Attached files
FORM 10-K/A
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, 2009
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
------------------- ------------------------
COMMON STOCK OTC
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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-K or any
amendment to this Form 10-K.
|X|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [___] Accelerated filer [___]
Non-accelerated filer [___] Smaller reporting company [_X_]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of
the registrant was approximately $2,809,255 as of June 30, 2009.
There were 340,579,815 shares outstanding of the registrant's Common
Stock as of September 17, 2009.
TABLE OF CONTENTS
PART II
ITEM 7 Management's Discussion and Analysis or Plan of Operation 2
ITEM 8 Financial Statements and Supplementary Data 7
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
ITEM 9A(T) Controls and Procedures 24
ITEM 9B Other Information 26
SIGNATURES 27
-1-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY STATEMENTS
This Form 10-KA contains financial projections and other
"forward-looking statements," as that term is used in federal securities laws,
about Warp 9 Inc.'s ("Warp 9" or the "Company") 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-KA.
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-KA. 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;
(d) inadequate capital to continue or expand its
business, and inability to raise additional capital
or financing to implement its business plans;
(e) failure to further commercialize its technology or to
make sales;
(f) reduction 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; and
(j) failure of the relicensing or other commercialization
of the Roaming Messenger technology to produce
revenues or profits;
There is no assurance that the Company will be profitable, the Company
may not be able to successfully develop, manage or market its products and
services, the Company may not be able to attract or retain qualified executives
and technology personnel, the Company may not be able to obtain customers for
its products or services, the Company's products and services may become
obsolete, government regulation may hinder the Company's business, additional
dilution in outstanding stock ownership may be incurred due to the issuance of
more shares, warrants and stock options, the exercise of outstanding warrants
and stock options, and other risks inherent in the Company's businesses.
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-KA. 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-KA or to reflect the occurrence of unanticipated events.
-2-
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 multi-channel retailers maximize the Internet channel by applying our
technologies for online e-commerce, e-mail marketing campaigns, and interactive
visual merchandising. Offered as 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 and software and
hardware architecture, design, and maintenance. 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 lower costs and 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 e-commerce operation.
We charge our customers a recurring monthly fee for using our
e-commerce software based on a Software-as-a-Service model. These fees include
fixed monthly charges, and variable fees based on the sales volume of our
clients' e-commerce websites. 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 contract revenue
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 have allowed 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. Clients utilizing this
technology have discovered when exposing consumers to virtual catalogs, a higher
average order size and significant increase in rate of conversion result. 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.
Research and development ("R&D") efforts have been focused both on
these new products and on updating our current products with new features. In
the planning phase of these new features, we look to direct client feedback and
feature requests; we study the e-commerce landscape to determine features that
will provide our clients with a competitive advantage in producing greater and
more effective selling; and we also examine features that will create a
competitive advantage during our sales process to clients. Emerging and
declining trends also play a role in how clients perceive what features should
be provided by which vendors and we are sometimes able to capitalize on these
opportunities by bundling features for greater value and/or increased fees and
revenue.
The results of operation for the fiscal year ending June 30, 2009
reflect one complete year of the Company focusing exclusively on the Warp 9
e-commerce products and services. In September 2006, we ceased our Roaming
Messenger business and reduced our staff significantly in order to focus on our
Warp 9 business.
-3-
Approximately 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,
2009, the ICS product accounted for 61% of gross revenue. The monthly recurring
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, 2009, the EMS product
accounted for 2% 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, 2009, VMS and VCS sales accounted for 1%
of gross revenue. During the fiscal year ending June 30, 2009, the professional
services accounted for 29% 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.
