FORM 10-KSB/A
Amendment No. 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2007
COMMISSION FILE NUMBER 0-13215
WARP 9, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 30-0050402
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(State of Incorporation) (I.R.S. Employer Identification No.)
50 Castilian Dr. Suite 101, Santa Barbara, California 93117
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(Address of principal executive offices) (Zip Code)
(805) 964-3313
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Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK OTC
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
The aggregate market value of voting stock held by non-affiliates of
the registrant was approximately $1,510,681 as of September 25, 2007 (computed
by reference to the last sale price of a share of the registrant's Common Stock
on that date as reported by NASDAQ).
There were 245,282,938 shares outstanding of the registrant's Common
Stock as of September 25, 2007.
TABLE OF CONTENTS
10KSB/A
PART I.................................................................... 1
ITEM 1.................................................................... 1
ITEM 2.................................................................... 7
ITEM 3.................................................................... 7
ITEM 4.................................................................... 7
PART II................................................................... 8
ITEM 5.................................................................... 8
ITEM 6.................................................................... 9
ITEM 7.................................................................... 14
ITEM 8.................................................................... 33
ITEM 8A................................................................... 33
PART III.................................................................. 34
ITEM 9.................................................................... 34
ITEM 10................................................................... 36
ITEM 11................................................................... 39
ITEM 12................................................................... 39
ITEM 13................................................................... 39
ITEM 14................................................................... 41
SIGNATURES................................................................ 42
CERTIFICATIONS............................................................ 43
PART I
ITEM 1. BUSINESS
COMPANY HISTORY
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Warp 9, Inc. (the "Company") is a Nevada corporation formerly known as
Roaming Messenger, Inc., formerly known as Latinocare Management Corporation
("LMC"). On August 24, 2006, the Company's board of directors and majority
shareholders voted to change the name of the Company from Roaming Messenger,
Inc. to Warp 9, Inc. to reflect a new strategic plan of focusing primarily on
the business of the Company's wholly owned subsidiary, Warp 9, Inc., a Delaware
corporation that is an e-commerce Software-as-a-Service provider.
GENERAL
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We are a provider of e-commerce software platforms and services for the
catalog and retail industry. Our suite of software platforms is designed to help
online retailers maximize the Internet channel by using advanced technologies
for online catalogs, e-mail marketing campaigns, and interactive visual
merchandising. Offered on an outsourced and fully managed Software-as-a-Service
("SaaS") model, our products allow customers to focus on their core business,
rather than technical implementations. We also offer professional services to
our clients which include online catalog design, merchandizing and optimization,
order management, e-mail marketing campaign development, integration to third
party payment processing and fulfillment systems, analytics, custom reporting
and strategic consultation.
Our products and services allow our clients to focus on promoting and
marketing their brand, product line and website while leveraging the investments
we have made in technology and infrastructure to operate a dynamic online
catalog.
We charge our customers a monthly fee for using our e-commerce software
based on a Software-as-a-Service model. Unlike traditional software companies
that sell software on a perpetual license where quarterly and annual revenues
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are quite difficult to predict, our SaaS model spreads the collection of
contracts over several quarters or years and makes our revenues more predictable
for a longer period of time.
In September 2006, we ceased our Roaming Messenger business and reduced
our staff significantly in order to focus on our Warp 9 business. At that time
we temporarily licensed our Roaming Messenger technology and related business to
another company, but the license agreement was subsequently terminated and all
of the technology and related business was assigned back to us. Accordingly, we
currently own the Roaming Messenger technology and related business but have not
yet made a decision regarding whether or when we will restart that business,
seek a joint venture partner for it, or license it to a third party. As a result
of the termination of the prior license agreement, our ownership of the Roaming
Messenger technology and business was restored, and we retained 5,000,000 shares
of the licensee's common stock. The prior licensee is Carbon Sciences, Inc.
We have generated only minimal revenues from the licensing of Roaming
Messenger technology, and earned minimal revenues from that technology when we
operated the business before the exclusive license. To date, almost all of our
revenues are generated from Warp 9 e-commerce products and services.
INDUSTRY OVERVIEW
-----------------
GROWTH OF THE INTERNET AND E-COMMERCE
Online retailing and e-commerce sales continue to grow. The U.S.
Commerce Department reported that e-commerce sales in the fourth quarter of 2006
rose 24.6% compared to the fourth quarter of 2005, continuing a series of strong
quarterly growth reports. According to the 2007 State of Retailing Online report
from Forrester Research, online sales will rise 18 percent to $259.1 billion
this year alone, representing an increase of 159% from just 4 years ago.
According to the report, Americans last year spent more online on apparel,
accessories, and footwear than they did on computers for the first time ever.
This year 10 percent of all clothing sales are expected to occur online.
We believe there are a number of factors that are contributing to the
growth of e-commerce: (i) adoption of the Internet continues to increase
globally; (ii) broadband technology is becoming more widely available and the
adoption of broadband for Internet use is increasing at a rapid rate; (iii)
Internet users are increasingly comfortable with the process of buying products
online; (iv) the functionality of online stores continues to improve, a greater
range of payment options are available, and special offers and shipping
discounts are making online shopping more attractive; (v) businesses are placing
more emphasis on their online stores as they can reach a larger audience at a
comparatively lower cost than the methods used to drive traffic to traditional
brick-and-mortar retail stores or sell through printed paper catalogs. As a
result of these growth drivers, retailers and catalogers have begun to build
large, global customer bases that can be reached cost-effectively, potentially
resulting in higher sales and profitability.
OPPORTUNITIES FOR OUTSOURCED E-COMMERCE
We believe there are advantages to outsourced e-commerce that will
continue to make solutions like those of Warp 9 an attractive alternative to
building and maintaining this capability in-house. These advantages include: (i)
eliminating the substantial up-front and ongoing costs of computer hardware,
network infrastructure and specialized application software and personnel; (ii)
reducing the time it takes to get online stores live and productive; (iii)
shifting the ongoing technology, financial, regulatory and compliance risks to a
proven service provider; (iv) leveraging the expertise of an e-commerce service
provider to accelerate growth of an online business; and (v) allowing businesses
to focus on their specific core competencies.
TECHNOLOGY PRODUCTS
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We primarily offer two proprietary software systems to our customers -
e-commerce and e-mail marketing. It is our product development goal to create
other complementary systems to deliver a fully integrated platform for a
successful e-commerce operation.
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WARP 9 INTERNET COMMERCE SYSTEM (WARP 9 ICS)
The Warp 9 ICS is an enterprise-grade software system that enables
catalogers and retailers to expand their operation to the Internet with minimal
investment, overhead and risk. A business does not need to invest in new
hardware or software in order to utilize the Warp 9 ICS, because it is offered
as a fully managed online catalog system hosted in our Internet datacenter. With
a range of easy to use and highly customizable features for product presentation
as well store management, Warp 9 ICS satisfies many of the current and next
generation requirements of catalogers and retailers. We charge our customers a
recurring monthly fee for using the Warp 9 ICS software based on 12, 24 and 36
month term agreements. There are various pricing packages for Warp 9 ICS,
depending on the customer's desired level of scalability and reliability.
Warp 9 ICS is designed with a highly scalable enterprise architecture
that allows us to provide our customers with maximum performance and system
uptime. As our customer base or transaction volume grows, we simply add new
servers, CPUs, memory and bandwidth without substantial changes to the ICS
software. The high end version of the Warp 9 ICS offering operates on a cluster
of load balanced and fault-tolerant servers in our datacenter. If a server in
the cluster fails for any reason, the architecture shifts the traffic to other
available servers, thus minimizing downtime and disruption to our customers'
mission critical e-commerce websites.
WARP 9 E-MAIL MARKETING SYSTEM (WARP 9 EMS)
Warp 9 EMS is a web-based e-mail campaign and list management system
designed for high performance and reliability. EMS's sophisticated technology
will allow markets to send targeted e-mail campaigns that help grow, retain and
maximize the lifetime value of their customers. Through content personalization
and list segmentation, campaign efforts will result in higher response rates,
higher conversion rates and improved customer loyalty. E-mail marketing systems,
such as Warp 9 EMS, enable unprecedented response times that are not achievable
through traditional forms of direct marketing. Most ICS customers also purchase
EMS to complement their online commerce strategy.
PROFESSIONAL SERVICES
---------------------
Our customers are not technology companies and have varying internal
expertise in the areas of e-commerce, online marketing and web technologies. To
provide a complete solution to our customers, we also offer professional
services to help our customers maximize the use of our technology or other
online e-commerce technologies. Professional services include but not limited to
e-commerce web page template development, e-mail campaign content creation,
custom system configuration, graphics design, management of online marketing
programs, and integration to backend business systems.
SITE DESIGN AND DEVELOPMENT
We offer our clients site design services that utilize our experience
and expertise to create efficient and effective online catalogs powered by Warp
9 ICS. Our e-commerce solutions can be deployed quickly for our clients and
implemented in a variety of ways from simple shopping websites to complex
systems that integrate to backend inventory management systems. This is all done
by maximally using the feature set of Warp 9 ICS.
MERCHANDIZING AND PROMOTIONS DESIGN
The Warp 9 ICS technology platform supports a wide range of
merchandising activities. On an ongoing basis, we help our clients create
effective promotional activities, up-sell, cross-sell as well as promote
featured products during any phase of the shopping process. By doing so, our
professional services team continues to work with our clients to deliver
targeted offers designed to increase close ratios and average order size.
ADVANCED REPORTING AND ANALYTICS
Warp 9 ICS captures a great deal of information about sales and visitor
activities in its database. We provide our clients access to a collection of
standard and customizable reports as well as create any report they need for
their individual business making decisions. For example, we can create custom
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reports to help our clients analyze the average orders size of one design versus
and another. This enables our clients to track and analyze sales, products,
transactions and customer behavior to further refine their market strategies to
increase sales.
STRATEGIC MARKETING SERVICES
We offer a wide range of strategic marketing services designed to
increase customer acquisition, retention and lifetime value. Through a
combination of web analytics, analytics-based statistical testing and
optimization, our team of strategic marketing consultants develop, deliver and
manage programs such as paid search advertising, search engine optimization,
affiliate marketing, store optimization and e-mail optimization for our clients.
We believe our ability to capture and analyze integrated traffic and commerce
data enhances the value of our strategic marketing services as we can precisely
determine the effectiveness of specific marketing activities, website changes,
and other actions taken by our clients.
REVENUE MODEL
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We charge our customers a monthly fee, based on term contracts, to use
the Warp 9 ICS and Warp 9 EMS products under a Software-as-a-Service ("SaaS")
model. Unlike traditional software companies that sell software on a perpetual
license where quarterly and annual revenues are very difficult to predict, our
SaaS model spreads the collection of contracts over several quarters or years
and makes our revenues more predictable for a longer period of time.
The Company also generates revenue by offering professional web
production, graphic design, marketing, and other consulting services to support
Warp 9 products and generally to aid in the operations of our customers'
e-commerce activities.
BENEFITS TO CLIENTS
-------------------
Our complete solution of providing robust technology along with
complementary professional services delivers many benefits to our customers
which help drive our continual growth.
REDUCED TOTAL COST OF OWNERSHIP AND RISK
Utilizing our technology and services, businesses can dramatically
reduce or eliminate upfront and ongoing hardware, software, maintenance and
support costs associated with developing, customizing, deploying and upgrading
an in-house e-commerce solution. They can have a global e-commerce presence
without assuming the costs and risks of developing it themselves and take
immediate advantage of the investments we continually make in our e-commerce
systems and associated services. Our ongoing investment in the latest
technologies and e-commerce functionality helps ensure that our clients maintain
pace with industry advances.
