As filed with the Securities and Exchange Commission on March 13, 2007
Registration Number 333-131326
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WARP 9, INC.
(FORMERLY KNOWN AS ROAMING MESSENGER, INC.)
(Name of Small Business Issuer in its Charter)
Nevada 7372 30-0050402
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
50 Castilian Dr. Suite 101, Santa Barbara
California 93117
(805) 964-3313
(Address and telephone number of principal executive offices)
Louie Ucciferri
Chairman
Warp 9, Inc.
50 Castilian Dr. Suite 101, Santa Barbara
California 93117
(805) 964-3313
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Louis A. Brilleman, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
(212) 930-9700
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement. If any of the
securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The registrant hereby amends this registration statement on such date or date(s)
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the commission acting pursuant to said Section
8(a) may determine.
EXPLANATORY NOTE
On April 8, 2006, the Securities and Exchange declared effective the
registration statement on SB-2 (the "Registration Statement") filed by Warp 9,
Inc. (known at the time as Roaming Messenger, Inc., the "Company"). The Company
is filing this post effective amendment to the Registration Statement for the
purpose of updating its financial and other disclosures. The 59,244,267 shares
included in this post effective amendment is lower than the number of shares
included in the Registration Statement as a result of sales of shares by the
selling securityholder.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION, DATED MARCH 13, 2007
WARP 9, INC.
59,244,733 SHARES OF COMMON STOCK
This prospectus relates to the resale by the selling stockholder of up to
59,244,733 shares of our common stock consisting of (i) 49,744,733 shares of
common stock issuable upon conversion of convertible debentures at a price per
share equal to the lower of (A) $0.15 or (B) 80% of the lowest volume weighted
average price of the Common Stock during the five trading days immediately
preceding the conversion date, (ii) 1,500,000 shares of common stock issuable
upon exercise of warrants at $0.08 per share, (iii) 4,000,000 shares of common
stock issuable upon exercise of warrants at $0.10 per share, and (iv) 4,000,000
shares of common stock issuable upon exercise of warrants at $0.12 per share.
The selling stockholder may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions.
We are not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. We will, however, receive
proceeds from the cash exercise, if any, of warrants to purchase 9,500,000
shares of our common stock. All costs associated with this registration will be
borne by us.
Our common stock currently trades on the Over the Counter Bulletin Board ("OTC
Bulletin Board") under the symbol "WNYN.OB."
On March 8, 2007, the last reported sale price for our common stock on the OTC
Bulletin Board was $0.01 per share.
The securities offered in this prospectus involve a high degree of risk. See
"Risk Factors" beginning on page 4 of this prospectus to read about factors you
should consider before buying shares of our common stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Roaming
Messenger, Inc. with the Securities and Exchange Commission. The selling
stockholder may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
The date of this Prospectus is March 13, 2007
TABLE OF CONTENTS
Page
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 3
Forward Looking Statements.................................................. 9
Use of Proceeds............................................................. 10
Management's Discussion and Analysis or Plan of Operation................... 10
Business.................................................................... 15
Description of Property..................................................... 22
Legal Proceedings........................................................... 22
Directors and Executive Officers............................................ 22
Executive Compensation...................................................... 23
Security Ownership of Certain Beneficial Owners
and Management.............................................................. 26
Market for Common Equity and Related
Stockholder Matters......................................................... 27
Selling Shareholder......................................................... 28
Certain Relationships and Related Transactions.............................. 29
Description of Securities................................................... 29
Plan of Distribution........................................................ 30
Legal Matters............................................................... 33
Experts..................................................................... 33
Where You Can Find More Information......................................... 33
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.............................................. 33
Index to Consolidated Financial Statements.................................. F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock. Roaming Messenger,
Inc. is referred to throughout this prospectus as "Roaming Messenger," "we" or
"us."
GENERAL
We are a provider of e-commerce software platforms and services for the catalog
and retail industry. Our suite of software platforms is designed to help online
retailers maximize the Internet channel by using advanced technologies for
online catalogs, e-mail marketing campaigns, and interactive visual
merchandising. Offered on an outsourced and fully managed Software-as-a-Service
("Saas") model, our products allow customers to focus on their core business,
rather than technical implementations. We also offer professional services to
our clients which include online catalog design, merchandizing and optimization,
order management, e-mail marketing campaign development, integration to third
party payment processing and fulfillment systems, analytics, custom reporting
and strategic consultation.
Our products and services allow our clients to focus on promoting and marketing
their brand, product line and website while leveraging the investments we have
made in technology and infrastructure to operate a dynamic online catalog.
We charge our customers a monthly fee for using our e-commerce software based on
a Software-as-a-Service model. 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 contracts over
several quarters or years and makes our revenues more predictable for a longer
period of time.
We also licensed our Roaming Messenger mobile messaging technology, on an
exclusive basis to one licensee in September 2006, from which we are entitled to
receive royalty revenues.
We have generated only minimal revenues from the licensing of Roaming Messenger
technology, and earned minimal revenues from that technology when we operated
the business before the exclusive license. To date, almost all of our revenues
have been generated from Warp 9 e-commerce products and services.
For the year ended June 30, 2006, we generated revenues of $1,757,685 and
incurred a consolidated net loss of $2,164,352. For the six-month period ending
December 31, 2006, we generated revenue of $1,336,430 and incurred a
consolidated net loss of $247,830. As a result of recurring losses from
operations, a working capital deficit and accumulated deficit, our auditors, in
their report dated September 27, 2006, have expressed substantial doubt about
our ability to continue as a going concern.
Our principal executive office is located at 50 Castilian Drive, Suite 101,
Santa Barbara, California 93117 and our telephone number is (805) 964-3313.
1
This Offering
Shares offered by Selling
Stockholders..................... Up to 59,244,733, consisting of 49,744,733
shares issuable upon conversion of
convertible debentures and 9,500,000 shares
issuable upon conversion of warrants.
Common Stock to be outstanding
after the offering............... 287,031,266 *
Use of Proceeds.................. We will not receive any proceeds from the
sale of the common stock hereunder.
Risk Factors..................... The purchase of our common stock involves a
high degree of risk. You should carefully
review and consider "Risk Factors" beginning
on page 4
OTC Bulletin Board
Trading Symbol................... WNYN.OB
* The above information regarding common stock to be outstanding after the
offering is based on 227,786,533 shares of common stock outstanding as of
February 13, 2007.
2
RISK FACTORS
An investment in our shares involves a high degree of risk. Before making an
investment decision, you should carefully consider all of the risks described in
this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially and adversely affected. If this were to happen, the price of our
shares could decline significantly and you may lose all or a part of your
investment. The risk factors described below are not the only ones that may
affect us. Our forward-looking statements in this prospectus are subject to the
following risks and uncertainties. Our actual results could differ materially
from those anticipated by our forward-looking statements as a result of the risk
factors below. See "Forward-Looking Statements."
RISKS RELATED TO OUR BUSINESS
We have a history of losses, expect continuing losses and may never achieve
Profitability.
For the years ended June 30, 2006 and 2005, we generated revenues of $1,757,685
and $1,184,212, respectively, and incurred consolidated net losses of $2,164,352
and $2,479,100, respectively. For the six-month period ending December 31, 2006,
we generated revenue of $1,336,430 and incurred a consolidated net loss of
$247,830. We cannot assure you that we can achieve or sustain profitability on a
quarterly or annual basis in the future. Our operations are subject to the risks
and competition inherent in the establishment of a business enterprise. There
can be no assurance that future operations will be profitable. Revenues and
profits, if any, will depend upon various factors, including whether our product
will achieve market acceptance. We may not achieve our business objectives and
the failure to achieve such goals would have an adverse impact on us. These
matters raise substantial doubt about our ability to continue as a going
concern.
Our auditors have included a going concern modification in their opinion.
Our auditors have modified their opinion to our financial statements because of
concerns about our ability to continue as a going concern. These concerns arise
from the fact that we have not yet established an ongoing source of revenues
sufficient to cover our operating costs and that we must raise additional
capital in order to continue to operate our business. If we are unable to
continue as a going concern, you could lose your entire investment in us.
We may need to raise additional capital, which may not be available on
acceptable terms or at all.
From December 2005 through April 2006 we received an aggregate of $1,200,000 in
debt financing from Cornell Capital Partners LP. In the future, we may be
required to raise additional funds, particularly if we exhaust the funds
advanced under that agreement, are unable to generate positive cash flow as a
result of our operations and are required to repay the convertible debentures as
a result of Cornell Capital's failure to convert the debentures into common
stock. There can be no assurance that financing will be available in amounts or
on terms acceptable to us, if at all. The inability to obtain additional capital
may reduce our ability to continue to conduct business operations. If we are
unable to obtain additional financing, we will likely be required to curtail our
research and development plans. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
Our success is dependent upon increasing acceptance of wireless access to the
Internet in the United States.
Our services are primarily wireless web based. Therefore, our success is linked
directly to the extent to which users of the Internet in the United States
accept wireless web based technology as a viable means of communication and
increase their use and reliance upon wireless access to the Internet. Currently,
wireless web based technology has limited application and the demand for
wireless access is minimal, and if such demand does not increase, or, if such
demand increases at a pace slower than projected, then our financial condition
and results of operations will be materially and adversely affected.
3
We do not maintain theft or casualty insurance, and only maintain modest
liability and property insurance coverage and therefore we could incur losses as
a result of an uninsured loss.
We do not maintain theft or casualty insurance and we have modest liability and
property insurance coverage, along with workmen's compensation and related
insurance. We cannot assure that we will not incur uninsured liabilities and
losses as a result of the conduct of our business. Any such insured loss or
liability could have a material adverse affect on our results of operations.
If we lose key employees and consultants or are unable to attract or retain
qualified personnel, our business could suffer.
Our success is highly dependent on our ability to attract and retain qualified
engineering and management personnel. Since we are a small company, we are
highly dependent on our management and key employees. We do not have any
material employment agreements with any members of management or employees.
Accordingly, there can be no assurance that they will remain associated with us.
If we were to lose members of management or key employees, we may experience
difficulties in competing effectively, developing our technology and
implementing our business strategies.
If we are unable to protect our intellectual property effectively, we may be
unable to prevent third parties from using our technologies, which would impair
our competitive advantage.
We have not yet been granted patents for our technology and we cannot assure you
that any of our currently pending or future patent applications will result in
issued patents, or that any patents issued to us will not be challenged,
invalidated or held unenforceable. We cannot guarantee you that we will be
successful in defending challenges made in connection with our patent
applications. We rely on trade secret protection, and other contractual
restrictions to protect our proprietary technologies, all of which provide
limited protection and may not adequately protect our rights or permit us to
gain or keep any competitive advantage. If we fail to protect our intellectual
property, we will be unable to prevent third parties from using our technologies
and they will be able to compete more effectively against us.
We cannot guarantee you that any patents issued to us will be broad enough to
provide any meaningful protection nor can we assure you that one of our
competitors may not develop more effective technologies, designs or methods
without infringing our intellectual property rights or that one of our
competitors might not design around our proprietary technologies.
If we are not able to protect our proprietary technology, trade secrets and
know-how, our competitors may use our inventions to develop competing products.
We have applied for certain patents relating to our technology. However, these
patents may not be issued, or if issued, may not protect us against our
competitors, and patent litigation is very expensive. We may not have sufficient
cash available to pursue any patent litigation to its conclusion.
We cannot rely solely on our current patents to be successful. The standards
that the U.S. Patent and Trademark Office and foreign patent offices use to
grant patents, and the standards that U.S. and foreign courts use to interpret
patents, are not the same and are not always applied predictably or uniformly
and can change, particularly as new technologies develop. As such, the degree of
patent protection obtained in the U.S. may differ substantially from that
obtained in various foreign countries. In some instances, patents have issued in
the U.S. while substantially less or no protection has been obtained in Europe
or other countries.
We cannot be certain of the level of protection, if any, that will be provided
by our patents, if issued. If we attempt to enforce them and they are challenged
in court where our competitors may raise defenses such as invalidity,
unenforceability or possession of a valid license. In addition, the type and
extent of any patent claims that may be issued to us in the future are
uncertain. Any patents which are issued may not contain claims that will permit
us to stop competitors from using similar technology.
4
We are subject to competition from other companies, some of which have greater
financial resources, brand recognition, management experience than we do.
The e-commerce and online retailing industry is a growing and maturing industry
characterized with intense competition. We will be subject to competition from
other companies, many of which have greater financial resources, greater name
recognition, more management experience, and longer operating histories than we
have. There is no assurance that we will be able to compete successfully or
profitably in the mobile data technology business.
We may not be able to respond to the rapid technological change of the
e-commerce industry.
E-commerce and online retailing technologies are evolving technologies. Our
future success is dependent upon our ability to adapt rapidly to changes in
e-commerce and web based technology. To do so, we must continually improve the
performance, features and reliability of our technology and products. If we fail
to maintain a competitive level of technological expertise, it would have a
material adverse effect on our business, results of operations, and financial
condition. In addition, the widespread adoption of e-commerce and the internet
for conduction business transactions could require substantial expenditures by
us to modify or adapt our services or infrastructure to compete effectively,
which could have a material adverse effect on our business, results of
operations, and financial condition.
We may be subject to Internet regulation.
Currently there are few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. Several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online services providers in a manner similar to
long distance telephone carriers and to impose access fees on these companies.
Any imposition of access fees could increase the cost of transmitting data over
the Internet. Moreover, it may take years to determine the extent to which
existing laws relating to issues such as property ownership, libel and personal
privacy are applicable to the Internet. Any new laws or regulations relating to
the Internet, or to mobile data technology, could materially adversely affect
our business and results of operations.
We are reliant upon third parties to assist in the operation and maintenance of
our network infrastructure.
We rely on third parties to assist in operating and maintaining our network
infrastructure. If these systems fail, user traffic could be disrupted or
delayed, which could impair our business and damage our reputation. Fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events could damage these systems and cause interruptions in our
services. Computer viruses, electronic break-ins or other similar disruptive
problems could result in reductions or termination of our services by our
customers or otherwise adversely affect our business. We do not have any backup
systems or a formal disaster recovery plan. Our Web site must be able to
accommodate a high volume of traffic and deliver frequently updated information.
We are dependent upon the operations of the Internet and our Web site for our
business.
Since ours is a web based service, our customers depend on Internet service
providers, online service providers and other Web site operators for access to
our Web site. If our Web site experiences slower response times or decreased
traffic for a variety of reasons, it could have an adverse affect on our
business and results of operations especially as compared to other services that
rely on other communication media as well. Any outages, delays or other Internet
difficulties due to system failures unrelated to our systems could have an
adverse affect on our business and reputation. The Internet network
infrastructure may not be able to support continued growth, which could
adversely affect our business.
5
Unknown software defects could disrupt our services and harm our business and
reputation.
Our software products are inherently complex. Additionally, our product and
service offerings depend on complex software, both internally developed and
licensed from third parties. Complex software often contains defects or errors
in translation, particularly when first introduced or when new versions are
released or localized for international markets. We may not discover software
defects in our products or that affect new or current services or enhancements
until after they are deployed. Despite testing, it is possible that defects may
occur in the software. These defects could cause service interruptions, which
could damage our reputation or increase service costs, cause us to lose revenue,
delay market acceptance or divert development resources.
If our system security is breached, our reputation could suffer and our revenues
could decline.
A fundamental requirement for online communications is the secure transmission
of confidential information over public networks. As a young company, we have
limited experience protecting ourselves against security breaches and may be
more vulnerable in that respect than other more mature entities. Therefore,
third parties may attempt to breach our security or that of our customers. If
these attempts are successful, customers' confidential information, including
customers' profiles, passwords, financial account information, credit card
numbers or other personal information could be breached. We may be liable to our
customers for any breach in security and a breach could harm our ability to
market and sell our services. We rely on encryption technology licensed from
third parties. Our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays or loss of data. We may be required to expend significant capital and
other resources to license encryption technology and additional technologies to
protect against security breaches or to alleviate problems caused by any breach.
Failure to prevent security breaches may make it difficult to retain and attract
customers and cause us to spend additional resources that could cause our
operating results to decline.
RISKS RELATING TO OUR CONVERTIBLE DEBENTURES:
There are a large number of shares underlying our convertible notes and warrants
that are being registered in this prospectus and the sale of these shares may
depress the market price of our common stock.
As of February 13, 2007, we had 227,786,533 shares of common stock issued and
outstanding. In connection with the financing arrangements that we entered into
in December 2005, we also have outstanding secured convertible debentures or an
obligation to issue callable secured convertible notes that may be converted
into an estimated 59,000,000 shares of common stock at current market prices,
and outstanding warrants or an obligation to issue warrants to purchase
9,500,000 shares of common stock.
On February 21, 2007, the closing bid price of our common stock was $.012. The
debentures issued in December 2005 are convertible at the lower of $0.15 or 80%
of the lowest volume weighted average price of our common stock during the five
trading days immediately preceding the conversion. Therefore, the number of
shares of common stock issuable upon conversion of the secured convertible
debentures may increase if the market price of our stock declines. Upon
effectiveness of the registration statement of which this prospectus forms a
part, all of the shares, including all of the shares issuable upon conversion of
the notes and upon exercise of our warrants, may be sold without restriction.
The sale of these shares may adversely affect the market price of our common
stock.
The variable price feature of our convertible debentures could require us to
issue a substantially greater number of shares, which will cause dilution to our
existing stockholders. The number of shares we will be required to issue upon
conversion of the debentures will increase if the market price of our stock
decreases. This will cause dilution to our existing stockholders.
As of February 13, 2007, Cornell had converted approximately $295,000 of the
total of $1,200,000 issued initially. The following is an example of the amount
of shares of our common stock issuable upon conversion of the entire remaining
$905,000 in convertible debentures, based on market prices assumed to be 25%,
50% and 75% below the closing price on February 21, 2007 of $0.012:
6
------------------------------------------------------------------------------------------
% BELOW MARKET PRICE PER SHARE WITH 20% DISCOUNT NUMBER OF SHARES PERCENTAGE
------------------------------------------------------------------------------------------
25% $0.009 $0.0072 125,694,444 35.6%
------------------------------------------------------------------------------------------
50% $0.006 $0.0048 188,541,666 45.3%
------------------------------------------------------------------------------------------
75% $0.003 $0.0024 377,083,333 62.3%
------------------------------------------------------------------------------------------
* Based upon 227,786,533 shares of common stock outstanding as of February 13,
2007.
The lower the stock price, the greater the number of shares issuable under the
convertible debentures
The number of shares issuable upon conversion of the debentures is determined by
the market price of our common stock prevailing at the time of each conversion.