-4-
RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2009 AS COMPARED TO THE YEAR
ENDED JUNE 30, 2008
REVENUE
Total revenue for the twelve month period ended June 30, 2009 decreased
by ($216,321) to $2,133,344 from $ 2,349,665 in the prior year, a decrease of
9%. The difference is primarily due to a decrease in professional and other
services of ($223,813), a reduction in Warp 9 EMS revenue of ($43,845), and a
reduction of Warp 9 VCS revenue of ($58,320), due to attrition from the slowing
economic environment and decreased client budgets. This was offset by an
increase of certain one-time revenue receipts of $144,652 from Warp 9 ICS early
termination settlement revenue.
COST OF REVENUE
The cost of revenue for the twelve month period ended June 30, 2009
increased by $12,675 to $156,310 as compared to $143,635 for the twelve month
period ended June 30, 2008. The increase in the cost of revenue was primarily
due to an increase in sales commissions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by
$74,843 during the twelve months ended June 30, 2009 to $1,620,824 as compared
to $1,545,981 for the twelve month period ended June 30, 2008. The increase in
SG&A expenses was primarily due to an increase in bad debt allowance expense of
$138,093 and an increase of legal fees of $20,959, offset by a decrease in
employee related expenses of ($73,873) and a decrease in insurance of ($8,188).
RESEARCH AND DEVELOPMENT
Research and development expenses decreased by ($11,858) during the
twelve months ended June 30, 2009 to $36,877 as compared to $48,735 for the
twelve months ended June 30, 2008. The decrease is due to an overall decrease in
employee expenses.
DEPRECIATION AND AMORTIZATION
Expense related to depreciation and amortization was $66,053 for the
twelve months ended June 30, 2009 as compared to $141,059 for the prior year.
The decrease is due to the elimination of amortization expenses related to the
Cornell convertible debenture and decreased depreciation of other equipment.
-5-
OTHER INCOME AND EXPENSE
Total other income and expense was $55,640 for the twelve months ended
June 30, 2009 as compared to $415,211 for the prior year. The change is mostly
due to the gain on the sale of an investment recorded in the twelve months
ending June 30, 2008.
NET INCOME
For the twelve months ended June 30, 2009, Warp 9's consolidated net
income was $150,723 as compared to a consolidated net income of $2,922,069 for
the twelve months ended June 30, 2008. This decrease in net income is primarily
due to the inclusion in the 2008 fiscal year of a recognized tax benefit of
$2,065,508 resulting from the recognition of deferred tax assets related to net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Warp 9 had cash as of June 30, 2009 of $849,508 as compared to cash of
$680,649 as of June 30, 2008. Warp 9 had net working capital (i.e. the
difference between current assets and current liabilities) of $1,195,641 as of
June 30, 2009 as compared to a net working capital of $742,976 at June 30, 2008.
Cash flow provided by operating activities was $290,864 for the year
ended June 30, 2009 as compared to $447,544 for the year ended June 30, 2008.
The decrease of ($156,680) in cash flow provided by operating activities was
primarily due to payments for outstanding current liabilities during the year
ended June 30, 2009.
Cash flow used by investing activities was ($6,286) for the year ended
June 30, 2009 as compared to cash flow provided in investing activities of
$495,645 for the year ended June 30, 2008. The decrease of ($501,931) for cash
flow used by investing activities was primarily due to the recognition of a one
time gain on the sale of an investment to the Company's investment portfolio
during the fiscal year ended June 30, 2008.
Cash flow used by financing activities was ($115,719) for the year
ended June 30, 2009 as compared to ($694,381) during the year ended June 30,
2008. The decrease of $578,662 for cash flows used by financing activities is
primarily due to recognition of payments in settlement of the Cornell
convertible debenture during the fiscal year ended June 30, 2008.
For the twelve months ended June 30, 2009, the Company's capital needs
have primarily been met from positive cash-flow from operations.
While Warp 9 expects that its capital needs in the foreseeable future
may 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. In the current financial environment, it has been
difficult for the Company to obtain equipment leases and other business
financing. There is no assurance that Warp 9 would be able to obtain additional
working capital through the private placement of common stock or from any other
source.
OFF-BALANCE SHEET ARRANGEMENTS
None.
-6-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF WARP 9, INC.