REVENUE GROWTH
Through our team of services consultants, we help our clients grow
their businesses by applying our technology and experience to (i) increase the
acquisition, retention and lifetime value of new customers; (ii) extending their
businesses into new geographic markets; and (iii) expanding the visibility and
sales of their products through new online sales channels. We have developed
substantial expertise in online marketing and merchandising, which we apply to
help our clients increase traffic to their online stores, and improve order
close ratios, average order sizes and repeat purchases, all of which are
designed to generate higher revenues for our clients' businesses and greater
revenue for Warp 9.
DEPLOYMENT SPEED
Businesses can reduce the time required to develop an e-commerce
presence by utilizing our outsourced business model. Typically, a new client can
have an online store live much more quickly than if they decided to build, test
and deploy the e-commerce capability in-house. Once they are operational on our
platform, most clients can utilize our remote control toolset to make real-time
changes to their online store, allowing them to address issues and take
advantage of opportunities without technical assistance.
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FOCUS ON CORE COMPETENCY
By utilizing our outsourced e-commerce model, businesses can focus on
developing, marketing and selling their products rather than devoting time and
resources to building and maintaining an e-commerce infrastructure. Management
can focus their time on their core business while ensuring they have access to
the latest technologies, tools and expertise for running a successful e-commerce
operation.
SALES AND MARKETING
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Our objective is to be the leading provider of outsourced e-commerce
solutions for online catalog and retail operations. To achieve this objective,
we intend to enhance, promote and support the idea that Warp 9 is the complete
provider of the necessary technology platform and professional services to
effectively conduct a serious e-commerce operation.
We currently market our e-commerce solutions directly to clients and
prospective clients. We focus our efforts on generating awareness of the Warp 9
brand and capabilities, establishing our position as a leader in the online
catalog space. Our sales team calls on senior marketing and IT executives within
a retailer or catalog company who are looking to create or expand their
e-commerce operation. During the client sales process, our sales staff delivers
demonstrations, presentations, collateral material, return-on-investment
analyses, proposals and contracts.
A great deal of our new customers comes from word-of-mouth referrals to
due to the fact that Warp 9 has been in the industry for a number of years with
strong references and proven track record. Prospective clients quite often look
for us at tradeshows to learn more about Warp 9 based on the recommendations of
our existing customers. Word-of-mouth referrals have been very valuable to us
and we intend to continue nurturing our customer and industry relationship to
maximize these referrals.
While our success to date has been from direct sales efforts, we intend
to explore a channel partner strategy to expand our customer base quickly in the
fiscal quarters to come. Prospective channel partners include consultants and
designers in the catalog industry, as well as backend order fulfillment systems
providers. With the growing maturity of multi-channel e-commerce strategies,
many of the robust backend systems providers are looking for robust front-end
e-commerce system, like Warp 9 ICS, to deliver a fully integrated online/offline
solution to their clients.
COMPETITION
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The market for e-commerce solutions is highly competitive, especially
as it reaches maturity. We compete with e-commerce solutions that our customers
develop themselves or contract with third parties to develop. We also compete
with other outsourced e-commerce providers. The competition we encounter
includes:
o In-house development of e-commerce capabilities using tools or
applications from companies such as Art Technology Group, Broadvision,
and IBM;
o E-Commerce capabilities custom-developed by companies such as IBM
Global Services, and Accenture, Inc.;
o Other providers of outsourced e-commerce solutions, such as GSI
Commerce, Inc., Macrovision Corporation, asknet Inc. and eSellerate,
Inc.;
o Companies that provide technologies, services or products that support
a portion of the e-commerce process, such as payment processing,
including CyberSource Corporation and PayPal Corp.;
o High-traffic branded websites that generate a substantial portion of
their revenue from e-commerce and may offer or provide to others the
means to offer their products for sale, such as Amazon.com, Inc.; and
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o Web hosting, web services and infrastructure companies that offer
portions of our solution and are seeking to expand the range of their
offering, such as Network Solutions, LLC, Akamai Technologies, Inc.,
Yahoo! Inc., eBay Inc. and Hostopia.com Inc.
PATENTS AND PATENT APPLICATIONS
-------------------------------
Our intellectual property portfolio consists of the following patent and patent
applications, which primarily relate to the Roaming Messenger technology:
SELF CONTAINED BUSINESS TRANSACTION CAPSULES
A self-contained business transaction capsule, or eCapsule, is a small
electronic capsule that contains all the necessary data and logic to complete a
business transaction. The eCapsule is a "thin" and "lightweight" small
computer-readable file that is device independent. The eCapsule allows a
business, for example, to encapsulate an individual product or offer into an
intelligent object that is capable of completing entire transactions. The
eCapsule includes data about the product or service being provided, such as the
product price, a textual description, or options for the product or service (a
transaction description). The eCapsule also includes transaction logic or
business logic capable of completing the transaction, such as billing and
shipping information, order routing information, order status information,
shipping status information, and any other transaction rules necessary to
process the transaction. Moreover, the eCapsule is adapted to be broadcasted to,
and stored on, a portable electronic device, such as a mobile wireless-enabled
device, like a cellular telephone, a personal digital assistant (PDA) or a
laptop computer. This patent was issued on September 12, 2006.
A METHOD OF AND SYSTEM FOR TRANSMITTING A MOBILE AGENT FOR INSTRUCTION EXECUTION
This invention relates to transmitting a mobile agent for executing programmable
instructions and, more particularly, to transmitting a virtual machine in a
mobile agent to assist instruction execution. This patent application discloses
the actual system implementation of the Roaming Messenger platform using a
mobile agent approach. The application for this patent was filed on December 7,
2004.
A METHOD OF AND INSTRUCTION SET FOR EXECUTING OPERATIONS ON A DEVICE
This invention relates to executable instructions and, more particularly, to
instructions that are executable on a device that receives a mobile agent. This
patent application discloses the actual implementation of the Roaming Messenger
device engine and messenger instruction sets and modes of execution. The
application for this patent was filed on December 7, 2004.
UTILIZING MOBILE DEVICES AS A COMMUNICATION PROXY FOR NON-CONNECTED TERMINALS
This invention is a method and system in which terminals, appliances and
machines without dedicated Internet connections can complete Internet based
transactions by piggy-backing on the connection of the user's handheld device.
An example of an application of this invention is a vending machine that can
conduct electronic wireless payments without having an internal wireless device
that communicates with a server on the Internet. Existing solutions require the
vending machine to be equipped with an internal cell phone. Using this
invention, the vending machine can communicate with the consumer's handheld
device via Infrared or Bluetooth and simply uses the handheld device as the
conduit to the Internet for remote payment processing. This invention also
covers many other applications including secured doorways, factory floors and
smart data acquisition sensors. The application for this patent was filed on
February 21, 2002.
GOVERNMENT REGULATION
---------------------
We are subject to various federal, state, and local laws affecting
medical e-commerce and communication businesses. The Federal Trade Commission
and equivalent state agencies regulate advertising and representations made by
businesses in the sale of their products, which apply to us. We are also subject
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to government laws and regulations governing health, safety, working conditions,
employee relations, wrongful termination, wages, taxes and other matters
applicable to businesses in general.
EMPLOYEES
---------
As of June 30, 2007, we had thirteen full time employees, four of whom
are employed in administrative, marketing, and sales positions, and nine
technical employees employed in research, development, and technical product
maintenance positions.
All of our employees have executed agreements that impose nondisclosure
obligations on the employee and assign to us (to the extent permitted by
California law) all copyrights and other inventions created by the employee
during his employment with us. Additionally, we have a trade secret protection
policy in place that management believes to be adequate to protect our
intellectual property and trade secrets.
SEASONALITY
-----------
We do not anticipate that our business will be substantially affected
by seasonality.
TRADEMARKS
----------
We have registered trademarks for Roaming Messenger(R), eCapsule(R),
and Warp 9(R).
ITEM 2. PROPERTIES
The Company currently leases approximately 8,605 square feet of office
space at 50 Castilian Dr., Suite 101, Santa Barbara, California 93117 for
approximately $10,628 per month, pursuant to a six year lease agreement with
rent commencing on October 1, 2004.
The Company has vacated its old office space of approximately 3,650
square feet located at 6144 Calle Real, Suite 200 Santa Barbara, California
93117 which it had subleased for the remainder of the lease until March 2007.
ITEM 3. LEGAL PROCEEDINGS
The Company may be involved in legal actions and claims arising in the
ordinary course of business, from time to time, none of which at the time are
considered to be material to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 24, 2006, holders of 106,074,025 shares of the Company's
common stock, or approximately 52.9% of the total issued and outstanding common
stock of the Company, voted to change the name of the Company from Roaming
Messenger, Inc. to Warp 9, Inc., by amending the Company's articles of
incorporation. The Board of Directors of the Company voted unanimously to
implement this shareholder action.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the OTC Bulletin Board Market
under the symbol "WNYN." The range of high and low bid quotations for each
fiscal quarter within the last three fiscal years was as follows:
Year Ended June 30, 2007 HIGH LOW
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First Quarter ended September 30, 2006 $0.02 $0.01
Second Quarter ended December 31, 2006 $0.03 $0.01
Third Quarter ended March 31, 2007 $0.03 $0.01
Fourth Quarter ended June 30, 2007 $0.03 $0.02
Year Ended June 30, 2006 HIGH LOW
---- ---
First Quarter ended September 30, 2005 $0.19 $0.09
Second Quarter ended December 31, 2005 $0.15 $0.07
Third Quarter ended March 31, 2006 $0.09 $0.05
Fourth Quarter ended June 30, 2006 $0.06 $0.02
Year Ended June 30, 2005 HIGH LOW
---- ---
First Quarter ended September 30, 2004 $0.68 $0.04
Second Quarter ended December 31, 2004 $0.75 $0.25
Third Quarter ended March 31, 2005 $0.31 $0.19
Fourth Quarter ended June 30, 2005 $0.26 $0.11
--------------------------
The above quotations reflect inter-dealer prices, without retail
markup, mark-down, or commission and may not necessarily represent actual
transactions.
The common stock of Warp 9, Inc. has a par value of $0.001, and
495,000,000 shares are authorized to be issued. The Company is also authorized
to issue 5,000,000 shares of preferred stock with a par value of $0.001. The
rights, preferences and privileges of the holders of the preferred stock will be
determined by the Board of Directors prior to issuance of such shares.
As of June 30, 2007, there were approximately 319 record holders of the
Company's common stock, not including shares held in "street name" in brokerage
accounts which are unknown. As of June 30 2007, there were approximately
227,910,128 shares of common stock outstanding on record.
The Company has not declared or paid any cash dividends on its common
stock and does not anticipate paying dividends for the foreseeable future.