The lower the market price, the greater the number of shares issuable under the
debentures. Upon issuance of the shares, to the extent that holders of those
shares will attempt to sell the shares into the market, these sales may further
reduce the market price of our common stock. This in turn will increase the
number of shares issuable under the debentures. This may lead to an escalation
of lower market prices and an increasing number of shares to be issued. A larger
number of shares issuable at a discount to a continuously declining stock price
will expose our shareholders to greater dilution and a reduction of the value of
their investment.
A lower stock price will provide an incentive to Cornell to sell additional
shares into the market.
The number of shares that Cornell will receive under the convertible debentures
is determined by the market price of our common stock prevailing at the time of
each conversion. The lower the market price, the greater the number of shares
issuable under the debentures. As a result, Cornell will have an incentive to
sell as large a number of shares as possible to obtain a lower conversion price.
This will lead to greater dilution of exiting shareholders and a reduction of
the value of their investment.
The issuance of our stock upon conversion of the debentures could encourage
short sales by third parties, which could contribute to the future decline of
our stock price and materially dilute existing stockholders' equity and voting
rights.
The debentures have the potential to cause significant downward pressure on the
price of our common stock. This is particularly the case if the shares being
placed into the market exceed the market's ability to absorb the increased
number of shares of stock. Such an event could place further downward pressure
on the price of our common stock, which presents an opportunity to short sellers
and others to contribute to the future decline of our stock price. If there are
significant short sales of our stock, the price decline that would result from
this activity will cause the share price to decline more so, which, in turn, may
cause long holders of the stock to sell their shares thereby contributing to
sales of stock in the market. If there is an imbalance on the sell side of the
market for the stock, our stock price will decline. If this occurs, the number
of shares of our common stock that is issuable upon conversion of the debentures
will increase, which will materially dilute existing stockholders' equity and
voting rights.
If we are required for any reason to repay our outstanding secured convertible
debentures, we would be required to deplete our working capital, if available,
or raise additional funds. Our failure to repay the secured convertible
debentures, if required, could result in legal action against us, which could
require the sale of substantial assets.
From December 2005 through April 2006 we issued an aggregate of $1,200,000
principal amount of secured convertible debentures of which to date $295,000 has
been converted. These debentures are due and payable, with interest, three years
from their respective dates of issuance, unless sooner converted into shares of
our common stock. Any event of default such as our failure to repay the
principal or interest when due, our failure to issue shares of common stock upon
conversion by the holder could require the early repayment of the convertible
7
debentures. We anticipate that the full amount of the convertible debentures
will be converted into shares of our common stock, in accordance with the terms
of these debentures. If we were required to repay the convertible debentures, we
would be required to use our limited working capital and raise additional funds.
If we were unable to repay the debentures when required, the holders could
commence legal action against us and foreclose on all of our assets to recover
the amounts due. Any such action would require us to curtail or cease
operations.
The large number of shares issuable upon conversion of the secured convertible
debentures may result in a change of control
As there is no limit on the number of shares that may be issued upon conversion
of the convertible debentures, these issuances may result in Cornell controlling
us. It may be able to exert substantial influence over all matters submitted to
a vote of the shareholders, including the election and removal of directors,
amendments to our articles of incorporation and by-laws, and the approval of a
merger, consolidation or sale of all or substantially all of our assets. In
addition, this concentration of ownership could inhibit the management of our
business and affairs and have the effect of delaying, deferring or preventing a
change in control or impeding a merger, consolidation, takeover or other
business combination which our shareholder, may view favorably.
The lower the stock price, the greater the number of shares issuable upon
conversion of the convertible debentures.
The number of shares that Cornell will receive upon conversion of the
convertible debentures is determined by the market price of our common stock
prevailing at the time of each conversion. The lower the market price, the
greater the number of shares issuable upon conversion. Upon issuance of the
shares, to the extent that Cornell will attempt to sell the shares into the
market, these sales may further reduce the market price of our common stock.
This in turn will increase the number of shares issuable upon subsequent
conversions. This may lead to an escalation of lower market prices and ever
greater numbers of shares to be issued. A larger number of shares issuable at a
discount to a continuously declining stock price will expose our shareholders to
greater dilution and a reduction of the value of their investment.
The following risks relate principally to our common stock and its market value:
There is a limited market for our common stock.
Our common stock is quoted on the OTC Bulletin Board under the symbol "WNYN.OB."
There is a limited trading market for our common stock. Accordingly, there can
be no assurance as to the liquidity of any markets that may develop for our
common stock, the ability of holders of our common stock to sell our common
stock, or the prices at which holders may be able to sell our common stock.
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
o technological innovations or new products and services by us
or our competitors;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
8
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with limited revenues to date, you
may consider any one of these factors to be material. Our stock price may
fluctuate widely as a result of any of the above.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock.
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. The payment of dividends on our
common stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.
Our common stock may be deemed penny stock with a limited trading market.
Our common stock is currently listed for trading on the OTC Bulletin Board which
is generally considered to be a less efficient market than markets such as
NASDAQ or other national exchanges, and which may cause difficulty in conducting
trades and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stock" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded in the OTC
Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to
obtain coverage for significant news events because major wire services, such as
the Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make written or oral statements
that are "forward-looking," including statements contained in this prospectus
and other filings with the Securities and Exchange Commission, reports to our
stockholders and news releases. All statements that express expectations,
estimates, forecasts or projections are forward-looking statements within the
meaning of the Act. In addition, other written or oral statements which
constitute forward-looking statements may be made by us or on our behalf. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "projects," "forecasts," "may," "should," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
9
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Important
factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital
or to obtaining the financing needed to implement its business plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
(i) insufficient revenues to cover operating costs.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by selling stockholder. We will receive no proceeds from
the sale of shares of common stock in this offering. However, we will receive
proceeds from the cash exercise, if any, of the warrants owned by the selling
stockholder. Assuming cash exercise of the warrants, we may receive up to
approximately $1,000,000. We expect to use these funds for working capital
purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
OVERVIEW
We are a provider of e-commerce software platforms and services for the catalog
and retail industry. Our suite of software platforms is designed to help online
retailers maximize the Internet channel by using advanced technologies for
online catalogs, e-mail marketing campaigns, and interactive visual
merchandising. Offered on an outsourced and fully managed Software-as-a-Service
("SaaS") model, our products allow customers to focus on their core business,
rather than technical implementations. We also offer professional services to
our clients which include online catalog design, merchandizing and optimization,
order management, e-mail marketing campaign development, integration to third
party payment processing and fulfillment systems, analytics, custom reporting
and strategic consultation.
Our products and services allow our clients to focus on promoting and marketing
their brand, product line and website while leveraging the investments we have
made in technology and infrastructure to operate a dynamic online catalog.
10
We charge our customers a monthly fee for using our e-commerce software based on
a Software-as-a-Service model. These fees include fixed monthly charges, and
variable fees based on the sales volume of our clients' e-commerce websites.
Unlike traditional software companies that sell software on a perpetual license
where quarterly and annual revenues are quite difficult to predict, our SaaS
model spreads the collection of contract revenue over several quarters or years
and makes our revenues more predictable for a longer period of time.
We also licensed our patented mobile messaging technology on an exclusive basis
to one licensee, from which we expect to derive royalty revenues. We have
generated only minimal revenues from the licensing of that technology to date.
To date, almost all of our revenues are generated from Warp 9 e-commerce
products and services.
The quarter ended December 31, 2006 was the highest revenue quarter in the
history of the Company. The primary reasons for this revenue increase were: (i)
increases in monthly fees due to higher sales volumes by our growing number of
e-commerce clients and (ii) more professional services work from clients such as
custom marketing campaigns, augmenting website functionality, and custom
programming projects. One of the reasons for the increase in monthly fees is
because our SaaS pricing model is based in part on the sales volume of our
clients' e-commerce websites. Since online retailing revenues are the highest
during the holiday shopping season, our revenues for the months of October
through December are higher during that period.
The results of operation for the quarter ended December 31, 2006 are also the
first complete quarter of financials which solely reflect the Warp 9 e-commerce
products and services operation.
While the Warp 9 ICS (Internet Commerce System) is our flagship and highest
revenue product, we have been developing new products based a proprietary
virtual publishing technology that we have developed. These new products will
allow for the creation of interactive web versions of paper catalogs and
magazines where users can flip through pages with a mouse and click on products
or advertisements. These magazines or catalogs will have built-in integration
for e-commerce transactions through our ICS product and other transaction based
activities. This means that when shoppers click on a product, they are taken to
the e-commerce product page where they can add that product to their shopping
cart for purchasing. Our beta customers have discovered that order sizes through
virtual catalogs are higher than traditional e-commerce websites and resulting
in increasing sales demand. We have been selling this solution on a limited
basis as a programming service while we refine the product and technology. We
believe there are many markets for our virtual catalog and magazine technology
and we intend to aggressively market these new products in the near future.
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.
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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.
As of June 30, 2006 the Company adopted financial accounting standard 123
(revised 2004) using the modified prospective method. In accordance with this
method, the financial statements for prior periods have not been restated to
reflect, and do not include, the impact of FAS 123R. See footnote #2 to the
attached financial statements for further discussion of the adoption of this
accounting standard.
FAS 123R was adopted for the financial statements for the fiscal year ended June
30, 2006, an not interim financial statements for the quarters ended September
30, 2005, December 31, 2005, and March 31, 2006.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2006 AND 2005
Total revenue for the twelve month period ended June 30, 2006 increased by
$573,473 to $1,757,685 from $1,184,212 in the prior year. Revenue was derived
principally from our Warp 9 Inc. subsidiary. The increase in revenue was the
result of an increase in new Warp 9 clients, related professional services and
reselling of third party online marketing services.
The cost of revenue, in terms of percentage of revenue, for the twelve month
period ended June 30, 2006 was 25% as compared to 34% for the twelve-month
period ended June 30, 2005. The decrease in the cost of revenue is a result of
the increased sales of higher margin Warp 9 products and services.
Total costs and expenses for the twelve month period ended June 30, 2006
increased by $198,657 to $3,445,527 from $3,246,870 in 2005. The change is
primarily due to increase in selling, general and administrative expenses.
Selling, general and administrative expenses increased by $189,999 during the
twelve months ended June 30, 2006 to $2,925,889 from $2,735,890 in the prior
year. The increase in selling, general and administrative expenses were
primarily due to the expensing of employee stock options and conversion features
associated with a convertible debenture.
Non-cash selling, general and administrative expenses for the year ended June
30, 2006 totaled $928,209 which include (i) $136,350 in warrant and stock
compensation in lieu of payment in cash to our consultants and independent
contractors for business development and strategic advisory services, (ii)
$161,793 in employee stock option expenses, and (iii) $630,066 of net expenses
associated with the accounting for a convertible debenture in accordance with
EITF 00-19 and EITF 00-27.
Expense related to depreciation was $92,602 for the twelve months ended June 30,
2006 as compared to $113,775 for the prior year.
Research and development expenses increased by $29,831 during the twelve months
ended June 30, 2006 to $427,036 from $397,205 in the prior year due to
additional staff.
Total other income and expense was ($35,321) for the twelve months ended June
30, 2006 as compared to ($17,177) in the prior year.
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For the twelve months ended June 30, 2006, our consolidated net loss was
($2,164,352) as compared to a consolidated net loss of ($2,479,100) for the
twelve months ended June 30, 2005.
THREE-MONTH PERIOD ENDED DECEMBER 31, 2006 COMPARED TO THE SAME PERIOD IN 2005
Total revenue for the three-month period ended December 31, 2006 was $903,754 as
compared to $518,146 for the three-month period ended December 31, 2005. The 74%
increase in revenue was primarily due to (i) the increase in monthly fees from
our e-commerce software as a result of a larger customer base that is
experiencing higher sales volumes, and (ii) a general increase in professional
services from having more customers.
The cost of revenue for the three-month period ended December 31, 2006 was 23%
of gross revenue as compared to 31% of gross revenue for the three-month period
ended December 31, 2005. This decrease in cost of revenue is due to the
increased sale of higher profit margin products and services.
Total operating expenses for the three month period ended December 31, 2006
decreased by $83,759 to $569,800 from $653,559 in 2005. The change is primarily
due to the virtual elimination of all operating costs relating to the Roaming
Messenger business, which was licensed to a third party in September 2006 for
operation by it on an exclusive basis.
Selling, general and administrative expenses for the three month period ended
December 31, 2006 was $529,225 as compared to $522,615 for the three month
period ended December 31, 2005. While the virtual elimination of all operating
costs relating to the Roaming Messenger business tended to reduce our overall
selling, general and administrative expense for the three month period ended
December 31, 2006, we incurred an approximately $59,000 increase in salaries,
bonuses and benefits as well as one time charges of (i) $42,694 related to a
settlement of a lawsuit from a former employee, and (ii) $49,858 for bad debt
allowances.
Non-cash selling, general and administrative expenses for the three months ended
December 31, 2006 totaled $9,696 for employee stock option expenses.
Research and development expenses for the three month period ended December 31,
2006 was $0 compared to $106,972 for the three month period ended December 31,
2005. This decrease is due to the elimination of research and development costs
relating to the Roaming Messenger business.
Expense related to depreciation and amortization was $40,575 for the three
months ended December 31, 2006 as compared to $23,972 for the prior year.
Total other income and expense was ($15,146) for the three months ended December
31, 2006 as compared to ($101,017) in the prior year. The difference is
primarily due to a $100,000 expense representing the value of the
conversionfeature of the Cornell convertible debenture in accordance to EITF
00-27 during the three month period ended December 31, 2005.
For the three months ended December 31, 2006, our consolidated net income was
$108,376 as compared to a consolidated net loss of ($395,762) for the three
months ended December 31, 2005. We achieved a consolidated net income because of
the elimination of costs previously associated with the Roaming Messenger
operation, and an increase in holiday season revenues along with a general
increase in customers for Warp 9 e-commerce products and services.
SIX-MONTH PERIOD ENDED DECEMBER 31, 2006 COMPARED TO THE SAME PERIOD IN 2005
Total revenue for the six-month period ended December 31, 2006 was $1,336,430 as
compared to $856,072 for the six-month period ended December 31, 2005. The 56%
increase in revenue was primarily due to (i) the increase in monthly fees from
our e-commerce software as a result of a larger customer base that experienced
higher sales volumes, and (ii) a general increase in professional services from
having more customers.
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The cost of revenue for the six-month period ended December 31, 2006 was 23% of
gross revenue as compared to 31% of gross revenue for the six-month period ended
December 31, 2005. This decrease in cost of revenue is due to the increased sale
of higher profit margin products and services.
Total operating expenses for the six month period ended December 31, 2006
decreased by $172,389 to $1,217,988 from $1,390,377 in 2005. The change is
primarily due to the virtual elimination of all operating costs relating to the
Roaming Messenger business which was licensed to a third party in September 2006
for operation by it on an exclusive basis.
Selling, general and administrative expenses for the six month period ended
December 31, 2006 was $1,030,397 as compared to $1,130,258 for the six month
period ended December 31, 2005. While the virtual elimination of all operating
costs relating to the Roaming Messenger business tended to reduce our overall
selling, general and administrative expense for the six month period ended
December 31, 2006, we incurred an approximately $32,000 increase in salaries,
bonuses and benefits as well as one time charges of (i) $42,694 relating to a
settlement of a lawsuit from a former employee, and (ii) $47,797 for bad debt
allowances.
Non-cash selling, general and administrative expenses for the six months ended
December 31, 2006 totaled $40,383 for employee stock option expenses.
Research and development expenses for the six month period ended December 31,
2006 is $107,377 compared to $212,754 for the six month period ended December
31, 2005. This decrease is due to the elimination of research and development
costs relating to the Roaming Messenger business in September 2006.
Expenses related to depreciation and amortization was $80,214 for the six months
ended December 31, 2006 as compared to $47,365 for the prior year.
Total other income and expense was ($60,101) for the six months ended December
31, 2006 as compared to ($103,883) in the prior year.
For the six months ended December 31, 2006, our consolidated net loss was
($247,830) as compared to a consolidated net loss of ($904,574) for the six
months ended December 31, 2005. The reduction in our consolidated net loss is
due to the elimination of costs previously associated with the Roaming Messenger
operation, and a general increase in revenue from Warp 9 e-commerce products and
services.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash at December 31, 2006 of $245,018 as compared to cash of
$387,180 as of June 30, 2006. The Company had a net working capital deficit
(i.e. the difference between current assets and current liabilities) of
($845,641) at December 31, 2006 as compared to a net working capital deficit of
($848,174) at June 30, 2006. Cash flow utilized by operating activities was
($141,544) for the six months ended December 31, 2006 as compared to cash
utilized for operating activities of ($583,124) during the six months ended
December 31, 2005. Cash flow used in investing activities was ($11,173) for the
six months ended December 31, 2006 as compared to cash used in investing
activities of ($26,462) during the six months ended December 31, 2005. Cash flow
provided by financing activities was $10,555 for the six months ended December
31, 2006 as compared to cash provided by financing activities of $640,988 for
the six months ended December 31, 2005.
On August 11, 2005, the Company was approved for a $100,000 revolving line of
credit from Bank of America at an interest of prime plus 4 percentage points.
This line of credit is not secured by assets of the Company. The effective
interest rate on the line of credit at December 31, 2006 was 12.25% per annum.
At December 31, 2006, $62,182 was borrowed under this line of credit.
We believe that our cash at hand and the additional cash generated from
operations will be sufficient to fund our business over the next 12 months
assuming conversion of the debentures discussed in the next paragraph.
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From December 2005 through April 2006, we issued to Cornell Capital Partners
L.P. our 10% secured convertible debentures in the aggregate principal amount of
$1,200,000. The debentures mature on the third anniversary of the date of
issuance and we are not required to make any payments until the maturity date.
Holders of the debentures may convert at any time amounts outstanding under the
debentures into shares of our common stock at a conversion price per share equal
to the lesser of (i) $0.15 or (ii) 80% of the lowest volume weighted average
price of our common stock during the five trading days immediately preceding the
conversion date as quoted by Bloomberg, LP.
To date, Cornell has converted approximately $295,000. We anticipate that the
full amount of the convertible debentures will be converted into shares of our
common stock, in accordance with the terms of these debentures. If we were
required to repay the convertible debentures, we would be required to use our
limited working capital and raise additional funds. We anticipate that we will
obtain any additional required working capital through the private placement of
Common Stock to domestic accredited investors pursuant to Regulation D of the
Securities Act of 1933, as amended (the "Act"), or to offshore investors
pursuant to Regulation S of the Act. There is no assurance that we will obtain
the additional working capital that we need through the private placement of
Common Stock. In addition, such financing may not be available in sufficient
amounts or on terms acceptable to us.
