UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For quarterly period ended March 31, 2014
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition period from _______________ to ______________
Commission File Number: 0-13215
WARP 9, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 30-0050402
----------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1933 CLIFF DRIVE, SUITE 11, SANTA BARBARA, CA 93109
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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
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 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.
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Yes[_X_] No[__]
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Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
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Yes[_X_] No[__]
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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. (Check One).
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Large accelerated filer [___] Accelerated filer [___]
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Non-accelerated filer [___] Smaller reporting company [_X_]
(Do not check if a smaller
reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
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Yes[__] No[_X_]
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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 May 12, 2014, the number of shares outstanding of the registrant's class
of common stock was 96,135,126.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
------
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of March 31, 2014
(unaudited) and June 30, 2013 3
Consolidated Statements of Operations for the Three
and Nine Months ended March 31, 2014 and March 31, 2013 4
(unaudited)
Consolidated Statement of Shareholders' Equity/(Deficit)
for the Nine Months ended March 31, 2014 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 2014 and March 31, 2013 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Mine Safety Disclosures 16
Item 5. Other Information 16
Item 6. Exhibits 16
Signatures 17
-2-
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2014 June 30, 2013
------------------ ---------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 22,044 $ 12,636
Accounts Receivable, net 66,150 62,887
Prepaid and Other Current Assets 11,365 1,343
------------------ ---------------
TOTAL CURRENT ASSETS 99,559 76,866
------------------ ---------------
PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 10,533 83,288
Computer Equipment 22,741 266,789
Computer Software 1,904 14,840
Leasehold Improvements - 18,696
------------------ ---------------
35,178 383,613
Less accumulated depreciation (22,960) (333,215)
------------------ ---------------
NET PROPERTY AND EQUIPMENT 12,218 50,398
------------------ ---------------
OTHER ASSETS
Lease Deposit 14,199 8,244
Licensing fees - 5,000
------------------ ---------------
TOTAL OTHER ASSETS 14,199 13,244
------------------ ---------------
TOTAL ASSETS $ 125,976 $ 140,508
================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES
Accounts Payable $ 236,767 $ 176,871
Accrued Expenses 120,340 91,966
Deferred Income 6,350 -
Accrued Interest 10,936 7,948
Deferred Operating Lease Liability 4,420 6,117
Notes Payable, Wings Fund, net 205,734 126,984
Note Payable, Other 37,867 37,867
Customer Deposit 6,846 6,846
------------------ ---------------
TOTAL CURRENT LIABILITIES 629,260 454,599
------------------ ---------------
LONG-TERM LIABILITIES
Notes Payable, net 31,840 -
------------------ ---------------
TOTAL LONG-TERM LIABILITIES 31,840 -
------------------ ---------------
TOTAL LIABILITIES 661,100 454,599
------------------ ---------------
SHAREHOLDERS' EQUITY/(DEFICIT)
Preferred Stock, $0.001 Par Value;
5,000,000 Authorized Shares; no shares issued and outstanding - -
Common Stock, $0.001 Par Value;
495,000,000 Authorized Shares;
96,135,126 and 96,135,126 Shares Issued and Outstanding , respectively 96,135 96,135
Additional Paid In Capital 7,419,229 7,373,623
Accumulated Deficit (8,050,488) (7,783,849)
------------------ ---------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) (535,124) (314,091)
------------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) $ 125,976 $ 140,508
================== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
March 31, 2014 March 31, 2013 March 31, 2014 March 31, 2013
---------------- ---------------- ---------------- ----------------
REVENUE $ 182,039 $ 223,740 $ 793,534 $ 835,177
COST OF SERVICES 28,876 45,135 199,836 147,464
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 153,163 178,605 593,698 687,713
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Selling, general and administrative expenses 285,497 268,897 787,530 841,347
Research and development - - - 13,307
Stock option expense 5,692 5,713 17,356 15,234
Depreciation and amortization 1,250 5,703 41,674 16,765
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 292,439 280,313 846,560 886,653
---------------- ---------------- ---------------- ----------------
INCOME/(LOSS) FROM OPERATIONS BEFORE OTHER INCOME/(EXPENSES) (139,276) (101,707) (252,862) (198,939)
