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EX-32.2 - WARP 9, INC.ex32.2.txt
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EX-31.2 - WARP 9, INC.ex31.2.txt
EX-31.1 - WARP 9, INC.ex31.1.txt

                                  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, 2013

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

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

               1933 CLIFF DRIVE, SUITE 11, SANTA BARBARA, CA 93109
        ----------------------------------------------------------------
               (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_]                                 No[__]
--------------------------------------------------------------------------------

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).
--------------------------------------------------------------------------------
                             Yes[_X_]                                 No[__]
--------------------------------------------------------------------------------

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          [___]          Smaller reporting company    [_X_]
(Do not check if a smaller
reporting company)
--------------------------------------------------------------------------------

Indicate by check mark whether the  Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
--------------------------------------------------------------------------------
                            Yes[__]                                   No[_X_]
--------------------------------------------------------------------------------

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 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 December 31, 2013 (unaudited) and June 30, 2013 3 Consolidated Statements of Operations for the Three and Six Months ended December 31, 2013 and December 31, 2012 (unaudited) 4 Consolidated Statement of Shareholders' Equity/(Deficit) for the Six Months ended December 31, 2013 (unaudited) 5 Consolidated Statements of Cash Flows for the Six Months ended December 31, 2013 and December 31, 2012 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Mine Safety Disclosures 15 Item 5. Other Information 15 Item 6. Exhibits 15 Signatures 16 -2-
PART I. - FINANCIAL INFORMATION ------------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS WARP 9, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, 2013 June 30, 2013 ------------------ --------------- (unaudited) ASSETS CURRENT ASSETS Cash $ 24,166 $ 12,636 Accounts Receivable, net 70,618 62,887 Prepaid and Other Current Assets 8,207 1,343 ------------------ --------------- TOTAL CURRENT ASSETS 102,991 76,866 ------------------ --------------- PROPERTY & EQUIPMENT, at cost Furniture, Fixtures & Equipment 10,349 83,288 Computer Equipment 22,741 266,789 Computer Software 1,754 14,840 Leasehold Improvements - 18,696 ------------------ --------------- 34,844 383,613 Less accumulated depreciation (21,709) (333,215) ------------------ --------------- NET PROPERTY AND EQUIPMENT 13,135 50,398 ------------------ --------------- OTHER ASSETS Lease Deposit 14,199 8,244 Licensing fees - 5,000 ------------------ --------------- TOTAL OTHER ASSETS 14,199 13,244 ------------------ --------------- TOTAL ASSETS $ 130,325 $ 140,508 ================== =============== LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) CURRENT LIABILITIES Accounts Payable $ 219,246 $ 176,871 Accrued Expenses 95,833 91,966 Accrued Interest 9,940 7,948 Deferred Operating Lease Liability 4,986 6,117 Notes Payable, Wings Fund, net 168,856 126,984 Note Payable, Other 37,867 37,867 Customer Deposit 6,846 6,846 ------------------ --------------- TOTAL CURRENT LIABILITIES 543,574 454,599 ------------------ --------------- TOTAL LIABILITIES 543,574 454,599 ------------------ --------------- 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 7,392,287 7,373,623 Accumulated Deficit (7,901,671) (7,783,849) ------------------ --------------- TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) (413,249) (314,091) ------------------ --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) $ 130,325 $ 140,508 ================== =============== The accompanying notes are an integral part of these consolidated financial statements. -3-
WARP 9, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended --------------------------------------- --------------------------------------- December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 ------------------- ------------------- ------------------- ------------------- REVENUE $ 376,179 $ 260,706 $ 611,495 $ 611,437 COST OF SERVICES 101,938 49,002 168,623 102,329 ------------------- ------------------- ------------------- ------------------- GROSS PROFIT 274,241 211,704 442,872 509,108 ------------------- ------------------- ------------------- ------------------- OPERATING EXPENSES Selling, general and administrative expenses 248,258 259,834 504,299 572,449 Research and development - - - 13,307 Stock option expense 5,825 5,840 11,664 9,521 Depreciation and amortization 1,228 5,411 40,424 11,063 ------------------- ------------------- ------------------- ------------------- TOTAL OPERATING EXPENSES 255,311 271,085 556,387 606,340 ------------------- ------------------- ------------------- ------------------- INCOME/(LOSS) FROM OPERATIONS BEFORE OTHER INCOME/(EXPENSES) 18,930 (59,381) (113,515) (97,232) ------------------- ------------------- ------------------- ------------------- OTHER INCOME/(EXPENSES) Other income - 7,500 5,000 15,000 Gain on disposal of fixed assets 9,358 9,778 Gain on extinguishment of debt - - - 8,808 Interest expense (8,168) (996) (16,332) (1,992) ------------------- ------------------- ------------------- ------------------- TOTAL OTHER INCOME/(EXPENSES) 1,190 6,504 (1,554) 21,816 ------------------- ------------------- ------------------- ------------------- INCOME/(LOSS) FROM