WARP 9, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONTENTS
PAGE
----
Report of Independent Registered Public Accounting Firm 8
Consolidated Balance Sheets 9
Consolidated Statements of Operations 10
Consolidated Statements of Shareholders' Equity 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements 13-23
-7-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Warp 9, Inc.
Santa Barbara, California
We have audited the accompanying consolidated balance sheets of Warp 9, Inc. and
subsidiaries as of June 30, 2009 and 2008, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
years in the period ended June 30, 2009. 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
subsidiaries as of June 30, 2009 and 2008, and the results of their operations
and their cash flows for each of the two years in the period ended June 30,
2009, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management's assessment of the effectiveness of
Warp 9, Inc.'s internal control over financial reporting as of June 30, 2009,
included in the accompanying Form 10-K and, accordingly, we do not express an
opinion thereon.
/s/ HJ Associates & Consultants, LLP
_____________________________________
HJ Associates & Consultants, LLP
Salt Lake City, Utah
September 25, 2009
-8-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2009 June 30, 2008
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash $ 849,508 $ 680,649
Restricted Cash 93,000 93,000
Accounts Receivable, net 324,668 290,920
Prepaid and Other Current Assets 11,804 16,679
Current Portion of Deferred Tax Asset 165,167 38,849
--------------- ---------------
TOTAL CURRENT ASSETS 1,444,147 1,120,097
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PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 89,485 89,485
Computer Equipment 511,889 505,603
Commerce Server 50,000 50,000
Computer Software 9,476 9,476
--------------- ---------------
660,850 654,564
Less accumulated depreciation (621,829) (555,947)
--------------- ---------------
NET PROPERTY AND EQUIPMENT 39,021 98,617
--------------- ---------------
OTHER ASSETS
Lease Deposit 9,749 9,749
Internet Domain, net 891 1,062
Long Term Deferred Tax Asset 1,762,727 2,029,859
--------------- ---------------
TOTAL OTHER ASSETS 1,773,367 2,040,670
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TOTAL ASSETS $ 3,256,535 $ 3,259,384
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 70,573 $ 64,799
Credit Cards Payable 254 15,352
Accrued Expenses 87,194 88,514
Bank Line of Credit - 7,916
Deferred Income - 35,333
Note Payable, Other 33,916 40,107
Note Payable, Related Party - 50,481
Customer Deposit 48,431 51,436
Capitalized Leases, Current Portion 8,138 23,183
--------------- ---------------
TOTAL CURRENT LIABILITIES 248,506 377,121
--------------- ---------------
LONG TERM LIABILITIES
Note payable, Other 46,542 74,216
Capitalized Leases - 7,912
--------------- ---------------
TOTAL LONG TERM LIABILITIES 46,542 82,128
--------------- ---------------
TOTAL LIABILITIES 295,048 459,249
--------------- ---------------
SHAREHOLDERS' EQUITY
Common Stock, $0.001 Par Value;
495,000,000 Authorized Shares;
340,579,815 and 340,579,815 Shares Issued
and Outstanding, respectively 340,579 340,579
Additional Paid In Capital 6,897,311 6,886,682
Accumulated Deficit (4,276,403) (4,427,126)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 2,961,487 2,800,135
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,256,535 $ 3,259,384
=============== ===============
The accompanying notes are an integral part
of these consolidated financial statements
-9-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
June 30, 2009 June 30, 2008
---------------- ---------------
REVENUE $ 2,133,344 $ 2,349,665
COST OF SERVICES 156,310 143,635
---------------- ---------------
GROSS PROFIT 1,977,034 2,206,030
OPERATING EXPENSES
Selling, general and administrative expenses 1,620,824 1,545,981
Research and development 36,877 48,735
Stock option expense 11,129 28,905
Depreciation and amortization 66,053 141,059
---------------- ---------------
TOTAL OPERATING EXPENSES 1,734,883 1,764,680
---------------- ---------------
INCOME FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) 242,151 441,350
OTHER INCOME/(EXPENSE)
Interest income 40,489 20,663
Other income 37,208 24,206
Gain on sale of investment - 498,750
Gain/(Loss) on derivative liability valuation - 100,038
Interest expense (22,057) (228,446)
---------------- ---------------
TOTAL OTHER INCOME (EXPENSE) 55,640 415,211