---------------- ---------------- ---------------- ----------------
OTHER INCOME/(EXPENSES)
Other income 347 7,500 5,693 22,500
Gain on disposal of fixed assets - - 9,778 -
Gain on extinguishment of debt 1,877 - 1,877 8,808
Interest expense (10,964) (1,945) (27,297) (3,937)
---------------- ---------------- ---------------- ----------------
TOTAL OTHER INCOME/(EXPENSES) (8,740) 5,555 (9,949) 27,371
---------------- ---------------- ---------------- ----------------
INCOME/(LOSS) FROM OPERATIONS BEFORE PROVISION FOR TAXES (148,016) (96,152) (262,811) (171,568)
---------------- ---------------- ---------------- ----------------
PROVISION FOR INCOME (TAXES)/BENEFIT
Income taxes paid (1,050) - (3,828) (1,616)
Income tax (provision)/benefit - - - -
---------------- ---------------- ---------------- ----------------
PROVISION FOR INCOME (TAXES)/BENEFIT (1,050) - (3,828) (1,616)
---------------- ---------------- ---------------- ----------------
NET INCOME/(LOSS) $ (149,066) $ (96,152) $ (266,639) $ (173,184)
================ ================ ================ ================
EARNINGS PER SHARE
BASIC AND DILUTED $ (0.00) $ (0.00) $ (0.00) $ (0.00)
================ ================ ================ ================
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 96,135,126 96,135,126 96,135,126 96,135,126
================ ================ ================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
(Unaudited)
Preferred Stock Common Stock Additional
---------------------- -------------------------------- Paid-in Accumulated
Shares Value Shares Value Capital Deficit Total
----------- ---------- ---------------- --------------- --------------- ---------------- --------------
Balance, June 30, 2013 - $ - 96,135,126 $ 96,135 $ 7,373,623 $ (7,783,849) $ (314,091)
Stock compensation expense - - - - 17,356 - 17,356
Net loss - - - - - (266,639) (266,639)
Discount on Note - - - - 28,250 - 28,250
----------- ---------- ---------------- --------------- --------------- ---------------- --------------
Balance, March 31, 2014 - $ - 96,135,126 $ 96,135 $ 7,419,229 $ (8,050,488) $ (535,124)
=========== ========== ================ =============== =============== ================ ==============
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31, 2014 March 31, 2013
----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (266,639) $ (173,184)
Adjustment to reconcile net loss to net cash
(used) by operating activities
Depreciation and amortization 41,674 16,765
Bad debt expense - (43,256)
Cost of stock compensation recognized 17,356 15,234
Amortization of Debt Discount 10,990 -
(Gain)/Loss on sale of fixed assets (9,778) -
Contributed services - 12,000
Change in assets and liabilities:
(Increase) Decrease in:
Accounts receivable (3,263) 42,575
Prepaid and other assets (15,977) 1,777
Other assets 5,000 9,000
Increase (Decrease) in:
Accounts payable 59,896 54,986
Accrued expenses 44,212 1,364
Deferred income 6,350 (32,853)
Other liabilities (1,697) (8,884)
----------------------- -----------------------
NET CASH (USED) IN OPERATING ACTIVITIES (111,876) (104,475)
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,494) (7,705)
Sale of property and equipment 9,778 -
----------------------- -----------------------
NET CASH PROVIDED/(USED) IN INVESTING ACTIVITIES 6,284 (7,705)
----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note 115,000 50,000
----------------------- -----------------------
NET CASH PROVIDED IN FINANCING ACTIVITIES 115,000 50,000
----------------------- -----------------------
NET INCREASE/(DECREASE) IN CASH 9,408 (62,180)
CASH, BEGINNING OF YEAR 12,636 63,104
----------------------- -----------------------
CASH, END OF PERIOD $ 22,044 $ 924
======================= =======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ - $ -
======================= =======================
Taxes paid $ - $ 475
======================= =======================
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 2014
1. BASIS OF PRESENTATION
The accompanying unaudited 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 nine months
ended March 31, 2014 are not necessarily indicative of the results that may
be expected for the year ending June 30, 2014. For further information
refer to the financial statements and footnotes thereto included in the
Company's Form 10K for the year ended June 30, 2013.
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.
ACCOUNTS RECEIVABLE
The Company extends credit to its customers, who are located throughout the
United States of America. 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 March 31, 2014 and
June 30, 2013 are $24,907 and $24,907, respectively.
REVENUE RECOGNITION
The Company recognizes income when the service is provided or when product
is delivered. We present revenue, net of customer incentives. Income is
primarily generated from: 1) Recurring monthly fees from clients who
subscribe to the Company's hosting and support services on terms averaging
twelve months, 2) Recurring and non-recurring fees to build or provide
maintenance for clients' websites ("Professional Services"), or 3) Fees
from the sale of third party marketing services. Unless terminated
accordingly with prior written notice, the term 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 ASC 605-45.
