AiAdvertising, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - AiAdvertising, Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - AiAdvertising, Inc.	ex321.htm
EX-32.2 - EXHIBIT 32.2 - AiAdvertising, Inc.	ex322.htm
EX-31.2 - EXHIBIT 31.2 - AiAdvertising, Inc.	ex312.htm
EX-31.1 - EXHIBIT 31.1 - AiAdvertising, Inc.	ex311.htm

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 December 31, 2011

[ ] 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.
(Exact name of registrant as specified in its charter)

CALIFORNIA	30-0050402
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6500 Hollister Avenue, Suite 120, Santa Barbara, CA 93117
(Address of principal executive offices) (Zip Code)

(805) 964-3313
Registrant's telephone number, including area code


(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.

Yes

[_X_]

[__]

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

[_X_]

[__]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).

Large accelerated filer	[___]		Accelerated filer	[___]
Non-accelerated filer (Do not check if a smaller reporting company)	[___]		Smaller reporting company	[_X_]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

[__]

[_X_]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of January 31, 2012, 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	2
	Consolidated Balance Sheets as of December 31, 2011 (unaudited) and June 30, 2011 (audited)	3
	Consolidated Statements of Operations for the Three Months and Six Months ended December 31, 2011 and December 31, 2010 (unaudited)	4
	Consolidated Statement of Shareholders’ Equity for the Six Months ended December 31, 2011 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months ended December 31, 2011 and December 31, 2010 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14

Item 4T.	Controls and Procedures	15

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3.	Defaults Upon Senior Securities	17

Item 4.	(Removed and Reserved)	17

Item 5.	Other Information	17

Item 6.	Exhibits	17

Signatures		18

PART I. - FINANCIAL INFORMATION

Item 1. CONSOLIDATED Financial Statements

WARP 9, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	December 31, 2011			June 30, 2011
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	155,439		$	575,398
Accounts Receivable, net		120,169			68,269
Prepaid and Other Current Assets		20,984			25,388
TOTAL CURRENT ASSETS		296,592			669,055

PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment		88,023			89,485
Computer Equipment		273,410			632,793
Computer Software		14,025			20,972
Leasehold Improvements		18,696			18,696
		394,154			761,946
Less accumulated depreciation		(316,986	)		(681,131	)
NET PROPERTY AND EQUIPMENT		77,168			80,815

OTHER ASSETS
Lease Deposit		8,244			8,244
Internet Domain, net		1,393			1,513
Licensing fees		23,000			29,000
TOTAL OTHER ASSETS		32,637			38,757

TOTAL ASSETS	$	406,397		$	788,627

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts Payable	$	32,401		$	71,248
Accrued Expenses		74,378			92,845
Deferred Income		34,603			32,010
Deferred Operating Lease Liability		4,996			4,045
Note Payable		39,838			37,867
Customer Deposit		21,361			27,873
TOTAL CURRENT LIABILITIES		207,577			265,888

LONG TERM LIABILITIES
Note payable		-			1,971
TOTAL LONG TERM LIABILITIES		-			1,971

TOTAL LIABILITIES		207,577			267,859

SHAREHOLDERS' EQUITY
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		7,300,826			7,299,905
Accumulated Deficit		(7,198,141	)		(6,875,272	)
TOTAL SHAREHOLDERS' EQUITY		198,820			520,768

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	406,397		$	788,627

The accompanying notes are an integral part of these consolidated financial statements.

WARP 9, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Six Months Ended
	December 31, 2011			December 31, 2010			December 31, 2011			December 31, 2010

REVENUE	$	214,054		$	253,131		$	408,493		$	499,722

COST OF SERVICES		27,596			21,469			50,365			40,695

GROSS PROFIT		186,458			231,662			358,128			459,027

OPERATING EXPENSES
Selling, general and administrative expenses		324,468			296,550			605,582			575,469
Research and development		28,974			27,222			68,011			46,265
Stock option expense		873			63			921			202
Depreciation and amortization		5,482			6,725			11,661			13,450