---------------- ---------------
INCOME FROM OPERATIONS BEFORE PROVISION FOR TAXES 297,791 856,561
PROVISION FOR INCOME (TAXES)/BENEFIT
Income taxes paid (6,254) (3,200)
Income tax (provision)/benefit (140,814) 2,068,708
---------------- ---------------
PROVISION FOR INCOME (TAXES)/BENEFIT (147,068) 2,065,508
---------------- ---------------
NET INCOME 150,723 2,922,069
================ ===============
BASIC AND DILUTED EARNINGS PER SHARE $ 0.00 $ 0.01
================ ===============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 340,579,815 273,771,640
================ ===============
The accompanying notes are an integral part
of these consolidated financial statements
-10-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
---------------- ----------- ----------- ------------ --------------
Balance, June 30, 2007 227,910,128 $ 227,910 $6,251,506 $(7,349,195) $ (869,779)
Issuance of common stock in August 2007, note 7
Convertible debenture 11,009,174 11,009 108,991 - 120,000
Issuance of common stock in September 2007, note 7
Convertible debenture 6,363,636 6,364 63,636 - 70,000
Issuance of common stock in October 2007, note 7
Convertible debenture 11,235,955 11,236 88,764 - 100,000
Issuance of common stock in January 2008, note 7
Convertible debenture 11,842,105 11,842 33,158 - 45,000
Issuance of common stock in February 2008, note 7
Convertible debenture 13,043,478 13,043 39,131 - 52,174
Issuance of common stock in March 2008, note 7
Convertible debenture 13,750,000 13,750 24,750 - 38,500
Issuance of common stock in April 2008, note 7
Convertible debenture 29,579,185 29,579 33,721 - 63,300
Issuance of common stock in May 2008, note 7
Convertible debenture 15,846,154 15,846 4,754 - 20,600
Derivative liability - - 209,712 - 209,712
Stock option expense - - 28,905 - 28,905
Stock issuance cost - - (346) - (346)
Net income - - - 2,922,069 2,922,069
---------------- ----------- ----------- ------------ --------------
Balance, June 30, 2008 340,579,815 340,579 6,886,682 (4,427,126) 2,800,135
Stock option expense - - 11,129 - 11,129
Stock issuance cost - - (500) - (500)
Net income - - - 150,723 150,723
---------------- ----------- ----------- ------------ --------------
Balance, June 30, 2009 340,579,815 $ 340,579 $ 6,897,311 $(4,276,403) $ 2,961,487
================ =========== =========== ============ ==============
The accompanying notes are an integral part
of these consolidated financial statements
-11-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
June 30, 2009 June 30, 2008
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 150,723 $ 2,922,069
Adjustment to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 66,053 65,907
Gain on sale of investment - (498,750)
Bad debt expense 83,784 42,207
Conversion feature recorded as interest expense - 151,412
Amortization of loan costs - 75,151
Cost of stock compensation recognized 11,129 28,905
Derivative expense - (100,038)
Change in assets and liabilities:
(Increase) Decrease in:
Accounts receivable (117,532) (106,897)
Prepaid and other assets 4,875 (8,600)
Deferred tax asset 140,814 (2,068,708)
Increase (Decrease) in:
Accounts payable (9,324) 30,202
Accrued expenses (1,320) (132,761)
Deferred income (35,333) 35,333
Other liabilities (3,005) 12,112
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 90,864 447,544
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investment - 500,000
Purchase of property and equipment (6,286) (4,355)
---------------- ----------------
NET CASH PROVIDED/(USED) IN INVESTING ACTIVITIES (6,286) 495,645
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable (84,346) (203,106)
Payments on capitalized leases (22,957) (31,960)
Payments on line of credit (7,916) (35,000)
Payments on convertible debenture - (423,969)
Proceeds from issuance of common stock, net of cost (500) (346)
---------------- ----------------
NET CASH USED BY FINANCING ACTIVITIES (115,719) (694,381)
---------------- ----------------
NET INCREASE IN CASH 168,859 248,808
CASH, BEGINNING OF YEAR 680,649 431,841
================ ================
CASH, END OF YEAR $ 849,508 $ 680,649
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 22,057 $ 209,957
================ ================
Taxes paid $ 6,254 $ 3,200
================ ================
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the year ended June 30, 2008, the Company issued 112,669,687 shares of
of common stock at a fair value of $509,574 for the convertible debenture.
