
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008 (as restated)
|
|
|
|
(unaudited)
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|
|
|
ASSETS
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
412,785
|
|
$
|
541,116
|
|
Accounts receivable, net
|
|
1,654,536
|
|
988,371
|
|
Inventories, net
|
|
2,774,692
|
|
1,827,211
|
|
Prepaid expenses
|
|
250,971
|
|
638,801
|
|
Other current assets
|
|
473,336
|
|
316,045
|
|
|
|
|
|
|
|
Total Current Assets
|
|
5,566,320
|
|
4,311,544
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
1,254,626
|
|
1,446,557
|
|
Other Assets:
|
|
|
|
|
|
Other long term assets
|
|
340,625
|
|
503,856
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,161,571
|
|
$
|
6,261,957
|
|
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
3
Table of Contents
New World Brands, Inc.
and Subsidiary
Condensed
Consolidated Balance Sheets
as of September 30,
2009 (unaudited)
and December 31,
2008
|
|
September
30,
|
|
December
31,
|
|
|
|
2009
|
|
2008
(as restated)
|
|
|
|
(unaudited)
|
|
|
|
LIABILITIES & STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,865,954
|
|
$
|
1,917,899
|
|
Accrued
expenses
|
|
497,834
|
|
447,491
|
|
Customer
deposits
|
|
8,873
|
|
4,365
|
|
Capital
leases, current portion
|
|
54,031
|
|
67,531
|
|
Notes
payable, current portion
|
|
254,834
|
|
14,693
|
|
Other
current liabilities
|
|
174,005
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
5,855,531
|
|
2,451,979
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
2,054,854
|
|
1,665,995
|
|
Capital
leases, net of current portion
|
|
72,925
|
|
91,913
|
|
|
|
|
|
|
|
Total
Long-Term Liabilities
|
|
2,127,779
|
|
1,757,908
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
7,983,310
|
|
4,209,887
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity (Deficit)
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000 shares authorized, 200 shares designated as
Series A preferred stock Series A preferred stock $0.01 par value, no shares
issued
|
|
|
|
|
|
Common
stock, $0.01 par value, 600,000,000 shares authorized, 457,316,257 and
418,479,673 shares issued as of September 30, 2009 and December 31, 2008
respectively
|
|
4,573,162
|
|
4,184,797
|
|
Additional
paid-in capital
|
|
10,543,069
|
|
10,685,482
|
|
Accumulated
deficit
|
|
(15,775,563
|
)
|
(12,653,209
|
)
|
Accumulated
Other Comprehensive Income
|
|
2,593
|
|
|
|
|
|
(656,739
|
)
|
2,217,070
|
|
Less:
Treasury shares (common 6,600,000 shares as of September 30, 2009 and
December 31,2008) at cost
|
|
(165,000
|
)
|
(165,000
|
)
|
Total
Stockholders Equity (Deficit)
|
|
(821,739
|
)
|
2,052,070
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders Equity (Deficit)
|
|
$
|
7,161,571
|
|
$
|
6,261,957
|
|
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
4
Table of
Contents
New World Brands, Inc.
and Subsidiary
Condensed
Consolidated Statements of Operations
For the Three
Months Ended
September 30, 2009
and 2008
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Hardware
|
|
$
|
1,925,096
|
|
$
|
1,535,641
|
|
Carrier Services
|
|
1,792,220
|
|
4,283,265
|
|
|
|
|
|
|
|
|
|
3,717,316
|
|
5,818,906
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
Hardware
|
|
(1,524,692
|
)
|
(931,726
|
)
|
Carrier Services
|
|
(1,539,932
|
)
|
(2,893,171
|
)
|
|
|
|
|
|
|
|
|
(3,064,624
|
)
|
(3,824,897
|
)
|
|
|
|
|
|
|
Gross Profit
|
|
652,692
|
|
1,994,009
|
|
Sales, General and Administrative Expenses
|
|
(1,727,894
|
)
|
(1,559,215
|
)
|
|
|
|
|
|
|
(Loss) Income from Operations
|
|
(1,097,451
|
)
|
434,794
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
Interest Income (Expense)
|
|
(55,725
|
)
|
2,088
|
|
Other Income (Expense)
|
|
(2,042
|
)
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
(57,767
|
)
|
2,088
|
|
|
|
|
|
|
|
(Loss) Income before Income
Taxes
|
|
(1,132,969
|
)
|
436,882
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(1,132,969
|
)
|
$
|
436,882
|
|
|
|
|
|
|
|
Net Loss Per Share - basic and diluted
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding
During the Year
|
|
|
|
|
|
Basic
|
|
426,695,950
|
|
416,903,586
|
|
|
|
|
|
|
|
Diluted
|
|
426,695,950
|
|
477,954,142
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
5
Table of Contents
New World Brands, Inc.
and Subsidiary
Condensed
Consolidated Statements of Operations
For the Nine Months
Ended
September 30, 2009
and 2008
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Hardware
|
|
$
|
3,484,244
|
|
$
|
6,231,784
|
|
Carrier Services
|
|
4,224,702
|
|
11,271,459
|
|
|
|
|
|
|
|
|
|
7,708,946
|
|
17,503,243
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
Hardware
|
|
(2,528,137
|
)
|
(4,496,089
|
)
|
Carrier Services
|
|
(4,419,252
|
)
|
(8,983,809
|
)
|
|
|
|
|
|
|
|
|
(6,947,389
|
)
|
(13,479,898
|
)
|
|
|
|
|
|
|
Gross Profit
|
|
761,557
|
|
4,023,345
|
|
Sales, General and Administrative Expenses
|
|
(3,821,919
|
)
|
(4,639,043
|
)
|
|
|
|
|
|
|
(Loss) Income from Operations
|
|
(3,060,362
|
)
|
(615,698
|
)
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
Interest Income (Expense)
|
|
(80,295
|
)
|
7,482
|
|
Other Income
|
|
18,303
|
|
70,078
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
(61,992
|
)
|
77,560
|
|
|
|
|
|
|
|
(Loss) Income Before Income
Taxes
|
|
(3,122,354
|
)
|
(538,138
|
)
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(3,122,354
|
)
|
$
|
(538,138
|
)
|
|
|
|
|
|
|
Net Loss Per Share - basic and diluted
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding
During the Year
|
|
|
|
|
|
Basic
|
|
416,872,704
|
|
416,353,761
|
|
|
|
|
|
|
|
Diluted
|
|
416,872,704
|
|
416,353,761
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
6
Table of Contents
New World Brands, Inc.
and Subsidiary
Condensed
Consolidated Statements of Cash Flows
For the Nine
Months Ended
September 30, 2009
and 2008
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,122,354
|
)
|
$
|
(538,138
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
470,377
|
|
401,386
|
|
Allowance
for doubtful accounts
|
|
29,400
|
|
(105,725
|
)
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
Accounts
receivable
|
|
(672,957
|
)
|
(42,555
|
)
|
Inventory
|
|
(947,482
|
)
|
(947,080
|
)
|
Prepaid
expenses
|
|
387,829
|
|
(602,736
|
)
|
Other
current assets
|
|
(157,290
|
)
|
146,380
|
|
Deposits
and other assets
|
|
140,625
|
|
120,625
|
|
Accounts
payable
|
|
3,105,494
|
|
822,013
|
|
Accrued
expenses and other liabilities
|
|
(107,097
|
)
|
71,835
|
|
Customer
deposits
|
|
4,508
|
|
(112,581
|
)
|
Other
current liabilities
|
|
174,005
|
|
|
|
Subtotal: Adjustments to
reconcile net loss to net cash used in
operating activities
|
|
2,427,412
|
|
(248,438
|
)
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
(694,942
|
)
|
(786,576
|
)
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Net
purchases of property and equipment
|
|
(278,446
|
)
|
(353,714
|
)
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(278,446
|
)
|
(353,714
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Payments
of principal on capital lease
|
|
(32,489
|
)
|
|
|
Proceeds
from notes payable
|
|
640,000
|
|
1,092,184
|
|
Payments
of notes payable
|
|
(11,000
|
)
|
(649,447
|
)
|
Sale
(Purchase) of common and preferred stock
|
|
245,952
|
|
(125,000
|
)
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
842,463
|
|
317,737
|
|
|
|
|
|
|
|
Effect
of foreign currency exchange
|
|
2,594
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
(128,331
|
)
|
(822,553
|
)
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
541,116
|
|
2,038,635
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
412,785
|
|
$
|
1,216,082
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
7
Table of Contents
New World Brands, Inc.
and Subsidiary
Condensed
Consolidated Statements of Cash Flows
For the Nine
Months Ended
September 30, 2009
and 2008
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest paid
|
|
$
|
81,657
|
|
$
|
66,088
|
|
Income taxes paid
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and
financing activities
|
|
|
|
|
|
Acquisition of property and equipment through
capital leases
|
|
|
|
|
|
Increase in property and equipment
|
|
10,299
|
|
$
|
109,794
|
|
Increase in capital lease payable
|
|
(10,299
|
)
|
(109,794
|
)
|
Share issuance on asset acquisition
|
|
|
|
|
|
|
|
Increase in common stock
|
|
|
230,463
|
|
|
|
|
Increase in intangible assets
|
|
|
(38,405
|
)
|
|
|
|
Decrease in accounts payable
|
|
|
(107,547
|
)
|
|
|
|
Decrease in paid-in capital
|
|
|
(84,511
|
)
|
|
|
|
|
|
$
|
|
|
$
|
|
|
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
8
Table of Contents
NEW
WORLD BRANDS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
NOTE A
ORGANIZATION,
CAPITALIZATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Basis of Presentation
New
World Brands, Inc. (
New World
Brands
,
the Company
,
NWB
,
we
,
us
or
our
)
is a Delaware corporation that is engaged in the telecommunications business
through its two operating divisions. One is NWB Networks, which includes TELES
USA. This division is focused on the telecommunications hardware business and
delivers voice over internet equipment, support, and solutions as the exclusive
reseller of the TELES AG line of products in North America. The other division
is NWB Telecom, which acts as a long distance wholesale termination provider.
It primarily offers international routes to domestic carriers for the
termination of voice over internet phone service. A third operating division
was organized at the end of the third quarter of 2009 and has been named NWB
Retail. This division has not yet started operations and has no costs or
revenues in the current reporting period. Revenues are anticipated in future
periods and NWB Retail shall be separated out as a unique segment in the
segmented reporting of New World Brands Inc.
Significant
Accounting Policies
Revenue
Recognition
NWB Networks
: Revenue is recognized when goods are shipped to or
picked up by the customer from our facilities. Services and support revenue is
recognized on a ratable basis over the service period as services and support
are provided to the customer. Sales of equipment and software requiring the
installation of equipment and or software are recognized when the customer has
accepted that the installation is completed and acknowledges such through a
formal process.
NWB Telecom
: Revenue is
recognized when services are rendered to the customer.
Reserves
and Allowances
Bad Debt:
The Company maintains a reserve for bad debt based
on historical activity and economic conditions specific to each division. We
have increased our reserve when compared to the same period a year ago
primarily to account for increased risk of non-payment due to the currently
poor general economic conditions. The
allowance for bad debts on our accounts receivable for the NWB Networks
division in the this quarter is 5% of the accounts receivable while the reserve
for the NWB Telecom division is 1% of accounts receivable.
