UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED DECEMBER 31, 2006
COMMISSION FILE NUMBER 0-13215
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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 A, 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 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the proceeding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
As of February 13, 2007 the number of shares outstanding of the
registrant's only class of common stock was 227,786,533.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet as of December 31, 2006 (unaudited).................................................... 3
Statements of Operations for the Three Months and Six Months ended December 31, 2006
and 2005 (unaudited)................................................................................. 4
Statements of Cash Flows for the Six Months ended
December 31, 2006 and 2005 (unaudited)............................................................... 5
Notes to Consolidated Financial Statements
(unaudited).......................................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................ 10
Item 3 Controls and Procedures.............................................................................. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................... 15
Item 2. Changes in Securities................................................................................ 15
Item 3. Defaults upon Senior Securities...................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 16
Item 5. Other Information.................................................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................................................... 17
Signatures.................................................................................................... 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 245,018
Accounts Receivable, net 461,052
Prepaid and Other Current Assets 17,936
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TOTAL CURRENT ASSETS 724,006
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PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 89,485
Computer Equipment 499,970
Commerce Server 50,000
Computer Software 9,476
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648,931
Less Accumulated Depreciation (445,480)
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NET PROPERTY AND EQUIPMENT 203,451
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OTHER ASSETS
Lease Deposit 9,749
Restricted Cash 93,000
Internet Domain, net 1,319
Investment-Zingerang 10,000
Loan Costs 144,167
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TOTAL OTHER ASSETS 258,235
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TOTAL ASSETS $ 1,185,692
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LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 243,452
Credit Cards Payable 90,880
Accrued expenses 447,431
Bank Line of Credit 62,182
Deferred Income 136,000
Note Payable 19,000
Customer Deposit 41,033
Derivative Liability-Debenture 494,084
Capitalized Leases, Current Portion 35,585
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TOTAL CURRENT LIABILITIES 1,569,647
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LONG TERM LIABILITIES
Convertible Debenture 955,000
Beneficial Conversion Feature (201,906)
Capitalized Leases 47,736
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TOTAL LIABILITIES 800,830
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SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value;
495,000,000 authorized shares;
216,786,532 shares issued and outstanding 216,786
Additional paid in capital 6,181,921
Accumulated deficit (7,583,492)
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TOTAL SHAREHOLDERS' DEFICIT (1,184,785)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,185,692
==============
The accompanying notes are an integral part of these financial statements.
3
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Three Six Six
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
-------------- --------------- --------------- --------------
REVENUE $ 903,754 $ 518,146 $ 1,336,430 $ 856,072
COST OF SERVICES 210,432 159,332 306,171 266,386
-------------- --------------- --------------- --------------
GROSS PROFIT 693,322 358,814 1,030,259 589,686
OPERATING EXPENSES
Selling, General and Administrative Expenses 529,225 522,615 1,030,397 1,130,258
Research and Development - 106,972 107,377 212,754
Depreciation and Amortization 40,575 23,972 80,214 47,365
-------------- --------------- --------------- --------------
TOTAL OPERATING EXPENSES 569,800 653,559 1,217,988 1,390,377
-------------- --------------- --------------- --------------
INCOME (LOSS) FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) 123,522 (294,745) (187,729) (800,691)
OTHER INCOME/(EXPENSE)
Interest Income 1,119 763 3,334 1,779
Other Income 25,242 9,579 53,657 15,965
Interest Expense (41,507) (111,359) (117,092) (121,627)
-------------- --------------- --------------- --------------
TOTAL OTHER INCOME (EXPENSE) (15,146) (101,017) (60,101) (103,883)
-------------- --------------- --------------- --------------
INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION FOR TAXES 108,376 (395,762) (247,830) (904,574)
PROVISION FOR INCOME TAXES - - - -
-------------- --------------- --------------- --------------
NET INCOME (LOSS) 108,376 (395,762) (247,830) (904,574)
============== =============== =============== ==============
BASIC AND DILUTED LOSS PER SHARE $ 0.00 $ (0.00) $ (0.00) $ (0.00)
============== =============== =============== ==============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 209,677,484 184,151,379 203,413,895 182,798,365
============== =============== =============== ==============
The accompanying notes are an integral part of these financial statements.