BUSINESS
COMPANY HISTORY
We are a Nevada corporation formerly known as Latinocare Management Corporation
and, more recently, as Roaming Messenger, Inc. We were originally incorporated
in Colorado in July 1983. Effective April 1, 2003, we completed a Plan and
Agreement of Reorganization with Warp 9, Inc., a Delaware corporation and
effective June 30, 2003, we completed a second Plan and Agreement of
Reorganization with Warp 9. Pursuant to the such reorganization, Latinocare
acquired all of the issued and outstanding common stock of Warp 9 in exchange
for approximately 131,026,173 newly issued shares of Latinocare common stock,
Warp 9 became a wholly owned subsidiary of Latinocare, and the shareholders of
Warp 9 became the controlling shareholders of Latinocare. Prior to its business
combination with Warp 9, Latinocare had no tangible assets and insignificant
liabilities. Subsequent to the reorganization we changed our name to Roaming
Messenger, Inc.
On August 24, 2006, we changed our name from Roaming Messenger, Inc. to Warp 9,
Inc. to reflect a new strategic plan of focusing primarily on the business of
the Company's wholly owned subsidiary, Warp 9, Inc., an e-commerce
Software-as-a-Service provider.
On September 18, 2006, we signed an Exclusive Technology Licensing Agreement
with one licensee for our Roaming Messenger mobile messaging technology. In
light of granting this exclusive license, it allowed us to reduce our personnel
count which reduced our overall cash utilization.
GENERAL
We are a provider of e-commerce software platforms and services for the catalog
and retail industry. Our suite of software platforms is designed to help online
retailers maximize the Internet channel by using advanced technologies for
online catalogs, e-mail marketing campaigns, and interactive visual
merchandising. Offered on an outsourced and fully managed Software-as-a-Service
("Saas") model, our products allow customers to focus on their core business,
rather than technical implementations. We also offer professional services to
our clients which include online catalog design, merchandizing and optimization,
order management, e-mail marketing campaign development, integration to third
party payment processing and fulfillment systems, analytics, custom reporting
and strategic consultation.
Our products and services allow our clients to focus on promoting and marketing
their brand, product line and website while leveraging the investments we have
made in technology and infrastructure to operate a dynamic online catalog.
15
We charge our customers a monthly fee for using our e-commerce software based on
a Software-as-a-Service 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 contracts over
several quarters or years and makes our revenues more predictable for a longer
period of time.
We also licensed our Roaming Messenger mobile messaging technology, on an
exclusive basis to one licensee in September 2006, from which we are entitled to
receive royalty revenues.
We have generated only minimal revenues from the licensing of Roaming Messenger
technology, and earned minimal revenues from that technology when we operated
the business before the exclusive license. To date, almost all of our revenues
are generated from Warp 9 e-commerce products and services.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET AND E-COMMERCE
Online retailing and e-commerce sales continue to grow with no sign of slowing
down. The U.S. Commerce Department reported that e-commerce sales in the fourth
quarter of 2005 rose 23.4% compared to the fourth quarter of 2004, continuing a
series of strong quarterly growth reports. According to the 2006 State of
Retailing Online report from Forrester Research, online sales will top $200
billion this year alone, representing an increase of 100% from just 3 years ago.
According to the report, retailers are recognizing the importance that the
online channel plays in overall sales, with more than 38% of online customers
being new to a retailer's entire business.
We believe there are a number of factors that are contributing to the growth of
e-commerce: (i) adoption of the Internet continues to increase globally; (ii)
broadband technology is becoming more widely available and the adoption of
broadband for Internet use is increasing at a rapid rate; (iii) Internet users
are increasingly comfortable with the process of buying products online; (iv)
the functionality of online stores continues to improve, a greater range of
payment options are available, and special offers and shipping discounts are
making online shopping more attractive; (v) businesses are placing more emphasis
on their online stores as they can reach a larger audience at a comparatively
lower cost than the methods used to drive traffic to traditional
brick-and-mortar retail stores or sell through printed paper catalogs. As a
result of these growth drivers, retailers and catalogers have begun to build
large, global customer bases that can be reached cost-effectively, potentially
resulting in higher sales and profitability.
OPPORTUNITIES FOR OUTSOURCED E-COMMERCE
We believe there are advantages to outsourced e-commerce that will continue to
make solutions like Warp 9 an attractive alternative to building and maintaining
this capability in-house. These advantages include: (i) eliminating the
substantial up-front and ongoing costs of computer hardware, network
infrastructure and specialized application software and personnel; (ii) reducing
the time it takes to get online stores live and productive; (iii) shifting the
ongoing technology, financial, regulatory and compliance risks to a proven
service provider; (iv) leveraging the expertise of an e-commerce service
provider to accelerate growth of an online business; and (v) allowing businesses
to focus on their specific core competencies.
TECHNOLOGY PRODUCTS
We primarily offer two proprietary software systems to our customers -
e-commerce and e-mail marketing. It is our product development goal to create
other complementary systems to deliver a fully integrated platform for a
successful e-commerce operation.
WARP 9 INTERNET COMMERCE SYSTEM (WARP 9 ICS)
The Warp 9 ICS is an enterprise-grade software system that enables catalogers
and retailers to expand their operation to the Internet with minimal investment,
overhead and risk. A business does not need to invest in new hardware or
16
software in order to utilize the Warp 9 ICS, because it is offered as a fully
managed online catalog system hosted in our Internet datacenter. With a range of
easy to use and highly customizable features for product presentation as well
store management, Warp 9 ICS satisfies many of the current and next generation
requirements of catalogers and retailers. We charge our customers a recurring
monthly fee for using the Warp 9 ICS software based on 12, 24 and 36 month term
agreements. There are various pricing packages for Warp 9 ICS, depending on the
customer's desired level of scalability and reliability.
Warp 9 ICS is designed with a highly scalable enterprise architecture that
allows us to provide our customers with maximum performance and system uptime.
As our customer base or transaction volume grows, we simply add new servers,
CPUs, memory and bandwidth without substantial changes to the ICS software. The
high end version of the Warp 9 ICS offering operates on a cluster of load
balanced and fault-tolerant servers in our datacenter. If a server in the
cluster fails for any reason, the architecture shifts the traffic to other
available servers, thus minimizing downtime and disruption to our customers'
mission critical e-commerce websites.
WARP 9 E-MAIL MARKETING SYSTEM (WARP 9 EMS)
Warp 9 EMS is a web-based e-mail campaign and list management system designed
for high performance and reliability. EMS's sophisticated technology will allow
markets to send targeted e-mail campaigns that help grow, retain and maximize
the lifetime value of their customers. Through content personalization and list
segmentation, campaign efforts will result in higher response rates, higher
conversion rates and improved customer loyalty. E-mail marketing systems, such
as Warp 9 EMS, enable unprecedented response times that are not achievable
through traditional forms of direct marketing. Most ICS customers also purchase
EMS to complement their online commerce strategy.
PROFESSIONAL SERVICES
Our customers are not technology companies and have very little internal
expertise in the areas of e-commerce, online marketing and web technologies. To
provide a complete solution to our customers, we also offer professional
services to help our customers maximize the use of our technology or other
online e-commerce technologies. Professional services include but are not
limited to e-commerce web page template development, e-mail campaign content
creation, custom system configuration, graphics design, management of online
marketing programs, and integration to backend business systems.
SITE DESIGN AND DEVELOPMENT
We offer our clients site design services that utilize our experience and
expertise to create efficient and effective online catalogs powered by Warp 9
ICS. Our e-commerce solutions can be deployed quickly for our clients and
implemented in a variety of ways from simple shopping websites to complex
systems that integrate to backend inventory management systems. This is all done
by maximally using the feature set of Warp 9 ICS.
MERCHANDIZING AND PROMOTIONS DESIGN
The Warp 9 ICS technology platform supports a wide range of merchandising
activities. On an ongoing basis, we help our clients create effective
promotional activities, up-sell, cross-sell as well as promote featured products
during any phase of the shopping process. By doing so, our professional services
team continues to work with our clients to deliver targeted offers designed to
increase close ratios and average order size.
ADVANCED REPORTING AND ANALYTICS
Warp 9 ICS captures a great deal of information about sales and visitor
activities in its database. We provide our clients access to a collection of
standard and customizable reports as well as create any report they need for
their individual business making decisions. For example, we can create custom
reports to help our clients analyze the average orders size of one design versus
another. This enables our clients to track and analyze sales, products,
transactions and customer behavior to further refine their market strategies to
increase sales.
17
STRATEGIC MARKETING SERVICES
We offer a wide range of strategic marketing services designed to increase
customer acquisition, retention and lifetime value. Through a combination of web
analytics, analytics-based statistical testing and optimization, our team of
strategic marketing consultants develop, deliver and manage programs such as
paid search advertising, search engine optimization, affiliate marketing, store
optimization and e-mail optimization for our clients. We believe our ability to
capture and analyze integrated traffic and commerce data enhances the value of
our strategic marketing services as we can precisely determine the effectiveness
of specific marketing activities, website changes, and other actions taken by
our clients.
REVENUE MODEL
We charge our customers a monthly fee, based on termed contracts, to use the
Warp 9 ICS and Warp 9 EMS products under a Software-as-a-Service ("SaaS") model.
Unlike traditional software companies that sell software on a perpetual license
where quarterly and annual revenues are very difficult to predict, our SaaS
model spreads the collection of contracts over several quarters or years and
makes our revenues more predictable for a longer period of time.
Over half of the Company's revenues are from the ICS product which continues to
be a growing product. EMS is a smaller revenue-generating product and usually
sold to customers already subscribing to the ICS product. The monthly
subscription fee for Warp 9 ICS is generally variable with the growth of a
client's online revenues. Therefore, when our customers sell more online, our
revenues and profit margin increases without dramatic increase in costs.
BENEFITS TO CLIENTS
Our complete solution of providing robust technology along with complementary
professional services delivers many benefits to our customers which help drive
our continual growth.
REDUCED TOTAL COST OF OWNERSHIP AND RISK
Utilizing our technology and services, businesses can dramatically reduce or
eliminate upfront and ongoing hardware, software, maintenance and support costs
associated with developing, customizing, deploying and upgrading an in-house
e-commerce solution. They can have a global e-commerce presence without assuming
the costs and risks of developing it themselves and take immediate advantage of
the investments we continually make in our e-commerce systems and associated
services. Our ongoing investment in the latest technologies and e-commerce
functionality helps ensure that our clients maintain pace with industry
advances.
REVENUE GROWTH
Through our team of services consultants, we help our clients grow their
businesses by applying our technology and experience to (i) increase the
acquisition, retention and lifetime value of new customers; (ii) extending their
businesses into new geographic markets; and (iii) expanding the visibility and
sales of their products through new online sales channels. We have developed
substantial expertise in online marketing and merchandising, which we apply to
help our clients increase traffic to their online stores, and improve order
close ratios, average order sizes and repeat purchases, all of which are
designed to generate higher revenues for our clients' businesses and greater
revenue for Warp 9.
18
DEPLOYMENT SPEED
Businesses can reduce the time required to develop an e-commerce presence by
utilizing our outsourced business model. Typically, a new client can have an
online store live in a matter of days or weeks compared with months or longer if
they decide to build, test and deploy the e-commerce capability in-house. Once
they are operational on our platform, most clients can utilize our remote
control toolset to make real-time changes to their online store, allowing them
to address issues and take advantage of opportunities without technical
assistance.
FOCUS ON CORE COMPETENCY
By utilizing our outsourced e-commerce model, businesses can focus on
developing, marketing and selling their products rather than devoting time and
resources to building and maintaining an e-commerce infrastructure. Management
can focus their time on what they know best while ensuring they have access to
the latest technologies, tools and expertise for running a successful e-commerce
operation.
SALES AND MARKETING
Our objective is to be the leading provider of outsourced e-commerce solutions
for online catalog and retail operations. To achieve this objective, we intend
to enhance, promote and support the idea that Warp 9 is the complete provider of
the necessary technology platform and professional services to effectively
conduct a serious e-commerce operation.
We currently market our e-commerce solutions directly to clients and prospective
clients. We focus our efforts on generating awareness of the Warp 9 brand and
capabilities, establishing our position as a leader in the online catalog space.
Our sales team calls on senior marketing and IT executives within a retailer or
catalog company who are looking to create or expand their e-commerce operation.
During the client sales process, our sales staff delivers demonstrations,
presentations, collateral material, return-on-investment analyses, proposals and
contracts.
A great deal of our new customers comes from word-of-mouth referrals due to the
fact that Warp 9 has been in the industry for a number of years with strong
references and a proven track record. Prospective clients quite often look for
us at tradeshows to learn more about Warp 9 based on the recommendations of our
existing customers. Word-of-mouth referrals have been very valuable to us and we
intend to continue nurturing our customer and industry relationships to maximize
these referrals.
While our success to date has been from direct sales efforts, we intend to
explore a channel partner strategy to expand our customer base quickly in the
fiscal quarters to come. Prospective channel partners include consultants and
designers in the catalog industry, as well as backend order fulfillment systems
providers. With the growing maturity of multi-channel e-commerce strategies,
many of the robust backend systems providers are looking for a robust front-end
e-commerce system, like Warp 9 ICS, to deliver a fully integrated online/offline
solution to their clients.
COMPETITION
The market for e-commerce solutions is highly competitive, especially as it
reaches maturity. We compete with e-commerce solutions that our customers
develop themselves or contract with third parties to develop. We also compete
with other outsourced e-commerce providers. The competition we encounter
includes:
o In-house development of e-commerce capabilities using tools or
applications from companies such as Art Technology Group, Broadvision, and IBM;
o E-Commerce capabilities custom-developed by companies such as IBM
Global Services, and Accenture, Inc.;
19
o Other providers of outsourced e-commerce solutions, such as GSI
Commerce, Inc., Macrovision Corporation, asknet Inc. and eSellerate, Inc.;
o Companies that provide technologies, services or products that
support a portion of the e-commerce process, such as payment processing,
including CyberSource Corporation and PayPal Corp.;
o High-traffic branded websites that generate a substantial portion of
their revenue from e-commerce and may offer or provide to others the means to
offer their products for sale, such as Amazon.com, Inc.; and
o Web hosting, web services and infrastructure companies that offer
portions of our solution and are seeking to expand the range of their offering,
such as Network Solutions, LLC, Akamai Technologies, Inc., Yahoo! Inc., eBay
Inc. and Hostopia.com Inc.
PATENTS, PATENT APPLICATIONS AND TRADEMARKS
Our intellectual property portfolio consists of one patent and three patent
applications, which primarily related to the Roaming Messenger technology that
was licensed on an exclusive basis to another company in September 2006:
SELF CONTAINED BUSINESS TRANSACTION CAPSULES
This patent was issued on September 12, 2006. The patent has been licensed, in
September 2006, to one licensee on an exclusive basis, including to the
exclusion of the Company, in consideration for an agreement by the licensee to
pay royalties if it earns revenue from the technology.
A self-contained business transaction capsule, or eCapsule, is a small
electronic capsule that contains all the necessary data and logic to complete a
business transaction. The eCapsule is a "thin" and "lightweight" small
computer-readable file that is device independent. The eCapsule allows a
business, for example, to encapsulate an individual product or offer into an
intelligent object that is capable of completing entire transactions. The
eCapsule includes data about the product or service being provided, such as the
product price, a textual description, or options for the product or service (a
transaction description). The eCapsule also includes transaction logic or
business logic capable of completing the transaction, such as billing and
shipping information, order routing information, order status information,
shipping status information, and any other transaction rules necessary to
process the transaction. Moreover, the eCapsule is adapted to be broadcasted to,
and stored on, a portable electronic device, such as a mobile wireless-enabled
device, like a cellular telephone, a personal digital assistant (PDA) or a
laptop computer.
A METHOD OF AND SYSTEM FOR TRANSMITTING A MOBILE AGENT FOR INSTRUCTION EXECUTION
The application for this patent was filed on December 7, 2004. This patent
application has been licensed to one licensee on an exclusive basis, including
to the exclusion of the Company, in September, 2006.
This invention relates to transmitting a mobile agent for executing programmable
instructions and, more particularly, to transmitting a virtual machine in a
mobile agent to assist instruction execution. This patent application discloses
the actual system implementation of the Roaming Messenger platform using a
mobile agent approach.
A METHOD OF AND INSTRUCTION SET FOR EXECUTING OPERATIONS ON A DEVICE
The application for this patent was filed on December 7, 2004. This patent
application has been licensed to one licensee on an exclusive basis, including
to the exclusion of the Company, in September, 2006.
This invention relates to executable instructions and, more particularly, to
instructions that are executable on a device that receives a mobile agent. This
patent application discloses the actual implementation of the Roaming Messenger
device engine and messenger instruction sets and modes of execution.
20
UTILIZING MOBILE DEVICES AS A COMMUNICATION PROXY FOR NON-CONNECTED TERMINALS
This invention is a method and system in which terminals, appliances and
machines without dedicated Internet connections can complete Internet based
transactions by piggy-backing on the connection of the user's handheld device.
An example of an application of this invention is a vending machine that can
conduct electronic wireless payments without having an internal wireless device
that communicates with a server on the Internet. Existing solutions require the
vending machine to be equipped with an internal cell phone. Using this
invention, the vending machine can communicate with the consumer's handheld
device via Infrared or Bluetooth and simply uses the handheld device as the
conduit to the Internet for remote payment processing. This invention also
covers many other applications including secured doorways, factory floors and
smart data acquisition sensors. The application for this patent was filed on
February 21, 2002.
On September 18, 2006, we entered into a ten year Exclusive Technology Licensing
Agreement with Zingerang, Inc. Under this agreement, the Company grants to
Zingerang, an exclusive, worldwide, sub-licensable, transferable,
royalty-bearing right and license to the Roaming Messenger technology and
related patent portfolio. In consideration for granting the license to
Zingerang, the Company is entitled to an ongoing royalty fee equal to five
percent (5%) of Zingerang's gross sales related to the licensed technology, to
be paid quarterly. The Company will immediately receive a one time payment equal
to $100,000 as a recoupable advance against the royalties, $50,000 of which has
been received. During the term of the Agreement, Zingerang may, at its sole
discretion, pay to the Company a one-time royalty payment of $500,000, in lieu
of ongoing royalties, less certain patent application fees.