We also offer professional services such as development services. The fees
for development services with multiple deliverables constitute a separate
unit of accounting in accordance with ASC 605-25, which 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 March 31, 2014 and June 30, 2013 was
$6,350 and $0, respectively.
For the quarter ended, March 31, 2014, monthly recurring fees for the
Company's hosting and support services account for 34% of the Company's
total revenues, professional services account for 64% and the remaining 2%
of total revenues are from resale of third party products and services.
For the quarter ended, March 31, 2013, monthly recurring fees for hosting
and support services account for 11% of the Company's total revenues,
professional services account for 86% and the remaining 3% of total
revenues are from resale of third party products and services.
STOCK-BASED COMPENSATION
The Company addressed 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 transactions are accounted for
using a fair-value-based method and recognized as expenses in our statement
of income. There was no material impact on the Company's financial
statement of operations.
-7-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 2014
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation expense recognized during the period is based on
the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the
consolidated statement of operations during the three months ended March
31, 2014, included compensation expense for the stock-based payment awards
granted prior to, but not yet vested, as of March 31, 2014 based on the
grant date fair value estimated. Stock-based compensation expense
recognized in the statement of income for the nine months ended March 31,
2014 is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. The stock-based compensation expense recognized
in the consolidated statements of operations during the nine months ended
March 31, 2014 and 2013 are $17,356 and $15,234, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management reviewed accounting pronouncements issued during the nine months
ended March 31, 2014, and no pronouncements were adopted during the period.
RECLASSIFICATION
Certain statement of operations amounts for the nine months ended March 31,
2013 were reclassified to conform to the presentation of the period ended
March 31, 2014.
3. LIQUIDITY AND OPERATIONS
The Company had net losses of $266,639 and $173,184 for the nine months
periods ended March 31, 2014 and 2013, respectively, and net cash used in
operating activities of $111,876 and $104,475 for the same periods,
respectively.
While we expect that our capital needs in the foreseeable future will be
met by cash-on-hand and existing cash flow, there is no assurance that the
Company will generate any or sufficient positive cash flows, or 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. The Company has recently been incurring operating losses and
experiencing negative cash flow. In the current financial environment, it
could become difficult for the Company to obtain business leases and other
equipment financing. There is no assurance that we would be able to obtain
additional working capital through the private placement of common stock or
from any other source.
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 does not generate significant revenue, and has
negative cash flows from operations, which 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, an additional
cash infusion. Management believes the existing shareholders and potential
prospective new investors will provide the additional cash needed to meet
the Company's obligations as they become due, and will allow the
development of its core of business.
4. CONVERTIBLE NOTE PAYABLE
On March 25, 2013, the Company signed a convertible promissory note ("the
March 2013 Note") in the amount of $100,000, at which time an initial
advance of $50,000 was received to cover operational expenses. The lender
advanced an additional $20,000 on April 16, 2013, an additional $15,000 on
May 1, 2013 and an additional $15,000 on May 16, 2013, for a total draw of
$100,000. The terms of the March 2013 Note allow the lender to convert all
or part of the outstanding balance plus accrued interest, at any time after
the effective date, at a conversion price of the lower of (a) $0.015per
share, or (b) 50% of the lowest trade price of Common Stock recorded on any
trade day after the effective date of the agreement. The March 2013 Note
bears interest at a rate of 10% per year and originally carried a maturity
date twelve (12) months from the effective date or each advance. The terms
of the agreement were amended to change the maturity date to eighteen
months.
On May 16, 2013, the Company signed a convertible promissory note ("the May
2013 Note") in the amount of $100,000, at which time an initial advance of
$10,000 was received to cover operational expenses. The lender advanced an
additional $20,000 on June 3, 2013, an additional $25,000 on July 2, 2013
and an additional $10,000 on September 30, 2013, for a total
-8-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 2014
4. CONVERTIBLE NOTE PAYABLE (continued)
draw of $65,000. The terms of the May 2013 Note allow the lender to convert
all or part of the outstanding balance plus accrued interest, at any time
after the effective date, at a conversion price of the lower of (a) $0.015
per share, or (b) 50% of the lowest trade price of Common Stock recorded on
any trade day after the effective date of the agreement. At the time of
issuance, the Company recognized a discount on the May 2013 Note in the
amount of $6,000 and an additional $7,000 during the quarter ended
September 30, 2013, due to the beneficial conversion feature. This discount
will be recognized over twelve months, beginning on May 16, 2013. The May
2013 Note bears interest at a rate of 10% per year and matures one year
from the effective date of each advance.