OPERATIONS BEFORE PROVISION FOR TAXES 20,120 (52,877) (115,069) (75,416) ------------------- ------------------- ------------------- ------------------- PROVISION FOR INCOME (TAXES)/BENEFIT Income taxes paid - - (2,753) (1,616) Income tax (provision)/benefit - - - - ------------------- ------------------- ------------------- ------------------- PROVISION FOR INCOME (TAXES)/BENEFIT - - (2,753) (1,616) ------------------- ------------------- ------------------- ------------------- NET INCOME/(LOSS) $ 20,120 $ (52,877) $ (117,822) $ (77,032) =================== =================== =================== =================== 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 - - - - 11,664 - $ 11,664 Net loss - - - - - (117,822) $ (117,822) Discount on Note - - - - 7,000 - $ 7,000 ---------- ---------- ------------------ --------------- ---------------- --------------- -------------- Balance, December 31, 2013 - $ - 96,135,126 $ 96,135 $ 7,392,287 $ (7,901,671) $ (413,249) ========== ========== ================== =============== ================ =============== ============== The accompanying notes are an integral part of these consolidated financial statements. -5-
WARP 9, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended December 31, 2013 December 31, 2012 ----------------------- ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (117,822) $ (77,032) Adjustment to reconcile net loss to net cash (used) by operating activities Depreciation and amortization 40,425 11,063 Bad debt expense - (10,000) Cost of stock compensation recognized 11,664 9,521 Amortization of Debt Discount 5,745 - Gain/Loss on sale of fixed assets (9,778) Contributed services - 12,000 Change in assets and liabilities: (Increase) Decrease in: Accounts receivable (7,731) 30,068 Prepaid and other assets (12,819) 2,973 Other assets 5,000 6,000 Increase (Decrease) in: Accounts payable 42,375 20,398 Accrued expenses 13,986 (5,442) Deferred income - (25,553) Other liabilities (1,131) 2,013 ----------------------- ---------------------- NET CASH (USED) IN OPERATING ACTIVITIES (30,086) (23,991) ----------------------- ---------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (3,162) (5,017) Sale of PP&E 9,778 - ----------------------- ---------------------- NET CASH PROVIDED/(USED) IN INVESTING ACTIVITIES 6,616 (5,017) ----------------------- ---------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of note 35,000 - ----------------------- ---------------------- NET CASH PROVIDED/(USED) IN FINANCING ACTIVITIES 35,000 - ----------------------- ---------------------- NET INCREASE/(DECREASE) IN CASH 11,530 (29,008) CASH, BEGINNING OF YEAR 12,636 63,104 ----------------------- ---------------------- CASH, END OF PERIOD $ 24,166 $ 34,096 ======================= ====================== 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 DECEMBER 31, 2013 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, 2013 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 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, 2013 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. 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, 2013 and June 30, 2013 was $0 and $0, respectively. For the quarter ended, December 31, 2013, monthly recurring fees for the Company's total commerce platform ("TCP"), the Company's Internet commerce system ("ICS"), and mobile services account for 25% of the Company's total revenues, professional services account for 74% and the remaining 1% of total revenues are from resale of third party products and services. For the quarter ended, December 31, 2012, monthly recurring fees for TCP, ICS, and mobile services account for 22% of the Company's total revenues, professional services account for 73% and the remaining 5% 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 DECEMBER 31, 2013 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, 2013, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of December 31, 2013 based on the grant date fair value estimated. Stock-based compensation expense recognized in the statement of income for the six months ended December 31, 2013 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 six months ended December 31, 2013 and 2012 are $11,664 and $9,521, respectively. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Management reviewed accounting pronouncements issued during the six months ended December 31, 2013, and no pronouncements were adopted during the period. RECLASSIFICATION Certain statement of operations amounts for the six months ended December 31, 2012 were reclassified to conform to the presentation of the period ended December 31, 2013. 3. LIQUIDITY AND OPERATIONS The Company had net losses of $117,822 and $77,032 for the six months periods ended December 31, 2013 and 2012, respectively, and net cash used in operating activities of $30,086 and $23,991 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, Wings Fund, Inc., 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) $0.015 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. The March 2013 Note bears interest at a rate of 10% per year and matures one year from the effective date of each advance. 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, Wings Fund, Inc., 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 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 -8-