Effective July 10, 2003, the Company adopted the Warp 9, Inc. 2003
Stock Option Plan for Directors, Officers, Employees and Key Consultants (the
"Plan") authorizing the issuance of up to 25,000,000 shares of the Company's
common stock pursuant to the grant and exercise of up to 25,000,000 stock
options. The Plan has been approved by the holders of the outstanding shares of
the Company. The following table sets forth certain information regarding the
Plan as of June 30, 2007:
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NUMBER OF SECURITIES
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING STOCK FUTURE ISSUANCE UNDER EQUITY
OUTSTANDING STOCK OPTIONS OPTIONS COMPENSATION PLANS
-------------------------- -------------------------- ----------------------------
Equity compensation plans 3,299,198 $0.02 22,225,000
approved by security
holders
During the quarter ended September 30, 2006, the Company issued
10,696,641 shares of common stock ranging from $0.0088 per share to $0.0092 per
share to Cornell Capital Partners, LLP for the conversion of $95,000 of
principal balance of the $1,200,000 debenture issued to Cornell in December
2005. The shares were issued in a transaction exempt under Regulation D.
During the quarter ended December 31, 2006, the Company issued
16,286,745 shares of common stock ranging from $0.0046 per share to $0.0078 per
share to Cornell Capital Partners, LLP for the conversion of $90,000 of
principal balance of the $1,200,000 debenture issued to Cornell in December
2005. The shares were issued in a transaction exempt under Regulation D.
During the quarter ended March 31, 2007, the Company issued 11,123,596
shares of common stock ranging from $0.005 per share to $0.0089 per share to
Cornell Capital Partners, LLP for the conversion of $60,000 of principal balance
of the $1,200,000 debenture issued to Cornell in December 2005. The shares were
issued in a transaction exempt under Regulation D.
During the quarter ended June 30, 2007, the Company did not issue any
shares of common stock to Cornell Capital Partners, LLP towards the repayment of
the outstanding principal balance of the debenture issued to Cornell in December
2005.
During the period from July 1, 2007 until September 27, 2007, the
Company issued 17,372,810 shares of common stock to Cornell Capital Partners,
LLP, reducing the principal balance of its debenture by $190,000 to $705,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY STATEMENTS
---------------------
This Form 10-KSB/A contains financial projections and other
"forward-looking statements," as that term is used in federal securities laws,
about Warp 9 Inc.'s financial condition, results of operations and business.
These statements include, among others: statements concerning the potential for
revenues and expenses and other matters that are not historical facts. These
statements may be made expressly in this Form 10-KSB/A. You can find many of
these statements by looking for words such as "believes," "expects,"
"anticipates," "estimates," or similar expressions used in this Form 10-KSB/A.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause the Company's actual results to be materially
different from any future results expressed or implied by the Company in those
statements. The most important facts that could prevent the Company from
achieving its stated goals include, but are not limited to, the following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
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(d) inadequate capital and barriers to raising the
additional capital or to obtaining the financing
needed to implement its business plans;
(e) inadequate capital to continue business;
(f) changes in demand for the Company's products and
services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by
outside parties;
(i) insufficient revenues to cover operating costs.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. The Company cautions you not to place undue reliance
on the statements, which speak only as of the date of this Form 10-KSB/A. The
cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that the Company or persons acting on its behalf may issue. The
Company does not undertake any obligation to review or confirm analysts'
expectations or estimates or to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this Form 10-KSB/A or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our
condensed consolidated financial statements and notes to those statements. In
addition to historical information, the following discussion and other parts of
this quarterly report contain forward-looking information that involves risks
and uncertainties.
CURRENT OVERVIEW
----------------
We are a provider of e-commerce software platforms and services for the
catalog and retail industry. Our suite of software platforms are designed to
help online retailers maximize the Internet channel by using advanced
technologies for online catalogs, e-mail marketing campaigns, and interactive
visual merchandising. Offered on an outsourced and fully managed
Software-as-a-Service ("SaaS") model, our products allow customers to focus on
their core business, rather than technical implementations. We also offer
professional services to our clients which include online catalog design,
merchandizing and optimization, order management, e-mail marketing campaign
development, integration to third party payment processing and fulfillment
systems, analytics, custom reporting and strategic consultation.
Our products and services allow our clients to focus on promoting and
marketing their brand, product line and website while leveraging the investments
we have made in technology and infrastructure to operate a dynamic online
catalog.
We charge our customers a monthly fee for using our e-commerce software
based on a Software-as-a-Service model. Unlike traditional software companies
that sell software on a perpetual license where quarterly and annual revenues
are quite difficult to predict, our SaaS model spreads the collection of
contracts over several quarters or years and makes our revenues more predictable
for a longer period of time.
While the Warp 9 Internet Commerce System (ICS) is our flagship and
highest revenue product, we have been developing and deploying new products
based on a proprietary virtual publishing technology that we have developed.
These new products will allow for the creation of interactive web versions of
paper catalogs ("VCS")and magazines ("VMS") where users can flip through pages
with a mouse and click on products or advertisements. These magazines or
catalogs will have built-in integration for e-commerce transactions through our
ICS product and other transaction based activities. For catalogs, this means
that when shoppers click on a product, they are taken to the e-commerce product
page where they can add that product to their shopping cart for purchase. In the
case of magazines, when shoppers click on an advertisement, they are taken
either to a page on the magazine publisher's site or directly to an advertiser's
site where a transaction can take place - while retaining a path back to the
magazine. Generally, publishers utilizing this technology are able to extend the
life of a print property, broaden distribution of the published material,
-10-
increase the number of customer touch-points, and create greater engagement with
their customers. Catalogers utilizing this technology have discovered that when
exposing consumers to the virtual catalogs the results are a higher average
order size and a significant increase rate of conversion. Management believes
that as a result of the VCS and VMS service, magazine publishers are able to add
distinct and measurable value to advertisers and create additional revenue
opportunities. We have been selling this solution on a limited basis as a
professional service while we refine the product and technology. We believe
there are many markets for our virtual catalog and magazine technology and we
intend to test market these new products in greater distribution in the near
future.
The results of operation for the fiscal year ending June 30, 2007
reflect three complete quarters of the Company focusing exclusively on the Warp
9 e-commerce products and services, and one quarter of mixed financials results
(i.e. the fiscal quarter ending September 30, 2006 reflects both the Warp 9 and
Roaming Messenger operations).
Over half of the Company's revenues are from the ICS product which
continues to be a growing product. During the fiscal year ending June 30, 2007,
the ICS product accounted for 43% of gross revenue. The monthly subscription fee
for Warp 9 ICS is generally variable with the growth of a client's online
revenues. Therefore, when our customers sell more online, our revenues and
profit margin increase without dramatic increase in costs. EMS is a smaller
revenue-generating product and usually sold to customers already subscribing to
the ICS product. During the fiscal year ending June 30, 2007, the EMS product
accounted for 4% of gross revenue. VCS and VMS are newer products and are
currently only being sold on a limited basis while they are further developed.
During the fiscal year ending June 30, 2007, VMS and VCS sales accounted for 3%
of gross revenue. During the fiscal year ending June 30, 2007, the professional
services accounted for 28% of gross revenue and other products and services
accounted for 22% of gross revenue.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our discussion and analysis of our financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management re-evaluates its estimates and judgments, particularly those related
to the determination of the estimated recoverable amounts of trade accounts
receivable, impairment of long-lived assets, revenue recognition and deferred
tax assets. We believe the following critical accounting policies require more
significant judgment and estimates used in the preparation of the financial
statements.
We maintain an allowance for doubtful accounts for estimated losses
that may arise if any of our customers are unable to make required payments.
Management specifically analyzes the age of customer balances, historical bad
debt experience, customer credit-worthiness, and changes in customer payment
terms when making estimates of the uncollectability of our trade accounts
receivable balances. If we determine that the financial conditions of any of our
customers deteriorated, whether due to customer specific or general economic
issues, increases in the allowance may be made. Accounts receivable are written
off when all collection attempts have failed.
We follow the provisions of Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements" for revenue recognition and SAB
104. Under Staff Accounting Bulletin 101, four conditions must be met before
revenue can be recognized: (i) there is persuasive evidence that an arrangement
exists, (ii) delivery has occurred or service has been rendered, (iii) the price
is fixed or determinable and (iv) collection is reasonably assured.
Income taxes are accounted for under the asset and liability method.
Under this method, to the extent that we believe that the deferred tax asset is
not likely to be recovered, a valuation allowance is provided. In making this
determination, we consider estimated future taxable income and taxable timing
differences expected in the future. Actual results may differ from those
estimates.
-11-
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
----------------------------------------------------------------
REVENUE
Total revenue for the twelve month period ended June 30, 2007 increased
by $979,324 to $2,737,009 from $1,757,685 in the prior year an increase of 54%.
Revenue was derived principally from our Warp 9 Inc. subsidiary. The increase in
revenue was the result of an increase in new Warp 9 SaaS clients, related
professional services and reselling of third party online marketing services.
COST OF REVENUE
The cost of revenue for the twelve month period ended June 30, 2007,
increased by $78,296 to $519,485 as compared to $441,189 for the twelve month
period ended June 30, 2006. As a percentage of revenue, cost of revenue
decreased for the period ended June 30, 2007 to 19% as compared to 25% for the
twelve-month period ended June 30, 2006. The decrease in the cost of revenue is
a result of the increased sales of higher margin Warp 9 products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses decreased by
($410,887) during the twelve months ended June 30, 2007 to $1,924,172 as
compared to $2,335,059 for the twelve month period ended June 30, 2006. The
decrease in SG&A expenses was primarily due to the reduction in the Roaming
Messenger operations.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased by ($315,624) during the
twelve months ended June 30, 2007 to $111,412 as compared to $427,036 for the
twelve months ended June 30, 2006. The decrease in R&D was due primarily to the
reduction in the Roaming Messenger operations.
DEPRECIATION AND AMORTIZATION
Expense related to depreciation and amortization was $194,046 for the
twelve months ended June 30, 2007 as compared to $92,602 for the prior year. The
increase is due to expenses related to the Cornell convertible debenture.
OTHER INCOME AND EXPENSE
Total other income and expense was ($1,427) for the twelve months
ended June 30, 2007 as compared to ($626,151) for the prior year. The change is
due to an increase in the derivative liability valuation related to the Cornell
convertible debenture for 2007.
NET LOSS
For the twelve months ended June 30, 2007, our consolidated net loss
was ($13,533) as compared to a consolidated net loss of ($2,164,352) for the
twelve months ended June 30, 2006. This decrease in Net Loss was a result of
reduction of expenses associated with the reduction in the Roaming Messenger
operations and an increase in sales of the Warp 9 product line.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
We had cash at June 30, 2007 of $431,841 as compared to cash of
$387,180 as of June 30, 2006. We had a net working deficit (i.e. the difference
between current assets and current liabilities) of $(80,342) at June 30, 2007 as
compared to a net working deficit of ($249,369) at June 30, 2006.
Cash flow provided by operating activities was $103,228 for the year
ended June 30, 2007 as compared to cash flow used by operating activities was
($1,038,374) for the year ended June 30, 2006.
Cash flow used in investing activities was $(4,952) for the year ended
June 30, 2007 as compared to ($61,143) during the year ended June 30, 2006.
-12-
Cash flow used by financing activities was $(53,615) for the year ended
June 30, 2007 as compared to cash provided by financing activities of $1,249,168
during the year ended June 30, 2006.
For the twelve months ended, June 30, 2007, our capital needs have
primarily been met from positive cash-flow.
While we expect our capital needs in the foreseeable future to be met
by cash-on-hand and positive cash flow, there is no assurance that the Company
will have sufficient capital to finance its growth and business operations, or
that such capital will be available on terms that are favorable to the Company
or at all.
We anticipate that we may be able to obtain additional required working
capital through the private placement of common stock to domestic accredited
investors pursuant to Regulation D of the Securities Act of 1933, as amended
(the "Act"), or to offshore investors pursuant to Regulation S of the Act. There
is no assurance that we will obtain the additional working capital that we need
through the private placement of common stock. In addition, such financing may
not be available in sufficient amounts or on terms acceptable to us.