TOTAL OPERATING EXPENSES		359,797			330,560			686,175			635,386

LOSS FROM OPERATIONS BEFORE OTHER INCOME/(EXPENSES)		(173,339	)		(98,898	)		(328,047	)		(176,359	)

OTHER INCOME/(EXPENSE)
Interest income		(52	)		9,151			(6,401	)		16,787
Other income		7,500			7,863			15,240			8,863
Interest expense		(1,003	)		(913	)		(1,999	)		(2,012	)

TOTAL OTHER INCOME (EXPENSE)		6,445			16,101			6,840			23,638

LOSS FROM OPERATIONS BEFORE PROVISION FOR TAXES		(166,894	)		(82,797	)		(321,207	)		(152,721	)

PROVISION FOR INCOME (TAXES)/BENEFIT
Income taxes paid		-			-			(1,662	)		-
Income tax (provision)/benefit		-			16,881			-			6,508

PROVISION FOR INCOME (TAXES)/BENEFIT		-			16,881			(1,662	)		6,508

NET LOSS	$	(166,894	)	$	(65,916	)	$	(322,869	)	$	(146,213	)


BASIC AND DILUTED EARNINGS PER SHARE	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED		96,135,126			68,115,963			96,135,126			68,115,963

The accompanying notes are an integral part of these consolidated financial statements.

WARP 9, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED DECEMBER 31, 2011

									Additional
	Preferred Stock				Common Stock				Paid-in		Accumulated
	Shares		Value		Shares		Value		Capital		Deficit			Total
Balance, June 30, 2011		-	$	-		96,135,126	$	96,135	$	7,299,905	$	(6,875,272	)	$	520,768

Stock compensation expense (unaudited)		-		-		-		-		921		-			921

Net loss for the six months ended December 31, 2011 (unaudited)		-		-		-		-		-		(322,869	)		(322,869	)
Balance, December 31, 2011 (unaudited)		-	$	-		96,135,126	$	96,135	$	7,300,826	$	(7,198,141	)	$	198,820

The accompanying notes are an integral part of these consolidated financial statements.

WARP 9, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	December 31, 2011			December 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(322,869	)	$	(146,213	)
Adjustment to reconcile net loss to net cash
used by operating activities
Depreciation and amortization		11,661			13,450
Bad debt expense		11,256			(52,952	)
Cost of stock compensation recognized		921			202
Contributed services		-			64,614
Change in assets and liabilities:
(Increase) Decrease in:
Accounts receivable		(63,156	)		(32,680	)
Prepaid and other assets		4,404			4,412
Deferred tax asset		-			(6,508	)
Other assets		6,000			8,205
Increase (Decrease) in:
Accounts payable		(38,847	)		(59,550	)
Accrued expenses		(18,467	)		(1,014	)
Deferred income		2,593			8,276
Other liabilities		(5,562	)		1,586

NET CASH PROVIDED/(USED) IN OPERATING ACTIVITIES		(412,066	)		(198,172	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase / (disposal) of property and equipment		(7,893	)		(4,538	)

NET CASH USED IN INVESTING ACTIVITIES		(7,893	)		(4,538	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable		-			(1,382	)

NET CASH PROVIDED/(USED) IN FINANCING ACTIVITIES		-			(1,382	)

NET DECREASE IN CASH		(419,959	)		(204,092	)


CASH, BEGINNING OF PERIOD		575,398			733,737

CASH, END OF PERIOD	$	155,439		$	529,645

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	-		$	391
Taxes paid	$	1,662		$	-

The accompanying notes are an integral part of these consolidated financial statements.

WARP 9, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

DECEMBER 31, 2011

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 six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. For further information refer to the financial statements and footnotes thereto included in the Company's Form 10K for the year ended June 30, 2011.

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 primarily in California. Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers' financial condition. Management reviews accounts receivable on a regular basis, based on contracted terms and how recently payments have been received to determine if any such amounts will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The balance of the allowance account at December 31, 2011 and June 30, 2011 are $22,664 and $11,408, respectively.