The accompanying notes are an integral part
of these consolidated financial statements
-12-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
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.
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, 2009 and 2008 are $151,085 and
$67,301 respectively.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
-13-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
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. The deferred revenue as of June 30, 2009 and 2008 was $0 and
$35,333, respectively.
For the fiscal year ended, June 30, 2009, monthly fee from web products and
associated service fees account for 64% of the Company's total revenues,
professional services account for 28% and the remaining 8% of total
revenues are from resale of third party products and services.
For the fiscal year ended, June 30, 2008, monthly fee from web products and
associated service fees account for 53% of the Company's total revenues,
professional services account for 38% and the remaining 9% 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. Historically, 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 $36,877 and $48,735 for the years ended June 30,
2009 and 2008, respectively.
ADVERTISING COSTS
The Company expenses the cost of advertising and promotional materials when
incurred. Total advertising costs were $32,985 and $27,329 for the years
ended June 30, 2009 and 2008, respectively.
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, 2009 and 2008, 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.
-14-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
Depreciation expense are $66,053 and $65,907 for the years ended June 30,
2009 and 2008 respectively.
Included in property and equipment are assets under capitalized leases with
an original cost of $218,179. Depreciation of assets under capitalized
leases is included in depreciation and amortization expense. During the
years ended June 30, 2009 and 2008, there were no additions to fixed assets
through capitalized leases.
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.
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
operations. The adoption of (FAS) No. 123R by the Company had no material
impact on the statement of operations.
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, 2008,
included compensation expense for the stock-based payment awards granted
prior to, but not yet vested, as of June 30, 2009 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 123R. As stock-based compensation expense recognized
in the statement of income for the year ended June 30, 2009 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,
2009, we accounted for forfeitures as they occurred. The stock-based
compensation expense recognized in the consolidated statement of operations
during the years ended June 30, 2009 and 2008 was $11,129 and $28,905,
respectively.
-15-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE
SFAS 128 "Earnings Per Share" requires the Company to calculate earnings
per share based on basic and diluted earnings per share, as defined. Basic
earnings per share excludes dilution and is computed by dividing net income
by the weighted average number of shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if stock options and warrants to issue common stock were exercised or
converted into common stock. The dilutive effect of outstanding options
issued by the Company were not reflected in diluted earnings per share,
because under the provision of the treasury stock method, options will only
have a dilutive effect when the average market price of common stock during
the period exceeds the exercise price of the options. The Company's average
market price for common stock was less than the exercise price of all
outstanding stock options and warrants.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS
165"), which establish general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued. SFAS 165 is for interim or annual periods ending
after June 15, 2009. The adoption of SFAS 165 did not have a material
effect on the Company's financial statements.