Additionally, the Company participated in Zingerang's founder round of financing
where it acquired forty million (40,000,000) shares of common stock in
Zingerang, which represents a large minority position, for a total investment of
$10,000.
TRADEMARKS
We have registered trademarks for Roaming Messenger(R), eCapsule(R), and Warp
9(R), although, we have licensed the Roaming Messenger(R) and eCapsule(R)
trademarks to Zingerang, Inc. on an exclusive basis under the Exclusive
Technology License Agreement, dated September 18, 2006.
GOVERNMENT REGULATION
We are subject to various federal, state, and local laws affecting medical
e-commerce and communication businesses. The Federal Trade Commission and
equivalent state agencies regulate advertising and representations made by
businesses in the sale of their products, which apply to us. We are also subject
to government laws and regulations governing health, safety, working conditions,
employee relations, wrongful termination, wages, taxes and other matters
applicable to businesses in general.
EMPLOYEES
As of June 30, 2006, we had fifteen full time employees, six of whom are
employed in administrative, marketing, and sales positions, and nine technical
employees employed in research, development, and technical product maintenance
positions. As a result of entering into the Exclusive Technology Agreement on
September 18, 2006, we laid-off five employees that were involved in the
marketing and engineering of the Roaming Messenger operation.
All of our employees have executed agreements that impose nondisclosure
obligations on the employee and assign to us (to the extent permitted by
California law) all copyrights and other inventions created by the employee
during his employment with us. Additionally, we have a trade secret protection
policy in place that management believes to be adequate to protect our
intellectual property and trade secrets.
21
SEASONALITY
Since the holiday shopping season from October through December is the highest
revenue season for retailers in general, we expect that our results of operation
for that the quarter ending December 31 will be better than most other quarters.
PROPERTIES
We currently lease approximately 8,605 square feet of office space at 50
Castilian Dr., Suite A, Santa Barbara, California 93117 for approximately $7,750
per month, triple net, pursuant to a six year lease agreement with rent
commencing on October 1, 2004.
We have vacated its old office space of approximately 3,650 square feet located
at 6144 Calle Real, Suite 200 Santa Barbara, California 93117 which it has
subleased for the remainder of the lease until March 2007.
LEGAL PROCEEDINGS
We are not currently involved in any litigation.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the executive officers and directors of the Company as
of September 30, 2006:
NAME AGE POSITION
Louie Ucciferri 46 Chairman, Acting Chief Financial
Officer and Secretary
Harinder Dhillon 33 President, Chief Executive Officer
and Director
Kin Ng 37 Director
--------------------
Louie Ucciferri has been a director since 2003 and was appointed our Chairman
and acting Chief Financial officer in October 2006. He is currently the Chief
Executive Officer of Regent Capital Group, a National Association of Securities
Dealers, Inc. ("NASD") registered broker dealer dedicated to real estate
investments. From 1995 to 2004, Mr. Ucciferri served as the President of
Westlake Financial Architects, an investment-banking firm he founded in 1995 to
provide financial and investment advisory services to early stage companies. He
has raised investment capital for both private and public companies and has
created liquidity for investors in the form of public offerings. Since November
1998, he has also served as President of Camden Financial Services, a NASD
registered broker dealer that serves as the dealer manager for a real estate
company that has raised in excess of $150 million in equity capital for the
acquisition of commercial office properties in southern California and Arizona.
Harinder Dhillon was appointed our President and Chief Executive officer in
October 2006. He has been our Vice President of Operations since October 2001
and has been the President of Warp 9 Inc. since July 1, 2005. Mr. Dhillon joined
us in July 2000. Prior to joining us, from 1993 to1998, Mr. Dhillon served as
the Chief Information Officer of Informax Data Systems, an enterprise systems
integrator headquartered in Southern California. Thereafter, during 1999 until
he joined us, he worked as an independent technology consultant. He has
designed, managed, and led the development and deployment of multi-million
dollar enterprise Internet, Intranet and integration projects for Fortune 500
companies and various government units. His client list included Department of
Justice, Immigration and Naturalization Services, US Navy, US Air Force, and the
City of Los Angeles. His projects included enterprise work flow automation,
real-time field services, infrastructure build out, and network and systems
22
integration. Mr. Dhillon received a Bachelor degree in Electrical and Computer
Engineering from the University of California at Santa Barbara in 1996.
Kin Ng was elected to our board in October 2006. Mr. Ng has been a real estate
broker and mortgage loan broker at Signal Financial Solutions since 2000. He
specializes in real estate sale, purchase, lease and management. Prior to that,
he had a career in the airline industry. From 1998 to 2000, he was the Airport
Operations Supervisor for China Southern Airlines, prior to which he held
various positions for Delta Airlines and American Trans Air. Mr. Ng received a
Bachelor of Science degree in 1993 from the School of Hospitality Management at
California State Polytechnic University at Pomona.
Under the Nevada General Corporation Law and the Company's Articles of
Incorporation, as amended, the Company's directors will have no personal
liability to the Company or its stockholders for monetary damages incurred as
the result of the breach or alleged breach by a director of his "duty of care".
This provision does not apply to the directors' (i) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law, (ii)
acts or omissions that a director believes to be contrary to the best interests
of the corporation or its shareholders or that involve the absence of good faith
on the part of the director, (iii) approval of any transaction from which a
director derives an improper personal benefit, (iv) acts or omissions that show
a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders, (v) acts or omissions
that constituted an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders, or
(vi) approval of an unlawful dividend, distribution, stock repurchase or
redemption. This provision would generally absolve directors of personal
liability for negligence in the performance of duties, including gross
negligence.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
BOARD COMMITTEES
The Board of Directors has not had an Audit Committee since February 2006.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and certain persons who own more than 10% of a registered class of the Company's
equity securities (collectively, "Reporting Persons"), to file reports of
ownership and changes in ownership ("Section 16 Reports") with the Securities
and Exchange Commission (the "SEC"). Reporting Persons are required by the SEC
to furnish the Company with copies of all Section 16 Reports they file.
Based solely on its review of the copies of such Section 16 Reports received by
it, or written representations received from certain Reporting Persons, all
Section 16(a) filing requirements applicable to the Company's Reporting Persons
during and with respect to the fiscal year ended June 30, 2006 have been
complied with on a timely basis.
EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
In consideration for his agreement to serve as a director of the Company, the
Company and Mr. Ng have entered into a one year letter agreement, effective
October 16, 2006, pursuant to which Mr. Ng will receive stock options to
purchase 1,000,000 shares of the Company's common stock under the Company's 2003
Stock Option Plan at an exercise price of $0.01, per share, the fair market
value of the Company's stock on the date of the grant. The options vest 1/12 per
23
month over a 12 month period and are exercisable for a period of four years from
the date of vesting of the last options to vest pursuant to the option
agreement, but no longer than ten (10) years from the date of grant of the
options.
Additional information about the compensation of Messrs. Ucciferri and Dhillon
as directors is set forth below under "Employment Agreements."
EXECUTIVE OFFICER COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer and our most highly
paid executive officers (the "Named Executive Officers") whose total annual
salary and bonus for services rendered in all capacities for the year ended June
30, 2006 was $100,000 or more.
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------------------------------------------------------------------
FISCAL OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING ALL OTHER
--------------------------- ---- ------ ----- ------------ OPTIONS COMPENSATION
----------- ------------
Jonathan Lei (1) 2006 $138,000 - 0 - - 0 - -0- - 0 -
President, Chief Financial 2005 $138,000 - 0 - - 0 - -0- - 0 -
Officer, and Secretary 2004 $138,000 - 0 - - 0 - -0- - 0 -
Harinder Dhillon (2) 2006 $150,000 (2) $11,371 - 0 - 650,000 - 0 -
President of Warp 9 Inc. 2005 $125,000 $2,894 - 0 - -0- - 0 -
2004 $125,000 $8,714 - 0 - -0- - 0 -
Michael Chuises (3) 2006 $120,000 - 0 - - 0 - -0- - 0 -
Vice President Engineering 2005 $120,000 (3) - 0 - - 0 - 1,000,000 - 0 -
2004 - - 0 - - 0 - -0- - 0 -
------------------------
(1) Mr. Lei resigned his position in October 2006.
(2) Effective March 1, 2006, Mr. Dhillon's base annual salary was increased to
$200,000 from $125,000. In addition, he has a performance bonus plan for earning
up to $150,000 based on the profitability of the Warp 9 operation over the
subsequent 12 months. In July 2005, Mr. Dhillon received a cashless stock option
grant to purchase 650,000 shares of unregistered common stock at an exercise
price equal to the fair market value of common stock at the time grant, which
was $0.13 per share.
(3) Mr. Chuises was promoted to Vice President of Engineering on October 1,
2004, with a base salary of $120,000. On April 15, 2005, Mr. Chuises was granted
1,000,000 stock options to purchase unregistered common stock at an exercise
price equal to the fair market value of unregistered common stock at the time
grant, which was $0.10 per share. Prior to his promotion, Mr. Chuises had
450,000 options at an exercise price of $0.08 and 550,000 options at an exercise
price of $0.17. Due to a lay-off of Roaming Messenger staff, Mr. Chuises'
employment was terminated on September 13, 2006.
24
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information with respect to options to purchase
common stock of the Company granted to the Company's officers during fiscal year
2006.
PERCENT OF TOTAL
OPTIONS GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
----------------------------------------------------------------------------------------------
Harinder Dhillon 650,000 (1) 54% $0.13 Four years from the
President, Warp 9 Inc. date of grant
-----------------
(1) These stock options were fully vested at the time of grant.
FISCAL YEAR-END OPTION EXERCISES
The following table sets forth information with respect to options to purchase
common stock of the Company held by the Company's executive officers at June 30,
2006.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
JUNE 30, 2006 AT JUNE 30, 2006 (2)
------------- --------------------
SHARES
ACQUIRED
UPON
NAME EXERCISE VALUE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------------- ----------- ------------- ----------- -------------
Harinder Dhillon -0- -0- 650,000 -0- -0- -0-
President, Warp 9 Inc.
---------------
(1) The value realized is the difference between the market price of the common
stock on the date of exercise and the exercise price of the stock option. The
underlying securities held upon exercise are unregistered common stock.
(2) The value of unexercised "in-the-money" options is the difference between
the market price of the common stock on June 30, 2006 ($0.02 per share) and the
exercise price of the option, multiplied by the number of shares subject to the
option. The underlying securities held upon exercise are unregistered common
stock.
EMPLOYMENT AGREEMENTS
In consideration for his agreement to serve as the Chairman, Acting Chief
Financial Officer, and Corporate Secretary of the Company, the Company and Mr.
Ucciferri have entered into a one year letter agreement, effective October 16,
2006, pursuant to which Mr. Ucciferri will receive a monthly retainer of $2,500
and stock options to purchase 2,500,000 shares of the Company's common stock
under the Company's 2003 Stock Option Plan at an exercise price of $0.01, per
share, the fair market value of the Company's stock on the date of the grant.
The options vest 1/12 per month over a 12 month period and are exercisable for a
period of four years from the date of vesting of the last options to vest
pursuant to the option agreement, but no longer than ten (10) years from the
date of grant of the options.
In addition to the compensation Mr. Dhillon currently receives for his services
as the President of the Company's wholly owned subsidiary, the Company has
agreed to grant to Mr. Dhillon stock options to purchase 8,000,000 shares of the
Company's common stock under the Company's 2003 Stock Option Plan at an exercise
price of $0.01, per share, the fair market value of the Company's stock on the
date of the grant, effective October 16, 2006 in consideration for Mr. Dhillon's
agreement to serve as a director, Chief Executive Officer, and President of the
Company. The options vest 1/48 per month over a 48 month period and are
exercisable for a period of four years from the date of vesting of the last
options to vest pursuant to the option agreement, but no longer than ten (10)
years from the date of grant of the options. The option agreement will terminate
if Mr. Dhillion resigns, is removed, or otherwise ceases to be Chief Executive
Officer and President of the Company. Certain terms and conditions of Mr.
Dhillon's appointment are still being discussed and have not yet been
determined.
25
STOCK OPTION PLAN
On July 10, 2003, the Board of Directors of the Company adopted the 2003 Stock
Option Plan for Directors, Executive Officers, Employees and Key Consultants of
the Company (the "2003 Plan"). The 2003 Plan was ratified by the shareholders of
the Company by written consent effective August 25, 2003. The 2003 Plan
authorizes the issuance of up to 25,000,000 shares of the Company's common stock
pursuant to the grant and exercise of up to 25,000,000 stock options. To date,
5,209,994 options to purchase 5,209,994 shares of common stock at volume
weighted average price of $0.11 per share granted under the 2003 Plan are
outstanding. To date, 2,775,000 options have been exercised.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the names the executive officers and directors of
the Company and all persons known by the Company to beneficially own 5% or more
of the issued and outstanding common stock of the Company at February 27, 2007.
For each person the address is c/o the Company, 50 Castilian Drive, Suite 101,
Santa Barbara, California 93117.
NAME, TITLE AND ADDRESS NUMBER OF SHARES BENEFICIALLY OWNED(2) PERCENTAGE OWNERSHIP
----------------------------------------- -------------------------------------- --------------------
Harinder Dhillon
President and CEO and Director 11,585,000 5.09%
Louie Ucciferri
Chairman and CFO and Secretary 3,500,000 1.75%
All current Executive Officers as a Group 15,135,000 6.64%
Kin Ng 50,000 0.02%
Director
Jonathan Lei (1)
86,969,525 38.18%
All current Directors who are not Executive
Officers as a group 50,000 0.02%
---------------------
(1) Mr. Lei resigned his position with the Company in October 2006.
(2) Except as pursuant to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all shares of
common stock beneficially owned. The total number of issued and outstanding
shares and the total number of shares owned by each person does not include
unexercised warrants and stock options, and is calculated as of February 27,
2006.
26
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock has been quoted on the OTC Bulletin Board under the symbol
"WNYN.OB." The following table shows the reported high and low closing bid
quotations per share for our common stock based on information provided by the
OTC Bulletin Board. Particularly since our common stock is traded infrequently,
such over-the-counter market quotations reflect inter-dealer prices, without
markup, markdown or commissions and may not necessarily represent actual
transactions or a liquid trading market.
Year Ended June 30, 2007 HIGH LOW
---- ---
First Quarter ended September 30, 2006 $0.024 $0.011
Second Quarter ended December 31, 2006 $0.026 $0.0063
Year Ended June 30, 2006 HIGH LOW
---- ---
First Quarter ended September 30, 2005 $0.19 $0.09
Second Quarter ended December 31, 2005 $0.15 $0.07
Third Quarter ended March 31, 2006 $0.09 $0.05
Fourth Quarter ended June 30, 2006 $0.06 $0.02
Year Ended June 30, 2005 HIGH LOW
---- ---
First Quarter ended September 30, 2004 $0.68 $0.04
Second Quarter ended December 31, 2004 $0.75 $0.25
Third Quarter ended March 31, 2005 $0.31 $0.19
Fourth Quarter ended June 30, 2005 $0.26 $0.11
Year Ended June 30, 2004 HIGH LOW
---- ---
First Quarter ended September 30, 2003 $0.52 $0.27
Second Quarter ended December 31, 2003 $0.45 $0.25
Third Quarter ended March 31, 2004 $3.60 $0.27
Fourth Quarter ended June 30, 2004 $1.90 $0.45
NUMBER OF STOCKHOLDERS
As of February 28, 2007, there were approximately 500 holders of record of our
common stock.
DIVIDEND POLICY
Historically, we have not paid any dividends to the holders of our common stock
and we do not expect to pay any such dividends in the foreseeable future as we
expect to retain our future earnings for use in the operation and expansion of
our business.
27
SELLING SHAREHOLDER
The following table presents information regarding the selling stockholder. A
description of the selling stockholder's relationship to us and how the selling
stockholder acquired the shares to be sold in this offering is detailed in the
information immediately following this table.
Shares Beneficially Owned Shares Beneficially Owned After
Prior to Offering the Offering(2)
Selling Stockholder Number Percent(1) Number Percent(1)
------------------- ------ ---------- ------ ----------
Cornell Capital Partners LP. 11,160,501 (2) 4.9% -0- --
Total 11,160,501 -0- -0-
-----------------
* less than 1%.
(1) Applicable percentage ownership is based on 227,786,533 shares of common
stock outstanding as of February 13, 2007. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently exercisable or exercisable within 60 days of
February 13, 2007 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Consists of shares issuable upon conversion of convertible debentures.
Pursuant to provisions in the convertible debentures and the warrants, Cornell's
beneficial ownership of our common stock is limited to 4.9% of the total
outstanding, which limitation may only be waived upon 61-day notice. All
investment decisions of, and control of, Cornell Capital Partners are held by
its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing member
of Yorkville Advisors, makes the investment decisions on behalf of and controls
Yorkville Advisors.
FINANCING
Following is a description of the transaction that gave rise to the inclusion
into this prospectus of the shares on behalf of the selling shareholder.
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10%
secured convertible debentures in the aggregate principal amount of $1,200,000
of which $400,000 was advanced immediately, the second installment of $350,000
was advanced in January 2006 and the last installment of $450,000 was advanced
in April 2006. The debentures mature on the third anniversary of the date of
issuance and we are not required to make any payments until the maturity date.
Holders of the debentures may convert at any time amounts outstanding under the
debentures into shares of our common stock at a conversion price per share equal
to the lesser of (i) $0.15 or (ii) 80% of the lowest volume weighted average
price of our common stock during the five trading days immediately preceding the
conversion date as quoted by Bloomberg, LP. Cornell has agreed not to short any
of the shares of Common Stock for as long as any of the debentures remain
outstanding.
We have the right to redeem, upon three-business day notice, a portion or all
amounts outstanding under the debenture prior to the maturity date at a 20%
redemption premium provided that the closing bid price of our common stock is
less than $0.15. In addition, in the event of a redemption, we are required to
issue to Cornell 50,000 shares of common stock for each $100,000 redeemed, which
shares are not being registered herewith. Under the terms of the debenture, the
holder has the right to convert all or part of the debenture within the
three-day period following the delivery of a redemption notice.
We also issued to Cornell five-year warrants to purchase 1,500,000, 4,000,000
and 4,000,000 shares of Common Stock at $0.08, $0.10 and $0.12, respectively.
28
In connection with the purchase agreement, we also entered into a registration
rights agreement with Cornell providing for the registration of the shares of
common stock issuable upon conversion of the debentures and exercise of the
warrants.