Revenue Recognition

The Company recognizes income when the service is provided or when product is delivered. We present revenue, net of customer incentives. Most of the income is generated from monthly fees from clients who subscribe to the Company's fully hosted web based e-commerce products on terms averaging twelve months. Unless terminated accordingly with prior written notice, the agreements automatically renew for another term.

We provide online marketing services that we purchase from third parties. The gross revenue presented in our statement of operations is in accordance with 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 December 31, 2011 and June 30, 2011 was $34,603 and $32,010, respectively.

For the quarter ended, December 31, 2011, monthly fee from web products and associated service fees account for 71% of the Company’s total revenues, professional services account for 11% and the remaining 18% of total revenues are from resale of third party products and services.

For the quarter ended, December 31, 2010, monthly fee from web products and associated service fees account for 79% of the Company’s total revenues, professional services account for 6% and the remaining 15% 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.

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 December 31, 2011, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of December 31, 2011 based on the grant date fair value estimated. Stock-based compensation expense recognized in the statement of income for the three months ended December 31, 2011 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation expense recognized in the consolidated statements of operations during the six months ended December 31, 2011 and 2010 are $921 and $202 respectively.

WARP 9, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

DECEMBER 31, 2011

Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the six months ended December 31, 2011, and no pronouncements were adopted during the period.

3. LIQUIDITY AND OPERATIONS

The company had net losses of $322,869 and $146,213 for the six month periods ended December 31, 2011 and 2010, respectively, and net cash used in operating activities of $412,066 and $198,172 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.

4. CAPITAL STOCK

At December 31, 2011 and 2010, 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.

5. STOCK OPTIONS AND WARRANTS

On July 10, 2003, the Company adopted the Warp 9, Inc. Stock Option Plan for Directors, Executive Officers, and Employees of and Key Consultants to the Company. This Plan, may issue 25,000,000 shares of common stock. Options granted under the Plan could be either Incentive Options or Nonqualified Options, and are administered by the Company’s Board of Directors. Each option may be exercisable in full or in installment and at such time as designated by the Board. Notwithstanding any other provision of the Plan or of any Option Agreement, each option are to expire on the date specified in the Option Agreement, which date are to be no later than the tenth anniversary of the date on which the option was granted (fifth anniversary in the case of an Incentive Option granted to a greater-than-10% stockholder). The purchase price per share of the Common Stock under each Incentive Option is to be no less than the Fair Market Value of the Common Stock on the date the option was granted (110% of the Fair Market Value in the case of a greater-than-10% stockholder). The purchase price per share of the Common Stock under each Nonqualified Option were to be specified by the Board at the time the Option was granted, and could be less than, equal to or greater than the Fair Market Value of the shares of Common Stock on the date such Nonqualified Option was granted, but were to be no less than 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.

On October 12, 2011, the Company granted 3,000,000 employee qualified (incentive) stock options, and 500,000 non-qualified stock options at a strike price of $0.004. The options vest 1/48th monthly and expire October 12, 2021.

WARP 9, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

DECEMBER 31, 2011

A summary of the Company’s stock option activity and related information follows:

	12/31/2011
	Options			Weighted average exercise price
Outstanding -beginning of period		608,000		$	0.06
Granted		3,500,000			0.004
Exercised		-			-
Forfeited		(520,000	)		0.05
Outstanding - end of period		3,588,000		$	0.01
Exercisable at the end of period		277,384		$	0.02
Weighted average fair value of
options granted during the year				$	14,000

The Black Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The weighted average remaining contractual life of options outstanding issued under the plan as of

December 31, 2011 was as follows:


Exercise prices		Number of options outstanding		Weighted Average remaining contractual life (years)
$	0.400		10,000		0.00
$	0.350		20,000		2.00
$	0.050		50,000		2.81
$	0.050		8,000		6.58
$	0.004		3,500,000		9.79
			3,588,000

6. SUBSEQUENT EVENTS

Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has determined that no such events require disclosure.

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:

●	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

●

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-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 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 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 Company;

(m)

uncollectible accounts and the need to incur expenses to collect amounts owed to the Company;

(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 or successfully compete,, 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, or other risks inherent in the Company’s businesses.