OFF-BALANCE SHEET ARRANGEMENTS
None.
-13-
ITEM 7. FINANCIAL STATEMENTS OF ROAMING MESSENGER, INC.
ROAMING MESSENGER, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONTENTS
PAGE
Report of Independent Registered Public Accounting Firm .................. 15
Consolidated Balance Sheets............................................... 16
Consolidated Statements of Operations..................................... 17
Consolidated Statements of Shareholders' Deficit.......................... 18
Consolidated Statements of Cash Flows .................................... 19
Notes to Consolidated Financial Statements ............................... 20-32
-14-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Warp 9, Inc.
Santa Barbara, California
We have audited the consolidated balance sheet of Warp 9, Inc. and subsidiary as
of June 30, 2007, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the years ended June 30, 2007 and 2006.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Warp 9, Inc. and
subsidiary as of June 30, 2007, and the results of their operations and their
cash flows for the years ended June 30, 2007 and 2006, in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and recurring negative cash flows from operations. This raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ HJ Associates & Consultants, LLP
------------------------------------
HJ Associates & Consultants, LLP
Salt Lake City, Utah
September 27, 2007
-15-
WARP9, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2007
ASSETS
CURRENT ASSETS
Cash $ 431,841
Accounts Receivable, net 226,230
Prepaid and Other Current Assets 8,080
--------------
TOTAL CURRENT ASSETS 666,151
--------------
PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 89,485
Computer Equipment 501,248
Commerce Server 50,000
Computer Software 9,476
--------------
650,209
Less accumulated depreciation (490,211)
--------------
NET PROPERTY AND EQUIPMENT 159,998
--------------
OTHER ASSETS
Lease Deposit 9,749
Restricted Cash 93,000
Internet Domain, net 1,233
Investment-Carbon Science 1,250
Loan Costs 75,151
--------------
TOTAL OTHER ASSETS 180,383
--------------
TOTAL ASSETS $ 1,006,532
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 38,363
Credit Cards Payable 11,585
Accrued Expenses 221,275
Bank Line of Credit 42,916
Note Payable 13,000
Customer Deposit 39,324
Derivative Liability-Debenture 348,295
Capitalized Leases, Current Portion 31,735
--------------
TOTAL CURRENT LIABILITIES 746,493
--------------
LONG TERM LIABILITIES
Note payable, Other 200,481
Note payable, C.Smith 154,429
Convertible Debenture 895,000
Beneficial Conversion Feature (151,412)
Capitalized Leases 31,320
--------------
TOTAL LONG TERM LIABILITIES 1,129,818
--------------
TOTAL LIABILITIES 1,876,311
--------------
SHAREHOLDERS' DEFICIT
Common Stock, $0.001 Par Value;
495,000,000 Authorized Shares;
227,910,128 Shares Issued and Outstanding 227,910
Additional Paid In Capital 6,251,506
Accumulated Deficit (7,349,195)
--------------
TOTAL SHAREHOLDERS' DEFICIT (869,779)
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,006,532
==============
The accompanying notes are an integral part of these financial statements
-16-
WARP9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------
Years Ended
June 30, 2007 June 30, 2006
---------------- ----------------
REVENUE $ 2,737,009 $ 1,757,685
COST OF SERVICES 519,485 441,189
---------------- ----------------
GROSS PROFIT 2,217,524 1,316,496
OPERATING EXPENSES
Selling, general and administrative expenses 1,924,172 2,335,059
Research and development 111,412 427,036
Depreciation and amortization 194,046 92,602
---------------- ----------------
TOTAL OPERATING EXPENSES 2,229,630 2,854,697
---------------- ----------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) (12,106) (1,538,201)
OTHER INCOME/(EXPENSE)
Gain on Settlement - 24,000
Interest Income 9,064 65,733
Other Income 79,133 -
Gain/(Loss) on derivative liability valuation 141,096 (590,830)
Interest Expense (230,720) (125,054)
---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (1,427) (626,151)
---------------- ----------------
LOSS FROM OPERATIONS BEFORE PROVISION FOR TAXES (13,533) (2,164,352)
PROVISION FOR INCOME TAXES - -
---------------- ----------------
NET INCOME/(LOSS) (13,533) (2,164,352)
================ ================
BASIC AND DILUTED LOSS PER SHARE $ (0.00) $ (0.01)
================ ================
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 210,045,258 184,846,599
================ ================
The accompanying notes are an integral part of these financial statements
-17-
WARP9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
-------------- ------------ ------------- -------------- -------------
Balance, June 30, 2005 180,807,091 180,807.06 4,950,066 (5,171,310) (40,437)
Issuance of common stock, note 6
Convertible debenture 3,271,881 3,272 56,728 - 60,000
Issuance of common stock, note 6
Stock issued for cash 4,579,174 4,579 282,568 - 287,147
Issuance of common stock, note 6
Stock issued for services 1,145,000 1,145 135,205 - 136,350
Warrant Compensation - - 16,828 - 16,828
Discount on convertible debenture - - 300,000 - 300,000
Stock Compensation, net - - 144,965 - 144,965
Net Loss - - - (2,164,352) (2,164,352)
-------------- ------------ ------------- -------------- -------------
Balance, June 30, 2006 189,803,146 $ 189,803 $5,886,360 $ (7,335,662) $ (1,259,499)
Issuance of common stock in September 2006, note 6
Convertible debenture 10,696,641 10,697 84,303 - 95,000
Issuance of common stock in December 2006, note 6
Convertible debenture 16,286,745 16,287 73,713 - 90,000
Issuance of common stock in March 2007, note 6
Convertible debenture 11,123,596 11,124 48,876 - 60,000
Derivative liability - - 109,289 - 109,289
Stock compensation, net - - 49,899 - 49,899
Stock issuance cost - - (934) - (934)
Net Loss - - - (13,533) (13,533)
-------------- ------------ ------------- -------------- -------------
Balance, June 30, 2007 227,910,128 $ 227,910 $ 6,251,506 $ (7,349,195) $ (869,779)
============== ============ ============= ============== =============
The accompanying notes are an integral part of these financial statements
-18-
WARP9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------
Years Ended
June 30,
2007 2006
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,533) $ (2,164,352)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 91,280 68,048
Gain on Settlement - (24,000)
Issuance of common shares and warrants for services - 136,350
Conversion feature recorded as interest expense 109,352 300,000
Amortization of loan costs 102,766 24,583
Cost of stock compensation recognized 49,899 161,793
Derivative expense (141,096) 590,830
Beneficial conversion feature - (260,764)
(Increase) Decrease in:
Accounts receivable (65,160) 17,659
Prepaid and other assets 15,811 (1,525)
Increase (Decrease) in:
Accounts payable 21,300 49,847
Accrued expenses 65,185 32,116
Deferred Income (61,333) 34,666
Other liabilities (71,243) (3,625)
--------------- ---------------
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 103,228 (1,038,374)
--------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of stock for investment (1,250) -
Purchase of property and equipment (3,702) (61,143)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (4,952) (61,143)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable (49,500) (5,000)
Payments on capitalized leases (45,755) (30,821)
Proceeds from line of credit 42,574 342
Proceeds from convertible debenture - 997,500
Proceeds from issuance of common stock, net of cost (934) 287,147
--------------- ---------------
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES (53,615) 1,249,168
--------------- ---------------
NET INCREASE (DECREASE) IN CASH 44,661 149,651
CASH, BEGINNING OF PERIOD 387,180 237,529
--------------- ---------------
CASH, END OF PERIOD $ 431,841 $ 387,180
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 21,878 $ 41,169
=============== ===============
Taxes paid $ 3,888 $ 1,600
=============== ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the year ended June 30, 2007, the Company issued 38,106,982 shares of
common stock at a fair value of $245,000 for the convertible debenture; the
Company reclassified accrued expenses of $237,891 to a note payable; also the
Company reclassified an accounts payable in the amount of $154,429 to a note
payable. During the year ended June 30, 2006, the Company received a $24,000
settlement due to a law suit; 3,271,881 shares of common stock were converted
with a fair value of $60,000.
The accompanying notes are an integral part of these financial statements
-19-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
1. ORGANIZATION AND LINE OF BUSINESS
ORGANIZATION
Warp 9, Inc. (the "Company") is a Nevada corporation formerly known as
Roaming Messenger, Inc., formerly known as Latinocare Management
Corporation ("LMC"). On August 24, 2006, the Company's board of directors
and majority of shareholders voted to change the name of the Company from
Roaming Messenger, Inc. to Warp 9, Inc. to reflect a new strategic plan of
focusing primarily on the business of the Company's wholly owned
subsidiary, Warp 9, Inc. (a Delaware corporation). The Company, based in
Goleta, California, began operations October 1, 1999. The Company is a
provider of fully hosted web based e-commerce software products.
LINE OF BUSINESS
Warp 9, Inc. is a provider of e-commerce platforms and services for the
catalog and retail industry. Its suite of software platforms is designed to
help online retailers maximize the Internet channel by applying advanced
technologies for online catalogs, e-mail marketing campaigns, and
interactive visual merchandising. Offered on a fully managed
Software-as-a-Service model, Warp 9 products allow customers to focus on
their core business, rather than technical implementations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Warp 9, Inc. is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in
the United States of America and have been consistently applied in the
preparation of the financial statements.
The Consolidated Financial Statements include Warp 9, Inc. (the Company),
and its majority-owned subsidiaries ("Warp 9, Inc., a Delaware
corporation"). All significant inter-company transactions are eliminated in
consolidation.
RECLASSIFICATION
Certain items included in the year ended June 30, 2006 financial statements
have been reclassified to conform to the current year financial statements.
GOING CONCERN
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting, which contemplates continuity of
operations, realization of assets and liabilities and commitments in the
normal course of business. The accompanying financial statements do not
reflect any adjustments that might result if the Company is unable to
continue as a going concern. The Company's losses and negative cash flows
from operations raise substantial doubt about the Company's ability to
continue as a going concern. The ability of the Company to continue as a
going concern and appropriateness of using the going concern basis is
dependent upon, among other things, additional cash infusion. The Company
has funded its operation through the sale of its common stock through
private offerings and equity financing, as discussed in note 6. Management
believes, but there is no assurance, that the Company will obtain the
additional working capital that it needs through the sale of its Common
Stock. The Company has incurred operating deficits since inception, which
are expected to continue until its business model is fully developed.
ACCOUNTS RECEIVABLE
The Company extends credit to its customers, who are located primarily in
California. Accounts receivable are customer obligations due under normal
trade terms. The Company performs continuing credit evaluations of its
customers' financial condition. Management reviews accounts receivable on a
regular basis, based on contracted terms and how recently payments have
been received to determine if any such amounts will potentially be
uncollected. The Company includes any balances that are determined to be
uncollectible in its allowance for doubtful accounts. After all attempts to
collect a receivable have failed, the receivable is written off. The
balance of the allowance account at June 30, 2007 and 2006 are $25,094 and
26,292 respectively.
-20-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION
The Company recognizes income when the service is provided or when product
is delivered. We present revenue, net of customer incentives. Most of the
income is generated from monthly fees from clients who subscribe to the
Company's fully hosted web based e-commerce products on terms averaging
twelve months. Unless terminated accordingly with prior written notice, the
agreements automatically renew for another term.
We provide online marketing services that we purchase from third parties.