Our obligations under the purchase agreement are secured by substantially all of
our assets. As further security for our obligations thereunder, Jon Lei, our
former Chief Executive Officer and currently a principal shareholder, granted a
security interest in 2,000,000 shares of common stock that he owns.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeded or exceeds $60,000 and in which
any director, executive officer, holder of more than 5% of our common stock or
any member of the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest.
DESCRIPTION OF SECURITIES
The following description of our capital stock and provisions of our articles of
incorporation and bylaws, each as amended, is only a summary. You should also
refer to the copies of our articles of incorporation and bylaws which are
included as exhibits to our Report on 10-KSB filed with the SEC on April 10,
2002. Our authorized capital stock consists of 495,000,000 shares of common
stock, par value $0.001 per share and 5,000,000 shares of preferred stock $0.001
par value per share. As of February 13, 2007, there are 227,786,533 shares of
common stock issued and outstanding and no shares of preferred stock issued and
outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on all
matters submitted to a vote of our stockholders. Holders of our common stock are
entitled to receive dividends ratably, if any, as may be declared by the board
of directors out of legally available funds, subject to any preferential
dividend rights of any outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of our common stock are entitled to
receive ratably our net assets available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of our common stock have no preemptive, subscription, redemption
or conversion rights. The outstanding shares of common stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further stockholder approval.
PREFERRED STOCK
Our board of directors is authorized without further stockholder approval, to
issue from time to time up to a total of 5,000,000 shares of preferred stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of these series without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of our
management without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. Currently, there are no shares of preferred stock outstanding
and we have no present plans to issue any shares of preferred stock.
29
CONVERTIBLE DEBENTURES
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10%
secured convertible debentures in the aggregate principal amount of $1,200,000
of which $400,000 was advanced immediately. The second installment of $350,000
($295,000 net of fees) was advanced on January 27, 2006. The last installment of
$450,000 ($395,000 net of fees) was advanced on May 9, 2006, after the
registration statement was declared effective by the Securities and Exchange
Commission. The debentures mature on the third anniversary of the date of
issuance and we are not required to make any payments until the maturity date.
Holders of the debentures may convert at any time amounts outstanding under the
debentures into shares of our common stock at a conversion price per share equal
to the lesser of (i) $0.15 or (ii) 80% of the lowest volume weighted average
price of our common stock during the five trading days immediately preceding the
conversion date as quoted by Bloomberg, LP. Cornell has agreed not to short any
of the shares of Common Stock.
We have the right to redeem a portion or all amounts outstanding under the
debenture prior to the maturity date at a 20% redemption premium provided that
the closing bid price of our common stock is less than $0.15. In addition, in
the event of a redemption, we are required to issue to Cornell 50,000 shares of
common stock for each $100,000 redeemed.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mountain Share
Transfer, located at 1625 Abilene Drive, Broomfield, Colorado 80020.
PLAN OF DISTRIBUTION
The selling stockholder, or its pledgees, donees, transferees, or any of its
successors in interest selling shares received from the named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be a selling
stockholder) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling stockholder may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt to
sell the common stock as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling stockholder
to its partners, members or stockholders;
o By pledge to secure debts of other obligations;
30
o In connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions in
standardized or over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which the same
broker acts as an agent on both sides of the trade. The selling stockholders may
also transfer the common stock by gift. We do not know of any arrangements by
the selling stockholders for the sale of any of the common stock.
The selling stockholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the common stock. These brokers or dealers may act as principals, or as
an agent of a selling stockholder. Broker-dealers may agree with a selling
stockholder to sell a specified number of the stocks at a stipulated price per
share. If the broker-dealer is unable to sell common stock acting as agent for a
selling stockholder, it may purchase as principal any unsold shares at the
stipulated price. Broker-dealers who acquire common stock as principals may
thereafter resell the shares from time to time in transactions in any stock
exchange or automated interdealer quotation system on which the common stock is
then listed, at prices and on terms then prevailing at the time of sale, at
prices related to the then-current market price or in negotiated transactions.
Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling stockholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount of selling
stockholders' shares being offered and the terms of the offering, the names of
any agents, brokers, dealers or underwriters, any applicable commission and
other material facts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling stockholder can presently estimate the
amount of any such compensation.
The selling stockholders and any underwriters, brokers, dealers or agents that
participate in the distribution of the common stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling stockholder is deemed to be an underwriter, the
selling stockholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling stockholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
stockholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. We will not pay any
compensation or give any discounts or commissions to any underwriter in
connection with the securities being offered by this prospectus.
31
A selling stockholder may enter into hedging transactions with broker-dealers
and the broker-dealers may engage in short sales of the common stock in the
course of hedging the positions they assume with that selling stockholder,
including, without limitation, in connection with distributions of the common
stock by those broker-dealers. A selling stockholder may enter into option or
other transactions with broker-dealers, who may then resell or otherwise
transfer those common stock. A selling stockholder may also loan or pledge the
common stock offered hereby to a broker-dealer and the broker-dealer may sell
the common stock offered by this prospectus so loaned or upon a default may sell
or otherwise transfer the pledged common stock offered by this prospectus.
The selling stockholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling stockholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling stockholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We have agreed to indemnify the selling stockholder and any brokers, dealers and
agents who may be deemed to be underwriters, if any, of the common stock offered
by this prospectus, against specified liabilities, including liabilities under
the Securities Act. The selling stockholder has agreed to indemnify us against
specified liabilities.
The common stock offered by this prospectus was originally issued to the selling
stockholders pursuant to an exemption from the registration requirements of the
Securities Act, as amended. We agreed to register the common stock issued to the
selling stockholders under the Securities Act, and to keep the registration
statement of which this prospectus is a part effective until all of the
securities registered under this registration statement have been sold. We have
agreed to pay all expenses incident to the registration of the common stock held
by the selling stockholders in connection with this offering, but all selling
expenses related to the securities registered shall be borne by the individual
holders of such securities pro rata on the basis of the number of shares of
securities so registered on their behalf.
We cannot assure you that the selling stockholders will sell all or any portion
of the common stock offered by this prospectus. In addition, we cannot assure
you that a selling stockholder will not transfer the shares of our common stock
by other means not described in this prospectus.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On or about August 2, 2006, we engaged HJ Associates & Consultants, LLP,
Certified Public Accountants to audit and review the Company's financial
statements for the fiscal year ending June 30, 2006. The new accountant has been
engaged for general audit and review services and not because of any particular
transaction or accounting principle, or because of any disagreement with our
former accountant, Rose, Snyder & Jacobs, a corporation of certified public
accountants.
The former accountant was dismissed effective August 2, 2006. The Former
Accountant's reports on our financial statements during our past two fiscal
years did not contain an adverse opinion or disclaimer of opinion, nor was it
modified as to uncertainty, audit scope or accounting principles, except for a
going concern qualification contained in its audit reports for the fiscal years
ended June 30, 2004 and 2005. The decision to change accountants was recommended
and approved by our Board of Directors. During the fiscal years ended June 30,
2004 and June 30, 2005 through the date hereof, we did not have any
disagreements with the former accountant on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to the former accountant's satisfaction, would have
caused it to make reference to the subject matter of the disagreement in
connection with its reports.
32
HJ Associates was engaged effective August 2, 2006. The new accountant was
engaged for general audit and review services and not because of any particular
transaction or accounting principle, or because of any disagreement with the
former accountant.
LEGAL MATTERS
The validity of the common stock has been passed upon by Sichenzia Ross Friedman
Ference LLP, New York, New York.
EXPERTS
The June 30, 2005 and 2004 financial statements included in the Prospectus have
been audited by Rose, Snyder & Jacobs, a corporation of certified public
accountants to the extent and for the periods set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
Our consolidated balance sheet as of June 30, 2006 and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year then
ended were audited by HJ Associates & Consultants, LLP as set forth in their
report appearing elsewhere herein and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form SB-2 under the Securities
Act for the common stock to be sold in this offering. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules that were filed with the registration statement. For further
information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we refer
you to the full text of the contract or other document filed as an exhibit to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may be
inspected without charge at the public reference facilities maintained by the
SEC 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of the
registration statement may be obtained from the SEC upon payment of the
prescribed fee. Information regarding the operation of the public reference
rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http://www.sec.gov.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Under the Nevada General Corporation Law and our Articles of Incorporation, as
amended, our directors will have no personal liability to us or our stockholders
for monetary damages incurred as the result of the breach or alleged breach by a
director of his "duty of care". This provision does not apply to the directors'
(i) acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) approval of
any transaction from which a director derives an improper personal benefit, (iv)
acts or omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (v) acts or omissions that constituted an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, or (vi) approval of an unlawful dividend,
distribution, stock repurchase or redemption. This provision would generally
absolve directors of personal liability for negligence in the performance of
duties, including gross negligence.
33
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NEVADA STATE LAW
We may be or in the future we may become subject to Nevada's control share law.
A corporation is subject to Nevada's control share law if it has more than 200
stockholders, at least 100 of whom are stockholders of record and residents of
Nevada, and it does business in Nevada or through an affiliated corporation.
The law focuses on the acquisition of a "controlling interest" which means the
ownership of outstanding voting shares sufficient, but for the control share
law, to enable the acquiring person to exercise the following proportions of the
voting power of the corporation in the election of directors: (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
or (iii) a majority or more. The ability to exercise such voting power may be
direct or indirect, as well as individual or in association with others.
The effect of the control share law is that the acquiring person, and those
acting in association with it, obtains only such voting rights in the control
shares as are conferred by a resolution of the stockholders of the corporation,
approved at a special or annual meeting of stockholders. The control share law
contemplates that voting rights will be considered only once by the other
stockholders. Thus, there is no authority to strip voting rights from the
control shares of an acquiring person once those rights have been approved. If
the stockholders do not grant voting rights to the control shares acquired by an
acquiring person, those shares do not become permanent non-voting shares. The
acquiring person is free to sell its shares to others. If the buyers of those
shares themselves do not acquire a controlling interest, their shares do not
become governed by the control share law.
If control shares are accorded full voting rights and the acquiring person has
acquired control shares with a majority or more of the voting power, any
stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's control share law may have the effect of discouraging takeovers of the
corporation.
In addition to the control share law, Nevada has a business combination law
which prohibits certain business combinations between Nevada corporations and
"interested stockholders" for three years after the "interested stockholder"
first becomes an "interested stockholder" unless the corporation's board of
directors approves the combination in advance. For purposes of Nevada law, an
"interested stockholder" is any person who is (i) the beneficial owner, directly
or indirectly, of ten percent or more of the voting power of the outstanding
voting shares of the corporation, or (ii) an affiliate or associate of the
corporation and at any time within the three previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting power of the
then outstanding shares of the corporation. The definition of the term "business
combination" is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquiror to use the corporation's assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other stockholders.
The effect of Nevada's business combination law is to potentially discourage
parties interested in taking control of us from doing so if it cannot obtain the
approval of our board of directors.
34
WARP 9, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONTENTS
PAGE
Report of Independent Registered Public Accounting Firm .............. F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations................................. F-4
Consolidated Statements of Changes in Shareholders Equity............. F-5
Consolidated Statements of Cash Flows ................................ F-6
Notes to Consolidated Financial Statements ........................... F-7
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
Consolidated Balance Sheets as of December 31, 2006 (unaudited)....... F-21
Consolidated Statements of Operations for the Three and Six
Months ended December 31, 2006 and 2005 (unaudited)................... F-22
Consolidated Statements of Cash Flows for the Six Months
ended December 31, 2006 and 2005 (unaudited).......................... F-23
Notes to Condensed Consolidated Financial Statements
(unaudited)........................................................... F-24
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Roaming Messenger, Inc.
Santa Barbara, California
We have audited the consolidated balance sheet of Roaming Messenger, Inc. and
Subsidiary as of June 30, 2006, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provided a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Roaming
Messenger, Inc. and Subsidiary as of June 30, 2006, and the results of their
operations and their cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations since inception. This raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ HJ Associates & Consultants, LLP
-------------------------
HJ Associates & Consultants, LLP
Salt Lake City, Utah
September 27, 2006
F-2
ROSE, SNYDER & JACOBS
A CORPORATION OF CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Roaming Messenger, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' deficit and cash flows of Roaming Messenger, Inc. (a Nevada
Corporation) and Subsidiary for the year ended June 30, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards established by the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Roaming Messenger, Inc. and Subsidiary for the year ended June 30,
2005 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses and
negative cash flows from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Encino, California
September 16, 2005
F-2A
ROAMING MESSENGER, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 387,180
Accounts Receivable, net 161,070
Prepaid and Other Current Assets 23,891
-----------------
TOTAL CURRENT ASSETS 572,141
-----------------
PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 89,485
Computer Equipment 498,544
Commerce Server 50,000
Computer Software 8,478
-----------------
646,507
Less accumulated depreciation (399,101)
-----------------
NET PROPERTY AND EQUIPMENT 247,406
-----------------
OTHER ASSETS
Lease Deposit 9,749
Restricted Cash 93,000
Internet Domain, net 1,404
Loan Costs 177,917
-----------------
TOTAL OTHER ASSETS 282,070
-----------------
TOTAL ASSETS $ 1,101,617
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 171,492
Credit Cards Payable 86,219
Accrued expenses 394,071
Bank Line of Credit 342
Deferred Income 61,333
Note Payable 25,000
Customer Deposit 35,808
Derivative Liability-Debenture 598,805
Capitalized Leases, Current Portion 47,245
-----------------
TOTAL CURRENT LIABILITIES 1,420,315
-----------------
LONG TERM LIABILITIES
Convertible Debenture, net of Beneficial Conversion Feature 879,236
Capitalized Leases 61,565
-----------------
TOTAL LONG-TERM LIABILITIES 940,801
-----------------
TOTAL LIABILIITIES 2,361,116
-----------------
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value;
495,000,000 authorized shares;
189,803,146 shares issued and outstanding 189,803
Additional paid in capital 5,886,360
Accumulated deficit (7,335,662)
-----------------
TOTAL SHAREHOLDERS' DEFICIT (1,259,499)
-----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,101,617
=================
The accompanying notes are an integral part of these financial statements
F-3
ROAMING MESSENGER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
------------ -------------
2006 2005
------------ -------------
REVENUE $ 1,757,685 $ 1,184,212
COST OF SERVICES 441,189 399,265
------------ -------------
GROSS PROFIT 1,316,496 784,947
OPERATING EXPENSES
Selling, general and administrative expenses 2,925,889 2,735,890
Research and development 427,036 397,205
Depreciation and amortization 92,602 113,775
------------ -------------
TOTAL OPERATING EXPENSES 3,445,527 3,246,870
------------ -------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) (2,129,031) (2,461,923)
OTHER INCOME/(EXPENSE)
Gain on Settlement 24,000 -
Interest and Other Income 65,733 9,258
Interest Expense (125,054) (26,435)
------------ -------------
(35,321) (17,177)
------------ -------------
LOSS FROM OPERATIONS BEFORE PROVISION FOR TAXES (2,164,352) (2,479,100)
PROVISION FOR INCOME TAXES - -
------------ -------------
NET LOSS (2,164,352) (2,479,100)
============ =============
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.01)
============ =============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 184,846,599 174,247,486
============ =============
The accompanying notes are an integral part of these financial statements
F-4
ROAMING MESSENGER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED JUNE 30, 2006
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
----------------- ------------ ----------- ------------- --------------
Balance, June 30, 2004 172,399,614 $172,400 $3,871,738 $ (2,692,210) $ 1,351,928
Issuance of common stock, note 6 8,407,477 8,407 949,308 - 957,716
Issuance of warrants, note 7 129,020 129,020
Net loss - - - (2,479,100) (2,479,100)
----------------- ------------ ----------- ------------- --------------
Balance, June 30, 2005 180,807,091 $ 180,807 $4,950,066 $ (5,171,310) $ (40,437)
Issuance of common stock, note 6
Convertible debenture 3,271,881 3,272 56,728 60,000
Issuance of common stock, note 6 4,579,174 4,579 282,568 287,147
Stock issued for cash
Issuance of common stock, note 6
Stock issued for services 1,145,000 1,145 135,205 136,350
Warrant Compensation 16,828 16,828
Discount on convertible debenture 300,000 300,000
Option Compensation, net 144,965 144,965
Net Loss (2,164,352) (2,164,352)
----------------- ------------ ----------- ------------- --------------
Balance, June 30, 2006 189,803,146 $ 189,803 $5,886,360 $ (7,335,662) $ (1,259,499)
================= ============ =========== ============= ==============
The accompanying notes are an integral part of these financial statements
F-5
ROAMING MESSENGER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
June 30
2006 2005
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,164,352) (2,479,100)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 68,048 111,877
Issuance of common shares and warrants for services 136,350 459,482
Gain on Settlement (24,000) -
Beneficial conversion feature 300,000 -
Amortization of loan costs 24,583 -
Cost of warrant and stock options recognized 161,793 -
Derivative expense 590,830 -
Beneficial conversion feature (260,764)
(Increase) Decrease in:
Accounts receivable 17,659 (62,322)
Prepaid and other assets (1,525) (14,043)
Increase (Decrease) in:
Accounts payable 49,847 96,752
Accrued expenses 32,116 (1,838)
Deferred Income 34,666 26,667
Other liabilities (3,625) 185,327
---------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (1,038,374) (1,677,198)
---------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted Cash - (93,000)
Purchase of property and equipment (61,143) (58,603)
---------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (61,143) (151,603)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on note payable (5,000) (9,500)
Payments on capitalized leases (30,821) (46,526)
Proceeds from line of credit 342
Proceeds from Convertible Debenture, net 997,500 -
Proceeds from issuance of common stock, net of cost 287,147 627,254
---------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,249,168 571,228
---------------- --------------
NET INCREASE IN CASH 149,651 (1,257,573)
CASH, BEGINNING OF PERIOD 237,529 1,495,102
---------------- --------------
CASH, END OF PERIOD 387,180 237,529
================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid 41,169 18,580
================ ==============
Taxes paid 1,600 63
================ ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS During the year ended June 30,
2006, the Company received a $24,000 settlement due to a law suit; during the
year ended June 30, 2006 and 2005, the Company purchased $19,796 and $107,467
of equipment under capital leases respectively. During the year ended June
30, 2006 the Company converted $60,000 of the principal balance of the
convertible debenture in exchange for 3,271,881 shares of common stock.
The accompanying notes are an integral part of these financial statements
F-6
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
1. ORGANIZATION
Roaming Messenger, Inc., formerly known as Latinocare Management Corporation
("LMC), originally known as JNS Marketing, Inc. was incorporated in Colorado in
1983, and then reincorporated in Nevada.