Disputes:
The Company maintains a reserve against invoices
booked on the NWB Telecom revenue for possible customer disputes on the bill
for telecommunications services that we provide our customers. We allow a 30
day period for customers to dispute our bill to them and the reserve we
maintain is based on historical rates of disputes that we have encountered per
30 day period. The amount we currently
apply is 2.5 % of the NWB Telecom accounts receivable balance. This amount is
independent of any reserve that we maintain associated with a reserve for bad
debts.
Inventory:
Inventory valuation is maintained on a number of U.S.
generally accepted accounting principles (
GAAP
)
acceptable methods including FIFO, Specific Identification and Average Cost. We
maintain a reserve for obsolescence of inventory based on the nature of the equipment
and our ability to upgrade it to current status of between 3% and 12% of the
inventorys value depending on the category of the inventory item.
9
Table of Contents
Consolidation :
New World Brands has added two foreign
subsidiaries in Mexico that are virtually wholly owned by the company. These subsidiaries commenced operations in
the month of July 2009 and maintain their books using US GAAP for
reporting and consolidation purposes of the companys quarterly and annual
reports.
The
unaudited consolidated financial statements were prepared in accordance with
instructions to Form 10-Q and, therefore, do not include information or
notes necessary for a complete presentation of financial position, results of
operations, changes in stockholders equity and cash flows in conformity with US
GAAP. However, all normal recurring adjustments that, in the opinion of
management, are necessary to make the consolidated financial statements not
misleading have been included. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial
statements and notes thereto in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008. The results of operations for the
three and nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the full year or any other
interim period. In connection with the preparation of these financial
statements, the Company has evaluated events and transactions for items that
should potentially be recognized or disclosed through November 16, 2009,
which is the date the financial statements were issued.
In
preparing financial statements in conformity with US GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and income and expenses during the
reporting period.
Recently
Adopted Accounting Pronouncements
In September 2009, Accounting Standards
Codification (
ASC
) became the source of
authoritative U.S. GAAP recognized by the Financial Accounting Standards Board
(
FASB
) for nongovernmental entities,
except for certain FASB Statements not yet incorporated into ASC. Rules and
interpretive releases of the SEC under federal securities laws are also sources
of authoritative U.S. GAAP for registrants. The discussion below includes the
applicable ASC reference.
The
Company adopted ASC Topic 810-10
Consolidation
(formerly SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB No. 51
)
effective January 2, 2009. Topic 810-10 changes the manner of
presentation and related disclosures for the noncontrolling interest in a
subsidiary (formerly referred to as a minority interest) and for the
deconsolidation of a subsidiary. The presentation changes are reflected
retrospectively in the Companys unaudited condensed consolidated financial
statements.
The
Company adopted ASC Topic 825-10
Financial
Instruments
(formerly, FASB Staff Position No. SFAS 107-1 and
APB No. 28-1,
Disclosures about the
Fair Value of Financial Instruments
), which requires quarterly
disclosure of information about the fair value of financial instruments within
the scope of Topic 825-10. The Company adopted this pronouncement effective April 1,
2009.
In April 2009,
the Company adopted ASC Topic 820-10-65
Fair
Value Measurements and Disclosures
(formerly FASB Staff Position No. SFAS
157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
).
The standard provides additional guidance
for estimating fair value in accordance with Topic 820-10-65 when the volume
and level of activity for the asset or liability have significantly decreased
and includes guidance on identifying circumstances that indicate if a
transaction is not orderly. The Company adopted this pronouncement effective April 1,
2009 with no impact on its consolidated financial statements.
10
Table of Contents
The
Company adopted, ASC Topic 855-10
Subsequent
Events
(formerly SFAS 165,
Subsequent
Events
) effective April 1, 2009. This pronouncement changes the
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued.
In July 2009,
the FASB issued SFAS No. 168,
The
Hierarchy of Generally Accepted Accounting Principles
. SFAS 168
codified all previously issued accounting pronouncements, eliminating the prior
hierarchy of accounting literature, in a single source for authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS
168, now ASC Topic 105-10
Generally Accepted
Accounting Principles
, is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
adoption of this pronouncement did not have an effect on the consolidated
financial statements.
In August 2009, the FASB issued Accounting Standards
Update (
ASU
) No. 2009-05, Measuring
Liabilities at Fair Value, which clarifies, among other things, that when a
quoted price in an active market for the identical liability is not available,
an entity must measure fair value using one or more specified techniques. The
Company adopted the pronouncement effective July 1, 2009 with no impact on its
consolidated financial statements.
In October 2009,
the FASB issued ASU No. 2009-13,
Multiple-Deliverable
Revenue Arrangements,
which revises the existing multiple-element
revenue arrangements guidance and changes the determination of when the
individual deliverables included in a multiple-element revenue arrangement may
be treated as separate units of accounting, modifies the manner in which the
transaction consideration is allocated across the separately identified
deliverables and expands the disclosures required for multiple-element revenue
arrangements. The pronouncement is effective for financial statements issued
after December 31, 2010. The Company does not expect the pronouncement to
have a material effect on its consolidated financial statements.
Financial Instruments and Fair Values
The fair value of a financial instrument represents
the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Fair value
estimates are made at a specific point in time, based upon relevant market
information about the financial instrument.
The carrying amount of cash and cash equivalents,
trade receivables and other assets approximates fair value due to the
short-term maturities of these instruments.
The fair values of all other financial instruments,
including debt, approximate their book values as the instruments are short-term
in nature or contain market rates of interest.
NOTE B INVENTORIES
Inventories as of September 30,
2009 and December 31, 2008 consisted of the following:
|
|
September 30,
|
|
December 31,
|
|
Resale Hardware
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Finished
Goods inventories
|
|
$
|
2,871,892
|
|
$
|
1,893,411
|
|
Less
allowance for obsolete inventories
|
|
(97,200
|
)
|
(66,200
|
)
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
2,774,692
|
|
$
|
1,827,211
|
|
NOTE C NOTES PAYABLE
P&S
credit line
The
current balance outstanding has been maintained at $1,050,000. This balance is unchanged from the previous
quarter. The company is in compliance with the terms of the loan agreement as
per the most recent loan documents and amendments to such. The most recent
interest rate paid on this loan was 5.25% per the September 2009 interest
charge. This loan is paid interest only during its term with the entire balance
due upon maturity in May of 2012.
The
principals of P&S Spirit LLC include Dr. Selvin Passen, who is a
director and shareholder of the Company, as well as its former Chief Executive
Officer.
11
Table of Contents
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 could 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. 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. TELES A.G. agreed to forgo enforcement of the Loan Agreement element
requiring the completion of the Merger Agreement between Qualmax and the
Company in December of 2008. The Company then executed on a portion of
this agreement in December of 2008 by offsetting $600,000 of trade
payables due to TELES towards the loan facility. On January 19, the
company drew an amount of $400,000 paid in cash by TELES A.G. within the
context of the TELES Loan Agreement bringing the total draw to the maximum
amount of $1,000,000 as per the loan agreement. TELES A.G. and New World Brands
also agreed at that time to a reduction in the interest rate of the loan from
7% as per the original agreement to a rate of 5% commencing on the draw of the
first funds pursuant to this loan agreement.
The company
maintains its balance on the Teles loan unchanged from the prior quarter and
within the terms of the most recent amended loan agreement documents. The
interest rate on this loan is a fixed 5%.
SSB and
P&S loans
Effective
June 19, 2009, New World Brands, Inc. entered into a Loan Agreement
with Sigram Schindler Beteiligungsgesellschaft mbH (
SSB
),
pursuant to which SSB agreed to loan the Company up to $250,000 at an interest
rate of 18% per annum with a maturity date of December 31, 2009 (
SSB Loan
). The Company received
$125,000 under the SSB Loan from SSB on June 19, 2009.
Effective June 19,
2009, the Company entered in to a Loan Agreement with P&S Spirit Investments,
a general partnership (
P&S
)
of which Dr. Selvin Passen, MD, is Manager (
P&S
Loan
). The P&S Loan contemplates a loan to the Company by
P&S of up to $250,000 with a maturity date of December 31, 2009 and
payable with interest at 18% per annum. We received $125,000 of the P&S
Loan on June 19, 2009. The P&S general partnership may include
individuals and/or investments by individuals who are both related parties to
the Company and/or officers and/or directors or employees of the Company and/or
relatives thereof. In addition to being a Director of P&S, Dr. Passen
is also a Director of the Company.
This
was reported in the Companys Current Report on Form 8-K filed with the
SEC on June 24, 2009. Please note that these loans are current liabilities
and are not reflected in the maturities as part of notes payable, current
portion
Amendments
to loan covenants
Amendments
to both the P&S credit line and the TELES Loan were agreed to by all
parties effective June 29, 2009 that temporarily waived the covenants relating
to certain financial ratios in these agreements until March 31, 2010.
Other
loans
We have a total of
approximately $20,000 of principal remaining in loans on two company-owned
vehicles. The majority of the balance is for a truck that carries a term of 3
years and an interest rate of 0%. It is due to expire in 2011.
Total maturities of all
notes payable as of September 30, 2009 were as follows:
2010
|
|
$
|
254,834
|
|
2011
|
|
4,854
|
|
2012
|
|
2,050,000
|
|
2013
|
|
|
|
|
|
|
|
Total
notes payable
|
|
2,309,688
|
|
|
|
|
|
Notes
payable, current portion
|
|
(254,834
|
)
|
|
|
|
|
Notes
payable, net of current portion
|
|
$
|
2,054,854
|
|
12
Table of Contents
Interest expense incurred
on the above notes payable was approximately $56,000 and $26,000 for the three
month periods ended September 30, 2009 and 2008, respectively. For the nine months ended September 30,
2009 and 2008, interest expense was $82,000 and $40,000 respectively.
NOTE D CAPITAL LEASES
Description of Leasing
Arrangements and Depreciation
The company is the lessee
of equipment under capital leases expiring in various years through 2012.
The assets and liabilities under capital leases are recorded at the lower of
the present value of the minimum lease payments or their fair value of the
asset. The assets are depreciated over the lower of their related lease
terms or their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for 2009 and 2008.
NOTE E STOCKHOLDERS EQUITY
Computation
of Basic and Diluted Share Data
The following tables set
forth the computation of basic and diluted share data for the three and nine
months ended September 30, 2009 and 2008:
|
|
3 months
|
|
9 months
|
|
|
|
Ended September
30
|
|
Ended
September
30
|
|
2008
|
|
|
|
|
|
Weighted average number of shares
|
|
|
|
|
|
Basic (Common Stock)
|
|
416,903,586
|
|
416,353,761
|
|
|
|
|
|
|
|
Total Basic
|
|
416,903,586
|
|
416,353,761
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
Common Stock - options and warrants
|
|
61,050,556
|
|
|
|
Preferred Stock - options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
Total Dilutive
|
|
61,050,556
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
(Basic and diluted)
|
|
477,954,142
|
|
416,353,761
|
|
|
|
|
|
|
|
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
|
|
477,954,142
|
|
477,404,317
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
Weighted average number of shares
|
|
|
|
|
|
Basic (Common Stock)
|
|
426,695,950
|
|
416,872,704
|
|
|
|
|
|
|
|
Total Basic
|
|
426,695,950
|
|
416,872,704
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
Common Stock - options and warrants
|
|
|
|
|
|
Preferred Stock - options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
Total Dilutive
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
(Basic and diluted)
|
|
426,695,950
|
|
416,872,704
|
|
|
|
|
|
|
|
Weighted average of options and warrants not
included above (anti-diluted):
|
|
|
|
|
|
Basic (Common Stock)
|
|
61,050,556
|
|
61,050,556
|
|
Preferred Stock (as converted to Common Stock)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
487,746,506
|
|
477,923,260
|
|
13
Table of Contents
NOTE F INCOME TAXES
We account for income
taxes in accordance with ASC Topic 740
Accounting
for Income Taxes,
which
requires recognition of deferred tax
assets
and liabilities for expected future tax
consequences of events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets amounts expected to be realized. U.S. income
taxes are not provided on undistributed earnings, which are expected to be
permanently reinvested by a foreign subsidiary, unless the earnings can be
repatriated in a tax-free or cash-flow neutral manner.