The gross revenue presented in our statement of operations is in accordance
with EITF No. 99-19.
We also offer professional services such as development services. The fees
for development services constitute a separate unit of accounting in
accordance with EITF No. 00-21, and are recognized as the work is
performed.
Upfront fees for development services or other customer services are
deferred until certain implementation or contractual milestones have been
achieved. There was no deferred revenue as of June 30, 2007.
For the fiscal year ended, June 30, 2007, monthly fee from web products and
associated service fees account for 40% of the Company's total revenues,
professional services account for 36% and the remaining 24% of total
revenues are from resale of third party products and services.
For the fiscal year ended, June 30, 2006, monthly fee from web products and
associated service fees account for 42% of the Company's total revenues,
professional services account for 32% and the remaining 26% of total
revenues are from resale of third party products and services.
RETURN POLICY
On all service offerings such as web based e-commerce products there are no
returns. Monthly fees are assessed and revenue is recognized at the end of
every month, after service has been provided. Some higher paying customers
may have service level agreements where we guarantee system uptime such as
99.9% of the time per month. If we fall below the agreed upon level of
uptime, we shall credit one day of service fee for each hour our system is
down up to a maximum of one monthly fee. This guarantee only covers
downtime as a result of failure in the Company's hardware, software or
gross negligence. Historical, the Company has not had to issue any credits
for such returns.
COST OF REVENUE
Cost of revenue includes the direct costs of operating the Company's
network, including telecommunications charges and third party internet
marketing charges.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Total research and
development costs were $111,412 and $427,036 for the years ended June 30,
2007 and 2006, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying financial
statements. Significant estimates made in preparing these financial
statements include the allowance for doubtful accounts, the estimate of
useful lives of property and equipment, the deferred tax valuation
allowance, and the fair value of stock options and warrants. Actual results
could differ from those estimates.
-21-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried
at cost, which approximates their fair value, due to the relatively short
maturity of these instruments. As of June 30, 2007 and 2006, the Company's
capital lease obligations and notes payable have stated borrowing rates
that are consistent with those currently available to the Company and,
accordingly, the Company believes the carrying value of these debt
instruments approximates their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are depreciated or amortized
using the straight-line method over the following estimated useful lives:
Furniture, fixtures & equipment 7 Years
Computer equipment 5 Years
Commerce server 5 Years
Computer software 3 - 5 Years
Leasehold improvements Length of the lease
Property and equipment assets leased under capitalized leases with an
original cost of $218,179 at June 30, 2007 and 2006, respectively.
Amortization of assets under capitalized leases is included in depreciation
and amortization expense. During the years ended June 30, 2007 and 2006,
additions to fixed assets through capitalized leases totaled $0 and
$19,796, respectively.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company operates in a single industry segment. The Company markets its
services to companies and individuals in many industries and geographic
locations. The Company's operations are subject to rapid technological
advancement and intense competition in the telecommunications industry.
Accounts receivable represent financial instruments with potential credit
risk. The Company typically offers its customers credit terms. The Company
makes periodic evaluations of the credit worthiness of its enterprise
customers and other than obtaining deposits pursuant to its policies, it
generally does not require collateral. In the event of nonpayment, the
Company has the ability to terminate services.
ADVERTISING COSTS
The Company expenses the cost of advertising and promotional materials when
incurred. Total advertising costs were $30,950 and $50,751 for the years
ended June 30, 2007 and 2006, respectively.
STOCK-BASED COMPENSATION
As of June 30, 2006, the Company adopted Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (FAS) No. 123R, that addresses
the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for either equity instruments of the
enterprise or liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. The statement eliminates the ability to account
for share-based compensation transactions, as we formerly did, using the
intrinsic value method as prescribed by Accounting Principles Board, or
APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and
generally requires that such transactions be accounted for using a
fair-value-based method and recognized as expenses in our statement of
income. The adoption of (FAS) No. 123R by the Company had no material
impact on the statement of income.
The Company adopted FAS 123R using the modified prospective method which
requires the application of the accounting standard as of June 30, 2006.
Our financial statements as of and for the year ended June 30, 2007 reflect
the impact of adopting FAS 123R. In accordance with the modified
prospective method, the financial statements for prior periods have not
been restated to reflect, and do not include, the impact of FAS 123R.
-22-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based compensation expense recognized during the period is based on
the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the
consolidated statement of operations during the year ended June 30, 2007,
included compensation expense for the stock-based payment awards granted
prior to, but not yet vested, as of June 30, 2007 based on the grant date
fair value estimated in accordance with the pro forma provisions of FAS
148, and compensation expense for the stock-based payment awards granted
subsequent to June 30, 2006, based on the grant date fair value estimated
in accordance with FAS
STOCK-BASED COMPENSATION (CONTINUED)
123R. As stock-based compensation expense recognized in the statement of
income for the year ended June 30, 2007 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. FAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the pro forma information required under FAS 148 for the
periods prior to the year ended June 30, 2007, we accounted for forfeitures
as they occurred. The stock-based compensation expense recognized in the
consolidated statement of operations during the year ended June 30, 2007 is
$49,899.
Year Ended
6/30/2006
------------------
Net loss as reported $ (2,164,352)
Add: Stock-based employee compensation -
expense included in net reported loss
Deduct: Stock based employee -
compensation expense determined under fair value
based method for all awards
------------------
Pro forma net loss $ (2,164,352)
==================
Basic and diluted pro forma loss per share
As reported $ (0.01)
==================
Proforma $ (0.01)
==================
NET LOSS PER SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's stock under its stock option plan and warrants may
have a dilutive effect on the Company's earnings per share in the future
but are not included in the calculation for 2007 and 2006 because they have
an anti-dilutive effect in these periods.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to financial statements carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. The measurement of deferred
tax assets and liabilities is based on provisions of applicable tax law.
The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance based on the amount of tax benefits that, based on
available evidence, is not expected to be realized.
-23-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This Statement amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on the
reported results. The disclosure requirements of this statement were
effective for our years ended June 30, 2007 and 2006.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
which is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances) because that financial instrument embodies an
obligation of the issuer. The adoption of SFAS No. 150 did not have a
material effect on the financial statements of the Company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 seeks to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage) in the determination of inventory
carrying costs. The statement requires such costs to be treated as a
current period expense. This statement is effective for the company on July
2, 2006. The company does not believe the adoption of SFAS No. 151 will
have a material impact on its financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
revised Statement 123R, "Share-Based Payment," to be effective for annual
periods beginning after December 15, 2005 for the Company. Statement 123R
requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense in the
income statement. The cost is recognized over the requisite service period
based on fair values measured on grant dates. The new standard may be
adopted using either the modified prospective transition method or the
modified retrospective method. We are currently evaluating our share-based
employee compensation programs, the potential impact of this statement on
our consolidated financial position and results of operations, and the
alternative adoption methods.
In December 2004, the Financial Accounting Standards Board issued two FASB
Staff Positions - FSP FAS 109-1, Application of FASB Statement 109
"Accounting for Income Taxes" to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS
109-2 Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004.
Neither of these affected the Company as it does not participate in the
related activities.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance
related to the interaction between SFAS 123(R) and certain SEC rules and
regulations. It also provides the SEC staff's views regarding valuation of
share-based payment arrangements. In April 2005, the SEC amended the
compliance dates for SFAS 123(R), to allow companies to implement the
standard at the beginning of their next fiscal year, instead of the next
reporting period beginning after June 15, 2005. Management is currently
evaluating the impact SAB 107 will have on our financial statements.
-24-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides
guidance relating to the identification of and financial reporting for
legal obligations to perform an asset retirement activity. The
Interpretation requires recognition of a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. FIN 47 also defines when an entity
would have sufficient information to reasonably estimate the fair value of
an asset retirement obligation. The provision is effective no later than
the end of fiscal years ending after December 15, 2005. The Company will
adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not
believe the adoption will have a material impact on its financial position
or results of operations or cash flows.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections." This new standard replaces APB Opinion No. 20,
"Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes
in Interim Financial Statements," and represents another step in the FASB's
goal to converge its standards with those issued by the IASB. Among other
changes, Statement 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial
statements presented on the new accounting principle, unless it is
impracticable to do so. Statement 154 also provides that (1) a change in
method of depreciating or amortizing a long-lived non-financial asset be
accounted for as a change in estimate (prospectively) that was effected by
a change in accounting principle, and (2) correction of errors in
previously issued financial statements should be termed a "restatement."
The new standard is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005. Early
adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005. The
Company has evaluated the impact of the adoption of Statement 154 and does
not believe the impact will be significant to the Company's overall results
of operations or financial position.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", or SFAS 155, which will be effective for
fiscal years that begin after December 15, 2006. This statement amends SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, to
narrow the scope exception for interest-only and principal-only strips on
debt instruments to include only such strips representing rights to receive
a specified portion of the contractual interest or principal cash flows.
SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities
to hold a passive derivative financial instrument pertaining to beneficial
interests that itself is a derivative financial instrument. The Company
does not anticipate adoption of this standard will have a material impact
on its financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets", which will be effective for fiscal years that begin
after December 15, 2006. This statement amends SFAS 140, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES, A REPLACEMENT OF FASB STATEMENT 125, or SFAS 140, regarding
(1) the circumstances under which a servicing asset or servicing liability
must be recognized, (2) the initial and subsequent measurement of
recognized servicing assets and liabilities, and (3) information required
to be disclosed relating to servicing assets and liabilities. The Company
does not anticipate adoption of this standard will have a material impact
on its financial statements.
-25-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
3. OBLIGATIONS UNDER CAPITALIZED LEASES
YEAR ENDED
LESSOR DESCRIPTION 6/30/2007
----------------------------------------------------------------------------------------
SBBT Payable in monthly installments of $488
interest at 17%, matures in June, 2009 $ 13,763
SBBT Payable in monthly installments of $281
interest at 16%, matures in November, 2009 6,738
SBBT Payable in monthly installments of $726
interest at 17%, matures in August, 2009 15,656
GE Payable in monthly installments of $551
interest at 17%, matures in September, 2008 8,099
GE Payable in monthly installments of $1206
interest at 17%, matures in September, 2008 18,800
---------------
63,056
Less current portion 31,735
---------------
Long-term portion of obligations under
capitalized leases $ 31,321
===============
Minimum annual lease payments under capitalized lease obligations at June 30,
2007 are as follows:
Fiscal Year
-----------
2008 39,036
2009 24,423
2010 8,718
--------------
72,177
Less amount representing Interest 9,121
--------------
63,056
Less current portion 31,735
--------------
4. NOTES PAYABLE
The Company has a note payable to a vendor in the amount of $50,000,
bearing interest at 10%, with monthly interest payments only. The maturity
date, which was originally October 15, 2001, was subsequently amended to
March 15, 2002. The note was not paid off on its amended maturity date and
is in default. At June 30, 2007, the outstanding principal amount on this
note is $13,000. This note is secured by furniture of the Company. See note
12.
On October 16, 2006, the Company reclassified $237,981 of accrued salaries
to a promissory demand note, due no later than October 31, 2008. Interest
is paid annually at a rate of 5% per annum on the unpaid balance. At June
30, 2007, the outstanding principal amount is $200,481.
At June 30, 2007, the Company reclassified an accounts payable account to a
vendor in the amount of $154,429 to a note payable. The note bears no
interest.