On April 1, 2003, LMC a publicly traded company, entered into a Plan and
Agreement of Reorganization which resulted in Warp 9, Inc. ("Warp 9") becoming a
wholly-owned subsidiary of LMC. In connection with the transaction, all officers
and directors of LMC resigned and were replaced by the management team and
directors of Warp 9. Subsequently, LMC was renamed to Roaming Messenger Inc. by
the new board of directors. Although from a legal perspective, Roaming
Messenger, Inc. acquired Warp 9, Inc., the transaction is viewed as a
recapitalization of Warp 9, Inc., accompanied by an issuance of stock by Warp 9,
Inc. to the shareholders of Roaming Messenger, Inc. This is because Roaming
Messenger, Inc. did not have operations immediately prior to the transaction,
and following the transaction, Warp 9, Inc. was the operating company.
Warp 9, Inc. is a provider of e-commerce platforms and services for the catalog
and retail industry. Its suite of software platforms is designed to help online
retailers maximize the Internet channel by applying advanced technologies for
online catalogs, e-mail marketing campaigns, and interactive visual
merchandising. Offered on a fully managed Software-as-a-Service model, Warp 9
products allow customers to focus on their core business, rather than technical
implementations. Warp 9, Inc. was incorporated in the state of Delaware, under
the name of eCommerceland, on August 27, 1999. The Company, based in Goleta,
California, began operations October 1, 1999. Prior to October 1, 1999, the
Company was operated as WARP 9 Technologies, LLC ("LLC"), a California limited
liability company. LLC was merged with and into eCommerceland effective at its
close of business, September 30, 1999, and on December 21, 2000 changed its name
to Warp 9, Inc. For accounting and reporting purposes, the "merger" was
considered a continuation of the same business, under a different type of
entity. The operations and ownership of Warp 9, Inc. were substantially the same
as LLC. The Company's primary source of income is service of their Warp 9
contracts, which relates to fully hosted web based e-commerce software products.
On August 24, 2006, the Company's board of directors and majority of
shareholders voted to change the name of the Company from Roaming Messenger,
Inc. to Warp 9, Inc. to reflect a new strategic plan of focusing primarily on
the business of the Company's wholly owned subsidiary, Warp 9, Inc. The Company
anticipates that it will be able to effectuate the name change in October 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting, which contemplates continuity of operations,
realization of assets and liabilities and commitments in the normal course of
business. The accompanying financial statements do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The
Company's losses and negative cash flows from operations raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern and appropriateness of using the going
concern basis is dependent upon, among other things, additional cash infusion.
The Company has funded its operation through the sale of its common stock
through private offerings and equity financing, as discussed in note 6.
Management believes, but there is no assurance, that the Company will obtain the
additional working capital that it needs through the sale of its Common Stock.
The Company has incurred operating deficits since inception, which are expected
to continue until its business model is fully developed.
F-7
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
REVENUE RECOGNITION
The Company recognizes income when the service is provided or when product is
delivered. We present revenue, net of customer incentives. Most of the income is
generated from monthly fees from clients who subscribe to the Company's fully
hosted web based e-commerce products on terms averaging twelve months. Unless
terminated accordingly with prior written notice, the agreements automatically
renew for another term.
We provide online marketing services that we purchase from third parties. The
gross revenue presented in our statement of operations is in accordance with
EITF No. 99-19.
We also offer professional services such as development services. The fees for
development services constitute a separate unit of accounting in accordance with
EITF No. 00-21, and are recognized as the work is performed.
Upfront fees for development services or other customer services are deferred
until certain implementation or contractual milestones have been achieved.
Deferred income for the fiscal year ended, June 30, 2006, was $61,333.
For the fiscal year ended, June 30, 2006, monthly fee from web products and
associated service fees account for 42% of the Company's total revenues,
professional services account for 32% and the remaining 26% of total revenues
are from resale of third party products and services.
For the fiscal year ended, June 30, 2005, monthly fee from web products and
associated service fees account for 55% of the Company's total revenues,
professional services account for 23% and the remaining 22% of total revenues
are from resale of third party products and services.
RETURN POLICY
On all service offerings such as web based e-commerce products there are no
returns. Monthly fees are assessed and revenue is recognized at the end of every
month, after service has been provided. Some higher paying customers may have
service level agreements where we guarantee system uptime such as 99.9% of the
time per month. If we fall below the agreed upon level of uptime, we shall
credit one day of service fee for each hour our system is down up to a maximum
of one monthly fee. This guarantee only covers downtime as a result of failure
in the Company's hardware, software or gross negligence. Historical, the Company
has not had to issue any credits for such returns.
COST OF REVENUE
Cost of revenue includes the direct costs of operating the Company's network,
including telecommunications charges and third party internet marketing charges.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Total research and
development costs were $427,036 and $397,205 for the years ended June 30, 2006
and 2005, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
F-8
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying financial statements.
Significant estimates made in preparing these financial statements include the
allowance for doubtful accounts, the estimate of useful lives of property and
equipment, the deferred tax valuation allowance, and the fair value of stock
options and warrants. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximates their fair value, due to the relatively short maturity
of these instruments. As of June 30, 2006 and 2005, the Company's capital lease
obligations and notes payable have stated borrowing rates that are consistent
with those currently available to the Company and, accordingly, the Company
believes the carrying value of these debt instruments approximates their fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are depreciated or amortized
using the straight-line method over the following estimated useful lives:
Furniture, fixtures & equipment 7 Years
Computer equipment 5 Years
Commerce server 5 Years
Computer software 3 - 5 Years
Leasehold improvements Length of the lease
Property and equipment assets leased under capitalized leases with an original
cost of $218,179 and $199,418 at June 30, 2006 and 2005, respectively.
Amortization of assets under capitalized leases is included in depreciation and
amortization expense. During the years ended June 30, 2006 and 2005, additions
to fixed assets through capitalized leases totaled $19,796 and $107,467,
respectively.
During the year ended June 30, 2005, the Company vacated its premises on 6144
Calle Real in Santa Barbara. The Company recorded an expense for $23,485,
representing the cost of the remaining related leasehold improvements,
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company operates in a single industry segment. The Company markets its
services to companies and individuals in many industries and geographic
locations. The Company's operations are subject to rapid technological
advancement and intense competition in the telecommunications industry.
Accounts receivable represent financial instruments with potential credit risk.
The Company typically offers its customers credit terms. The Company makes
periodic evaluations of the credit worthiness of its enterprise customers and
other than obtaining deposits pursuant to its policies, it generally does not
require collateral. In the event of nonpayment, the Company has the ability to
terminate services.
ADVERTISING COSTS
The Company expenses the cost of advertising and promotional materials when
incurred. Total advertising costs were $50,751 and $53,147 for the years ended
June 30, 2006 and 2005, respectively.
F-9
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
As of June 30, 2006, the Company adopted Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" (FAS) No. 123R, that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions, as we formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock
Issued to Employees," and generally requires that such transactions be accounted
for using a fair-value-based method and recognized as expenses in our statement
of income. The adoption of (FAS) No. 123R by the Company had no material impact
on the statement of income.
The Company adopted FAS 123R using the modified prospective method which
requires the application of the accounting standard as of June 30, 2006. Our
financial statements as of and for the year ended June 30, 2006 reflect the
impact of adopting FAS 123R. In accordance with the modified prospective method,
the financial statements for prior periods have not been restated to reflect,
and do not include, the impact of FAS 123R.
Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that is ultimately expected
to vest. Stock-based compensation expense recognized in the consolidated
statement of operations during the year ended June 30, 2006, included
compensation expense for the stock-based payment awards granted prior to, but
not yet vested, as of June 30, 2006 based on the grant date fair value estimated
in accordance with the pro forma provisions of FAS 148, and compensation expense
for the stock-based payment awards granted subsequent to June 30, 2006, based on
the grant date fair value estimated in accordance with FAS 123R. As stock-based
compensation expense recognized in the statement of income for the year ended
June 30, 2006 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the pro forma information required
under FAS 148 for the periods prior to the year ended June 30, 2006, we
accounted for forfeitures as they occurred. The stock-based compensation expense
recognized in the consolidated statement of operations during the year ended
June 30, 2006 is $159,545.
Year Ended Year Ended
6/30/2006 6/30/2005
----------------- ----------------
Net loss as reported $ (2,164,352) $ (2,479,100)
Add: Stock-based employee compensation - -
expense included in net reported loss
Deduct: Stock based employee - (13,839)
compensation expense determined under fair value
based method for all awards
----------------- ----------------
Pro forma net loss $ (2,164,352) $ (2,492,939)
================= ================
Basic and diluted pro forma loss per share
As reported $ (0.01) $ (0.01)
================= ================
Proforma $ (0.01) $ (0.01)
================= ================
F-10
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET LOSS PER SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's stock under its stock option plan and warrants may have
a dilutive effect on the Company's earnings per share in the future but are not
included in the calculation for 2006 and 2005 because they have an antidilutive
effect in these periods.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to financial statements carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. The measurement of deferred tax assets and liabilities is based
on provisions of applicable tax law. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance based on the amount of tax
benefits that, based on available evidence, is not expected to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" which is
effective for financial instruments entered into or modified after May 31, 2003,
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. This statement establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. The adoption of SFAS No. 150
did not have a material effect on the financial statements of the Company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." SFAS No. 151 seeks to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage) in the determination of inventory carrying costs. The
statement requires such costs to be treated as a current period expense. This
statement is effective for the company on July 2, 2006. The company does not
believe the adoption of SFAS No. 151 will have a material impact on its
financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
revised Statement 123R, "Share-Based Payment," to be effective for annual
periods beginning after December 15, 2005 for Roaming Messenger, Inc. Statement
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation expense in the income
statement. The cost is recognized over the requisite service period based on
fair values measured on grant dates. The new standard may be adopted using
either the modified prospective transition method or the modified retrospective
method. We are currently evaluating our share-based employee compensation
programs, the potential impact of this statement on our consolidated financial
position and results of operations, and the alternative adoption methods.
In December 2004, the Financial Accounting Standards Board issued two FASB Staff
Positions - FSP FAS 109-1, Application of FASB Statement 109 "Accounting for
Income Taxes" to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. Neither of these affected the Company as it
does not participate in the related activities.
In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"), which provides interpretive guidance related to the
interaction between SFAS 123(R) and certain SEC rules and regulations. It also
provides the SEC staff's views regarding valuation of
F-11
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
share-based payment arrangements. In April 2005, the SEC amended the compliance
dates for SFAS 123(R), to allow companies to implement the standard at the
beginning of their next fiscal year, instead of the next reporting period
beginning after June 15, 2005. Management is currently evaluating the impact SAB
107 will have on our financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liability's fair value can be reasonably estimated. FIN 47
also defines when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provision is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006
and does not believe the adoption will have a material impact on its financial
position or results of operations or cash flows.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Error Corrections." This new standard replaces APB Opinion No. 20, "Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements," and represents another step in the FASB's goal to
converge its standards with those issued by the IASB. Among other changes,
Statement 154 requires that a voluntary change in accounting principle be
applied retrospectively with all prior period financial statements presented on
the new accounting principle, unless it is impracticable to do so. Statement 154
also provides that (1) a change in method of depreciating or amortizing a
long-lived non-financial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005 . The
Company has evaluated the impact of the adoption of Statement 154 and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
3. OBLIGATIONS UNDER CAPITALIZED LEASES
Year Ended
Lessor Description 6/30/2006
------------- ---------------------------------------------- --------------
SBBT Payable in monthly installments of $488
interest at 17%, matures in June, 2009. $ 17,028
SBBT Payable in monthly installments of $281
interest at 16%, matures in November, 2009 8,857
SBBT Payable in monthly installments of $726
interest at 17%, matures in August, 2009 21,140
GE Payable in monthly installments of $551
interest at 17%, matures in September, 2008 13,362
GE Payable in monthly installments of $1206
interest at 17%, matures in September, 2008 30,313
Washoe/BofA Payable in monthly installments of $1513,
interest at 6.8%, matures in April, 2007. 14,669
GE Payable in monthly installments of $710
interest at 12.8%, matures in October, 2006. 3,441
--------------
108,810
Less current portion 47,245
--------------
Long-term portion of obligations under
capitalized leases $ 61,565
==============
F-12
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
3. OBLIGATIONS UNDER CAPITALIZED LEASES (continued)
Minimum annual lease payments under capitalized lease obligations at June 30,
2006 are as follows:
2007 59,445
2008 39,036
2009 24,423
2010 8,718
--------------
131,622
Less amount representing Interest 22,812
--------------
108,810
Less current portion 47,245
--------------
Long term portion of capitalized lease obligations $ 61,565
4. NOTE PAYABLE
The Company has a note payable to a vendor in the amount of $50,000, bearing
interest at 10%, with monthly interest payments only. The maturity date, which
was originally October 15, 2001, was subsequently amended to March 15, 2002. The
note was not paid off on its amended maturity date and is in default. At June
30, 2006, the outstanding principal amount on this note is $25,000. This note is
secured by furniture of the Company. See note
5. DEFERRED TAX BENEFIT
At June 30, 2006 the Company has available for federal and state income tax
purposes, cumulative net operating loss carryforwards of approximately
$5,700,000, which expire at dates that have not been determined.
The difference between the Company's effective income tax rate and the statutory
federal rate for the year ended June 30, 2006 relates primarily to losses
incurred for which no tax benefit was recognized, due to the uncertainty of
realization. The valuation allowance was $2,503,490 at June 30, 2006,
representing a net increase of $523,200 for the year ended June 30, 2006.
Because of statutory "ownership changes" the amount of net operating losses
which may be utilized in future years are subject to significant annual
limitations.
A reconciliation of income tax expense that would result from applying the U.S.
Federal and State rate of 40% to pre-tax income from continuing operations for
the years ended June 30, 2006, with federal income tax expense presented in the
financial statements is as follows.
Year Ended
2006
----------------
Income tax benefit computed
at U.S. federal statutory rate (34%) $ (811,260)
State income taxes, net of benefit federal taxes (143,163)
Non deductible stock compensation 418,860
R&D 11,075
Other 1,260
Less valuation allowance 523,228
----------------
Income tax expense $ -
================
F-13
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
5. DEFERRED TAX BENEFIT (continued)
The deferred income tax benefit at June 30, 2006 reflects the impact of
temporary differences between the amounts of assets and liabilities recorded for
financial reporting purposes and such amounts as measured in accordance with tax
laws. The items, which comprise a significant portion of, deferred tax assets
and liabilities are approximately as follows:
Year Ended
2006
----------------
Deferred tax assets:
NOL Carryover 2,284,000
Deferred Income 24,500
R&D Credit 94,900
Officer salaries payable 110,890
Depreciation (10,800)
Less: valuation allowance (2,503,490)
----------------
Deferred income tax asset $ -
================
6. CAPITAL STOCK
During the year ended, June 30, 2006, the Company issued 3,271,881 shares of
common stock ranging from $0.0194 per share to $0.036 per share for the
conversion of the debenture with a value of $60,000; 4,279,174 shares of common
stock issued for cash consideration of $272,147; 300,000 shares of restricted
common stock issued for cash of $15,000; 1,145,000 shares of common stock issued
for services with a fair value of $136,350.
For the fiscal year ended, June 30, 2005, the Company issued 6,875,000 shares of
restricted common stock for a net cash consideration of $627,254 as a result of
a series of private offerings of common stock ranging from $0.08 per share to
$0.10 per share as well as exercise of stock options. 1,532,477 shares of
restricted common stock were also issued for $330,462 of services.
The common stock of Roaming Messenger, Inc. has a par value of $0.001, and
495,000,000 shares are authorized to be issued. 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.
At June 30, 2005, 22,225,000 shares of common stock were reserved for the
issuance of common stock pursuant to the Stock Option Plan, and 838,500 were
reserved for the issuance of common stock pursuant to outstanding warrants.
7. STOCK OPTIONS AND WARRANTS
In July 10, 2003, the Company adopted the Roaming Messenger, Inc. Stock Option
Plan for Directors, Executive Officers, and Employees of and Key Consultants to
Roaming Messenger, Inc. 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 options
may be exercisable in full or in installment and at such time as designated by
the Board. Notwithstanding any other provision of the Plan or of any Option
agreement, each option are to expire on the date specified in the Option
agreement, which date are to be no later than the tenth anniversary of the date
on which the Option was granted (fifth anniversary in the case of an Incentive
Option granted to a greater-than-10% stockholder). The purchase price per share
of the Common Stock under each Incentive Option are to be no less than the Fair
Market Value of the Common Stock on the date the Option was granted (110% of the
Fair Market Value in the case of a greater-than-10% stockholder).
F-14
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
7. STOCK OPTIONS AND WARRANTS (Continued)
The purchase price per share of the Common Stock under each Nonqualified Option
were to be specified by the Board at the time the Option was granted, and could
be less than, equal to or greater than the Fair Market Value of the shares of
Common Stock on the date such Nonqualified Option was granted, but were to be no
less than the par value of shares of Common Stock. The plan provided specific
language as to the termination of options granted hereunder.
SFAS 123, Accounting for Stock-Based Compensation, requires pro forma
information regarding net income (loss) using compensation that would have been
incurred if the Company had accounted for its employee stock options under the
fair value method of that statement. The Company also used the historical
industry index to calculate volatility, since the Company's stock history did
not represent the expected future volatility of the Company's common stock. The
fair value of options granted was determined using the Black Schole method with
the following assumptions:
Year Ended Year Ended
6/30/2006 6/30/2005
----------------------------------
Risk free interest rate 3.21% - 4.82% 3.36% - 4.00%
Stock volatility factor 0.31 - 0.53 0.29 - 0.81
Weighted average expected option life 4 years 4 years
Expected dividend yield None None
A summary of the Company's stock option activity and related information
follows:
Year ended Year ended
June 30, 2006 June 30, 2005
------------------------ -------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
--------- --------- --------- --------
Outstanding -beginning of year 4,234,994 $ 0.11 8,297,494 $ 0.11
Granted 1,200,000 0.12 3,500,000 0.12
Exercised - - 275,000 0.08
Forfeited 225,000 0.09 7,287,500 0.12
Outstanding - end of year 5,209,994 $ 0.11 4,234,994 $ 0.11
========= ========= ========= ========
Exercisable at the end of year 2,632,494 $ 0.11 972,980 $ 0.09
========= ========= ========= ========
Weighted average fair value of
options granted during the year $ 0.12 $ 0.12
========= ========
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.