We also account for
income taxes in accordance with Financial Accounting Standards Board (the
FASB
) Interpretation No. (
FIN
) 48, Accounting for
Uncertainty in Income Taxes and FSP FIN 48-1, which amended certain provisions
of FIN 48. FIN 48 clarifies the
accounting
for uncertainty in income taxes
recognized in financial statements in accordance with ASC Topic 740 Accounting
for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 requires that
the Company determine whether the benefits of the Companys tax positions are
more likely than not of being sustained upon audit based on the technical
merits of the tax position. The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods and disclosure. The following information was obtained from a review of
the 2005 federal and state income tax returns of Qualmax, Inc. and
Subsidiaries (
Qualmax
), the forms 10-K and
10-Q filed with the Securities and Exchange Commission by NWB, as updated by
the latest information available as of November 13, 2009.
The Company did not have
any unrecognized tax benefits and there was no effect on the financial
condition or results of operations for the three and nine month periods ended September 30,
2009 and 2008 as a result of implementing FIN 48, or FIN 48-1. In accordance
with FIN 48, the Company adopted the policy of recognizing interest and
penalties, if any, related to unrecognized tax positions as income tax expense.
The tax years 2005 - 2008 remain subject to examination by major tax
jurisdictions.
|
|
2009
|
|
Federal:
|
|
|
|
Current
|
|
$
|
|
|
Deferred
|
|
|
|
State:
|
|
|
|
Current
|
|
|
|
Deferred
|
|
|
|
Subtotal
|
|
|
|
Change
in valuation allowance
|
|
|
|
Benefit
(provision) for income taxes
|
|
$
|
|
|
14
Table of Contents
|
|
Amount
|
|
Rate
|
|
Computed income tax (benefit)
|
|
$
|
(1,190,000
|
)
|
34.00
|
%
|
State tax (benefit), net of federal benefit
|
|
(151,476
|
)
|
4.33
|
%
|
Change in valuation allowance
|
|
1,333,792
|
|
-38.11
|
%
|
Nondeductible expenses and other
|
|
7,684
|
|
-0.22
|
%
|
Total income tax expense (benefit)
|
|
$
|
|
|
|
|
|
|
2009
|
|
Deferred tax assets (short-term):
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
3,647,011
|
|
Capital
loss from sale of subsidiary
|
|
1,772,929
|
|
Allowance
for doubtful accounts receivable
|
|
29,879
|
|
Allowance
for inventory obsolescence
|
|
37,282
|
|
Depreciation &
amortization
|
|
112,968
|
|
Allowance
for disputes
|
|
1,342
|
|
Deferred
revenue
|
|
45,313
|
|
Deferred
tax assets (long-term):
|
|
|
|
Charitable
contributions carry forward
|
|
8,925
|
|
Deferred
Tax Assets before Valuation Allowance
|
|
5,655,649
|
|
|
|
|
|
Valuation
allowance
|
|
(5,665,649
|
)
|
Deferred
tax assets after valuation allowance
|
|
|
|
Deferred
tax liabilities - depreciation
|
|
|
|
Net
deferred tax assets after valuation
|
|
$
|
|
|
As of September 30, 2009, the Company had net
operating losses of approximately $8.8 million that can be carried forward for
up to twenty years and deducted against future taxable income. The net
operating loss carry forwards expire in various years through 2029. The Company
also has a capital loss carry forward of approximately $4.6 million that can be
carried forward for five years and deducted against future capital gain income.
The capital loss carry forward expires in 2012.
In assessing the ability
to realize a portion of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities and projected future taxable income in
making the assessment. The valuation allowance for deferred tax assets as of September 30,
2009 was $5.7 million. The increase in the valuation allowance was
approximately $1.3 million for the nine month period ended September 30,
2009, primarily due to the carry-forward of losses from operations for the nine
month period.
Federal Income Tax Liabilities
For
the nine months ended September 30, 2009, NWB did not incur a federal
income tax provision since it generated a net operating loss for the
period. For purposes of the deferred
income tax calculation, NWB had a 100 percent valuation allowance against its
net deferred tax assets and thus did not record a deferred tax benefit for the
nine months ended September 30, 2009.
The
federal and state corporate income tax returns for Qualmax and NWB for the
periods ended December 31, 2006 and 2007 are still pending to be
filed. For purposes of its 2006
corporate income tax returns, Qualmax will have to break-out its calendar year
2006 financial results between the pre-merger and post-merger time periods and
file short period corporate income tax returns for the different time
periods. As part of the reverse
acquisition, NWB changed its fiscal year end from May 31 to December 31,
which will also impact the filing of the 2006 short period corporate income tax
returns. Berenfeld, Spritzer, Shechter &
Sheer LLP (BSSS), NWBs tax preparer, is working with NWB to obtain the
necessary information for the preparation of the 2006 and 2007 corporate income
tax returns. Tax professionals from BSSS
have discussed in detail with the Company Chief Financial Officer which
information is required to prepare the federal and state corporate income tax
returns and all of the returns are expected to be prepared by BSSS and filed
with the appropriate taxing authorities by the end of 2009. Since Qualmax and NWB incurred taxable losses
during those years, it is expected that no federal or state corporate income
taxes will be due with the returns. Some
of the state income tax returns could require the payment of
15
Table of Contents
minimum
taxes, but those amounts are expected to be immaterial. Also, any penalties and/or interest assessed
by the taxing authorities for the late filing of the income tax returns should
also be immaterial since NWB and Qualmax incurred taxable losses. NWB requested extensions of time for the
filing of its federal and state corporate income tax returns for the year ended
December 31, 2008. The extended due
date of the federal corporate income tax return is September 15, 2009 and
the extended due date of the Oregon corporate income tax return is October 15,
2009.
The
tax depreciation expense for the 2007 and 2008 tax years and for the first
three quarters of 2009 was estimated based on the 2005 calendar year tax
depreciation schedules provided by Ribotsky, Levine & Company, CPAs,
Qualmaxs former tax preparation firm, and the net fixed asset additions of NWB
during 2007, 2008, and the first three quarters of 2009. Since the acquisition of Qualmax took place
in September, 2006, some of the fixed assets on the 2005 tax depreciation
schedules may not have been owned by NWB during the 2007 and 2008 tax years and
during the first three quarters of 2009.
Since the 2006 income tax returns have not yet been prepared, the
information regarding which depreciation methods and lives will be used for the
new fixed assets and what the dispositions of fixed assets were during these
years is not available at this time.
Since NWB and Qualmax incurred taxable losses during these tax years and
has substantial net operating losses carrying forward, the updating of the tax
depreciation expense for purposes of the corporate income tax returns is not
expected to have a material effect NWBs and Qualmaxs tax liabilities.
State Income Tax Liabilities
For
the 2005 tax year, Qualmax only filed a state income tax return in Oregon. Prior to the acquisition that occurred on September 15,
2006, NWB was a Florida-based corporation and filed Florida corporate income
tax returns. During the 2006 tax year,
the Company had an employee in California.
The Company intends to file a California corporate income tax return for
2006. During the 2007 tax year, the
Company had employees in four states other than Oregon. These were New York, Texas, Massachusetts,
and Florida. During 2007, the Company
did not have an employee in California.
The employees in these four other states are engineers and operations
management personnel who monitor the traffic on NWBs systems. The employees are not involved in sales. The Company is registered for individual
state income tax withholdings and unemployment compensation contributions in
the four states. During the 2008 tax
year, the Company only had employees outside of Oregon in the states of Florida
and New York. As during the 2007 tax
year, these employees were engineers and operations management personnel and
were not involved in sales. During the
first and second quarters of 2009, the Company continued to have the same
employees in New York and Florida (and performing the same functions) and did
not hire any employees in any other states outside of Oregon.
As
part of the state income tax return preparation process, BSSS is going to
review Qualmaxs and NWBs potential exposure to state income and/or franchise
taxes for the 2006, 2007, 2008, and 2009 tax years from the presence of its
employees in the various states under each states applicable statutes. Any possible state income tax assessments are
expected to be minimal since the company has been incurring significant tax net
operating losses.
During
its years of operations, the Company has had sales to many states other than
the State of Oregon. Some of these
states have in the past tried to aggressively pursue out of state businesses
for the imposition and collection of sales taxes on sales to residents of their
states. Although NWBs management is not
aware of any specific issues or contingencies directly related to NWB at this
time, there is a potential exposure for all multi-state businesses of a change
in state sales tax laws and the requirement to collect sales taxes on sales to
the states.
NOTE G
RESTATEMENT
OF FINANCIAL STATEMENTS
This restatement of 2008
condensed consolidated balance sheet was as a result of correction of an error
in accounting for the merger of New World Brands and Qualmax. Management discovered
this error in 2009. The effect of this error was to reduce additional paid in capital
by $22,921,075 resulting from the recapitalization of the NWB stockholders
equity, and to reduce the accumulated deficit by $22,921,075 to properly
reflect the historical accumulated deficit of the merged entity at the date of
the merger. The restatement had no effect on net loss or loss per share for
2008.
NOTE H ACQUISITION OF CERTAIN
AEROPOINTE ASSETS
New World Brands Inc.
initiated the purchase of most of the assets of Aeropointe Partners inc. (
Aeropointe
), a Texas Corporation
during the third quarter of 2009. The company had been doing business with
Aeropointe since the end of 2008 in the building of long distance carrier
routes for the companys NWB Telecom division.
The transactions effective date was September 1, 2009 and all
elements of the transaction will be completed by January 15, 2010.
The details of
this transaction were reported in an 8-K filing to the SEC on October 9, 2009.
Pursuant to SEC regulation S-X, financial statements are not required to be
presented in connection with this acquisition. A summary description of the
transaction is discussed below.
The company acquired the
Aeropointes rights to a contract that New World Brands was the other party to
as well as the right to assume the staff and the location of Aeropointe
operations. The company also was entitled to receive $100,000 in cash. The
consideration received by Aeropointe was New World Brands common stock . The total amount of stock to be received is
47,658,374 shares. A portion of this total number of shares, 8,821,791, is not
to be issued until January 15, 2010 per agreement but Aeropointe has
earned these shares by the end of the third quarter of 2009 and they are listed
on the consolidated balance sheet of New World Brands as other current
liability until they are delivered to Aeropointe.