4
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Six
months ended months ended
December 31, December 31,
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (247,830) $ (904,574)
Adjustment to Reconcile Net Loss to Net Cash
Used in Operating Activities
Depreciation and Amortization 46,379 47,508
Issuance of Common Shares and Warrants for Services - 125,943
Conversion of Convertible Debenture 185,000 100,000
Conversion Feature Recorded as Interest Expense (33,367)
Amortization of Loan Costs 33,750 -
Cost of Stock Options Recognized 40,383 -
Derivative Expense (81,791) -
(Increase) Decrease in:
Accounts Receivable (299,982) (95,705)
Prepaid and Other Assets 6,041 (963)
Increase (Decrease) in:
Accounts Payable 71,960 52,127
Accrued Expenses 53,360 -
Deferred Income 74,667 -
Other Liabilities 9,886 92,540
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NET CASH USED IN OPERATING ACTIVITIES (141,544) (583,124)
--------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of Stock for Investment (10,000) -
Purchase of Property and Equipment (1,173) (26,462)
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NET CASH USED IN INVESTING ACTIVITIES (11,173) (26,462)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on Note Payable (6,000) -
Payments on Capitalized Leases (45,285) (27,133)
Proceeds from Line of Credit 61,840 99,658
Proceeds from Convertible Debenture - 295,500
Proceeds from Issuance of Common Stock, Net of Cost - 272,963
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,555 640,988
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NET INCREASE (DECREASE) IN CASH (142,162) 31,402
CASH, BEGINNING OF PERIOD 387,180 237,529
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CASH, END OF PERIOD $ 245,018 $ 268,931
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $ 12,884 $ 21,627
=============== ===============
Taxes Paid $ - $ -
=============== ===============
Capitalized Lease Contracted $ 19,796 $ 19,796
=============== ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the three months ended December 31, 2006, the Company issued
16,286,745 shares of common stock at a fair value of $90,000 for the
convertible debenture. During the three months ended December 31, 2005, the
Company purchased $19,796 of equipment under capital leases respectively.
The accompanying notes are an integral part of these financial statements.
5
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all normal recurring adjustments considered necessary for a fair
presentation have been included. Operating results for the three month
period ended December 31, 2006 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2007. For further
information refer to the financial statements and footnotes thereto
included in the Company's Form 10K-SB for the year ended June 30, 2006.
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.
GOING CONCERN
The accompanying 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.
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 three and six months ended
December 31, 2006 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.
6
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (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 three and six months ended
December 31, 2006, included compensation expense for the stock-based
payment awards granted prior to, but not yet vested, as of December 31,
2006 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 December 31, 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 three and six months ended December 31, 2006 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, 2006, we accounted for
forfeitures as they occurred. The stock-based compensation expense
recognized in the consolidated statement of operations during the six
months ended December 31, 2006 is $40,383.
2006 2005
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Net loss as reported $ (247,830) $ (904,574)
Add: Stock based employee compensation expense - -
included in net reported loss, net of related tax effect
Deduct: Stock based employee compensation expense - (40,346)
determined under fair value based method for all awards,
net of related tax effect
---------------- ----------------
Pro forma net loss $ (247,830) $ (944,920)
================ ================
Basic and diluted pro forma loss per share
As reported $ (0.00) $ (0.00)
================ ================
Pro forma $ (0.00) $ (0.00)
================ ================
3. CAPITAL STOCK
At December 31, 2006, 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 six months ended December 31, 2006, the
Company issued 26,983,386 shares of common stock ranging from $0.0046 per
share to $0.0078 per share for the conversion of the debenture with a value
of $185,000.
7
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
4. 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 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 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. These warrants are being accounted for as equity
instruments.
8
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
4. CONVERTIBLE DEBENTURES (Continued)
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 December 31, 2006, the outstanding balance of the debentures were
$955,000 and the interest accrued was $94,221.
5. RELATED PARTY TRANSACTIONS
On January 16, 2007, Mr. Harinder Dhillon, the Company's President
exercised his option to purchase 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.
6. LITIGATION SETTLEMENT
On December 21, 2006, the Company entered into a satisfactory settlement
agreement with the plaintiff in a lawsuit and the case was dismissed with
prejudice and a mutual general release of all claims. A one time expense of
$42,694 was incurred for related legal fees and settlement cost.