WARP 9, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED DECEMBER 31, 2013 (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. For the six months ended December 31, 2013 and the year ended June 30, 2013, the Company included $5,746 and $542, respectively, in interest expense related to the discount. The May 2013 Note bears interest at a rate of 10% per year and matures one year from the effective date of each advance. 5. RELATED PARTIES During the quarter ended September 30, 2013 and fiscal year ended June 30, 2013, the Company received a total of $35,000 and $130,000, respectively, from Wings Fund, Inc., an affiliate of the Company, pursuant to the March 2013 Note and the May 2013 Note. See footnote 4 for details regarding the March 2013 Note and the May 2013 Note. During the quarter ended December 31, 2013, the Company did not receive any outside funding. 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 December 31, 2013 and 2012, 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 December 31, 2013 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 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. -9-
WARP 9, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED DECEMBER 31, 2013 The weighted average remaining contractual life of options outstanding issued under the plan as of December 31, 2013 was as follows: Weighted Average Number of remaining Exercise options contractual prices outstanding life (years) ----------------------- ------------------ ------------------- $ 0.050 8,000 4.58 $ 0.004 500,000 7.79 ------------------ 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. During the six months ended December 31, 2012, 2,500,000 of these options were 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 December 31, 2013, and related information follows: December 31, 2013 ------------------------------ Weighted average exercise Options 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 6,328,320 $ 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 determined that no such events require disclosure. -10-
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. -11-
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 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 SIX MONTHS ENDED DECEMBER 31, 2013, COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2012. REVENUE Total revenue for the six months ended December 31, 2013 increased by $58 to $611,495 compared to $611,437 for the six months ended December 31, 2012. COST OF REVENUE The cost of revenue for the six months ended December 31, 2013 increased by $66,294 to $168,623 compared to $102,329 for the six months ended December 31, 2012. The overall increase was primarily due to costs incurred to produce e-commerce websites. -12-
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative ("SG&A") expenses for the six months ended December 31, 2013 decreased $68,150 to $504,299 compared to $572,449 for the six months ended December 31, 2012. 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 six months ended December 31, 2013 decreased $13,307 to $0 compared to $13,307 for the six months ended December 31, 2012. 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 six months ended December 31, 2013 increased $29,361 to $40,424, compared to $11,063 for the six months ended December 31, 2012. 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 six months ended December 31, 2013 decreased $23,370 to net other expense of $1,554, compared to net other income of $21,816 for the six months ended December 31, 2012. The decrease was primarily due to the recognition of a gain on extinguishment of debt in the prior period, but no such item was recorded in the current period. In addition, as disclosed in footnote 4, the increase in Notes Payable 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 six months ended December 31, 2013 was ($117,822) compared to the consolidated net loss of ($77,032) for the six months ended December 31, 2012. The increase in net loss for the period was primarily due to an increase in depreciation expense. LIQUIDITY AND CAPITAL RESOURCES The Company had a net working capital deficit (i.e. the difference between current assets and current liabilities) of ($440,581) at December 31, 2013 compared to a net working capital deficit of ($377,733) at June 30, 2013. The decrease in net working capital at December 31, 2013 was caused by an increase in accounts payable and notes payable over the past year. Cash flow used in operating activities was ($30,086) for the six months ended December 31, 2013 compared to cash flow used in operating activities of ($23,991) for the six months ended December 31, 2012. The increase in cash flow used in operating activities of $6,095 was primarily due to an increase in net loss and prepaid assets, partially offset by increases in depreciation expense and accounts payable. Cash flow provided in investing activities was $6,616 for the six months ended December 31, 2013 as compared to cash flow used in investment activities of ($5,017) for the six months ended December 31, 2012. The increase in cash flow provided in investing activities of $11,633, 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 $35,000 for the six months ended December 31, 2013 as compared to $0 for the six months ended December 31, 2012. The increase in cash flow provided in financing activities of $35,000 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. -13-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------ Not Applicable. 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 December 31, 2013 (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 December 31, 2013. 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 December 31, 2013. 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 six month period ended December 31, 2013 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. -14-
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. -15-
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 12, 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: February 12, 2014 ------------------------------------------------------- Andrew Van Noy, Chief Executive Officer and President (Principal Executive Officer) By: /s/ Gregory Boden Dated: February 12, 2014 ------------------------------------------------------- Gregory Boden, Chief Financial Officer (Principal Financial/Accounting Officer) -16