NWB shares were valued for
this transaction based upon the average price of NWB stock in the prior period.
This amount is $0.006333 per share.
The total purchase price
was $301,820, of which consideration valued at $55,868 is payable on January
15, 2010, in the form of 8,821,791 shares of common stock. The net purchase price amount of $245,952 was
paid in the form of 38,836,583 shares of common stock issued effective
September 1, 2009. The seller has agreed
to contribute capital as consideration for issuance of the common stock, in the
amount of $100,000, which was paid in October 2009. The consideration has been reported as part
of accounts receivable. The company acquired intangible assets valued at
$38,405 at the date of acquisition, and satisfied accounts payable to the
seller of $163,416. The New World Brands
common stock issued to the seller was valued based upon the average price of
NWB stock for the ninety day period prior to the effective date of the
acquisition at a price of $0.006333 per share. The difference between the issue
price in the acquisition and the par value of the shares issued, $84,511, was
recorded as a reduction in additional paid in capital in the 3rd quarter 2009.
16
Table of
Contents
The Pro Forma impact of
this acquisition is represented below for the nine months ended September 30,
2009 and 2008 assuming the acquisition took place at the beginning of each
reporting period.
|
|
PRO FORMA
|
|
PRO FORMA
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
Hardware
|
|
$
|
3,484,244
|
|
$
|
6,231,784
|
|
Carrier
Services
|
|
4,224,702
|
|
11,271,459
|
|
|
|
|
|
|
|
|
|
7,708,946
|
|
17,503,243
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
|
Hardware
|
|
(2,528,137
|
)
|
(4,496,089
|
)
|
Carrier
Services
|
|
(4,373,815
|
)
|
(8,983,809
|
)
|
|
|
|
|
|
|
Total
Cost of Sales
|
|
(6,901,952
|
)
|
(13,479,898
|
)
|
|
|
|
|
|
|
Gross
Profit
|
|
806,994
|
|
4,023,345
|
|
Sales,
General and Administrative Expenses
|
|
(3,903,576
|
)
|
(4,639,043
|
)
|
|
|
|
|
|
|
Loss
from Operations Before Other Income
|
|
(3,096,582
|
)
|
(615,698
|
)
|
|
|
|
|
|
|
Interest
Income
|
|
1,362
|
|
7,482
|
|
Other
Income
|
|
18,303
|
|
70,078
|
|
|
|
|
|
|
|
Total
Other Income
|
|
19,665
|
|
77,560
|
|
|
|
|
|
|
|
Loss Before Income Taxes
|
|
(3,076,917
|
)
|
(538,138
|
)
|
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,076,917
|
)
|
$
|
(538,138
|
)
|
NOTE I LIQUIDITY
The
results of the companys activities over the course of the first three quarters
of 2009 have further weakened the Companys liquidity position as of September 30,
2009 as compared to its position on December 31, 2008. The following
comparison of the current assets and liabilities from September 30, 2009
to December 31, 2008 shows a decline in the ratio of current assets to
current liabilities (by 45.94%) and a decline in the cash position of the
company (by 23.72%), as well as a more significant decline in the quick ratio
(by 48.39%). The current cash position has improved from its low of
approximately $390,000 on March 31, 2009 by 5.84%. However, this was primarily due to the
issuance of a note payable that will mature in December 2009.
The
decline of the current ratio to less than 1:1 is a large concern with respect
to our continued ability to pay current liabilities.
17
Table of Contents
New
World Brands revenue numbers have seen a marked increase in the current quarter
over the two previous quarters. Sales are up over 88% from the second quarter
of 2009 but are still down about 36% from the same quarter a year ago. The
operating expenses to run the operations are less than a year ago but the
company is still running a cashflow deficit that is being financed from
accounts payable from our primary supplier.
We
have started to stock up on inventory of product from our primary supplier in
the expectation that the opportunity for increased sales in the fourth quarter
and beyond would grow.
Our
SGA costs for the quarter year over year are up but primarily due to bad debt
write downs. We continue to expect to collect on all receivables but have taken
a significant write down this quarter of approximately $650,000 to address our
evaluation of the collectability of certain receivables. The remaining SGA
costs are reduced by 30.87% otherwise since the same quarter in 2008.
Other
changes in our liquidity position arise from the terms of payment with our
suppliers on the NWB telecom division where the requirements had been mostly
prepaid. The terms of some of our key arrangements with suppliers in the
division have started to shift to postpaid. This may allow us some latitiude on
growing revenue.
Our
primary concern with respect to liquidity is to generate a breakeven cashflow
level of revenue to cover operating expenses on a monthly basis and we have not
reached that point as of the end of the third quarter of 2009.
NOTE J COMMITMENTS AND CONTINGENCIES
Credit
Facility with Pacific Continental Bank
The
Company entered into an agreement for the use of various credit services with
Pacific Continental Bank in February 2007. The conditions of this
agreement require the deposit of $60,000 with the bank as security for the
services as of September 30, 2009. 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 Litigation
Effective July 1,
2007 we sold our subsidiary, IP Gear Ltd., to TELES (
TELES Agreement
). A
material aspect of the TELES Agreement included a commitment of the Company to
indemnify, hold harmless and defend TELES and IP Gear, Ltd. against any
liabilities arising from the Piecom Tech litigation (herein). As a part
of the consideration for such an obligation, the Company is entitled to the
proceeds, if any, of the Piecom Tech litigation.
IP Gear was named
as a defendant in a lawsuit styled Piecom Tech. Israel Ltd. v. IP Gear Ltd.,
Case No, 26-05166-07-5, in the Herzliyah, Israel Regional Court. Piecom Tech.
had been a vendor to IP Gear, Ltd and was contracted to provide outsourced
contract manufacturing services. There is currently a deposit held by Piecom of
$214,000 towards the production of equipment not yet delivered and an amount in
escrow of $32,000 pending resolution of this matter. 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 occurred in August of
2008 but the matter was not resolved. The next mediation hearing is expected
for December, 2009. At present, management does not believe this matter poses
any significant financial risk to the Company.
Additional
Disputes
In addition to the
matters discussed above, the Company is involved in various disputes that arise
in the ordinary course of business.
Operating Lease Commitments
The Company assumed leases for physical locations in Mexico in July of
2009. The Company also assumed the lease for the physical location in Dallas
where our new staff as a result of the Aeropointe asset acquisition will be
working from.
18
Table of Contents
NOTE K SUBSEQUENT EVENTS
Aeropointe Partners Inc.
paid the $100,000 amount as per the Aeropointe Acquisition Agreement on October 4,
2009 to fulfill its portion of the obligation as agreed. Steve Bell, formerly of Aeropointe Partners
Inc was named to the Board of Directors of the Company and its President. Shawn
Lane, also formerly of Aeropointe Partners Inc., was named the companys Chief
Operating Officer (COO).
The company launched its
first product within the NWB Retail division in the first week of November of
2009. The product was a long distance calling card with a distributor in the US
Southeast.
NOTE L BUSINESS
SEGMENT REPORTING
The following presents
our segmented financial information by business line for the nine months ended September
30, 2009, and 2008. 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
.
A third business line, the
sale of calling cards intended for direct use by the final customer, is
beginning operations in the fourth quarter of 2009 under the name NWB Retail. This division was established on September 30,
2009, the final day of the third quarter.
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
NWB Telecom
|
|
$
|
4,224,702
|
|
$
|
11,271,459
|
|
|
|
|
|
|
|
NWB Networks
|
|
3,484,244
|
|
6,231,784
|
|
|
|
|
|
|
|
NWB Retail
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
7,708,946
|
|
17,503,243
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
NWB Telecom
|
|
(4,419,252
|
)
|
(8,983,809
|
)
|
|
|
|
|
|
|
NWB Networks
|
|
(2,528,137
|
)
|
(4,496,089
|
)
|
|
|
|
|
|
|
NWB Retail
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
(6,947,389
|
)
|
(13,479,898
|
)
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
NWB Telecom
|
|
(194,550
|
)
|
2,287,650
|
|
|
|
|
|
|
|
NWB Networks
|
|
956,107
|
|
1,735,695
|
|
|
|
|
|
|
|
NWB Retail
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
$
|
761,557
|
|
$
|
4,023,345
|
|
19
Table of Contents
ITEM
2.
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 consolidated
financial statements and notes thereto appearing elsewhere herein, and with our
prior filings with the Securities Exchange Commission (the
SEC
).
Disclosure
Regarding Forward-Looking Statements - Cautionary Statement
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, intend, plan, envision,
continue, intend, target, contemplate, budgeted, or will and
similar words or phrases or comparable terminology. Forward-looking statements
involve risks and uncertainties. The Company cautions that these statements are
further qualified by important economic, competitive, governmental and
technological factors that could cause the Companys business, strategy, or
actual results or events to differ materially, or otherwise, from those in the
forward-looking statements. We have based such forward-looking statements on
our current expectations, assumptions, estimates and projections, and therefore
there can be no assurance that any forward-looking statement contained herein,
or otherwise made by the Company, will prove to be accurate. The Company
assumes no obligation to update the forward-looking statements.
The Company has a relatively
limited operating history compared to others in the same business and is
operating in a rapidly changing industry environment, and its ability to
predict results or the actual effects of future plans or strategies, based on
historical results or trends or otherwise, is inherently uncertain. While we
believe that these forward-looking statements are reasonable, they are merely
predictions or illustrations of potential outcomes, and they involve known and
unknown risks and uncertainties, many beyond our control, that are likely to
cause actual results, performance, or achievements to be materially different
from those expressed or implied by such forward-looking statements. Factors
that could have a material adverse effect on the operations and future prospects
of the Company on a condensed basis include those factors discussed under Item
1A Risk Factors and Item 7, Managements Discussion and Analysis of
Financial Conditions and Results of Operations in the Annual Report on Form 10-K
filed on April 15, 2009 by the Company. These factors that could have a
material adverse effect on the Company include, but are not limited to, the
following:
·
|
|
A downturn in the
market for, or supply of, our core products and services, could reduce our
revenue and gross profit margin by placing downward pressure on prices and
sales volume, and we may not accurately anticipate changing supply and demand
conditions;
|
|
|
|
·
|
|
We have a limited
backlog, or pipeline, of product and services orders, and we do not control
the manufacturing of the core products we distribute and sell, exposing our
future revenues and profits to fluctuations and risks of supply interruptions
or rapid declines in demand;
|
|
|
|
·
|
|
We have recurring
quarterly and annual losses and continuing negative cash flow, which may
continue, potentially requiring us to either raise additional capital or
reduce costs relative to gross margins;
|
|
|
|
·
|
|
We may not be able to
raise necessary additional capital, and may not be able to reduce costs
sufficiently to reverse our negative cash flow, absent additional capital;
|
|
|
|
·
|
|
If we are successful in
raising additional capital, it will likely dilute current shareholders
ownership;
|
|
|
|
·
|
|
We may not be able to effectively contain corporate
overhead and other costs, including the costs of operating a public company,
relative to our profits and cash; and
|
|
|
|
·
|
|
Changes in laws or regulations, or regulatory
practices, in the United States and internationally, may increase our costs
or may prohibit continued operations or entry into some areas of business.
|
20
Table of Contents
Overview
of Business
A detailed review of the
Companys business is provided in Item 1, Description of Business in our
Annual Report on Form 10-K, filed on April 15, 2009, which is incorporated
herein by reference.