7. SUBSEQUENT EVENT
On February 1, 2007, the Company issued 10,000,000 shares of common stock
at $0.005 per share for the conversion of the Cornell debenture with an
outstanding balance reduction of $50,000.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS
This Form 10-QSB may contain "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:
o statements concerning the potential benefits that Warp 9, Inc. ("W9"
or the "Company") may experience from its business activities and
certain transactions it contemplates or has completed; and
o statements of W9's expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts. These statements may be made expressly in this Form 10-QSB. You
can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "estimates," "opines," or
similar expressions used in this Form 10-QSB. These forward-looking
statements are subject to numerous assumptions, risks and
uncertainties that may cause W9's actual results to be materially
different from any future results expressed or implied by W9 in those
statements. The most important facts that could prevent W9 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 commercialize its technology or to make sales;
(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.
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
10
outstanding stock ownership may be incurred due to the issuance of more shares,
warrants and stock options, or the exercise of outstanding warrants and stock
options, and other risks inherent in the Company's business.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. W9 cautions you not to place undue reliance on the
statements, which speak only as of the date of this Form 10-QSB. 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
W9 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-QSB, or to reflect the
occurrence of unanticipated events.
CURRENT OVERVIEW
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. 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.
We also licensed our patented mobile messaging technology on an exclusive
basis to one licensee, from which we expect to derive royalty revenues. We have
generated only minimal revenues from the licensing of that technology to date.
To date, almost all of our revenues are generated from Warp 9 e-commerce
products and services.
The quarter ended December 31, 2006 was the highest revenue quarter in the
history of the Company. The primary reasons for this revenue increase were: (i)
increases in monthly fees due to higher sales volumes by our growing number of
11
e-commerce clients and (ii) more professional services work from clients such as
custom marketing campaigns, augmenting website functionality, and custom
programming projects. One of the reasons for the increase in monthly fees is
because our SaaS pricing model is based in part on the sales volume of our
clients' e-commerce websites. Since online retailing revenues are the highest
during the holiday shopping season, our revenues for the months of October
through December are higher during that period.
The results of operation for the quarter ended December 31, 2006 are also
the first complete quarter of financials which solely reflect the Warp 9
e-commerce products and services operation.
While the Warp 9 ICS (Internet Commerce System) is our flagship and highest
revenue product, we have been developing new products based a proprietary
virtual publishing technology that we have developed. These new products will
allow for the creation of interactive web versions of paper catalogs and
magazines 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. 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 purchasing. Our beta customers have discovered that order sizes through
virtual catalogs are higher than traditional e-commerce websites and resulting
in increasing sales demand. We have been selling this solution on a limited
basis as a programming 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 aggressively market these new products in the near future.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2006
COMPARED TO THE SAME PERIOD IN 2005
Total revenue for the three-month period ended December 31, 2006 was
$903,754 as compared to $518,146 for the three-month period ended December 31,
2005. The 74% increase in revenue was primarily due to (i) the increase in
monthly fees from our e-commerce software as a result of a larger customer base
that is experiencing higher sales volumes, and (ii) a general increase in
professional services from having more customers.
The cost of revenue for the three-month period ended December 31, 2006 was
23% of gross revenue as compared to 31% of gross revenue for the three-month
period ended December 31, 2005. This decrease in cost of revenue is due to the
increased sale of higher profit margin products and services.
Total operating expenses for the three month period ended December 31, 2006
decreased by $83,759 to $569,800 from $653,559 in 2005. The change is primarily
due to the virtual elimination of all operating costs relating to the Roaming
Messenger business, which was licensed to a third party in September 2006 for
operation by it on an exclusive basis.
Selling, general and administrative expenses for the three month period
ended December 31, 2006 was $529,225 as compared to $522,615 for the three month
12
period ended December 31, 2005. While the virtual elimination of all operating
costs relating to the Roaming Messenger business tended to reduce our overall
selling, general and administrative expense for the three month period ended
December 31, 2006, we incurred an approximately $59,000 increase in salaries,
bonuses and benefits as well as one time charges of (i) $42,694 related to a
settlement of a lawsuit from a former employee, and (ii) $49,858 for bad debt
allowances.
Non-cash selling, general and administrative expenses for the three months
ended December 31, 2006 totaled $9,696 for employee stock option expenses.