3. OBLIGATIONS UNDER CAPITALIZED LEASES
LESSOR DESCRIPTION 6/30/2009 6/30/2008
-------------------------------------------------------------------------------- ---------------
SBBT Payble in monthly installments of $488
interest at 17%, matures in August, 2009 $ 1,421 $ 9,147
SBBT Payble in monthly installments of $281
interest at 16%, matures in November, 2009 1,352 4,257
SBBT Payble in monthly installments of $726
interest at 17%, matures in July, 2010 5,364 9,684
GE Payble in monthly installments of $551
interest at 17%, matures in September, 2008 - 5,857
GE Payble in monthly installments of $1206
interest at 17%, matures in September, 2008 - 2,150
--------------- ---------------
8,137 31,095
Less current portion 8,137 23,183
--------------- ---------------
Long-term portion of obligations under
captalized leases $ - $ 7,912
=============== ===============
-16-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
3. OBLIGATIONS UNDER CAPITALIZED LEASES (Continued)
Minimum annual lease payments under capitalized lease obligations at June
30, 2009 are as follows:
FISCAL YEAR
------------
2010 $ 8,718
Less amount representing Interest 581
----------
8,137
Less current portion 8,137
----------
Long term portion of capitalized lease obligations $ -
4. NOTES PAYABLE
The Company had 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
was in default until paid in full on June 5, 2008.
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, 2009 and 2008, the outstanding principal balance was $0 and $50,481,
respectively.
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 monthly payment on
the note is $3,342 per month and bears annual interest at the rate of 10%
per annum. At June 30, 2009 and 2008, the outstanding principal balance was
$80,458 and $114,323 respectively. The following is a schedule of payments
due for the next five years.
Year Ending
June 30,
-----------
2010 $33,916
2011 $37,463
2012 $ 9,079
5. DEFERRED TAX BENEFIT
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carry-forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
-17-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
5. DEFERRED TAX BENEFIT (Continued)
The provision (benefit) for income taxes for the year ended June 30, 2009
and 2008 consist of the following:
2009 2008
---------------- ----------------
Federal:
Current $ - $ -
Deferred 1,680,729 1,803,489
State:
Current - -
Deferred 247,165 265,219
---------------- ----------------
$ 1,927,894 $ 2,068,708
================ ================
Net deferred tax assets consist of the following components as of June 30,
2009 and 2008:
2009 2008
---------------- ----------------
Deferred Tax Assets:
NOL Carryforward $ 1,737,058 $ 1,924,273
Depreciation 25,669 10,735
R&D Carryforward 94,851 94,851
Accrued Vacation Payable 11,393 12,602
Allowance for Doubtful Accounts 58,923 26,247
Deferred Tax Liabilities: - -
Valuation Allowance - -
---------------- ----------------
Net Deferred Tax Asset $ 1,927,894 $ 2,068,708
================ ================
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal and state income tax rate of 39% to pretax
income from continuing operations for the years ended June 30, 2009 and
2008 due to the following:
2009 2008
---------------- ----------------
Book Income $ 116,138 $ 332,810
State Income Taxes 6,254 3,200
Nondeductible Stock Compensation 4,340 11,273
Other 812 1,598
Related Party Accruals (1,208) 26,248
Allowance for Bad Debt 32,676 391
Depreciation 14,933 8,516
Beneficial Conversion Feature - 59,051
Derative Liability Interest - (39,015)
NOL Carryover (167,691) (400,872)
Valuation Allowance - -
---------------- ----------------
Income Tax Expense $ 6,254 $ 3,200
================ ================
Due to the Company reporting income from continuing operations in the year ended
June 30,2008, the Company reduced the valuation allowance to $0 by recognizing a
deferred tax asset of $2,068,708 for the benefit of loss carry-forwards. The
Company has determined that based upon the current recognizable income and the
likelihood of future taxable earnings, the recognition threshold has been met.
The effect of meeting this threshold is included in the provision for income
taxes in the amount of $2,068,708 in the income statement, and is included in
the balance sheet in a current deferred tax asset of $165,167 and long term
deferred tax asset of $1,762,727.
-18-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
6. INCOME TAXES
The Company files income tax returns in the U.S. Federal jurisdiction, and
the state of California. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2005.
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, on July 1, 2007. The Company's
policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During
the period ended June 30, 2009, the Company did not recognize interest and
penalties.