-26-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
5. DEFERRED TAX BENEFIT
At June 30, 2007 the Company has available for federal and state income tax
purposes, cumulative net operating loss carry-forwards of approximately
$5,764,000 that may be offset against future taxable income. No tax benefit
has been reported in the June 30, 2007 financial statements since the
potential tax benefit is offset by a valuation allowance of the same
amount.
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income from
continuing operations for the period ended June 30, 2007 and 2006 due to
the following:
Year Ended Year Ended
2007 2006
----------- ------------
Income tax benefit computed
at U.S. federal statutory rate (34%) $ (4,600) $ (811,260)
State income taxes, net of benefit federal taxes (812) (143,163)
Non deductible stock compensation 7,200 418,860
R&D - 11,075
Other 500 1,260
Less valuation allowance (2,288) 523,228
----------- ------------
Income tax expense $ - $ -
=========== ============
The deferred income tax benefit at June 30, 2007 reflects the impact of
temporary differences between the amounts of assets and liabilities
recorded for financial reporting purposes and such amounts as measured in
accordance with tax laws. The items, which comprise a significant portion
of, deferred tax assets and liabilities are approximately as follows:
Year Ended Year Ended
2007 2006
---------------- ---------------
Deferred tax assets:
NOL Carryover 2,305,600 2,284,000
Deferred Income - 24,500
R&D Credit 94,900 94,900
Officer salaries payable - 110,890
Accrued vacation payable 12,500
Depreciation 2,300 (10,800)
Less: valuation allowance (2,415,300) (2,503,490)
---------------- ---------------
Deferred income tax asset $ - $ -
================ ===============
-27-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
6. CAPITAL STOCK
At June 30, 2007, the Company's authorized stock consists of 495,000,000
shares of common stock, par value $0.001 per share. The Company is also
authorized to issue 5,000,000 shares of preferred stock with a par value of
$0.001. The rights, preferences and privileges of the holders of the
preferred stock will be determined by the Board of Directors prior to
issuance of such shares. During the year ended, June 30, 2007, the Company
issued 38,106,982 shares of common stock ranging from $0.0046 to $0.0092
per share for the conversion of the debenture with a value of $245,000;
During the year ended June 30, 2006, the Company issued 3,271,881 shares of
common stock ranging from $0.0194 to $0.036 per share for the conversion of
the debenture with a value for of $60,000; 4,279,174 shares of common stock
issued for cash consideration of $272,147; 300,000 shares of restricted
common stock issued for cash of $15,000; 1,145,000 shares of common stock
issued for services with a fair value of $136,350.
7. STOCK OPTIONS AND WARRANTS
On July 10, 2003, the Company adopted the Warp 9, Inc. Stock Option Plan
for Directors, Executive Officers, and Employees of and Key Consultants to
the Company. This Plan, may issue 25,000,000 shares of common stock.
Options granted under the Plan could be either Incentive Options or
Nonqualified Options, and are administered by the Company's Board of
Directors. Each option may be exercisable in full or in installment and at
such time as designated by the Board. Notwithstanding any other provision
of the Plan or of any Option agreement, each option are to expire on the
date specified in the Option agreement, which date are to be no later than
the tenth anniversary of the date on which the Option was granted (fifth
anniversary in the case of an Incentive Option granted to a
greater-than-10% stockholder). The purchase price per share of the Common
Stock under each Incentive Option are to be no less than the Fair Market
Value of the Common Stock on the date the Option was granted (110% of the
Fair Market Value in the case of a greater-than-10% stockholder). The
purchase price per share of the Common Stock under each Nonqualified Option
were to be specified by the Board at the time the Option was granted, and
could be less than, equal to or greater than the Fair Market Value of the
shares of Common Stock on the date such Nonqualified Option was granted,
but were to be no less than the par value of shares of Common Stock. The
plan provided specific language as to the termination of options granted
hereunder.
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires pro forma
information regarding net income (loss) using compensation that would have
been incurred if the Company had accounted for its employee stock options
under the fair value method of that statement. The Company also used the
historical industry index to calculate volatility, since the Company's
stock history did not represent the expected future volatility of the
Company's common stock. The fair value of options granted was determined
using the Black Scholes method with the following assumptions:
Year Ended Year Ended
6/30/2007 6/30/2006
---------------------------------------
Risk free interest rate 3.2% - 5.07% 3.2% - 4.82%
Stock volatility factor 0.31 -0.53 0.31 -0.53
Weighted average expected option life 4 years 4 years
Expected dividend yield none none
-28-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
A summary of the Company's stock option activity and related information
follows:
Year ended Year ended
June 30, 2007 June 30, 2006
------------- -------------
Weighted Weighted
average average
exercise exercise
Options price Options price
----------------- -------------- ------------- --------------
Outstanding -beginning of year 5,209,994 $ 0.11 4,234,994 $ 0.11
Granted 15,806,500 0.01 1,200,000 0.12
Exercised - - - -
Forfeited 5,291,492 0.09 225,000 0.09
----------------- -------------- ------------- --------------
Outstanding - end of year 15,725,002 $ 0.05 5,209,994 $ 0.11
================= ============== ============= ==============
Exercisable at the end of year 3,299,198 $ 0.02 2,632,494 $ 0.11
================= ============== ============= ==============
Weighted average fair value of
options granted during the year $ 0.01 $ 0.12
============== ==============
7. STOCK OPTIONS AND WARRANTS (Continued)
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The weighted average remaining contractual life of options outstanding
issued under the plan as of June 30, 2007 was as follows:
Weighted
Average
Number of remaining
Exercise options contractual
prices outstanding life (years)
------------------- ------------------ ------------------
$ 0.07 100,000 2.50
$ 0.08 100,000 0.34
$ 0.10 300,000 1.84
$ 0.13 650,000 2.07
$ 0.01 13,300,002 3.30
$ 0.03 575,000 3.84
$ 0.02 700,000 3.97
------------------
15,725,002
-29-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
STOCK WARRANTS
During the year ended June 30, 2007, the Company issued no warrants for
services. Warrants were granted as follows:
DATE NUMBER OF SHARES MATURITY DATE EXERCISE PRICE
September 30, 2005 163,500 September 30, 2007 $ 0.10
December 31, 2005 321,000 December 31, 2007 $ 0.10
January 1, 2006 75,000 December 31, 2007 $ 0.10
March 31, 2006 375,000 March 31, 2008 $ 0.10
-----------------------
Total Granted 934,500
=======================
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of
our 10% secured convertible debentures in the aggregate principal amount of
$1,200,000. In connection with the sale of the convertible debenture, we
also issued to Cornell five-year warrants to purchase 1,500,000, 4,000,000
and 4,000,000 shares of Common Stock at $0.08, $0.10 and $0.12,
respectively.
At June 30, 2007, warrants to purchase 10,499,500 shares were outstanding.
8. LINE OF CREDIT
On August 11, 2005, the Company was approved for a $100,000 revolving line
of credit from Bank of America at an interest of prime plus 4 percentage
points. This line of credit is not secured by assets of the Company. The
effective interest rate of the line of credit at June 30, 2007 was 12%. As
of June 30, 2007, $42,916 was borrowed under this line of credit
9. CONVERTIBLE DEBENTURES
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of
our 10% secured convertible debentures in the aggregate principal amount of
$1,200,000 of which the first installment of $400,000 was advanced
immediately. The net amount of the first installment received by the
Company was $295,500 after paying total fees of $92,500 which included
legal, structuring, due diligence, commitment fees, and prior liability of
$12,000. An interest expense of $100,000, representing the value of the
conversion feature in accordance to EITF 00-27 was recorded for the first
installment. Under EITF 00-27, the Company records a beneficial conversion
cost associated with the convertibility feature of the security that equals
the value of any discount to market available at the time of conversion.
This beneficial conversion cost is recorded at the time the convertible
security is first issued and is amortized over the stated terms.
Holders of the debentures may convert at any time amounts outstanding under
the debentures into shares of our common stock at a conversion price per
share equal to the lesser of (i) $0.15 or (ii) 80% of the lowest volume
weighted average price of our common stock during the five trading days
immediately preceding the conversion date as quoted by Bloomberg, LP.
Cornell has agreed not to short any of the shares of Common Stock. EITF
00-19 is applicable to debentures issued by the Company in instances where
the number of shares into which a debenture can be converted is not fixed.
For example, when a debenture converts at a discount to market based on the
stock price on the date of conversion. In such instances, EITF 00-19
requires that the embedded conversion option of the convertible debentures
be bifurcated from the host contract and recorded at their fair value. In
accounting for derivatives under EITF 00-19, the Company records a
liability representing the estimated present value of the conversion
feature considering the historic volatility of the Company's stock, and a
discount representing the imputed interest associated with the beneficial
conversion feature. The discount is then amortized over the life of the
debentures and the derivative
-30-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
liability is adjusted periodically according to stock price fluctuations.
At the time of conversion, any remaining derivative liability is charged to
additional paid-in capital. For purpose of determining derivative
liability, the Company uses Black Scholes modeling for computing historic
volatility.
We have the right to redeem a portion or all amounts outstanding under the
debenture prior to the maturity date at a 20% redemption premium provided
that the closing bid price of our common stock is less than $0.15. In
addition, in the event of a redemption, we are required to issue to Cornell
50,000 shares of common stock for each $100,000 redeemed.
We also issued to Cornell five-year warrants to purchase 1,500,000,
4,000,000 and 4,000,000 shares of Common Stock at $0.08, $0.10 and $0.12
per share, respectively.
The second installment of $350,000 ($295,000 net of fees) was advanced on
January 27, 2006. An interest expense of $87,500 was incurred, representing
the value of the conversion feature in accordance to EITF 00-27.
The last installment of $450,000 ($395,000 net of fees) was advanced on May
9, 2006, after the registration statement was declared effective by the
Securities and Exchange Commission. An interest expense of $112,500,
representing the value of the conversion feature in accordance to EITF
00-27, was incurred at the receipt of this first installment.
The debentures mature on the third anniversary of the date of issuance, and
the Company is not required to make any payments until the maturity dates.
Interest is accrued at 10% per annum on the principal balance outstanding.
At June 30, 2007, the outstanding balance of the debentures were $895,000,
and the interest accrued was $139,864.
10. CONCENTRATIONS
For the year ended June 30, 2007, the Company had two customers who
represented approximately 32% of total revenue. For the year ended June 30,
2006, the Company had two customers who represented approximately 34% of
total revenue.
Accounts receivable from two customers represented approximately 32% of
total accounts receivable at June 30, 2007. Accounts receivable from two
customers represented approximately 35% of total accounts receivable at
June 30, 2006.
The Company has a concentration of credit risk for cash by maintaining
deposits with banks, which may at a time exceed insured amounts. At June
30, 2007, the Company had $301,379 exceeding the amount insured by the U.S.
Federal Deposit Insurance Corporation (FDIC).
11. RELATED PARTY TRANSACTIONS
On January 16, 2007, Mr. Harinder Dhillon, the Company's Chief Executive
Officer and President purchased 8,650,000 of the Company's common stock.
The options were personal holdings which were granted by Mr. Jon Lei, a 10%
or larger shareholder of the Company.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The following is a schedule, by years, of future minimum rental payments
required under operating leases for the facilities and equipment. The lease
for one of the facilities expires in 2010. The following is a schedule of
minimum lease payments for the next four years.
Years Ending Rent Payment
June 30,
----------------------- --------------------
2008 $ 109,000
2009 $ 108,000
2010 $ 109,000
-31-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
Total lease expense for the years ended June 30, 2007 and 2006 was $163,211
and $164,161 respectively. The Company is also required to pay its pro rata
share of taxes, building maintenance costs, and insurance in according to
the lease agreement.