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. W9 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 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-Q, or to reflect the occurrence of unanticipated events.

Current Overview

Warp 9 is a provider of e-commerce software platforms and services for the catalog and retail industry. Our suite of software platforms are designed to help multi-channel retailers maximize the Internet channel by applying our technologies for online catalogs, e-mail marketing campaigns, and interactive visual merchandising. Offered as an outsourced and fully managed Software-as-a-Service ("SaaS") model, our products allow customers to focus on their core business, rather than technical implementations and software and hardware architecture, design, and maintenance. We also offer professional services to our clients which include online catalog design, merchandizing and optimization, order management, e-mail marketing campaign development, integration to third party payment processing and fulfillment systems, analytics, custom reporting and strategic consultation.

Our products and services allow our clients to lower costs and focus on promoting and marketing their brand, product line and website while leveraging the investments we have made in technology and infrastructure to operate a dynamic online Internet presence.

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.

While the Warp 9 Internet Commerce System ("ICS") is our flagship and highest revenue product, we have developed and deployed new products based on a proprietary virtual publishing technology. These new products 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 have built-in integration for e-commerce transactions through our ICS product and other transaction based activities. Accordingly, 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. Clients utilizing this technology have discovered when exposing consumers to the virtual catalogs, a higher average order size and significant increase in rate of conversion result. We have sold this solution on a limited basis while we continue to refine the product and technology. We believe there could be many markets for our virtual catalog and magazine technology and we expect to test market these new products in the future.

Research and development (“R&D”) efforts have been focused both on updating our flagship ICS e-commerce platform as well as developing new products and on updating our current products with new features. In the planning phase of our development efforts, we look to direct client feedback and feature requests. We study the e-commerce landscape to determine features that will provide our clients with a competitive advantage in producing greater and more effective selling. We also examine features that will create a competitive advantage during our sales process to clients. Emerging and declining trends also play a role in how clients perceive what features should be provided by which vendors. We are sometimes able to capitalize on these opportunities by bundling features for greater value and/or increased fees and revenue. Management believes that in order to compete successfully, it must dedicate a greater allocation of resources to research and development. Updating our platform, creating new products and revamping the current products must be part of the ongoing operational practice in order to compete successfully. There can be no assurance that management will be able to successfully devote the resources needed for this research and development and that it will be able to compete successfully.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the estimated recoverable amounts of trade accounts receivable, impairment of long-lived assets, revenue recognition and deferred tax assets. We believe the following critical accounting policies require more significant judgment and estimates used in the preparation of the financial statements.

We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectability of our trade accounts receivable balances. If we determine that the financial conditions of any of our customers deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made. Accounts receivable are written off when all collection attempts have failed.

We follow the provisions of Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements" for revenue recognition and SAB 104. Under Staff Accounting Bulletin 101, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable and (iv) collection is reasonably assured.

Income taxes are accounted for under the asset and liability method. Under this method, to the extent that we believe that the deferred tax asset is not likely to be recovered, a valuation allowance is provided. In making this determination, we consider estimated future taxable income and taxable timing differences expected in the future. Actual results may differ from those estimates.

Results of Operations for the Three Months and Six Months Ended December 31, 2011 Compared to the Three Months and Six Months Ended December 31, 2010

REVENUE

Total revenue for the three months ended December 31, 2011 decreased by $39,077 to $214,054 compared to $253,131 for the same prior period. For the six months ended December 31, 2011, total revenue decreased by $91,229 to $408,493 compared to $499,722 in the same prior period. The overall decrease in revenue was the result of a decrease in recurring monthly fees caused by client terminations, partially offset by an increase in mobile website development. The client terminations were due to both i) the financial environment affecting the clients’ fiscal health and in turn, Warp 9’s revenue stream from those clients, and ii) increased competition in the e-commerce software space and the perceived competitive nature of the ICS product-line.