7. CAPITAL STOCK
At June 30, 2009, the Company's authorized stock consisted 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 per share. 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, 2008, the Company
issued 112,669,687 shares of common stock ranging from $0.0013 to $0.0110
per share for the conversion of the debenture with a value of $509,575.
8. 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.
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 years ended June 30, 2009 and
2008 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. 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
6/30/2009 6/30/2008
----------------------------------
Risk free interest rate 3.2% - 5.07% 3.2% - 5.07%
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
-19-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
8. STOCK OPTIONS AND WARRANTS (Continued)
A summary of the Company's stock option activity and related information
follows:
Year ended Year ended
June 30, 2009 June 30, 2008
-------------------------------- --------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
----------------- -------------- ---------------- --------------
Outstanding -beginning of year 14,350,000 $ 0.02 15,725,002 $ 0.05
Granted - - - -
Exercised - - - -
Forfeited (1,950,000) (0.02) (1,375,002) (0.04)
----------------- -------------- ---------------- --------------
Outstanding - end of year 12,400,000 $ 0.02 14,350,000 $ 0.02
================= ============== ================ ==============
Exercisable at the end of year 9,283,185 $ 0.02 8,430,309 $ 0.01
================= ============== ================ ==============
Weighted average fair value of
options granted during the year $ - $ -
============== ==============
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, 2009 was as follows:
Weighted
Average
Number of remaining
Exercise options contractual
prices outstanding life (years)
------------------- ------------------ ------------------
$ 0.07 100,000 4.50
$ 0.08 50,000 2.51
$ 0.13 650,000 0.07
$ 0.01 10,950,000 4.61
$ 0.03 150,000 5.84
$ 0.02 500,000 5.97
------------------
12,400,000
==================
-20-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
8. STOCK OPTIONS AND WARRANTS (Continued)
STOCK WARRANTS
During the year ended June 30, 2009, the Company issued no warrants for
services. A summary of the Company's warrant activity and related
information follows:
Year End Year End
June 30, 2009 June 30, 2008
----------------------------- ------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
---------------- ----------- ---------------- ------------
Outstanding -beginning of year 9,515,000 $ 0.11 10,499,500 $ 0.12
Granted - - - -
Exercised - - - -
Forfeited - - (984,500) (0.11)
---------------- ----------- ----------------- -----------
Outstanding - end of year 9,515,000 $ 0.11 9,515,000 $ 0.11
---------------- ----------- ----------------- -----------
9. LINE OF CREDIT
On January 30, 2009, the Company renewed its $100,000 revolving line of
credit from Bank of America at an annual interest rate of prime plus 2
percentage points. This line of credit is secured by assets of the Company.
The effective interest rate of the line of credit at June 30, 2009 was 9%.
As of June 30, 2009 and 2008, the balance was $0 and $7,916, respectively.
10. 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 recorded a beneficial conversion
cost associated with the convertibility feature of the security that was
equal to 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 had the right to 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 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 recorded 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 was
amortized over the life of the debentures and the derivative liability was
adjusted periodically according to stock price fluctuations. At the time of
conversion, any remaining derivative liability was charged to additional
paid-in capital. For purpose of determining derivative liability, the
Company used Black Scholes modeling for computing historic volatility.
-21-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
10. CONVERTIBLE DEBENTURES (Continued)
We had 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 was less than $0.15. In
addition, in the event of a redemption, we were 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.
On June 10, 2008, the Company settled the outstanding principal and
interest on the convertible debentures through a lump sum payment of
$620,846 consisting of $385,426 in principal, $196,878 in interest and
$38,542 in redemption penalty.
11. CONCENTRATIONS
For the year ended June 30, 2009, the Company had three customers who
represented approximately 43% of total revenue. For the year ended June 30,
2008, the Company had one customer who represented approximately 15% of
total revenue.