In the third quarter of 2009 the Company completed the
setup of a Mexican business location, at Paseo de La Presa de la Olla,
Guanajuato, GTO, Mexico 36000, in order to better meet the challenges of
expanding business in Central and South America. To promote and expand its
Mexican business interests, the Company completed the certification and
organization of two fully-consolidated Mexican corporations, Wahid y Asociados,
SA de CV, and NWB Technologies de Mexico S de RL de CV, located at the above
Guanajuato address, which completed the process of getting licensed to do
business in Leon, Mexico effective July 7, 2009.
On October 5, 2009, New World Brands, Inc.
executed an asset purchase agreement, with an effective date of September 1,
2009, in which the Company agreed to acquire certain assets of Aeropointe
Partners Inc., a Texas Corporation. As part of the acquisition, the Company
agreed to integrate five of Aeropointes staff members including officers and
employees. Mr. R. Steven Bell, the CEO of Aeropointe, has been integrated
into the Company in the position of President and Mr. Shawn Lane, the
President of Aeropointe, has become the COO of the Company. For further
information on this asset purchase agreement, see the Companys Current Report
on Form 8-K filed with the SEC on October 9, 2009.
The
Mexican subsidiaries and Aeropointe
acquisition will be reported as part of NWBs carrier division, NWB Telecom.
The Mexican subsidiaries include a network operations center for our carrier
division, and facilitate communication with NWBs Spanish-speaking carrier
customers. The Aeropointe acquisition is intended to provide more capacity and
traffic on our carrier routes.
Risks attendant to entering the prepaid
calling-card business.
We believe success in
providing our calling card services is dependent on our ability to provide low
rates and reliable service to our customers, while efficiently distributing our
calling cards to a geographically and culturally diverse customer base. The
calling card industry is notable for its ease of market entry. As calling rates
continue to decline and competition increases, thereby reducing the influence
of pricing as a differentiating competitive factor, we intend to compete on the
basis of our call quality, customer service and distribution capabilities.
We compete with other
providers of calling cards as well as established carriers and numerous small
or regional operators, and with providers of alternative telecommunications
services. Many of the largest telecommunications providers, including AT&T,
Verizon, Ibasis and STi Prepaid, currently market prepaid calling cards, which in
certain cases may compete with our cards. We believe that our interconnect and
termination agreements, network infrastructure and least-cost-routing system
provide us with the ability to offer low-cost, high quality services, while our
distribution network provides us with access to customers, and that these
factors represent competitive advantages. However, as some of our competitors
are substantially larger and have significantly greater financial, technical,
engineering, personnel and marketing resources, longer operating histories,
greater name recognition and larger customer bases than we do. The use by these
competitors of their resources in the prepaid calling card market could
significantly impact our ability to compete against them successfully. As these
competitors may be capable of providing comparable call quality and service
levels, our ability to maintain and/or to capture additional market share will
remain dependent upon our ability to continue to provide competitively priced
services.
In addition, we often
notice that many of the competitors in the prepaid calling card industry,
particularly in the United States, significantly overstate the number of
minutes that are actually delivered by their cards. These competitors have been
misleading calling card customers, and as a result, negatively impacting the
market share of Companies that refuse to engage in unfair business practices,
resulting in a reduction of our revenues and profits. We are uncertain, even
with the potential of fair competition, whether we will be able to grow our
prepaid calling card revenues in this environment. On the other hand, the
possibility exists that customers will appreciate the value of prepaid calling
cards that actually deliver the minutes they promise, and will grow brand
loyalty to Companies that can provide them with dependable products and
services.
The continued
growth of the use of wireless services, largely due to lower pricing of such
services, has adversely affected the sales of prepaid calling cards as
customers migrate from using prepaid calling cards to wireless services. We
expect pricing of wireless services to continue to decrease, resulting in
increased substitution of prepaid calling cards by wireless services and
increased pricing pressure on prepaid calling cards.
21
Table of Contents
We believe that recent
immigration trends in the United States may be decreasing our potential
customer base. Since immigrants are a target customer base for our prepaid
calling card business, their reduced number may have adversely affected our
revenues and profitability in that business. If these immigration trends
continue or accelerate, our calling card revenues and profitability may be
adversely affected.
If our competitors begin
to utilize their greater resources or operate at lower levels of profitability
in order to more aggressively market their products and services, or continue
to mislead calling card customers, this portion of our business could find
growth difficult
We may
not be able to obtain sufficient or cost-effective termination capacity to
particular destinations.
Most of our
telecommunications traffic is terminated through third-party providers. In
order to support our minutes-of-use demands and geographic expansion, we may
need to obtain additional termination capacity or destinations. We may not be
able to obtain sufficient termination capacity from high-quality carriers to
particular destinations or may have to pay significant amounts to obtain such
capacity. This could result in our not being able to support our minutes-of-use
demands or in a higher cost-per-minute to particular destinations, which could
adversely affect our revenues and margins.
The
termination of our carrier agreements with foreign partners or our inability to
enter into carrier agreements in the future could materially and adversely
affect our ability to compete, which could reduce our revenues and profits.
We rely upon our carrier
agreements with foreign partners in order to provide our telecommunications
services to our customers. These carrier agreements are for finite terms and,
therefore, there can be no guarantee that these agreements will be renewed at
all or on favorable terms to us. Our ability to compete would be adversely
affected if our carrier agreements were terminated, our suppliers capacity were
diminished or we were unable to enter into carrier agreements in the future to
provide our telecommunications services to our customers, which could result in
a reduction of our revenues and profits.
Our
customers, particularly our wholesale carrier customers, could experience
financial difficulties, which could adversely affect our revenues and
profitability if we experience difficulties in collecting our receivables.
As a provider of
international long distance services, we depend upon sales of transmission and
termination of traffic to other long distance providers and the collection of
receivables from these customers. The wholesale market continues to feature
many smaller, less financially stable companies. If continued weakness in the
telecommunications industry reduces our ability to collect our accounts
receivable from our major customers, particularly our wholesale carrier
customers, this may substantially affect our operations. Moreover, the after
effects of the collapse of the mortgage-backed credit markets may affect our
customers access to liquidity and impair our ability to collect on
receivables.
Our
revenues could suffer if our distributors and sales representatives fail to
effectively market and distribute our prepaid calling card products and other
services.
We currently rely on our
distributors and representatives for marketing and distribution of our prepaid
calling card products and other services. In foreign countries, we are
dependent upon our distributors and independent sales representatives, many of
which also sell services or products of other companies. As a result, we cannot
control whether these foreign distributors and sales representatives will
devote sufficient efforts to selling our services. In addition, we may not
succeed in finding capable retailers and sales representatives in new markets
that we may enter. If our distributors or sales representatives fail to
effectively market or distribute our prepaid calling card products and other
services, our ability to generate revenues and grow our customer base could be
substantially impaired
Regulation
of Telecom in the United States
Telecommunications
services are subject to government regulation at both the federal and state
levels in the United States. Any violations of the regulations may subject us
to enforcement actions, including interest and penalties. The FCC has
jurisdiction over all telecommunications common carriers to the extent they
provide interstate or international communications services. Each state
regulatory
22
Table of Contents
commission has
jurisdiction over the same carriers with respect to their provision of local
and intrastate communications services. Local governments often indirectly
regulate aspects of our communications business by imposing zoning
requirements, taxes, permit or right-of-way procedures or franchise fees.
Significant changes to the applicable laws or regulations imposed by any of
these regulators could have a material adverse effect on our business,
operating results and financial condition.
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 nine month
periods ended September 30, 2009 and 2008, were as follows:
Revenue
|
|
|
|
|
|
|
|
Company-Wide
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
5,080,950
|
|
$
|
2,013,839
|
|
-60.36
|
%
|
June 30
|
|
$
|
6,603,387
|
|
1,977,791
|
|
-70.05
|
%
|
September 30
|
|
$
|
5,818,906
|
|
3,717,316
|
|
-36.12
|
%
|
December 31
|
|
$
|
2,776,933
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
17,503,243
|
|
$
|
7,708,946
|
|
-55.96
|
%
|
Gross Profit
|
|
|
|
|
|
|
|
Company-Wide
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
704,391
|
|
$
|
(124,176
|
)
|
-117.63
|
%
|
June 30
|
|
$
|
1,324,944
|
|
233,041
|
|
-82.41
|
%
|
September 30
|
|
$
|
1,994,009
|
|
652,692
|
|
-67.27
|
%
|
December 31
|
|
$
|
226,092
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
4,023,344
|
|
$
|
761,557
|
|
-81.07
|
%
|
Gross Profit Margin
|
|
|
|
|
|
|
|
Company-Wide
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
13.86
|
%
|
-6.17
|
%
|
-144.52
|
%
|
June 30
|
|
20.06
|
%
|
11.78
|
%
|
-41.28
|
%
|
September 30
|
|
34.27
|
%
|
17.56
|
%
|
-48.76
|
%
|
December 31
|
|
8.14
|
%
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
22.99
|
%
|
9.88
|
%
|
-57.02
|
%
|
Company-wide revenue and
gross profits over the last four quarters ending September 30, 2009 show the
decline due to economic conditions and the slow recovery of financial
performance over the last quarter as compared with earlier quarters in 2009.
We note that the
following percentages are based upon pro forma restated unaudited financial
statements for the three and nine month periods ended September 30, 2009 and
2008.
|
|
NWB Networks
|
|
NWB Telecom
|
|
Revenue
|
|
as Portion of Company-Wide
|
|
as Portion of Company-Wide
|
|
for 3 Months Ending and
|
|
Revenue
|
|
Revenue
|
|
Year-to-Date
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
March 31
|
|
40.20
|
%
|
34.38
|
%
|
59.80
|
%
|
65.62
|
%
|
June 30
|
|
40.19
|
%
|
43.83
|
%
|
59.81
|
%
|
56.17
|
%
|
September 30
|
|
26.39
|
%
|
51.79
|
%
|
73.61
|
%
|
48.21
|
%
|
December 31
|
|
33.46
|
%
|
n/a
|
|
66.54
|
%
|
n/a
|
|
Year-to-Date September 30
|
|
35.60
|
%
|
45.20
|
%
|
64.40
|
%
|
54.80
|
%
|
|
|
NWB Networks
|
|
NWB Telecom
|
|
Gross Profit
|
|
as Portion
of Company-Wide
|
|
as Portion
of Company-Wide
|
|
for 3 Months Ending and
|
|
Gross
Profit
|
|
Gross
Profit
|
|
Year-to-Date
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
March 31
|
|
53.12
|
%
|
195.53
|
%
|
46.88
|
%
|
-295.53
|
%
|
June 30
|
|
57.18
|
%
|
134.27
|
%
|
42.82
|
%
|
-34.27
|
%
|
September 30
|
|
30.29
|
%
|
61.35
|
%
|
69.71
|
%
|
38.65
|
%
|
December 31
|
|
170.17
|
%
|
n/a
|
|
-70.17
|
%
|
n/a
|
|
Year-to-Date September 30
|
|
43.14
|
%
|
125.55
|
%
|
56.86
|
%
|
-25.55
|
%
|
23
Table of Contents
The discussion below of
gross profit on a per-business line or divisional basis provides additional
information regarding each lines performance.