F-15
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
7. STOCK OPTIONS AND WARRANTS (Continued)
The weighted average remaining contractual life of options outstanding issued
under the plan as of June 30, 2006 was as follows:
Weighted
Average
Number of remaining
Exercise options contractual
prices outstanding life (years)
-------- ------------- ------------
$ 0.07 100,000 3.50
$ 0.08 1,134,994 1.21
$ 0.10 2,400,000 2.72
$ 0.13 900,000 3.07
$ 0.17 700,000 2.18
STOCK WARRANTS
During the year ended June 30, 2006, Roaming Messenger, Inc. issued warrants for
services valued at $16,828, to purchase shares of common stock of Roaming
Messenger, Inc. These warrants became exercisable on their grant date. Warrants
were granted as follows:
Date Number of shares Maturity date Exercise Price
-------------------- ------------------------ ------------------- ---------------
September 30, 2005 163,500 September 30, 2007 $ 0.10
December 31, 2005 321,000 December 31, 2007 $ 0.10
January 1, 2006 75,000 December 31, 2007 $ 0.10
March 31, 2006 375,000 March 31, 2008 $ 0.10
-----------------------
Total Granted 934,500
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10%
secured convertible debentures in the aggregate principal amount of $1,200,000.
In connection with the sale of the convertible debenture, we also issued to
Cornell five-year warrants to purchase 1,500,000, 4,000,000 and 4,000,000 shares
of Common Stock at $0.08, $0.10 and $0.12, respectively.
At June 30, 2006, warrants to purchase 11,273,000 shares were outstanding.
8. LINE OF CREDIT
On August 11, 2005, the Company was approved for a $100,000 revolving line of
credit from Bank of America at an interest of prime plus 4 percentage points.
This line of credit is not secured by assets of the Company. The effective
interest rate of the line of credit at June 30, 2006 was 12%. As of June 30,
2006, $342 was borrowed under this line of credit
9. CONVERTIBLE DEBENTURES
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10%
secured convertible debentures in the aggregate principal amount of $1,200,000
of which the first installment of $400,000 was advanced immediately. The net
amount of the first installment received by the Company was $295,500 after
paying total fees of $92,500 which included legal, structuring, due diligence,
commitment fees, and
F-16
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
9. CONVERTIBLE DEBENTURES (continued)
prior liability of $12,000. A beneficial conversion feature of $100,000,
representing the value of the conversion feature in accordance to EITF 00-27 was
recorded for the first installment. Under EITF 00-27, the Company records a
beneficial conversion cost associated with the convertibility feature of the
security that equals the value of any discount to market available at the time
of conversion. This beneficial conversion cost is recorded at the time the
convertible security is first issued and is amortized over the stated terms.
Holders of the debentures may convert at any time amounts outstanding under the
debentures into shares of our common stock at a conversion price per share equal
to the lesser of (i) $0.15 or (ii) 80% of the lowest volume weighted average
price of our common stock during the five trading days immediately preceding the
conversion date as quoted by Bloomberg, LP. Cornell has agreed not to short any
of the shares of Common Stock. EITF 00-19 is applicable to debentures issued by
the Company in instances where the number of shares into which a debenture can
be converted is not fixed. For example, when a debenture converts at a discount
to market based on the stock price on the date of conversion. In such instances,
EITF 00-19 requires that the embedded conversion option of the convertible
debentures be bifurcated from the host contract and recorded at their fair
value. In accounting for derivatives under EITF 00-19, the Company records a
liability representing the estimated present value of the conversion feature
considering the historic volatility of the Company's stock, and a discount
representing the imputed interest associated with the beneficial conversion
feature. The discount is then amortized over the life of the debentures and the
derivative liability is adjusted periodically according to stock price
fluctuations. At the time of conversion, any remaining derivative liability is
charged to additional paid-in capital. For purpose of determining derivative
liability, the Company uses Black Scholes modeling for computing historic
volatility.
We have the right to redeem a portion or all amounts outstanding under the
debenture prior to the maturity date at a 20% redemption premium provided that
the closing bid price of our common stock is less than $0.15. In addition, in
the event of a redemption, we are required to issue to Cornell 50,000 shares of
common stock for each $100,000 redeemed.
We also issued to Cornell five-year warrants to purchase 1,500,000, 4,000,000
and 4,000,000 shares of Common Stock at $0.08, $0.10 and $0.12 per share,
respectively.
The second installment of $350,000 ($295,000 net of fees) was advanced on
January 27, 2006. A beneficial conversion feature of $87,500 was incurred,
representing the value of the conversion feature in accordance to EITF 00-27.
The last installment of $450,000 ($395,000 net of fees) was advanced on May 9,
2006, after the registration statement was declared effective by the Securities
and Exchange Commission. A beneficial conversion feature of $112,500,
representing the value of the conversion feature in accordance to EITF 00-27,
was incurred at the receipt of this third installment.
The debentures mature on the third anniversary of the date of issuance, and the
Company is not required to make any payments until the maturity dates. Interest
is accrued at 10% per annum on the principal balance outstanding. At June 30,
2006, the outstanding balance of the debentures were $1,140,000, and the
interest accrued was $43,280.
The convertible debenture is presented net of an unamortized discount of
$260,764 at June 30, 2006. This discount will be amortized to interest expense
over the stated term of the debenture.
F-17
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
10. CONCENTRATIONS
For the year ended June 30, 2006, the Company had two customers who represented
approximately 34% of total revenue. For the year ended June 30, 2005, the
Company had two customers who represented approximately 42% of total revenue.
Accounts receivable from two customers represented approximately 35% of total
accounts receivable at June 30, 2006. Accounts receivable from two customers
represented approximately 37% of total accounts receivable at June 30, 2005.
The Company has a concentration of credit risk for cash by maintaining deposits
with banks, which may at a time exceed insured amounts. At June 30, 2006, the
Company had $301,379 exceeding the amount insured by the U.S. Federal Deposit
Insurance Corporation (FDIC).
11. RELATED PARTY TRANSACTIONS
On June 30, 2005, the Company issued 350,000 shares of common stock to Mr. Tom
Djokovich for serving on the Company's Board of Directors through June 30, 2005.
An expense of $56,000 was recorded in connection with the issuance of these
shares.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The following is a schedule, by years, of future minimum rental payments
required under operating leases for the facilities and equipment. The lease for
one of the facilities expires in 2010. The following is a schedule of minimum
lease payments for the next four years.
YEARS ENDING RENT PAYMENT RENT INCOME
JUNE 30,
------------ ------------ -----------
2007 $ 176,000 $ 29,000
2008 $ 109,000 $ -
2009 $ 108,000 $ -
2010 $ 109,000 $ -
Total lease expense for the years ended June 30, 2006 and 2005 was $164,161 and
$193,708 respectively. The Company is also required to pay its pro rata share of
taxes, building maintenance costs, and insurance in according to the lease
agreement.
During the year ended June 30, 2005, the Company vacated its premises located at
6144 Calle Real, Santa Barbara, California. The lease expires in March 2007,
therefore the Company is obligated to pay the rent under the terms of the lease.
The Company is subleasing these premises at an agreed rent amount lower than the
rent amount per the original lease, which will generate a total cumulative
shortfall of $99,367 by the end of the lease. This shortfall has been recognized
as an expense for the year ended June 30, 2005, and is included in the accrued
expenses.
NOTE PAYABLE IN DEFAULT
The note payable has a default clause that allows the lender to assess late
payment charges in the amount of 10% of the delinquency. Since the Company did
not pay off the entire balance at its due date of March 15, 2002, the note is
currently in default. At June 30, 2006, the outstanding principal amount on this
note is $25,000. The Company has not accrued any delinquent charges.
F-18
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
12. COMMITMENTS AND CONTINGENCIES (continued)
RESTRICTED CASH
The Company has restricted cash in the amount of $93,000. This restricted cash
is used to collateralize a standby letter of credit in favor of the landlord as
part of the Company's lease agreement for its current office space at 50
Castilian Dr. Santa Barbara, CA 93117. This cash amount is restricted until the
lease expires on June 30, 2010 or when negotiated down.
LEGAL MATTERS
The Company may be involved in legal actions and claims arising in the ordinary
course of business, from time to time, none of which at the time are considered
to be material to the Company's business or financial condition.
Furthermore, In February 2006, Jonathan Lei, our Chairman and Chief Executive
Officer, and Bryan Crane, our then Vice President of Corporate Development, were
indicted by a federal grand jury in Florida, alleging that they conspired to
commit securities, mail and wire fraud in connection with an offer for private
funding made to Roaming Messenger Inc. over a year ago, in February 2005, by a
surreptitious investment fund formed by the Government. Specifically, the
indictment alleges that Messrs. Lei and Crane conspired with government agents
posing as fund managers to arrange for an illegal payment to be made to the fund
managers as an inducement to that fund making an investment in the Company. We
did not obtain any funding from the entity or the management company that were
posing as prospective investors. The Company was not named in the indictment.
The Company may be obligated to indemnify Mr. Lei and Mr. Crane for their
defense costs in these cases in amounts to be determined. This indictment may
have a material adverse impact on the financial position of the Company and its
results of operations as result of (i) the possible defense costs to be incurred
by the Company, (ii) possible departure of senior members of management and
(iii) possible damage to the Company's reputation.
13. SUBSEQUENT EVENT
On August 24, 2006, holders of 106,074,025 shares of the Company's common stock,
or approximately 52.9% of the total issued and outstanding common stock of the
Company, voted to change the name of the Company from Roaming Messenger, Inc. to
Warp 9, Inc., by amending the Company's articles of incorporation. The Board of
Directors of the Company voted unanimously to implement this shareholder action.
On September 18, 2006, Roaming Messenger, Inc. (the "Company") entered into an
Exclusive Technology License Agreement (the "License Agreement") with Zingerang,
Inc., a Nevada corporation ("Zingerang") pursuant to which the Company granted
an exclusive (including to the exclusion of the Company), worldwide,
sub-licensable, transferable, royalty-bearing right and license to make, have
made, import, use, offer for sale, sell, reproduce, distribute, display, perform
or otherwise exploit the Company's Roaming Messenger(R) technology, Roaming
Messenger(R) and eCapsule(R) trademarks, and patent application numbers
20060165030, 20060123396, and 20030110097 (the "License") for a period of ten
years. In its sole and absolute discretion, Zingerang may extend the term of the
License Agreement for additional ten year terms by providing written notice to
the Company of such election within thirty (30) days prior to the expiration of
the then current term. In consideration for granting the License to Zingerang,
for each calendar quarter during the term of the License Agreement, the Company
will receive an amount equal to Five Percent (5%) of Gross Sales, as that that
term is defined in the License Agreement (the "Royalties") for such
F-19
ROAMING MESSENGER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
13. SUBSEQUENT EVENT (continued)
period. The Company will also receive a one-time payment of $100,000 as a
recoupable advance against Royalties. Zingerang may, at its sole and absolute
discretion, pay to the Company, in lieu of ongoing Royalties, a one-time payment
in an amount equal to $500,000 less amounts, not to exceed $50,000, incurred by
Zingerang for legal and filing fees in connection with the continual prosecution
of the Company's three (3) patent applications. Zingerang has the right to
sublicense all or any portion of its rights under the License Agreement to
sublicensees. In light of the Company granting the worldwide exclusive License
to Zingerang, the Company has laid-off five engineering and marketing personnel
who were previously engaged in the Roaming Messenger business.
On September 18, 2006, the Company subscribed to purchase 40,000,000 founders
shares of the common stock of Zingerang for a purchase price of $0.00025 per
share, representing a total purchase price of $10,000. Pursuant to its
subscription agreement with Zingerang (the "Subscription Agreement"), the
Company agreed that it would not sell or offer to sell any unregistered shares
of Zingerang's common stock until a date two (2) years after a Registration
Statement on Form SB-2 is filed by Zingerang and declared effective by the
Securities and Exchange Commission (the "Lock-up Term"). Upon the expiration of
the Lock-up Term, the Company will be entitled to piggyback registration rights.
Zingerang has represented to the Company that this round of financing in which
the Company is participating will include approximately 59,500,000 additional
shares.
F-20
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 245,018
Accounts Receivable, net 461,052
Prepaid and Other Current Assets 17,936
--------------
TOTAL CURRENT ASSETS 724,006
--------------
PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 89,485
Computer Equipment 499,970
Commerce Server 50,000
Computer Software 9,476
--------------
648,931
Less Accumulated Depreciation (445,480)
--------------
NET PROPERTY AND EQUIPMENT 203,451
--------------
OTHER ASSETS
Lease Deposit 9,749
Restricted Cash 93,000
Internet Domain, net 1,319
Investment-Zingerang 10,000
Loan Costs 144,167
--------------
TOTAL OTHER ASSETS 258,235
--------------
TOTAL ASSETS $ 1,185,692
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 243,452
Credit Cards Payable 90,880
Accrued expenses 447,431
Bank Line of Credit 62,182
Deferred Income 136,000
Note Payable 19,000
Customer Deposit 41,033
Derivative Liability-Debenture 494,084
Capitalized Leases, Current Portion 35,585
--------------
TOTAL CURRENT LIABILITIES 1,569,647
--------------
LONG TERM LIABILITIES
Convertible Debenture 955,000
Beneficial Conversion Feature (201,906)
Capitalized Leases 47,736
--------------
TOTAL LIABILITIES 800,830
--------------
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value;
495,000,000 authorized shares;
216,786,532 shares issued and outstanding 216,786
Additional paid in capital 6,181,921
Accumulated deficit (7,583,492)
--------------
TOTAL SHAREHOLDERS' DEFICIT (1,184,785)
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,185,692
==============
The accompanying notes are an integral part of these financial statements.
F-21
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Three Six Six
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
-------------- --------------- --------------- --------------
REVENUE $ 903,754 $ 518,146 $ 1,336,430 $ 856,072
COST OF SERVICES 210,432 159,332 306,171 266,386
-------------- --------------- --------------- --------------
GROSS PROFIT 693,322 358,814 1,030,259 589,686
OPERATING EXPENSES
Selling, General and Administrative Expenses 529,225 522,615 1,030,397 1,130,258
Research and Development - 106,972 107,377 212,754
Depreciation and Amortization 40,575 23,972 80,214 47,365
-------------- --------------- --------------- --------------
TOTAL OPERATING EXPENSES 569,800 653,559 1,217,988 1,390,377
-------------- --------------- --------------- --------------
INCOME (LOSS) FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) 123,522 (294,745) (187,729) (800,691)
OTHER INCOME/(EXPENSE)
Interest Income 1,119 763 3,334 1,779
Other Income 25,242 9,579 53,657 15,965
Interest Expense (41,507) (111,359) (117,092) (121,627)
-------------- --------------- --------------- --------------
TOTAL OTHER INCOME (EXPENSE) (15,146) (101,017) (60,101) (103,883)
-------------- --------------- --------------- --------------
INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION FOR TAXES 108,376 (395,762) (247,830) (904,574)
PROVISION FOR INCOME TAXES - - - -
-------------- --------------- --------------- --------------
NET INCOME (LOSS) 108,376 (395,762) (247,830) (904,574)
============== =============== =============== ==============
BASIC AND DILUTED LOSS PER SHARE $ 0.00 $ (0.00) $ (0.00) $ (0.00)
============== =============== =============== ==============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 209,677,484 184,151,379 203,413,895 182,798,365
============== =============== =============== ==============
The accompanying notes are an integral part of these financial statements.
F-22
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Six
months ended months ended
December 31, December 31,
2006 2005
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (247,830) $ (904,574)
Adjustment to Reconcile Net Loss to Net Cash
Used in Operating Activities
Depreciation and Amortization 46,379 47,508
Issuance of Common Shares and Warrants for Services - 125,943
Conversion of Convertible Debenture 185,000 100,000
Conversion Feature Recorded as Interest Expense (33,367)
Amortization of Loan Costs 33,750 -
Cost of Stock Options Recognized 40,383 -
Derivative Expense (81,791) -
(Increase) Decrease in:
Accounts Receivable (299,982) (95,705)
Prepaid and Other Assets 6,041 (963)
Increase (Decrease) in:
Accounts Payable 71,960 52,127
Accrued Expenses 53,360 -
Deferred Income 74,667 -
Other Liabilities 9,886 92,540
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (141,544) (583,124)
--------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of Stock for Investment (10,000) -
Purchase of Property and Equipment (1,173) (26,462)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (11,173) (26,462)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on Note Payable (6,000) -
Payments on Capitalized Leases (45,285) (27,133)
Proceeds from Line of Credit 61,840 99,658
Proceeds from Convertible Debenture - 295,500
Proceeds from Issuance of Common Stock, Net of Cost - 272,963
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,555 640,988
--------------- ---------------
NET INCREASE (DECREASE) IN CASH (142,162) 31,402
CASH, BEGINNING OF PERIOD 387,180 237,529
--------------- ---------------
CASH, END OF PERIOD $ 245,018 $ 268,931
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $ 12,884 $ 21,627
=============== ===============
Taxes Paid $ - $ -
=============== ===============
Capitalized Lease Contracted $ 19,796 $ 19,796
=============== ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS During the three months ended
December 31, 2006, the Company issued 16,286,745 shares of common stock at a
fair value of $90,000 for the convertible debenture. During the three months
ended December 31, 2005, the Company purchased $19,796 of equipment under
capital leases respectively.
The accompanying notes are an integral part of these financial statements.
F-23
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been included.
Operating results for the three month period ended December 31, 2006 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2007. For further information refer to the financial statements and
footnotes thereto included in the Company's Form 10K-SB for the year ended June
30, 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Warp 9, Inc. is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management, which is
responsible for their integrity and objectivity. These accounting policies
conform to accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the financial
statements.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis of accounting, which contemplates continuity of operations, realization of
assets and liabilities and commitments in the normal course of business. The
accompanying financial statements do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
losses and negative cash flows from operations raise substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern and appropriateness of using the going concern basis
is dependent upon, among other things, additional cash infusion.
STOCK-BASED COMPENSATION
As of June 30, 2006, the Company adopted Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" (FAS) No. 123R, that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions, as we formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock
Issued to Employees," and generally requires that such transactions be accounted
for using a fair-value-based method and recognized as expenses in our statement
of income. The adoption of (FAS) No. 123R by the Company had no material impact
on the statement of income.
The Company adopted FAS 123R using the modified prospective method which
requires the application of the accounting standard as of June 30, 2006. Our
financial statements as of and for the three and six months ended December 31,
2006 reflect the impact of adopting FAS 123R. In accordance with the modified
prospective method, the financial statements for prior periods have not been
restated to reflect, and do not include, the impact of FAS 123R.