On March 4, 2014, the Company signed a convertible promissory note ("the
March 2014 Note") in the amount of $250,000, at which time an initial
advance of $25,000 was received to cover operational expenses. The lender
advanced an additional $20,000 on March 17, 2014, an additional $30,000 on
April 2, 2014, for a total draw of $75,000. The terms of the March 2014
Note allow the lender to convert all or part of the outstanding balance
plus accrued interest, at any time after the effective date, at a
conversion price of the lower of (a) $0.012 per share, or (b) 50% of the
lowest trade price of Common Stock recorded on any trade day after the
effective date of the agreement. The March 2014 Note bears interest at a
rate of 10% per year and matures eighteen months (18) from the effective
date of each advance. During the quarter ended March 31, 2014, the Company
recognized a discount on the March 2014 Note in the amount of $14,250, due
to the beneficial conversion feature. This discount will be recognized over
twelve months, beginning on March 4, 2014.
On April 16, 2014, the Company signed a convertible promissory note ("the
April 2014 Note") in the amount of $300,000, at which time an initial
advance of $40,000 was received to cover operational expenses. The terms of
the April 2014 Note allow the lender to convert all or part of the
outstanding balance plus accrued interest, at any time after the effective
date, at a conversion price of the lower of (a) $0.012 per share, or (b)
50% of the lowest trade price of Common Stock recorded on any trade day
after the effective date of the agreement. The April 2014 Note bears
interest at a rate of 10% per year and matures eighteen months (18) from
the effective date of each advance.
5. RELATED PARTIES
During the fiscal year ended June 30, 2012, the Company signed a licensing
agreement with PageTransformer, to obtain expertise in the area of mobile
app and mobile web development. This licensing agreement expires in the
year ended June 30, 2014 and will not be renewed. The two founders of
PageTransformer, Andrew VanNoy and Zachary Bartlett, are our current Chief
Executive Officer and our current Vice President of Operations,
respectively. Other than the original licensing fee paid to
PageTransformer, the Company has not made any subsequent payments to
PageTransformer under the licensing agreement.
6. CAPITAL STOCK
At March 31, 2014 and 2013, 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. No transactions affecting capital stock were noted
during the quarter ended March 31, 2014, or the fiscal year ended June 30,
2013.
7. STOCK OPTIONS AND WARRANTS
On July 10, 2003, the Company adopted the Warp 9, Inc. Stock Option Plan
for Directors, Executive Officers, and Employees of and Key Consultants to
the Company. This Plan authorized the grant of stock options to purchase up
to 25,000,000 shares of common stock until July 10, 2013. Accordingly no
new options may be granted under the Plan, but the terms and conditions of
the Plan still govern all outstanding options under the Plan. Options
granted under the Plan may 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 expires on the date specified in the
Option Agreement, which date may 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
-9-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 2014
7. STOCK OPTIONS AND WARRANTS (continued)
Option is to be no less than the Fair Market Value of the Common Stock on
the date the option is 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 is to be specified by the Board
at the time the Option is granted, and may be less than, equal to, or
greater than the Fair Market Value of the shares of Common Stock on the
date such Nonqualified Option is granted, but may be no less than 85% of
the Fair Market Value of the Common Stock on the date of grant. The Plan
provides specific language as to the termination of options granted.
The weighted average remaining contractual life of options outstanding
issued under the plan as of March 31, 2014 was as follows:
Weighted
Average
Number of remaining
Exercise options contractual
prices outstanding life (years)
------------------ ------------------- -----------------
$ 0.050 8,000 4.33
$ 0.004 500,000 7.54
-------------------
508,000
===================
On October 12, 2011, the Company granted 3,000,000 employee qualified
(incentive) stock options, and 500,000 non-qualified stock options at an
exercise price of $0.004 per share. The options vest 1/48th monthly and
expire on October 12, 2021. As of March 31, 2014, 2,500,000 of these
options have been forfeited due to terminations.
On August 13, 2012, the Company granted 12,500,000 non-qualified stock
options at an exercise price of $0.0053 per share. The options vest 1/36th
monthly and expire on August 13, 2019.