NOTE PAYABLE IN DEFAULT
The note payable has a default clause that allows the lender to assess late
payment charges in the amount of 10% of the delinquency. Since the Company
did not pay off the entire balance at its due date of March 15, 2002, the
note is currently in default. At June 30, 2007, the outstanding principal
amount on this note is $13,000. The Company has not accrued any delinquent
charges.
RESTRICTED CASH
The Company has restricted cash in the amount of $93,000. This restricted
cash is used to collateralize a standby letter of credit in favor of the
landlord as part of the Company's lease agreement for its current office
space at 50 Castilian Dr. Santa Barbara, CA 93117. This cash amount is
restricted until the lease expires on June 30, 2010 or when negotiated
down.
LEGAL MATTERS
The Company may be involved in legal actions and claims arising in the
ordinary course of business, from time to time, none of which at the time
are considered to be material to the Company's business or financial
condition.
13. SUBSEQUENT EVENT
During August 2007, the Company issued 11,009,174 shares of common stock at
a price of $0.0109 per share for the conversion of the debenture with a
value of $120,000.
During September 2007, the Company issued 6,363,636 shares of common stock
at a price of $0.0110 per share for the conversion of the debenture with a
value of $70,000.
On September 21, 2007, Warp 9, Inc. (the "Company") received written notice
from Magellan's International Travel Corporation ("Magellan") of Magellan's
decision not to renew both its Standard Hosting Agreement and Enterprise
Hosting Agreement (collectively, the "Agreements") with the Company.
Consequently, the Agreements are scheduled to terminate on November 16,
2007. The revenue generated by the Company from the Agreements represents
approximately 12% of the Company's total annual revenue. Magellan has
expressed a desire to renegotiate the Agreements. While the Company
believes that its business relationship with Magellan will continue, the
Company cannot assure that it will be able to renegotiate one or both of
the Agreements on terms acceptable to the Company. or at all.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Rose, Snyder and Jacobs, formerly auditors for the Company, was
dismissed as auditor on August 2, 2006. HJ Associates & Consultants, LLP were
engaged as auditors for the Company on August 2, 2006.
The change of accountants was approved by the Board of Directors. The
Company's Board of Directors currently does not have an Audit Committee.
In connection with audit of the two most recent fiscal years, and
through the date of termination of the accountants, no disagreements exist with
any former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope of procedure, which
disagreements if not resolved to the satisfaction of the former accountant would
have caused them to make reference in connection with his report to the subject
of the disagreement(s).
The audit report by Rose, Snyder and Jacobs for the periods ended June
30, 2005 and June 30, 2004 contained an opinion which included a paragraph
discussing uncertainties related to continuation of the Company as a going
concern. Otherwise, the audit reports by Rose, Snyder and Jacobs for the fiscal
year ended June 30, 2005 and June 30, 2004 did not contain an adverse opinion or
disclaimer of opinion, nor was qualified or modified as to uncertainty, audit
scope, or accounting principles.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's Chairman, Chief Executive Officer, and Acting Chief
Financial Officer have evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this annual report and, based on this evaluation, have concluded that the
disclosure controls and procedures are effective.
There have been no changes in the Company's internal control over
financial reporting that occurred during the Company's fiscal year that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
On December 28, 2005, we consummated a securities purchase agreement
with Cornell Capital Partners L.P. providing for the sale by us to Cornell of
our 10% secured convertible debentures in the aggregate principal amount of
$1,200,000, all of which has been advanced. The debentures mature on the third
anniversary of the date of issuance and we are not required to make any payments
until the maturity date. Holders of the debentures may convert at any time
amounts outstanding under the debentures into shares of our common stock at a
conversion price per share equal to the lesser of (i) $0.15 or (ii) 80% of the
lowest volume weighted average price of our common stock during the five trading
days immediately preceding the conversion date as quoted by Bloomberg, LP.
Cornell has agreed not to short any of the shares of our common stock.
We have the right to redeem, upon three-business day notice, a portion
or all amounts outstanding under the debenture prior to the maturity date at a
20% redemption premium provided that the closing bid price of our common stock
is less than $0.15. In addition, in the event of a redemption, we are required
to issue to Cornell 50,000 shares of common stock for each $100,000 redeemed,
which shares would not be required to be registered by the Company. Under the
terms of the debenture, the holder has the right to convert all or part of the
debenture within the three-day period following a redemption notice.
We also issued to Cornell five-year warrants to purchase 1,500,000,
4,000,000 and 4,000,000 shares of our common stock at $0.08, $0.10 and $0.12,
per share, respectively.
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In connection with the purchase agreement, we also entered into a
registration rights agreement with Cornell providing for the registration of the
shares of common stock issuable upon conversion of the debentures and exercise
of the warrants. We were obligated to use our best efforts to cause the
registration statement to be declared effective no later than April 27, 2006,
which we accomplished, and to insure that the registration statement remains in
effect until all of the shares of common stock issuable upon conversion of the
debentures and exercise of the warrants have been sold.
Our obligations under the purchase agreement are secured by
substantially all of our assets. As further security for our obligations there
under, Jon Lei, our former Chief Executive Officer, granted a security interest
to Cornell in 2,000,000 shares of the Company's common stock that he owns.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF EXCHANGE ACT
The following table lists the executive officers and directors of the
Company as of September 25, 2007:
NAME AGE POSITION
---------------- --- -------------------------------
Harinder Dhillon 34 Chief Executive Officer,
President and Director
Louie Ucciferri 46 Chairman of the Board of
Directors, Corporate Secretary,
Acting Chief Financial Officer
Kin Ng 38 Director
Harinder Dhillon has been our Chief Executive Officer since October 2006. Prior
to October 2006 Mr. Dhillon had been Vice President of Operations since October
2001 and has been the President of Warp 9 Inc. since July 1, 2005. Mr. Dhillon
joined us in July 2000. Prior to joining us, from 1993 to1998, Mr. Dhillon
served as the Chief Information Officer of Informax Data Systems, an enterprise
systems integrator headquartered in Southern California. Thereafter, during 1999
until he joined us, he worked as an independent technology consultant. He has
designed, managed, and led the development and deployment of enterprise
Internet, Intranet and integration projects for Fortune 500 companies and
various government agencies. Mr. Dhillon received a Bachelor degree in
Electrical and Computer Engineering from the University of California at Santa
Barbara in 1996.
Louie Ucciferri has been our Chairman of the Board, Corporate Secretary and
Acting Chief Financial Office since October 15, 2006 and has been one of our
directors since 2003. He is also the CEO of Regent Capital Group, a NASD
registered broker dealer dedicated to real estate investments. From 1995 to
2004, Mr. Ucciferri served as the President of Westlake Financial Architects, an
financial advisory firm he founded in 1995 to provide financial and investment
advisory services to early stage companies. Since November 1998, he has also
served as President of Camden Financial Services, a NASD registered broker
dealer. Mr. Ucciferri received Bachelors degrees in Economics and Sociology from
Stanford University in 1983.
Mr. Kin Ng has been an outside director since October 2006. Mr. Ng has been a
real estate broker and mortgage loan broker at Signal Financial Solutions since
2000. He specializes in real estate sales, purchase, lease and management. Prior
to that, he had a career in the airline industry. From 1998 to 2000, he was the
Airport Operations Supervisor for China Southern Airlines, prior to which he
held various positions for Delta Airlines and American Trans Air. Mr. Ng
received a Bachelor of Science degree in 1993 from the School of Hospitality
Management at California State Polytechnic University at Pomona.
Under the Nevada General Corporation Law and the Company's Articles of
Incorporation, as amended, the Company's directors will have no personal
liability to the Company or its stockholders for monetary damages incurred as
the result of the breach or alleged breach by a director of his "duty of care".
This provision does not apply to the directors' (i) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law, (ii)
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acts or omissions that a director believes to be contrary to the best interests
of the corporation or its shareholders or that involve the absence of good faith
on the part of the director, (iii) approval of any transaction from which a
director derives an improper personal benefit, (iv) acts or omissions that show
a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders, (v) acts or omissions
that constituted an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders, or
(vi) approval of an unlawful dividend, distribution, stock repurchase or
redemption. This provision would generally absolve directors of personal
liability for negligence in the performance of duties, including gross
negligence.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
BOARD COMMITTEES
The Board of Directors has not had an Audit Committee since February
2006 when Tom Djokovich, the sole member of the Audit Committee, resigned from
the Company's Board of Directors for personal reasons. Since then, we have not
reappointed an Audit Committee.
AUDITOR INDEPENDENCE
GENERAL. HJ Associates & Consultants, LLP ("HJ") is the Company's
principal auditing accountant firm since August 2006. HJ provided other
non-audit services to the Company. The Company's Board of Directors has
considered whether the provisions of non-audit services are compatible with
maintaining HJ independence.
REPORT OF THE AUDIT COMMITTEE
In February 2006, the sole member of the Company's Audit Committee
resigned from the Board of Directors for personal reasons. The Company has not
reformed the Audit Committee since that time. Accordingly the Company has not
received any reports from the Audit Committee during the fiscal year ended June
30, 2007. The Company's full board of directors is presently performing the
functions of an Audit Committee until a new Audit Committee is formed in the
future.
CODE OF CONDUCT
We have adopted a Code of Conduct that applies to all of our directors,
officers and employees. Any waiver of the provisions of the Code of Conduct for
executive officers and directors may be made only by the Audit Committee when
formed or the full Board of Directors and, in the case of a waiver for members
of the Audit Committee, by the Board of Directors. Any such waivers will be
promptly disclosed to our shareholders.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and certain persons who own more than 10% of a registered class of
the Company's equity securities (collectively, "Reporting Persons"), to file
reports of ownership and changes in ownership ("Section 16 Reports") with the
Securities and Exchange Commission (the "SEC"). Reporting Persons are required
by the SEC to furnish the Company with copies of all Section 16 Reports they
file.
Based solely on its review of the copies of such Section 16 Reports
received by it, or written representations received from certain Reporting
Persons, all Section 16(a) filing requirements applicable to the Company's
Reporting Persons during and with respect to the fiscal year ended June 30, 2007
have been complied with on a timely basis.
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ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our directors. The salary is paid to them for
their services as executive officers of the Company and not as directors.
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
FISCAL OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING ALL OTHER
--------------------------- ---- ------ ----- ------------ OPTIONS COMPENSATION
------- ------------
Harinder Dhillon (1) 2007 $200,000 $63,947 -0- 8,000,000 -0-
Chief Executive Officer,
President, Director
Louie Ucciferri (2) 2007 $22,500 -0- -0- 2,500,000 -0-
Chairman, Secretary, Chief
Financial Officer
Kin Ng (3) 2007 -0- -0- -0- 1,000,000 -0-
Director
---------------------
(1) Mr. Dhillon was appointed as Chief Executive Officer, President, and as
a Director of the Company and was compensated as such with a stock
option grant to purchase 8,000,000 shares of common stock, at an
exercise price of $0.01 per share, on October 15, 2006. These stock
options are exercisable until October 2014. These stock options vest in
equal monthly installments over a forty-eight month period.
(2) Mr. Ucciferri was appointed to Chairman, Secretary and Acting Chief
Financial Officer of the Company with compensation of $2,500 per month
and a stock option grant to purchase 2,500,000 shares of common stock,
at an exercise price of $0.01 per share, on October 15, 2006. These
stock options are exercisable until October 2010. These stock options
vest in equal monthly installments over a twelve month period.