NWB
Networks division revenue and gross profit
.
NWB Networks, our VoIP
and other telephony product distribution and resale business, 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 nine month
periods ended September 30, 2009 and 2008 were as follows:
Revenue
|
|
|
|
|
|
|
|
NWB Networks
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
2,042,401
|
|
$
|
692,332
|
|
-66.10
|
%
|
June 30
|
|
$
|
2,653,742
|
|
866,816
|
|
-67.34
|
%
|
September 30
|
|
$
|
1,535,641
|
|
1,925,096
|
|
25.36
|
%
|
December 31
|
|
$
|
929,243
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
6,231,784
|
|
$
|
3,484,244
|
|
-44.09
|
%
|
Gross Profit
|
|
|
|
|
|
|
|
NWB Networks
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
374,175
|
|
$
|
242,797
|
|
-35.11
|
%
|
June 30
|
|
$
|
757,605
|
|
312,906
|
|
-58.70
|
%
|
September 30
|
|
$
|
603,915
|
|
400,404
|
|
-33.70
|
%
|
December 31
|
|
$
|
384,751
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
1,735,695
|
|
$
|
956,107
|
|
-44.92
|
%
|
Gross Profit Margin
|
|
|
|
|
|
|
|
NWB Networks
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
18.32
|
%
|
35.07
|
%
|
91.43
|
%
|
June 30
|
|
28.55
|
%
|
36.10
|
%
|
26.44
|
%
|
September 30
|
|
39.33
|
%
|
20.80
|
%
|
-47.11
|
%
|
December 31
|
|
41.40
|
%
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
27.85
|
%
|
27.44
|
%
|
-1.47
|
%
|
Our relationship with
TELES AG, including our geographic exclusivity, has provided an opportunity for
the Company to sell these products at an attractive margin and to build a
support and service network for end-users and VARs. As our relationship with
TELES has matured, other advantageous developments have included greater input
by NWB into TELES product development. The Company, while maintaining its own
geographic exclusivity for the distribution of TELES equipment, may sell TELES
equipment anywhere in the world without restriction. We see the opportunity to
sell TELES equipment in other segments and markets being reflected in some of
the sales in the third quarter of 2009 results.
The Company has been
selling TELES equipment as an exclusive distributor since July, 2007, with the
TELES line having grown to become our dominant hardware product line. 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
the years of 2008 and 2009 on a quarterly and year-end basis.
24
Table of Contents
The method of accounting
for shipping in the cost of goods sold (
COGS
) for
the NWB Networks division has changed in Fiscal Year 2009. Previously, TELES
and non-TELES sales were accounted for as separate divisions within the
company, with all costs for NWB Networks specifically allocated to one product
line or the other. The two product lines of the NWB Networks division have been
combined for accounting purposes, with all costs, including the shipping costs,
a part of COGS, accounted for in aggregate. For all 2009 numbers in the tables
below, the shipping cost portion of COGS is divided between TELES and non-TELES
products proportionately to the revenue derived from each product line. The
values for 2008 are accounted using the method in use at that time, with
shipping costs allocated specifically to the cost of goods sold for either
TELES or non-TELES products.
|
|
2008
NWB Networks Revenue
|
|
2008
NWB Networks
Revenue
|
|
|
|
non-
TELES
|
|
TELES only
|
|
non-
TELES
|
|
TELES only
|
|
Q1
|
|
$
|
748,150
|
|
$
|
1,294,250
|
|
36.63
|
%
|
63.37
|
%
|
Q2
|
|
$
|
340,896
|
|
$
|
2,312,847
|
|
12.85
|
%
|
87.15
|
%
|
Q3
|
|
$
|
275,215
|
|
$
|
1,260,425
|
|
17.92
|
%
|
82.08
|
%
|
Q4
|
|
$
|
338,072
|
|
$
|
591,169
|
|
36.38
|
%
|
63.62
|
%
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,702,333
|
|
$
|
5,458,691
|
|
23.77
|
%
|
76.23
|
%
|
|
|
2009
NWB Networks
Revenue
|
|
2009
NWB Networks
Revenue
|
|
|
|
non-
TELES
|
|
TELES only
|
|
non-
TELES
|
|
TELES only
|
|
Q1
|
|
$
|
70,647
|
|
$
|
621,686
|
|
10.20
|
%
|
89.80
|
%
|
Q2
|
|
45,869
|
|
820,946
|
|
5.29
|
%
|
94.71
|
%
|
Q3
|
|
76,268
|
|
1,848,828
|
|
3.96
|
%
|
96.04
|
%
|
Q4
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
192,784
|
|
$
|
3,291,460
|
|
5.53
|
%
|
94.47
|
%
|
|
|
2008
NWB Networks
Gross Profit
|
|
2008
NWB Networks Gross
Profit Margin
|
|
|
|
non-
TELES
|
|
TELES only
|
|
non-
TELES
|
|
TELES only
|
|
Q1
|
|
$
|
15,342
|
|
$
|
358,832
|
|
4.10
|
%
|
95.90
|
%
|
Q2
|
|
$
|
26,962
|
|
$
|
730,643
|
|
3.56
|
%
|
96.44
|
%
|
Q3
|
|
$
|
28,574
|
|
$
|
575,340
|
|
4.73
|
%
|
95.27
|
%
|
Q4
|
|
$
|
116,139
|
|
$
|
268,611
|
|
30.19
|
%
|
69.81
|
%
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
187,017
|
|
$
|
1,933,426
|
|
8.82
|
%
|
91.18
|
%
|
|
|
2009
NWB Networks
Gross Profit
|
|
2009
NWB Networks
Gross Profit Margin
|
|
|
|
non-
TELES
|
|
TELES only
|
|
non-
TELES
|
|
TELES only
|
|
Q1
|
|
$
|
10,653
|
|
$
|
232,144
|
|
4.39
|
%
|
95.61
|
%
|
Q2
|
|
33,947
|
|
278,959
|
|
10.85
|
%
|
89.15
|
%
|
Q3
|
|
6,354
|
|
394,050
|
|
1.59
|
%
|
98.41
|
%
|
Q4
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
50,954
|
|
$
|
905,153
|
|
5.33
|
%
|
94.67
|
%
|
The majority of our TELES
equipment sales during the first three quarters of 2009 have been of TELESs
mobile fixed wireless application gateways, marketed under the iGate and vGate
brands. TELES mobile gateways provide a consolidated mobile, public switched
telephone network (PSTN) and VoIP gateway solution to carriers and corporate
network customers seeking to connect their private branch exchange (PBX) to
mobile and VoIP services, and can be added to integrated services digital
network (ISDN) and internet protocol (IP) environments for least cost routing
and other advanced call routing and rerouting applications. Demand for the
iGate and vGate brands did slow along with the demand for TELES equipment in
general in the last two quarters of 2008 and first two quarters of 2009 due in
part to the broad decline in economic conditions, but has substantially
recovered. Sales for this equipment in the third quarter of this year were more
than double what they were in the first quarter of the year.
All products purchased from TELES are per contract
quoted in the base currency used by TELES, the Euro. New World Brands sells all
goods to its customers in U.S. Dollars. As a result, we have a certain exposure
to currency risk to the extent the relative value of the U.S. Dollar drops
compared to the Euro. Despite exchange rate volatility between the Euro and the
U.S. Dollar throughout 2008, the exchange rate at the end of the year was
similar to what it was at the beginning of the year. The dollar has lost value
as of the end of the third quarter, declining from $1.39 Dollars to the Euro on
at the beginning of the year to $1.46 Dollars to the Euro as of the end of the
third quarter of this year. Increases in our exposure to currency risk due to
the growth of our Euro-denominated inventory has been partially offset by
payment agreements between NWB and TELES designed to mitigate risk. However, if
we are successful in our efforts to increase TELES sales, and as we increase
our Euro-based inventory, our exposure to currency risk will increase.
25
Table of
Contents
In the three month period
ending September 30, 2009, NWB Networks had two significant customers, each
accounting for more than 10% of revenue for the division, as well as for the
Company as a whole. The top ten customers of the NWB Networks division
accounted for the vast majority of revenue generated by the division as a
whole. The total is summarized in the table below. Although we continue to do
business with these customers, and have no reason to believe we will cease
doing business with any of them in the foreseeable future, the loss of any
large customer could adversely impact our results of operations if the revenue
stream were not replaced by other sales.
3 Months Ended
|
|
Two
|
|
September 30, 2009
|
|
Significant Customers
|
|
Revenue
|
|
$
|
1,468,247
|
|
Revenue as Portion of NWB Networks Division
Revenue
|
|
76.27
|
%
|
Revenue as Portion of Company-Wide Revenue
|
|
40.90
|
%
|
|
|
|
|
|
NWB
Telecom division revenue, gross profit and gross profit margin
.
Revenue and cost of goods
for the NWB Telecom division (wholesale VoIP services) for the three and nine
month periods ended September 30, 2009 and 2008 were as follows:
Revenue
|
|
|
|
|
|
|
|
NWB Telecom
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
3,038,549
|
|
$
|
1,321,507
|
|
-56.51
|
%
|
June 30
|
|
$
|
3,949,644
|
|
1,110,975
|
|
-71.87
|
%
|
September 30
|
|
$
|
4,283,265
|
|
1,792,220
|
|
-58.16
|
%
|
December 31
|
|
$
|
1,847,690
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
11,271,458
|
|
$
|
4,224,702
|
|
-62.52
|
%
|
Gross Profit
|
|
|
|
|
|
|
|
NWB Telecom
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
330,217
|
|
$
|
(366,972
|
)
|
-211.13
|
%
|
June 30
|
|
$
|
567,339
|
|
(79,866
|
)
|
-114.08
|
%
|
September 30
|
|
$
|
1,390,094
|
|
252,288
|
|
-81.85
|
%
|
December 31
|
|
$
|
(158,659
|
)
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
2,287,650
|
|
$
|
(194,550
|
)
|
-108.50
|
%
|
Gross Profit Margin
|
|
|
|
|
|
|
|
NWB Telecom
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
10.87
|
%
|
-27.77
|
%
|
-355.47
|
%
|
June 30
|
|
14.36
|
%
|
-7.19
|
%
|
-150.06
|
%
|
September 30
|
|
32.45
|
%
|
14.08
|
%
|
-56.61
|
%
|
December 31
|
|
-8.59
|
%
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
20.30
|
%
|
-4.61
|
%
|
-122.71
|
%
|
NWB Telecoms business model includes a portion of
cost that is fixed cost and a portion of cost that is variable with the amount
of traffic we terminate. When we are able to terminate a large volume of
traffic, the increase in gross margin results from the portion of cost that is
fixed regardless of volume, and we benefit as in the third quarter of 2008.
When the volume drops, the variable profit declines but the fixed costs remain
and we suffer a significant reduction in gross profit, as is seen in the last
quarter of 2008 and the first quarter of 2009. In the third quarter of 2009 the
financial performance of NWB Telecom improved significantly from the previous
quarter. While the division generated a positive margin in the third quarter of
2009, this has not yet been enough to overcome the negative margins of the
first two quarters of the year.