A summary of the Company's stock option activity for the three months
ending March 31, 2014, and related information follows:
March 31, 2014
------------------------------
Options Weighted
average
exercise
price
--------------- --------------
Outstanding - beginning of period 13,508,000 $ 0.005
Granted - -
Exercised - -
Forfeited - -
--------------- --------------
Outstanding - end of period 13,508,000 $ 0.005
=============== ==============
Exercisable at the end of period 7,417,361 $ 0.005
=============== ==============
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.
8. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of
ASC TOPIC 855, and has reported the following events:
-10-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 2014
8. SUBSEQUENT EVENTS (continued)
On April 16, 2014, the Company signed a convertible promissory note ("the
April 2014 Note") in the amount of $300,000, at which time an initial
advance of $40,000 was received to cover operational expenses. The lender
advanced an additional $55,000 on April 30, 2014, for a total draw of
$95,000. The terms of the April 2014 Note allow the lender to convert all
or part of the outstanding balance plus accrued interest, at any time after
the effective date, at a conversion price of the lower of (a) $0.012 per
share, or (b) 50% of the lowest trade price of Common Stock recorded on any
trade day after the effective date of the agreement. The April 2014 Note
bears interest at a rate of 10% per year and matures eighteen months (18)
from the effective date of each advance.
On April 2, 2014, the Company received an advance in the amount of $30,000
on the March 2014 Note.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
CAUTIONARY STATEMENTS
This Form 10-Q 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. ("Warp
9," "we," "us," "our," or the "Company") may experience from its
business activities and certain transactions it contemplates or has
completed; and
o Statements of Warp 9'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-Q. 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-Q. These forward-looking
statements are subject to numerous assumptions, risks and
uncertainties that may cause Warp 9's actual results to be materially
different from any future results expressed or implied by Warp 9 in
those statements. The most important facts that could prevent Warp 9
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) loss of customers and 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, reducing revenue and increasing costs;
(i) insufficient revenues to cover operating costs;
(j) failure of the re-licensing or other commercialization of
the Roaming Messenger technology to produce revenues or
profits;
(k) aspects of the Company's business are not proprietary and in
general the Company is subject to inherent competition;
(l) further dilution of existing shareholders' ownership in the
Company;
(m) uncollectible accounts and the need to incur expenses to
collect amounts owed to the Company; and
(n) the Company does not have an Audit Committee nor sufficient
independent directors.
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.
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-Q. 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-Q or to reflect the occurrence of unanticipated events.
-12-
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
Warp 9 is a provider of e-commerce solutions for midsize online sellers.
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. Our e-commerce solutions are primarily offered utilizing the
Magento platform for websites accessed through a desktop interface and the
Moovweb Responsive Delivery platform for websites accessed through a mobile
interface. 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.
We charge our customers fixed monthly management fees based on a SaaS
model. Unlike traditional software companies that sell software on a perpetual
license where quarterly and annual revenues are quite difficult to predict, our
SaaS model spreads the collection of contract revenue over several quarters or
years and makes our revenues more predictable for a longer period of time. We
also charge non-recurring fees to initially develop websites for our customers.
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 has 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 ASC 605-10-25, that 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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2014, COMPARED TO THE
NINE MONTHS ENDED MARCH 31, 2013.
REVENUE
Total revenue for the nine months ended March 31, 2014 decreased by $41,643
to $793,534 compared to $835,177 for the nine months ended March 31, 2013. The
decrease was primarily due to a decline in the launch of mobile website during
the current period.
COST OF REVENUE
The cost of revenue for the nine months ended March 31, 2014 increased by
$52,372 to $199,836 compared to $147,464 for the nine months ended March 31,
2013. The overall increase was primarily due to costs incurred to produce
e-commerce websites.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative ("SG&A") expenses for nine months
ended March 31, 2014 decreased $53,817 to $787,530 compared to $841,347 for the
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nine months ended March 31, 2013. The overall decrease in SG&A expenses was
primarily due to a decrease in salary and rent expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses for the nine months ended March 31, 2014
decreased $13,307 to $0 compared to $13,307 for the nine months ended March 31,
2013. The decrease was due to a reduction in time devoted to the Warp 9 Total
Commerce Platform ("TCP") and instead devoting those resources to operations and
current project production.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the nine months ended March 31,
2014 increased $24,909 to $41,674, compared to $16,765 for the nine months ended
March 31, 2013. The increase was due to the Company decommissioning its data
center and disposing of the data center equipment, some of which had not been
fully depreciated.