Research and development expenses for the three month period ended December
31, 2006 was $0 compared to $106,972 for the three month period ended December
31, 2005. This decrease is due to the elimination of research and development
costs relating to the Roaming Messenger business.
Expense related to depreciation and amortization was $40,575 for the three
months ended December 31, 2006 as compared to $23,972 for the prior year.
Total other income and expense was ($15,146) for the three months ended
December 31, 2006 as compared to ($101,017) in the prior year. The difference is
primarily due to a $100,000 expense representing the value of the conversion
feature of the Cornell convertible debenture in accordance to EITF 00-27 during
the three month period ended December 31, 2005.
For the three months ended December 31, 2006, our consolidated net income
was $108,376 as compared to a consolidated net loss of ($395,762) for the three
months ended December 31, 2005. We achieved a consolidated net income because of
the elimination of costs previously associated with the Roaming Messenger
operation, and an increase in holiday season revenues along with a general
increase in customers for Warp 9 e-commerce products and services.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2006 COMPARED
TO THE SAME PERIOD IN 2005
Total revenue for the six-month period ended December 31, 2006 was
$1,336,430 as compared to $856,072 for the six-month period ended December 31,
2005. The 56% increase in revenue was primarily due to (i) the increase in
monthly fees from our e-commerce software as a result of a larger customer base
that experienced higher sales volumes, and (ii) a general increase in
professional services from having more customers.
The cost of revenue for the six-month period ended December 31, 2006 was
23% of gross revenue as compared to 31% of gross revenue for the six-month
period ended December 31, 2005. This decrease in cost of revenue is due to the
increased sale of higher profit margin products and services.
Total operating expenses for the six month period ended December 31, 2006
decreased by $172,389 to $1,217,988 from $1,390,377 in 2005. The change is
primarily due to the virtual elimination of all operating costs relating to the
Roaming Messenger business which was licensed to a third party in September 2006
for operation by it on an exclusive basis.
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Selling, general and administrative expenses for the six month period ended
December 31, 2006 was $1,030,397 as compared to $1,130,258 for the six month
period ended December 31, 2005. While the virtual elimination of all operating
costs relating to the Roaming Messenger business tended to reduce our overall
selling, general and administrative expense for the six month period ended
December 31, 2006, we incurred an approximately $32,000 increase in salaries,
bonuses and benefits as well as one time charges of (i) $42,694 relating to a
settlement of a lawsuit from a former employee, and (ii) $47,797 for bad debt
allowances.
Non-cash selling, general and administrative expenses for the six months
ended December 31, 2006 totaled $40,383 for employee stock option expenses.
Research and development expenses for the six month period ended December
31, 2006 is $107,377 compared to $212,754 for the six month period ended
December 31, 2005. This decrease is due to the elimination of research and
development costs relating to the Roaming Messenger business in September 2006.
Expenses related to depreciation and amortization was $80,214 for the six
months ended December 31, 2006 as compared to $47,365 for the prior year.
Total other income and expense was ($60,101) for the six months ended
December 31, 2006 as compared to ($103,883) in the prior year.
For the six months ended December 31, 2006, our consolidated net loss was
($247,830) as compared to a consolidated net loss of ($904,574) for the six
months ended December 31, 2005. The reduction in our consolidated net loss is
due to the elimination of costs previously associated with the Roaming Messenger
operation, and a general increase in revenue from Warp 9 e-commerce products and
services.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at December 31, 2006 of $245,018 as compared to cash
of $387,180 as of June 30, 2006. The Company had a net working capital deficit
(i.e. the difference between current assets and current liabilities) of
($845,641) at December 31, 2006 as compared to a net working capital deficit of
($848,174) at June 30, 2006. Cash flow utilized by operating activities was
($141,544) for the six months ended December 31, 2006 as compared to cash
utilized for operating activities of ($583,124) during the six months ended
December 31, 2005. Cash flow used in investing activities was ($11,173) for the
six months ended December 31, 2006 as compared to cash used in investing
activities of ($26,462) during the six months ended December 31, 2005. Cash flow
provided by financing activities was $10,555 for the six months ended December
31, 2006 as compared to cash provided by financing activities of $640,988 for
the six months ended December 31, 2005.
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 on the line of credit at December 31, 2006 was 12.25% per annum.