(3) Kin Ng was appointed as a Director of the Company and was compensated
as such with a stock option grant to purchase 1,000,000 shares of
common stock, at an exercise price of $0.01 per share, on October 15,
2006. These stock options are exercisable until October 2010. These
stock options vest in equal monthly installments over a twelve month
period.
Directors generally do not receive cash compensation for their services
to the Company as directors, but are reimbursed for expenses actually incurred
in connection with attending meetings of the Board of Directors.
EXECUTIVE OFFICER COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer and our most highly
paid executive officers (the "Named Executive Officers") whose total annual
salary and bonus for services rendered in all capacities for the year ended June
30, 2007 was $100,000 or more.
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ANNUAL COMPENSATION LONG-TERM
------------------- COMPENSATION
AWARDS
------
FISCAL OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING ALL OTHER
--------------------------- ---- ------ ----- ------------ OPTIONS COMPENSATION
------- ------------
Harinder Dhillon............. 2007 $200,000 $63,947 -0- 8,000,000 (2) -0-
CEO, President of Warp 9, Inc. 2006 $150,000(1) $11,371 -0- 650,000 (1) -0-
2005 $125,000 $2,894 -0- -0- -0-
2004 $125,000 $8,714 -0- -0- -0-
Louie Ucciferri (3).......... 2007 $22,500 -0- -0- 2,500,000 -0-
Acting Chief Financial
Officer and Corporate
Secretary
--------------------------
(1) Effective March 1, 2006, Mr. Dhillon's base salary was increased to
$200,000 per year from $125,000. In addition, he has a performance
bonus plan for earning up to $150,000 based on the profitability of the
Warp 9 operation over the subsequent 12 months. In July 2005, Mr.
Dhillon received a cashless stock option grant to purchase 650,000
shares of unregistered common stock at an exercise price equal to the
fair market value of common stock at the time grant, which was $0.13
per share.
(2) Effective October 15, 2006, Mr. Dhillon was appointed as President and
Chief Executive Officer of the Company. Mr. Dhillon was granted a stock
option to purchase 8,000,000 shares of common stock, at an exercise
price of $0.01 per share, under the Company's 2003 Stock Option Plan.
(3) Mr. Ucciferri was appointed as Chairman of the Board of Directors,
Secretary and Acting Chief Financial Officer on October 15, 2006. Mr.
Ucciferri was granted a stock option to purchase 2,500,000 shares of
common stock, at an exercise price of $0.01 per share, under the
Company's 2003 Stock Option Plan and compensated as an executive
officer with a monthly retainer of $2,500.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information with respect to options to
purchase common stock of the Company granted to the Company's officers during
fiscal year 2007.
PERCENT OF TOTAL
OPTIONS GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
--------------------- --------------- ------------------ --------- -----------------
Harinder Dhillon 8,000,000 (1) 50.6% $0.01 9/16/2014
President, Warp 9 Inc.
Louie Ucciferri 2,500,000 (2) 15.8% $0.01 9/16/2011
-------------------
(1) These stock options were granted on October 15, 2006 vesting in equal
month-to-month installments over 48 months.
(2) These stock options were granted on October 15, 2006 vesting in equal
month-to-month installments over 12 months.
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FISCAL YEAR-END OPTION EXERCISES
The following table sets forth information with respect to options to
purchase common stock of the Company held by the Company's executive officers at
June 30, 2007.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
JUNE 30, 2007 AT JUNE 30, 2007 (2)
------------- --------------------
SHARES
ACQUIRED
UPON
NAME EXERCISE VALUE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------------- ----------- ------------- ----------- -------------
Harinder Dhillon -0- -0- 2,058,219 6,591,781 $20,582 $65,918
Chief Executive
Officer, President
Louie Ucciferri -0- -0- 1,770,833 729,167 $17,708 $ 7,292
Acting Chief Financial
Officer and
Corporate Secretary
----------------------
(1) The value realized is the difference between the market price of the common
stock on the date of exercise and the exercise price of the stock option.
The underlying securities held upon exercise are unregistered common stock.
(2) The value of unexercised "in-the-money" options is the difference between
the market price of the common stock on June 30, 2007 ($0.02 per share) and
the exercise price of the option, multiplied by the number of shares
subject to the option. The underlying securities held upon exercise are
unregistered common stock.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements with its
executive officers to date. The Company may enter into employment agreements
with them in the future.
STOCK OPTION PLAN
On July 10, 2003, the Board of Directors of the Company adopted the
2003 Stock Option Plan for Directors, Executive Officers, Employees and Key
Consultants of the Company (the "2003 Plan"). The 2003 Plan was ratified by the
shareholders of the Company by written consent effective August 25, 2003. The
2003 Plan authorizes the issuance of up to 25,000,000 shares of the Company's
common stock pursuant to the grant and exercise of up to 25,000,000 stock
options. To date, 15,725,002 options to purchase 15,725,002 shares of common
stock at volume weighted average price of $0.02 per share granted under the 2003
Plan are outstanding. To date, 2,775,000 options have been exercised.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the names the executive officers and
directors of the Company and all persons known by the Company to beneficially
own 5% or more of the issued and outstanding common stock of the Company at
September 25, 2007.
NAME, TITLE AND ADDRESS NUMBER OF SHARES
BENEFICIALLY OWNED (1) PERCENTAGE OWNERSHIP
----------------------- ---------------------- --------------------
Harinder Dhillon
Chief Executive Officer,
President of Warp 9 Inc. 12,085,000 4.93%
Louie Ucciferri
Chairman, Acting Chief Financial Officer,
Corporate Secretary 3,500,000 1.43%
All current Executive Officers as a Group 15,585,000 6.35%
Kin Ng
Director 50,000 0.02%
All current Directors who are
not Executive Officers as a Group 50,000 0.02%
Jonathan Lei 86,969,525 35.46%
-------------------------
(1) Except as pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect
to all shares of common stock beneficially owned. The total number of
issued and outstanding shares and the total number of shares owned by
each person does not include unexercised warrants and stock options,
and is calculated as of September 25, 2007.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 17, 2007, Mr. Harinder Dhillon, the Company's Chief Executive
Officer and President privately purchased 8,650,000 shares of the Company's
common stock, at a purchase price of $0.005 per share, from Mr. Jonathan Lei, a
10% or larger shareholder and former officer of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen Certificate for Common Stock (1)
4.2 Non-Qualified Employee Stock Option Plan (2)
4.3 Convertible Debenture dated December 28, 2005 (3)
4.4 Form of $0.08 Warrant (3)
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4.5 Form of $0.10 Warrant (3)
4.6 Form of $0.12 Warrant (3)
5.1 Opinion of Sichenzia Ross Friedman Ference LLP(3)
10.1 First Agreement and Plan of Reorganization between Latinocare Management Corporation,
a Nevada corporation, and Warp 9, Inc., a Delaware corporation (4)
10.2 Second Agreement and Plan of Reorganization between Latinocare Management Corporation,
a Nevada corporation, and Warp 9, Inc., a Delaware corporation (5)
10.3 Exchange Agreement and Representations for shareholders of Warp 9, Inc.(4)
10.4 Securities Purchase Agreement dated as of March 28, 2005 between Roaming Messenger,
Inc. and Wings Fund, Inc.(6)
10.5 Periodic Equity Investment Agreement dated as of March 28, 2005 between Roaming
Messenger, Inc. and Wings Fund, Inc.(6)
10.6 Registration Rights Agreement dated as of March 28, 2005 between Roaming Messenger,
Inc. and Wings Fund, Inc.(6)
10.7 Securities Purchase Agreement dated December 28, 2005 between the Company and Cornell
Capital Partners LLP (3)
10.8 Investor Registration Rights Agreement dated December 28, 2005 (3)
10.9 Insider Pledge and Escrow Agreement dated December 28, 2005 by and among the Company,
Cornell and David Gonzalez as escrow agent (3)
10.10 Security Agreement dated December 28, 2005 by and between the Company and Cornell (3)
10.11 Escrow Agreement Dated December 28, 2005 by and among the Company, Cornell and David
Gonzalez, as Escrow Agent (3)
10.12 Irrevocable Transfer Agent Instructions (3)
10.13 Exclusive Technology License Agreement, dated September 18, 2006 (8)
10.14 Subscription Agreement with Zingerang Inc., dated September 18, 2006 (8)
10.15 Termination of License Agreement with Carbon Sciences, Inc., dated April 2, 2007 (9)
21 List of Subsidiaries(7)
-------------------
(1) Incorporated by reference from the exhibits included with the
Company's prior Report on Form 10-KSB filed with the Securities and
Exchange Commission, dated March 31, 2002.
(2) Incorporated by reference from the exhibits included in the
Company's Information Statement filed with the Securities and Exchange
Commission, dated August 1, 2003.
(3) Incorporated by reference from the exhibits included in the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 29, 2005.
(4) Incorporated by reference from the exhibits included with the
Company's prior Report on Form SC 14F1 filed with the Securities and
Exchange Commission, dated April 8, 2003.
(5) Incorporated by reference from the exhibits included with the
Company's prior Report on Form 8K filed with the Securities and
Exchange Commission, dated May 30, 2003.
(6) Incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission dated March 30, 2005.
(7) Previously filed
(8) Incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission dated September 22, 2005.
(9) Incorporated by reference to exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission dated May 8, 2007.
-40-
(b) The following is a list of Current Reports on Form 8-K filed by the Company
during and subsequent to the last quarter of the fiscal year ended June 30,
2007.
Report on Form 8-K dated September 21, 2007 relating to notice of
termination of customer contract.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
HJ Associates & Consultants, LLP ("HJ") is the Company's principal
auditing accountant firm since August 2006. HJ provided other non-audit services
to the Company. The Company's Board of Directors has considered whether the
provisions of non-audit services is compatible with maintaining HJ independence.
Prior to August 2006, the Company's principal auditing accounting firm
was Rose Snyder & Jacobs, CPAs ("RSJ"). The Audit Committee approved the
engagement of RSJ before RSJ rendered audit and non-audit services to the
Company.
AUDIT FEES
An aggregate of $22,227 was billed by our auditors for the following
professional services: audit of the annual financial statement of the Company
for the fiscal year ended June 30, 2007, and review of the interim financial
statements included in quarterly reports on Form 10-QSB for the periods ended
September 30, 2006, December 31, 2006, and March 31, 2007.
An aggregate of $60,248 was billed by our auditors for the following
professional services: audit of the annual financial statement of the Company
for the fiscal year ended June 30, 2005, and review of the interim financial
statements included in quarterly reports on Form 10-QSB for the periods ended
September 30, 2005, December 31, 2005, and March 31, 2006.
TAX FEES
Our auditors billed the Company $2,694 for tax preparation services
during the fiscal year ended June 30, 2007.
-41-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: October 12, 2007 WARP 9, INC.
By: \s\ Harinder Dhillon
--------------------------------------
Harinder Dhillon,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: \s\ Louie Ucciferri Dated: October 12, 2007
--------------------------------------
Louie Ucciferri, Chairman, Corporate
Secretary, Acting Chief Financial Officer
(Principal Financial/Accounting Officer)
By: \s\ Harinder Dhillon Dated: October 12, 2007
--------------------------------------
Harinder Dhillon, Chief Executive Officer
and President (Principal Executive Officer)
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