OTHER INCOME AND EXPENSE
Total other income (expense) for the nine months ended March 31, 2014
decreased $37,320 to net other expense of $9,949, compared to net other income
of $27,371 for the nine months ended March 31, 2013. The decrease was primarily
due to an increase in Notes Payable which has contributed to a higher interest
expense in the current period when compared to the prior period.
NET INCOME/(LOSS)
The consolidated net loss for the nine months ended March 31, 2014 was
($266,639) compared to the consolidated net loss of ($173,184) for the nine
months ended March 31, 2013. The increase in net loss for the period was
primarily due to lower revenue and higher cost of revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a net working capital deficit (i.e. the difference between
current assets and current liabilities) of ($529,701) at March 31, 2014 compared
to a net working capital deficit of ($377,733) at June 30, 2013. The decrease in
net working capital at March 31, 2014 was caused by an increase in accounts
payable and notes payable over the past year.
Cash flow used in operating activities was ($111,876) for the nine months
ended March 31, 2014 compared to cash flow used in operating activities of
($104,475) for the nine months ended March 31, 2013. The increase in cash flow
used in operating activities of $7,401 was primarily due to increases in net
loss, and accounts receivable, partially offset by increases in depreciation
expense, accrued expenses and deferred income.
Cash flow provided in investing activities was $6,284 for the nine months
ended March 31, 2014 as compared to cash flow used in investment activities of
($7,705) for the nine months ended March 31, 2013. The increase in cash flow
provided in investing activities of $13,989, during the current period, was
primarily due to the sale of certain fixed assets which were no longer needed.
Cash flow provided in financing activities was $115,000 for the nine months
ended March 31, 2014 as compared to $50,000 for the nine months ended March 31,
2013. The increase in cash flow provided in financing activities of $65,000 was
due to proceeds received by the Company from a convertible promissory note.
While we expect that our capital needs in the foreseeable future will be
met by cash-on-hand and existing cash flow, there is no assurance that we will
generate any or sufficient positive cash flows, or have sufficient capital, to
finance our growth and business operations, or that such capital will be
available on terms that are favorable to us or at all. The Company has recently
been incurring operating losses and experiencing negative cash flow. In the
current financial environment, it could become difficult for the Company to
obtain business leases and other equipment financing. There is no assurance that
we 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
Not Applicable.
-14-
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed by Warp 9 in the reports that it files
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer that
it files under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer and principal financial
officers, or persons performing similar functions as appropriate to allow timely
decisions regarding required disclosure. The Company's Chairman, Chief Executive
Officer, and Chief Financial Officer are responsible for establishing and
maintaining disclosure controls and procedures for the Company.
Management has evaluated the effectiveness of the Company's disclosure
controls and procedures as of March 31, 2014 (under the supervision and with the
participation of the Company's Chairman, Chief Executive Officer, and 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
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective as of March 31, 2014.
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. After
evaluating the Company's internal controls over financial reporting, the
Company's Chairman, Chief Executive Officer, and Chief Financial Officer have
concluded that the internal controls over financial reporting are effective as
of March 31, 2014.
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 nine month period ended March 31,
2014 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
-15-
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
There are no current legal proceedings as of this time.
The Company may file additional collection actions and be involved in other
litigation in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-------------------------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
None.
ITEM 4. MINE SAFETY DISCLOSURES
-------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION
-------------------------
None
ITEM 6. EXHIBITS
----------------
(a) Exhibits
EXHIBIT NO. DESCRIPTION
------------- ------------------------------------------------------
31.1 Section 302 Certification
31.2 Section 302 Certification
32.1 Section 906 Certification
32.2 Section 906 Certification
EX-101.INS XBRL INSTANCE DOCUMENT*
EX-101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT*
EX-101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE*
EX-101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE*
EX-101.LAB XBRL TAXONOMY EXTENSION LABELS LINKBASE*
EX-101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE*
* Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the interactive
data files on Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, as amended, and otherwise are not subject to liability under those
sections.
-16-
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.
WARP 9, INC.
--------------------------------------
(Registrant)
Dated: May 13, 2014 By: /s/ Andrew Van Noy
-------------------------------------
Andrew Van Noy,
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/ Andrew Van Noy Dated: May 13, 2014
--------------------------------------------------------
Andrew Van Noy, Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Gregory Boden Dated: May 13, 2014
--------------------------------------------------------
Gregory Boden, Chief Financial Officer
(Principal Financial/Accounting Officer)
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