The Company faces challenges
in successfully establishing routes in Central and South America. These include
technical difficulties with the sophistication of the solution we intend to
implement, the increased reliance on a limited number of vendors and customers,
and a decrease in revenue and gross margin following a period of substantial
time and investment dedicated to new routes. Management believes these
challenges are being overcome, and that the positive margin generated by NWB
Telecom in the third quarter of 2009, as opposed to the first two quarters, is
a reflection of this.
26
Table of
Contents
During the third quarter
of 2009, NWB Telecom had one significant vendor accounting for over 10% of
total vendor expenses for the Company. There were two vendors accounting for
more than 10% of the division but not for the company as a whole. The following
table illustrates, for the third quarter of 2009, the revenue generated by the
resale of minutes purchased from this vendor, as well as the related gross
profit, in comparison to the associated revenue and gross profits of all other
NWB Telecom vendors, and all other Company vendors, during the period.
3 Months Ended
|
|
|
|
September 30, 2009
|
|
Significant Vendor
|
|
Revenue (generated from resale of service
purchased from vendor)
|
|
$
|
1,042,887
|
|
Gross Profit (earned from resale of service
purchased from vendor)
|
|
$
|
423,225
|
|
Revenue as Portion of NWB Telecom Division Revenue
|
|
58.19
|
%
|
Revenue as Portion of Company-Wide Revenue
|
|
28.05
|
%
|
Gross Profit as Portion of NWB Telecom Division
Profit
|
|
167.75
|
%
|
Gross Profit as Portion of Company-Wide Profit
|
|
55.57
|
%
|
We do not rely
upon or maintain any long term supply or termination service contracts, and all
of our vendor agreements are terminable at will by either party without notice.
In addition, our suppliers rely upon short term contracts or arrangements with
other local service providers, including tier 1 service providers, to supply
termination routes; these contracts or arrangements may also be terminated upon
short notice. Therefore, our VoIP service business is subject to supply
disruptions that are not within our control and that could have a material
adverse effect upon the NWB Telecom divisions financial results. In
fact, our NWB Telecom division has experienced loss or interruption of key
suppliers, including suppliers accounting for over 10% of NWB Telecom vendor
expenses during the three quarters of 2009, and the loss or interruption
substantially negatively impacted NWB Telecoms revenue and gross profit.
In addition,
critical issues concerning the commercial use of the Internet, including
security, cost, ease of use and access, intellectual property ownership, and
other legal liability issues, remain unresolved and could materially and
adversely affect both the growth of Internet usage generally and our business
in particular. Finally, we will not be able to increase our VoIP service
traffic if Internet infrastructure does not continue to expand to more
locations worldwide, particularly into emerging markets and developing nations.
The risk of negative impact on our gross profit due to supply interruptions is
increased by our recent reliance on a small number of vendors offering
relatively high-margin VoIP termination services in foreign countries.
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 a 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, thereby negatively
impacting our overall profitability in the near term.
From time to time we
prepay certain vendors for a portion of future services. In the event
that our vendor is unable to supply the termination services for which we have
prepaid, we are unlikely to be able to recover all, if any, of such
prepayments. As we receive the termination services for which we have
prepaid, of if we lose the ability to receive those services, we apply our
related prepaid expenses to the cost of goods sold for the NWB Telecom
division, thereby directly impacting our gross profits for the division.
We derive a significant amount of our revenue from a
relatively small number of customers. If we were to lose one or more of these
customers, and the business were not replaced, it could have an adverse impact
on our results of operations and financial condition. Each of three customers
accounted for 10% or more revenues for NWB Telecom, whereas two of those customers
each accounted for at least 10% the revenue for the Company overall, during the
three month period ending September 30, 2009, as outlined in the table
below.
3 Months Ended
|
|
Two
|
|
September 30, 2009
|
|
Significant Customers
|
|
Revenue (generated from resale of service to
customers)
|
|
$
|
1,234,074
|
|
Revenue as Portion of NWB Telecom Division Revenue
|
|
68.86
|
%
|
Revenue as Portion of Company-Wide Revenue
|
|
31.93
|
%
|
|
|
|
|
|
Furthermore, our top ten
customers accounted for the vast majority of NWB Telecom revenues during the
three month period ending September 30, 2009. Although we continue to do
business with these clients, and have no reason to believe we will cease doing
business with any of them in the foreseeable future, the loss of any large
client could adversely impact our results of operations if the revenue stream
were not replaced by other sales.
27
Table of
Contents
These customers are 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 these customers is extremely price-competitive, and we can have no assurance
that if we are able to continue to provide services to these customers, we will
continue to earn our current level of gross profits. Loss of these significant
customers 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.
NWB Retail
division revenue, gross profit and gross profit margin
.
On September 30,
2009, the company created a new division, NWB Retail, to handle services that
will be made available to the general public. This division was not yet active
on that date, the only day during the third quarter in which the division was
in existence.
Revenue
|
|
|
|
|
|
|
|
NWB Retail
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
n/a
|
|
$
|
n/a
|
|
n/a
|
|
June 30
|
|
$
|
n/a
|
|
n/a
|
|
n/a
|
|
September 30
|
|
$
|
n/a
|
|
|
|
n/a
|
|
December 31
|
|
$
|
n/a
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
n/a
|
|
$
|
|
|
n/a
|
|
Gross Profit
|
|
|
|
|
|
|
|
NWB Retail
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
n/a
|
|
$
|
n/a
|
|
n/a
|
|
June 30
|
|
$
|
n/a
|
|
n/a
|
|
n/a
|
|
September 30
|
|
$
|
n/a
|
|
|
|
n/a
|
|
December 31
|
|
$
|
n/a
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
n/a
|
|
$
|
|
|
n/a
|
|
Gross Profit Margin
|
|
|
|
|
|
|
|
NWB Retail
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
n/a
|
|
n/a
|
|
n/a
|
|
June 30
|
|
n/a
|
|
n/a
|
|
n/a
|
|
September 30
|
|
n/a
|
|
0.00
|
%
|
n/a
|
|
December 31
|
|
n/a
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
n/a
|
|
0.00
|
%
|
n/a
|
|
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, 2008, in the Companys Form 10-K filed with the SEC on April 15,
2009, under Item 7, Managements Discussion and Analysis of Financial
Conditions and Results of Operations. The following presentation is not
intended to substitute for any other portion of this Item 2.
2009
|
|
Revenue
Company
Wide
|
|
Revenue
NWB
Telecom
|
|
% of
Company-
Wide
Revenue
|
|
Revenue
NWB
Networks
(non-TELES)
|
|
% of
Company-
Wide
Revenue
|
|
Revenue
NWB
Networks
(TELES
only)
|
|
% of
Company-
Wide
Revenue
|
|
Revenue
NWB
Retail
|
|
% of
Company-
Wide
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
2,013,839
|
|
$
|
1,321,507
|
|
65.62
|
%
|
$
|
70,647
|
|
3.51
|
%
|
$
|
621,686
|
|
30.87
|
%
|
$
|
n/a
|
|
n/a
|
|
Q2
|
|
1,977,791
|
|
1,110,975
|
|
56.17
|
%
|
45,869
|
|
2.32
|
%
|
820,946
|
|
41.51
|
%
|
n/a
|
|
n/a
|
|
Q3
|
|
3,717,316
|
|
1,792,220
|
|
48.21
|
%
|
76,268
|
|
2.05
|
%
|
1,848,828
|
|
49.74
|
%
|
|
|
0.00
|
%
|
Q4
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
7,708,946
|
|
$
|
4,224,702
|
|
54.80
|
%
|
$
|
192,784
|
|
2.50
|
%
|
$
|
3,291,460
|
|
42.70
|
%
|
$
|
|
|
0.00
|
%
|
28
Table of
Contents
2009
|
|
Gross
Profit
Company
Wide
|
|
Gross
Profit
NWB
Telecom
|
|
% of
Company-
Wide
Gross
Profit
|
|
Gross
Profit NWB
Networks
(non-TELES)
|
|
% of
Company-
Wide
Gross
Profit
|
|
Gross
Profit NWB
Networks
(TELES
only)
|
|
% of
Company-
Wide
Gross
Profit
|
|
Gross
Profit
NWB
Retail
|
|
% of
Company-
Wide
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
$
|
(124,176
|
)
|
$
|
(366,972
|
)
|
-295.53
|
%
|
$
|
10,653
|
|
-8.58
|
%
|
$
|
232,144
|
|
-186.95
|
%
|
$
|
n/a
|
|
n/a
|
|
Q2
|
|
233,041
|
|
(79,865
|
)
|
-34.27
|
%
|
33,947
|
|
14.57
|
%
|
278,959
|
|
119.70
|
%
|
n/a
|
|
n/a
|
|
Q3
|
|
652,692
|
|
252,288
|
|
38.65
|
%
|
6,354
|
|
0.97
|
%
|
394,050
|
|
60.37
|
%
|
0
|
|
0.00
|
%
|
Q4
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
761,557
|
|
$
|
(194,550
|
)
|
-25.55
|
%
|
$
|
50,954
|
|
6.69
|
%
|
$
|
905,153
|
|
118.86
|
%
|
$
|
0
|
|
0.00
|
%
|
2009
|
|
Gross Profit Margin
Company Wide
|
|
Gross Profit Margin
NWB Telecom
|
|
Gross Profit Margin
NWB Networks
(non-TELES)
|
|
Gross Profit Margin
(TELES only)
|
|
Gross Profit Margin
NWB Telecom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
-6.17
|
%
|
-27.77
|
%
|
15.08
|
%
|
37.34
|
%
|
n/a
|
|
Q2
|
|
11.78
|
%
|
-7.19
|
%
|
74.01
|
%
|
33.98
|
%
|
n/a
|
|
Q3
|
|
17.56
|
%
|
19.09
|
%
|
8.33
|
%
|
21.31
|
%
|
0.00
|
%
|
Q4
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
9.88
|
%
|
-4.61
|
%
|
26.43
|
%
|
27.50
|
%
|
0.00
|
%
|
Total
Company expenses
.
Total Company expenses
(sales, marketing, general and administrative) for the three and nine month
periods ended September 30, 2009 and 2008 were as follows:
Total Company Expenses
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
1,550,777
|
|
$
|
1,073,399
|
|
-30.78
|
%
|
June 30
|
|
$
|
1,529,051
|
|
1,020,626
|
|
-33.25
|
%
|
September 30
|
|
$
|
1,559,215
|
|
1,727,894
|
|
-10.82
|
%
|
December 31
|
|
$
|
1,203,874
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
4,639,043
|
|
$
|
3,821,919
|
|
-17.61
|
%
|
The substantial decrease
in total expenses for the comparative three month periods is due primarily to
decreases in bad debt write-offs, trade show and travel, legal and litigation,
payroll, and accounting services.
Interest
.
Interest (Company-Wide)
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
17,515
|
|
$
|
22,249
|
|
27.03
|
%
|
June 30
|
|
$
|
18,130
|
|
25,410
|
|
40.15
|
%
|
September 30
|
|
$
|
30,443
|
|
55,725
|
|
83.05
|
%
|
December 31
|
|
$
|
32,988
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
66,088
|
|
$
|
100,384
|
|
51.89
|
%
|
The fluctuations in
interest paid in 2008 were a function of changes in interest rates and
principal owed during the year. The reduction in interest paid in the three
quarters of 2009 is the result of a lowering of the interest rate.