COST OF REVENUE

The cost of revenue for the three months ended December 31, 2011 increased by $6,127 to $27,596 compared to $21,469 for the same prior period. For the six months ended December 31, 2011 the cost of revenue increased $9,670 to $50,365 compared to $40,695 for the same prior period. The overall increase was primarily due to the increase in subcontractor services and recognition of the licensing fees to PageTransformer.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses for the three months ended December 31, 2011 increased $27,918 to $324,468 compared to $296,550 for the same prior period. For the six months ended December 31, 2011, SG&A expenses increased $30,113 to $605,582 compared to $575,469 in the same prior period. The overall increase in SG&A expenses was primarily due to an increase in salary expense, partially offset by a decrease in bad debt expense.

RESEARCH AND DEVELOPMENT

Research and development expenses for the three months ended December 31, 2011 increased $1,752 to $28,974 as compared to $27,222 for the same prior period. For the six months ended December 31, 2011, the research and development expenses increased $21,746 to $68,011 as compared to $46,265 for the same prior period. The overall increase was due to increased staffing expense associated with research and development to update our e-commerce platform and new products and features.

NET INCOME/(LOSS)

The consolidated net loss for the three months ended December 31, 2011 was ($166,894) compared to the consolidated net loss of ($65,916) for the same prior period. For the six months ended December 31, 2011, the consolidated net loss was ($322,869) compared to the consolidated net loss of ($146,213) for the same prior period. The consolidated net loss is mainly attributable to a reduction in revenue, and an increase in SG&A expense.

LIQUIDITY AND CAPITAL RESOURCES

The Company had net working capital (i.e. the difference between current assets and current liabilities) of $89,015 at December 31, 2011 as compared to a net working capital of $403,167 at June 30, 2011. The decrease in net working capital at December 31, 2011 was caused by a reduction in revenue and net income during the three months ended December 31, 2011.

Cash flow used in operating activities was ($412,066) for the six months ended December 31, 2011 as compared to cash flow used in operating activities of ($198,172) for the same prior period. The increase in cash flow used in operating activities of ($213,894) was primarily due to an increase in net loss and the absence of contributed services in the current period, partially offset by reductions in bad debt expense and accounts receivable.

Cash flow used in investing activities was ($7,893) for the six months ended December 31, 2011 as compared to cash flow used in investment activities of ($4,538) for the same prior period. The increase in cash flow used in investing activities of ($3,355) was primarily due to the increase of equipment purchases during the current period.

Cash flow used in financing activities was $0 for the six months ended December 31, 2011 as compared to ($1,382) for the same prior period. The decrease in cash flow of $1,382 used in financing activities was primarily due to no payments on debt being made during the current period.

Off-Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Item 4T. 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 interim 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 December 31, 2011 (under the supervision and with the participation of the Company’s Chairman, Chief Executive Officer, and interim 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 interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2011.

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 interim Chief Financial Officer have concluded that the internal controls over financial reporting are effective as of December 31, 2011.

No Attestation Report by Independent Registered Accountant

The effectiveness of our internal control over financial reporting as of December 31, 2011 has not been audited by our independent registered public accounting firm by virtue of our exemption from such requirement as a smaller reporting company.

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 second fiscal quarter 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

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. (Removed and reserved)

Item 5. OTHER INFORMATION

On June 1, 2011 the Company entered into an exclusive, royalty-free licensing agreement with PageTransformer for its mobile application technology, which turns print catalogs into digital iPad apps. The agreement is for a one-time license fee of thirty thousand dollars ($30,000) in cash. The term of the license commenced on June 1, 2011 and ends on December 1, 2013.

On July 1, 2011 the Company appointed William E. Beifuss Jr. as interim Chief Financial Officer.

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

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: February 14, 2012	By:	/s/ William E. Beifuss
		William E. Beifuss, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By: \s\William E. Beifuss	Dated: February 14, 2012
William E. Beifuss, Chief Executive Officer, President Interim Chief Financial Officer, and Corporate Secretary (Principal Executive Officer and Principal Financial/Accounting Officer)

AiAdvertising, Inc. - FORM 10-Q - February 14, 2012

Attached files

AiAdvertising, Inc. Reports