14
At December 31, 2006, $62,182 was borrowed under this line of credit.
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.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chairman and Chief Financial Officer has 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 quarterly report and, based
on this evaluation, has 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 fiscal quarter ended December 31, 2006 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 21, 2006, the Company entered into a satisfactory settlement
agreement with the plaintiff in a lawsuit and the case was dismissed with
prejudice and a mutual general release of all claims.
ITEM 2. CHANGES IN SECURITIES
During the three months 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 for the conversion of the Cornell debenture with an outstanding balance
reduction of $90,000.
During the three months ended December 31, 2006, the Company granted
14,531,500 stock options to various employees and new members of management at
an exercise price of $0.01 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In September 2006, by written consent of the holders of a majority of the
outstanding voting shares of the Company, the Company amended its Articles of
Incorporation to change its name from Roaming Messenger, Inc. to Warp 9, Inc.
ITEM 5. OTHER INFORMATION
On October 15, 2006, Jonathan Lei resigned as the Chairman, Chief Executive
Officer, President, Chief Financial Officer, and Corporate Secretary of the
Company for personal reasons. Mr. Lei has accrued a total of $237,980 in salary
on the Company's balance sheet since August 1999. This amount has been audited
by the Company's auditors and reported in the Company's Form 10Q-SB and 10K-SB
filings. The Company and Mr. Lei have agreed to convert his accrued salary into
a promissory note bearing simple interest at a rate of five percent (5%) per
annum payable on demand on or before October 31, 2008, in lieu of paying the
accrued salary upon Mr. Lei's resignation. The Company has also entered into a
one year consulting agreement with Mr. Lei, which can be terminated by either
party at any time upon 30 days prior written notice, in order to ease the
transition to new management. Pursuant to the terms of the agreement, Mr. Lei
will receive $12,500 per month in consideration for providing ongoing strategic
planning and advisory services to the Company including, but not limited to,
business planning, financial planning, product planning, and management
consulting services. The Company's Board of Directors has appointed Louie
Ucciferri to replace Jonathan Lei as Chairman of the Board of Directors and has
appointed Harinder Dhillon and Kin Ng to fill the vacancies on the Board of
Directors created by the resignation of Tom M. Djokovich in February 2006 and
the resignation of Jonathan Lei in October 2006. The Company has appointed
Harinder Dhillon, the President of the Company's wholly owned subsidiary, as the
President and Chief Executive Officer of the Company and Louie Ucciferri, a
director of the Company, as the new Corporate Secretary and Acting Chief
Financial Officer of the Company.
On October 25, 2006, the Company's articles of incorporation were amended
to change the name of the Company from Roaming Messenger, Inc. to Warp 9, Inc.
On November 2, 2006, the Company was approved to trade its common stock
under the new symbol WNYN.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. 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)
10.1 First Agreement and Plan of Reorganization between
Latinocare Management Corporation, a Nevada corporation, and
Warp 9, Inc., a Delaware corporation (3)
10.2 Second Agreement and Plan of Reorganization between
Latinocare Management Corporation, a Nevada corporation, and
Warp 9, Inc., a Delaware corporation (4)
10.3 Exchange Agreement and Representations for Shareholders of
Warp 9, Inc.(3)
31.1 Section 302 Certification
32.1 Section 906 Certification
----------------------------
(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 with the Company's
prior Report on Form SC 14F1 filed with the Securities and Exchange
Commission, dated April 8, 2003.
(4) 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.
(b) The following is a list of Current Reports on Form 8-K filed by the Company
during and subsequent to the quarter for which this report is filed.
(1) Form 8-K, dated October 17, 2006, filed with the SEC reflecting the
resignation of Jonathan Lei in all capacities with the Company and
appointment of new officers and directors.
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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: February 13, 2007 WARP 9, INC.
By: \s\Harinder Dhillon
--------------------------------------
Harinder Dhillon
President and Chief Executive Officer
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: February 13, 2007
--------------------------------------
Louie Ucciferri, Chairman
Corporate Secretary, Acting
Chief Financial Officer
(Principal Financial/accounting Officer)
By: \s\Harinder Dhillon Dated: February 13, 2007
--------------------------------------
Harinder Dhillon, President and
Chief Executive Officer, Director
(Principal Executive Officer)
18