At June 30, 2009 and 2008, accounts receivable from two customers
represented approximately 26% and 38% of total accounts receivable,
respectively.
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, 2009 and 2008, the Company had bank balances exceeding the amount
insured by the U.S. Federal Deposit Insurance Corporation (FDIC).
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
of the facilities expires in 2010. The following is a schedule of minimum
lease payments for the next year.
Years Ending Rent Payment
June 30,
------------ ------------
2010 $ 109,000
Total lease expense for the years ended June 30, 2009 and 2008 was $138,017
and $149,679, 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.
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, Suite 101 Dr. Santa Barbara, CA 93117. This cash
amount is restricted until the lease expires on June 30, 2010 or when
negotiated down. The restricted cash is classified as a separate line item
on the Balance Sheet.
-22-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
12. COMMITMENTS AND CONTINGENCIES (Continued)
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 EVENTS
Management has evaluated subsequent events through September 25, 2009, the
date the financial statements were available to be issued, and has
determined there are no subsequent events to be reported.
-23-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed by Warp 9
is recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the Securities and Exchange Commission. The
Company's Chairman, Chief Executive Officer, and Acting Chief Financial Officer
are responsible for establishing and maintaining controls and procedures for the
Company.
Management has evaluated the effectiveness of the Company's disclosure
controls and procedures as of June 30, 2009 (under the supervision and with the
participation of the Company's Chairman, Chief Executive Officer, and Acting
Chief Financial Officer) pursuant to Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended. As part of such evaluation, management
considered the matters discussed below relating to internal control over
financial reporting. Based on this evaluation, the Company's Chairman, Chief
Executive Officer, and Acting Chief Financial Officer have concluded that the
disclosure controls and procedures are effective, and are also effective to
ensure that information required to be disclosed in our reports submitted or
filed under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to our management, including our principal executive and principal
financial officer, to allow timely decisions regarding required disclosure.
The term "internal control over financial reporting" is defined as a
process designed by, or under the supervision of, the registrant's principal
executive and principal financial officers, or persons performing similar
functions, and effected by the registrant's board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
o pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of the registrant;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the registrant are being
made only in accordance with authorizations of management and
directors of the registrant; and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the registrant's assets that could have a material effect on
the financial statements.
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MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934). The Company's
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes of accounting
principles generally accepted in the United States. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance of achieving their control objectives.
Furthermore, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate due to change in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of the Company's
Chairman, Chief Executive Officer, and Acting Chief Financial Officer, the
Company conducted an evaluation of the effectiveness of its control over
financial reporting as of June 30, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in internal control-integrated framework. Based on
this evaluation, the Company's Chairman, Chief Executive Officer, and Acting
Chief Financial Officer have concluded that the internal controls over financial
reporting are effective.
AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over
financial reporting that occurred during the Company's fiscal year that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Prior to the fourth
quarter, Warp 9 completed procedures to achieve Sarbanes-Oxley 404 compliance,
which were tested during and since the fourth quarter.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
The Company's management does not expect that its disclosure controls
or its internal control over financial reporting will prevent or detect all
error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. The design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision
making can be faulty and that breakdowns can occur because of simple error or
mistake. Controls can also be circumvented by the individual acts of some
persons, by collusion of two or more people, or management override of the
controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
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ITEM 9B. OTHER INFORMATION
None
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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: March 2, 2010 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\ William E. Beifuss Dated: March 2, 2010
--------------------------------------
William E. Beifuss, Chairman
By: \s\ Louie Ucciferri Dated: March 2, 2010
--------------------------------------
Louie Ucciferri, Corporate
Secretary, Acting Chief Financial Officer
(Principal Financial/accounting Officer)
By: \s\ Harinder Dhillon Dated: March 2, 2010
--------------------------------------
Harinder Dhillon, Chief Executive Officer
and President (Principal Executive Officer)
and Director
By: \s\ John C. Beifuss Dated: March 2, 2010
--------------------------------------
John C. Beifuss, Director
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