Depreciation
and Amortization
Depreciation and Amortization (Company-Wide)
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
116,280
|
|
$
|
154,102
|
|
32.53
|
%
|
June 30
|
|
$
|
142,165
|
|
213,299
|
|
50.04
|
%
|
September 30
|
|
$
|
142,941
|
|
102,976
|
|
-27.96
|
%
|
December 31
|
|
$
|
113,927
|
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
401,386
|
|
$
|
470,377
|
|
17.19
|
%
|
29
Table of
Contents
Amortization and
depreciation for the Company increased in the first three quarters of 2009
reflecting increased capital investment during prior periods in switching,
routing, and tracking equipment and technology utilized by our NWB Telecom VoIP
service business. Our U.S.-based operations have a very limited amount invested
in software technology, and as a result, our current amortization is negligible
and not expected to increase in the near term.
Net
loss.
Throughout 2008 and the
first two quarters of 2009, the Company has experienced a high degree of
volatility in its revenue stream and gross profit numbers. The Company produced
a net profit for the three month period ended September 30, 2008.
The net profit reflected a substantial increase in high margin revenue
primarily in the NWB Telecom division, but also reflected continued relatively
high margin sales of TELES equipment and reduction in sales of low margin
legacy equipment in the NWB Networks division. This was followed by
challenges in both the NWB Networks and NWB Telecom divisions in the fourth
quarter of 2008 and the first two quarters of 2009. These challenges are the
result of current economic and technical issues in each of our divisions.
Management believes that
the most likely causes of losses in the fourth quarter of 2008 and the first
two quarters of 2009 are slowing product demand in the NWB Networks division
and supply interruptions in the NWB Telecom division. Demand for the NWB
Networks divisions key products slowed in the first quarter of 2009, most
likely due to poor performance of the economy overall and a restrictive credit
environment, before rebounding modestly in the second quarter of the year.
Revenue for NWB Networks declined in the first quarter of 2009, then increased
moderately in the second quarter as a result. It is not clear whether
economic growth and credit availability can rebound as quickly as they
deteriorated, and the outlook for the rest of 2009
remains
unclear. Supply of NWB Telecoms core services,
VoIP termination services in South and Central America and Mexico, has been
intermittent in the first half of 2009, with a substantial supply interruption
from key vendors in the first quarter of 2009 before improving in significantly
in the second quarter. The Company cannot predict its success in
continuing to secure replacement supply for lost vendor capacity.
The above factors
contributed to a net loss for the Company for both the year ended December 31,
2008 and the first three quarters of 2009. The Companys net losses for the
three and nine month periods ended September 30, 2009 and 2008 were as
follows:
Net Profit (Loss) (Company-Wide)
|
|
|
|
|
|
|
|
for 3 Months Ending and Year-to-Date
|
|
2008
|
|
2009
|
|
Change
|
|
March 31
|
|
$
|
(833,121
|
)
|
$
|
(1,176,605
|
)
|
-41.23
|
%
|
June 30
|
|
$
|
(141,900
|
)
|
(812,780
|
)
|
-472.78
|
%
|
September 30
|
|
$
|
436,882
|
|
(1,132,969
|
)
|
-359.33
|
%
|
December 31
|
|
$
|
(1,091,414
|
)
|
n/a
|
|
n/a
|
|
Year-to-Date September 30
|
|
$
|
(538,139
|
)
|
$
|
(3,122,354
|
)
|
-480.21
|
%
|
Following is a summary of
total company expenses, interest, amortization and depreciation, and resultant
net profit/loss, allocated among our two operating divisions, NWB Telecom and
NWB Networks, and showing NWB Networks results for non-TELES products and TELES
products only.
|
|
|
|
|
|
NWB
|
|
NWB
|
|
NWB
|
|
Jan 1 September 30, 2009
|
|
Company-Wide
|
|
Corporate
|
|
Telecom
|
|
Networks
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
761,557
|
|
n/a
|
|
$
|
(194,550
|
)
|
$
|
956,107
|
|
$
|
|
|
SG&A
Expense(1)
|
|
$
|
(3,821,919
|
)
|
$
|
(1,300,804
|
)
(2)
|
$
|
(1,297,759
|
)
|
$
|
(1,185,735
|
)
|
$
|
(37,531
|
)
|
Interest
|
|
$
|
(80,295
|
)
|
$
|
(57,397
|
)
|
$
|
(22,761
|
)
|
$
|
(138
|
)
|
$
|
|
|
Other
Income (Expense)
|
|
$
|
18,303
|
|
$
|
|
|
$
|
18,303
|
|
$
|
|
|
$
|
|
|
2009
Net Loss
|
|
$
|
(3,122,354
|
)
|
$
|
(1,358,290
|
)
|
$
|
(1,496,767
|
)
|
$
|
(229,766
|
)
|
$
|
(37,531
|
)
|
(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.
|
30
Table of
Contents
Liquidity
and Capital Resources
The
results of the companys activities over the course of the first half of 2009
have further weakened the Companys liquidity position as of September 30,
2009 as compared to its position on December 31, 2008. The following
comparison of the current assets and liabilities from September 30, 2009
to December 31, 2008 shows a decline in the ratio of current assets to
current liabilities (by 46.02%) and a decline in the cash position of the
company (by 23.72%), as well as a more significant decline in the quick ratio
(by 48.39%). The current cash position has improved from its low of
approximately $390,000 on March 31, 2009 by about 5.84%. However, this was primarily due to the
issuance of a note payable that will mature in December, 2009.
|
|
December 31,
2008
|
|
September 30,
2009
|
|
Cash
|
|
$
|
541,116
|
|
$
|
412,785
|
|
Current
Assets
|
|
$
|
4,311,544
|
|
$
|
5,566,320
|
|
Current
Liabilities
|
|
$
|
2,451,979
|
|
$
|
5,855,531
|
|
Current
Ratio (current assets to current liabilities)
|
|
1.76:1
|
|
0.95:1
|
|
Quick
Ratio (cash and accounts receivable to current liabilities)
|
|
0.62:1
|
|
0.35:1
|
|
Our current ratio and quick ratio declines are further
reflective of our weakening cash position. The company has not made
arrangements for any new sources of capital beyond the transaction with
Aeropointe (noted elsewhere) in this quarter. Our expectation is that we will
need to improve our cash position primarily through cost savings and revenue
growth.
New World Brands revenue numbers have seen a marked
increase in the current quarter over the two previous quarters. Sales are up
over 88% from the second quarter of 2009 but are still down about 36% from the
same quarter a year ago. The operating expenses to run the operations are less
than a year ago but the company is still running a cash flow deficit that is
being financed from accounts payable from our primary supplier.
We have started to stock up on inventory of product
from our primary supplier in the expectation that the opportunity for increased
sales in the fourth quarter and beyond would grow.
Our SGA costs for the quarter year over year are up
but primarily due to bad debt write downs. We continue to expect to collect on
all receivables but have taken a significant write down this quarter of
approximately $650,000 to address our evaluation of the collectability of
certain receivables. The remaining SGA costs are reduced by 30.87% otherwise
since the same quarter in 2008. A significant element of our cost reduction has
been to move certain technical and engineering services to our new operations
in Mexico. We feel that there is still room to obtain more cost efficiencies of
this nature in the fourth quarter and into 2010.
Other changes in our liquidity position arise from the
terms of payment with our suppliers on the NWB telecom division where the
requirements had been mostly prepaid. The terms of some of our key arrangements
with suppliers in the division have started to shift to postpaid. This may
allow us some latitude on growing revenue.
Our primary concern with respect to liquidity is to
generate a breakeven cashflow level of revenue to cover operating expenses on a
monthly basis and we have not reached that point as of the end of Q3 2009. We
have been on a downward trend in this area since 2008 and cannot guarantee that
future results will show the necessary improvements within the time
contstraints necessary to achieve gains.
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
Payment Obligations
|
|
Total
|
|
<1 Year
|
|
2-3 Years
|
|
4-5 Years
|
|
>5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Debt
|
|
$
|
2,309,688
|
|
$
|
254,834
|
|
$
|
2,054,854
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
$
|
126,956
|
|
$
|
54,031
|
|
$
|
102,701
|
|
$
|
6,363
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
$
|
228,040
|
|
$
|
67,486
|
|
$
|
118,954
|
|
$
|
41,600
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long Term Ob.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,664,684
|
|
$
|
376,351
|
|
$
|
2,276,509
|
|
$
|
47,963
|
|
$
|
|
|
31
Table of
Contents
Capital
expenditures.
In 2008 we increased our
investment in the switching and termination capacity of the NWB Telecom
division. We have continued this into 2009 with the emphasis being placed upon
not just increasing capacity but improving on the quality of the switching and
reporting as well as the robustness and redundancy of the telecom platform to
be able to handle unforeseen issues.
Capital
Expenditures of Continuing Operations of New World Brands
Comparative
Nine Month Ending September 30
|
|
2008
|
|
446,680
|
|
(92,966
|
)
|
353,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
308,671
|
|
(30,225
|
)
|
278,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change (%)
|
|
|
|
|
|
-21.28
|
%
|
The switching equipment will allow us to terminate
more long distance calls at a lower rate per call. We are working integrally
with TELES AG to use this as an opportunity to improve the performance of the TELES
equipment that the NWB Networks division stocks and sells. This area is one
where the synergy of our divisions is evident in the needs of one area
benefitting the product in the other.
New World Brands has
maintained this investment in telecom infrastructure as we feel that the
results will allow us to be able to grow faster as the economy recovers from
the most recent recession and we will able to do at a lower cost than a year
ago.
32
Table of
Contents
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4T. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
As
of the end of the period covered by this report and pursuant to Rule 13a-15(b) of
the Securities Exchange Act of 1934 (Exchange Act), the Corporations
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness and design of the Corporations
disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of
the Exchange Act). Based upon that evaluation, the Corporations Chief
Executive Officer and Chief Financial Officer concluded that the Corporations
disclosure controls and procedures were effective, as of the end of the period
covered by this report, in recording, processing, summarizing and reporting
information required to be disclosed by the Corporation in reports that it
files or submits under the Exchange Act, within the time periods specified in
the Securities and Exchange Commissions rules and forms.
Changes
in Internal Control over Finance Reporting
There
have been no changes in the Corporations internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) during
the quarter ended September 30, 2009 that have materially affected or are
reasonably likely to materially affect the Corporations internal control over
financial reporting.
33
Table of
Contents
PART II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
There have been no
material developments with respect to any of the legal proceedings described in
our previously filed Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
ITEM 1A.
RISK FACTORS
Factors that could have a
material adverse effect on the operations and future prospects of the Company
include those factors discussed in our Annual Report on Form 10-K, filed
with the SEC on April 15, 2009, under Item 1A, 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.
ISSUER
PURCHASES OF EQUITY SECURITIES
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
Not applicable.
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 (*)
|
|
|
|
33.1
|
|
Corrected Lock-up
Agreement (*)
|
34
Table of
Contents
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: November 16,2009
|
By:
|
/s/ M. David Kamrat
|
|
|
M. David Kamrat
|
|
|
Chief Executive Officer
and Chairman of the Board
|
|
|
|
|
|
|
Dated: November 16,2009
|
|
/s/ Shehryar Wahid
|
|
|
Shehryar Wahid
|
|
|
Chief Financial Officer
|
35
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