F-24
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (CONTINUED)
Stock-based compensation expense recognized during the period is based on the
value of the portion of stock-based payment awards that is ultimately expected
to vest. Stock-based compensation expense recognized in the consolidated
statement of operations during the three and six months ended December 31, 2006,
included compensation expense for the stock-based payment awards granted prior
to, but not yet vested, as of December 31, 2006 based on the grant date fair
value estimated in accordance with the pro forma provisions of FAS 148, and
compensation expense for the stock-based payment awards granted subsequent to
December 31, 2006, based on the grant date fair value estimated in accordance
with FAS 123R. As stock-based compensation expense recognized in the statement
of income for the three and six months ended December 31, 2006 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures, FAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the pro forma information required under FAS 148 for
the periods prior to the year ended June 30, 2006, we accounted for forfeitures
as they occurred. The stock-based compensation expense recognized in the
consolidated statement of operations during the six months ended December 31,
2006 is $40,383.
2006 2005
---------------- ----------------
Net loss as reported $ (247,830) $ (904,574)
Add: Stock based employee compensation expense - -
included in net reported loss, net of related tax effect
Deduct: Stock based employee compensation expense - (40,346)
determined under fair value based method for all awards,
net of related tax effect
---------------- ----------------
Pro forma net loss $ (247,830) $ (944,920)
================ ================
Basic and diluted pro forma loss per share
As reported $ (0.00) $ (0.00)
================ ================
Pro forma $ (0.00) $ (0.01)
================ ================
3. CAPITAL STOCK
At December 31, 2006, the Company's authorized stock consists of 495,000,000
shares of common stock, par value $0.001 per share. The Company is also
authorized to issue 5,000,000 shares of preferred stock with a par value of
$0.001. The rights, preferences and privileges of the holders of the preferred
stock will be determined by the Board of Directors prior to issuance of such
shares. During the six months ended December 31, 2006, the Company issued
26,983,386 shares of common stock ranging from $0.0046 per share to $0.0078 per
share for the conversion of the debenture with a value of $185,000.
F-25
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
4. CONVERTIBLE DEBENTURES
On December 28, 2005, we consummated a securities purchase agreement with
Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10%
secured convertible debentures in the aggregate principal amount of $1,200,000
of which the first installment of $400,000 was advanced immediately. The net
amount of the first installment received by the Company was $295,500 after
paying total fees of $92,500 which included legal, structuring, due diligence,
commitment fees, and prior liability of $12,000. An interest expense of
$100,000, representing the value of the conversion feature in accordance to EITF
00-27 was recorded for the first installment. Under EITF 00-27, the Company
records a beneficial conversion cost associated with the convertibility feature
of the security that equals the value of any discount to market available at the
time of conversion. This beneficial conversion cost is recorded at the time the
convertible security is first issued and is amortized over the stated terms.
Holders of the debentures may convert at any time amounts outstanding under the
debentures into shares of our common stock at a conversion price per share equal
to the lesser of (i) $0.15 or (ii) 80% of the lowest volume weighted average
price of our common stock during the five trading days immediately preceding the
conversion date as quoted by Bloomberg, LP. Cornell has agreed not to short any
of the shares of Common Stock. EITF 00-19 is applicable to debentures issued by
the Company in instances where the number of shares into which a debenture can
be converted is not fixed. For example, when a debenture converts at a discount
to market based on the stock price on the date of conversion. In such instances,
EITF 00-19 requires that the embedded conversion option of the convertible
debentures be bifurcated from the host contract and recorded at their fair
value. In accounting for derivatives under EITF 00-19, the Company records a
liability representing the estimated present value of the conversion feature
considering the historic volatility of the Company's stock, and a discount
representing the imputed interest associated with the beneficial conversion
feature. The discount is then amortized over the life of the debentures and the
derivative liability is adjusted periodically according to stock price
fluctuations. At the time of conversion, any remaining derivative liability is
charged to additional paid-in capital. For purpose of determining derivative
liability, the Company uses Black Scholes modeling for computing historic
volatility.
We have the right to redeem a portion or all amounts outstanding under the
debenture prior to the maturity date at a 20% redemption premium provided that
the closing bid price of our common stock is less than $0.15. In addition, in
the event of redemption, we are required to issue to Cornell 50,000 shares of
common stock for each $100,000 redeemed.
We also issued to Cornell five-year warrants to purchase 1,500,000, 4,000,000
and 4,000,000 shares of Common Stock at $0.08, $0.10 and $0.12 per share,
respectively. These warrants are being accounted for as equity instruments.
F-26
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2006
4. CONVERTIBLE DEBENTURES (Continued)
The second installment of $350,000 ($295,000 net of fees) was advanced on
January 27, 2006. An interest expense of $87,500 was incurred, representing the
value of the conversion feature in accordance to EITF 00-27.
The last installment of $450,000 ($395,000 net of fees) was advanced on May 9,
2006, after the registration statement was declared effective by the Securities
and Exchange Commission. An interest expense of $112,500, representing the value
of the conversion feature in accordance to EITF 00-27, was incurred at the
receipt of this first installment.
The debentures mature on the third anniversary of the date of issuance, and the
Company is not required to make any payments until the maturity dates. Interest
is accrued at 10% per annum on the principal balance outstanding. At December
31, 2006, the outstanding balance of the debentures were $955,000 and the
interest accrued was $94,221.
5. RELATED PARTY TRANSACTIONS
On January 16, 2007, Mr. Harinder Dhillon, the Company's President exercised his
option to purchase 8,650,000 of the Company's common stock. The options were
personal holdings which were granted by Mr. Jon Lei, a 10% or larger shareholder
of the Company.
6. LITIGATION SETTLEMENT
On December 21, 2006, the Company entered into a satisfactory settlement
agreement with the plaintiff in a lawsuit and the case was dismissed with
prejudice and a mutual general release of all claims. A one time expense of
$42,694 was incurred for related legal fees and settlement cost.
7. SUBSEQUENT EVENT
On February 1, 2007, the Company issued 10,000,000 shares of common stock at
$0.005 per share for the conversion of the Cornell debenture with an outstanding
balance reduction of $50,000.
F-27
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIMITATION OF LIABILITY: INDEMNIFICATION
Under the Nevada General Corporation Law and our Articles of Incorporation, as
amended, our directors will have no personal liability to us or our stockholders
for monetary damages incurred as the result of the breach or alleged breach by a
director of his "duty of care". This provision does not apply to the directors'
(i) acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) approval of
any transaction from which a director derives an improper personal benefit, (iv)
acts or omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (v) acts or omissions that constituted an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, or (vi) approval of an unlawful dividend,
distribution, stock repurchase or redemption. This provision would generally
absolve directors of personal liability for negligence in the performance of
duties, including gross negligence.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions or otherwise, we have been advised that in
the opinion of the Securities Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by
our director, officer, or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
we will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses payable by
Roaming Messenger, Inc. in connection with the offering described in this
registration statement. All of the amounts shown are estimates except the
Securities and Exchange Commission registration fee:
Securities and Exchange Commission Registration Fee $ 595
Accounting Fees and Expenses $10,000*
Legal Fees and Expenses $40,000*
Total $50,595
=======
*ESTIMATED
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On April 8, 2003, Warp 9, Inc. consummated a transaction, pursuant to which
shareholders of Warp 9 Inc. exchanged their shares for shares in Roaming
Messenger, Inc., with Warp 9, Inc. surviving as a wholly-owned subsidiary of
Roaming Messenger, Inc. This transaction was recorded as a recapitalization
followed by the issuance of shares by Warp 9, Inc. to the shareholders of
Roaming Messenger, Inc. Prior to the recapitalization transaction, Roaming
Messenger, Inc. was not an operating company, and its assets consisted
principally of cash of approximately $100,000, offset by the same amount of
liabilities. Under the terms of the transaction, Roaming Messenger, Inc. issued
131,026,173 shares of Roaming Messenger, Inc. common stock to the former
shareholders of Warp 9, Inc. in exchange for all the outstanding shares of Warp
9, Inc. (12.5 shares of Roaming Messenger, Inc. for every share of Warp 9,
Inc.). The transaction was consummated in two phases with the first issuance of
122,620,910 shares on April 8, 2003, and 8,405,263 shares on June 30, 2003.
After the recapitalization, options granted under the Warp 9 Inc. Employee Stock
option plan were cancelled and new options were issued under a new Roaming
Messenger Inc. Employee Stock Option Plan (effective July 10, 2003) to employees
in amounts consistent with their Warp 9 options. The Roaming Messenger options
have the same aggregate exercise price as the Warp 9 options. Most stock options
became fully vested on grant date, while others mirrored the same vesting
periods as the Warp 9 Inc. options. The Roaming Messenger Inc. stock options are
presented at June 30, 2003 even though the effective date was July 10, 2003.
From April 2003 through October 2003, the Company issued and sold 2,704,263
shares of common stock at a price of $0.08 per share for aggregate gross
proceeds of $216,341. The shares were issued to 6 accredited investors in
transactions exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
From April 2003 through October 2003, the Company issued and sold 2,704,263
shares of common stock at a price of $0.08 per share for aggregate gross
proceeds of $216,341. The shares were issued to 6 accredited investors in
transactions exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
From May 2003 through August 2003, the Company issued and sold 1,202,500 shares
of common stock, at a price of $0.08 per share to 3 consultants for services
valued at $96,200. The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
From October 2003 through January 2004, the Company issued and sold 2,017,500
shares of common stock at a price of $0.08 per share for aggregate gross
proceeds of $161,400. The shares were issued to 7 accredited investors in
transactions exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
In December 2003, the Company issued 150,000 shares of common stock to 4
employees as bonuses. The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
From August 2003 through April 2004, the Company issued and sold 13,181,027
shares of common stock for aggregate consideration of $1,096,415 to foreign
investors pursuant to Regulation S.
In February 2004, Roaming Messenger, Inc. issued and sold 1,500,000 shares of
common stock at a price of $0.16 per share for aggregate gross proceeds of
$240,400. The shares were issued to 7 accredited investors in transactions
exempt under Rule 506 of Regulation D promulgated under Section 4(2) of the
Securities Act of 1933, as amended.
From December 2003 through June 2004, the Company issued and sold 497,750 shares
of common stock for aggregate consideration of $89,048 to foreign investors
pursuant to Regulation S.
II-2
In October 2003 through January 2004, the Company issued 530,000 shares of
common stock at a price of $0.08 per share to 3 consultants for services. The
shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
In February 2004, the Company issued 1,875,000 shares of common stock upon the
exercise of employee options. The shares were issued pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
In March 2004, the Company issued 600,000 shares of common stock upon the
exercise of a warrant. The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
In April 2004, the Company issued 525,000 shares of common stock upon the
exercise of an employee option. The shares were issued pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
In March 2004, the Company issued and sold 1,500,061 shares of common stock at a
price of $0.35 per share for aggregate gross proceeds of $525,000. The shares
were issued to 3 accredited investors in transactions exempt under Rule 506 of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as
amended.
In April 2004, the Company issued and sold 420,000 shares of common stock at
price of $0.50 per share for aggregate gross proceeds of $210,000. The shares
were issued to an accredited investor in a transaction exempt under Rule 506 of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as
amended.
In August 2004, the Company issued 125,000 shares of common stock upon the
exercise of an employee option. The shares were issued pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
In November 2004, the Company issued and sold 10,000 shares of common stock at a
price of $0.50 per share to a consultant for services. The shares were issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In December 2004, the Company issued 150,000 shares of common stock upon the
exercise of an employee option. In January 2005, the Company issued and sold
155,000 shares of common stock at a price of $0.30 per share to a consultant for
services. The shares were issued pursuant to Section 4(2) of the Securities Act
of 1933, as amended.
In February 2005, the Company issued and sold 272,589 shares of common stock at
a price of $0.26 per share to a consultant for services. The shares were issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In March 2005, the Company issued and sold 624,000 shares of common stock at a
price of $0.20 per share to two consultants for services. The shares were issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On March 28, 2005, the Company issued and sold 5,000,000 shares of common stock
at a price of $0.10 per share for aggregate gross proceeds of $500,000. The
shares were issued to an accredited investor in a transaction exempt under Rule
506 of Regulation D promulgated under Section 4(2) of the Securities Act of
1933, as amended.
In April 2005, the Company issued and sold 1,600,000 shares of common stock at a
price of $0.10 per share for aggregate gross proceeds of $160,000. The shares
were issued to 9 accredited investors in transactions exempt under Rule 506 of
Regulation D ("Regulation D") promulgated under Section 4(2) of the Securities
Act of 1933, as amended.
On June 30, 2005 and July 1, 2005, Roaming Messenger issued 470,888 and 400,000
shares of common stock, respectively at $0.16 per share for consulting services.
These shares were issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
In August 2005, Roaming Messenger issued 420,000 shares of common stock $0.16
per share for consulting services. These shares were issued pursuant to Section
4(2) of the Securities Act of 1933, as amended.
II-3
In September 2005, Roaming Messenger issued and sold 640,000 shares of common
stock at a price of $0.06 per share for aggregate gross proceeds of $40,000 to
Wings Fund Inc. The shares were issued in a transaction exempt under Regulation
D. In October 2005, Roaming Messenger issued 250,000 shares of common stock at
$0.10 per share for consulting services. These shares were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
In October 2005, Roaming Messenger issued and sold 1,580,611 shares of common
stock at a price of $0.06 per share for aggregate gross proceeds of $98,000 to
Wings Fund Inc. The shares were issued in a transaction exempt under Regulation
D. In December 2005, Roaming Messenger issued 250,000 shares of common stock at
$0.10 per share for consulting services. These shares were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
In December 2005, Roaming Messenger issued and sold 300,000 shares of
unregistered common stock at a price of $0.05 per share for aggregate gross
proceeds of $15,000. The shares were issued to 2 accredited investors in
transactions exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
In December 2005, Roaming Messenger issued and sold 2,058,563 shares of common
stock at a price of $0.07 per share for aggregate gross proceeds of $134,147 to
Wings Fund Inc. The shares were issued in a transaction exempt under Regulation
D. On December 28, 2005, Roaming Messenger sold $400,000 in principal amount
convertible debentures to one accredited investor. It also issued to the same
investor five-year warrants to purchase 1,500,000, 4,000,000 and 4,000,000
shares of Common Stock at $0.08, $0.10 and $0.12, respectively. The securities
were issued in a transaction exempt under Rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, as amended.
In January 2006, Roaming Messenger issued 75,000 shares of common stock to a
business development consultant for services performed. The stock was valued at
$0.07. The securities were issued in a transaction exempt under Rule 506 of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as
amended.
In February 2006, Roaming Messenger issued 400,000 shares of common stock to an
entity in payment of a $32,000 payable. The securities were issued in a
transaction exempt under Rule 506 of Regulation D promulgated under Section 4(2)
of the Securities Act of 1933, as amended.
During the 3-months period ended March 31, 2006, the Company issued two-year
warrants to purchase 321,000 shares of Common Stock at $0.10, to a business
development consultant.
During the 3-month period ended June 30, 2006, the Company issued 3,271,881
shares of common stock ranging from $0.0194 per share to $0.036 per share to
Cornell Capital Partners, LLP for the conversion of $60,000 of principal balance
of the $1,200,000 debenture issued to Cornell in December 2005. The shares were
issued in a transaction exempt under Regulation D.
During the three months ended September 30, 2006, the Company issued 10,696,641
shares of common stock ranging from $0.0088 per share to $0.0092 per share for
the conversion of the debenture with an outstanding balance reduction of
$95,000. The shares were issued in a transaction exempt under Regulation D.
During the three months ended December 31, 2006, the Company issued 16,286,745
shares of common stock ranging from $0.0046 per share to $0.0078 per share for
the conversion of the Cornell debenture with an outstanding balance reduction of
$90,000. The shares were issued in a transaction exempt under Regulation D.
During the three months ended December 31, 2006, the Company granted 14,531,500
stock options to various employees and new members of management at an exercise
price of $0.01 per share.
II-4
ITEM 27. EXHIBITS
Exhibit Description
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen Certificate for Common Stock (1)
4.2 Non-Qualified Employee Stock Option Plan (2)
4.3 Convertible Debenture dated December 28, 2005 (3)
4.4 Form of $0.08 Warrant (3)
4.5 Form of $0.10 Warrant (3)
4.6 Form of $0.12 Warrant (3)
5.1 Opinion of Sichenzia Ross Friedman Ference LLP(4)
10.1 First Agreement and Plan of Reorganization between Latinocare
Management Corporation, a Nevada corporation, and Warp 9, Inc., a
Delaware corporation (5)
10.2 Second Agreement and Plan of Reorganization between Latinocare
Management Corporation, a Nevada corporation, and Warp 9, Inc., a
Delaware corporation (5)
10.3 Exchange Agreement and Representations for shareholders of Warp 9,
Inc.(5)
10.4 Securities Purchase Agreement dated as of March 28, 2005 between
Roaming Messenger, Inc. and Wings Fund, Inc.(7)
10.5 Periodic Equity Investment Agreement dated as of March 28, 2005
between Roaming Messenger, Inc. and Wings Fund, Inc.(7)
10.6 Registration Rights Agreement dated as of March 28, 2005 between
Roaming Messenger, Inc. and Wings Fund, Inc.(6)
10.7 Securities Purchase Agreement dated December 28, 2005 between the
Company and Cornell Capital Partners LLP (3)
10.8 Investor Registration Rights Agreement dated December 28, 2005 (3)
10.9 Insider Pledge and Escrow Agreement dated December 28, 2005 by and
among the Company, Cornell and David Gonzalez as escrow agent (3)
10.10 Security Agreement dated December 28, 2005 by and between the
Company and Cornell (3)
10.10 Escrow Agreement Dated December 28, 2005 by and among the Company,
Cornell and David Gonzalez, as Escrow Agent (3)
10.12 Irrevocable Transfer Agent Instructions (3)
10.13 Exclusive Technology License Agreement, dated September 18, 2006 (8)
10.14 Subscription Agreement with Zingerang Inc., dated September 18, 2006
(8)
10.15 Stock Option Agreement for Harinder Dhillon*
10.16 Stock Option Agreement for Louie Ucciferri*
10.17 Stock Option Agreement for Kin Ng*
10.18 Consulting Agreement for Louie Ucciferri*
10.19 Consulting Agreement for Kin Ng*
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included in exhibit
5.1)
23.2 Consent of Rose, Snyder & Jacobs*
23.3 Consent of HJ Associates & Consultants, LLP*
24.1 Power of Attorney (included on signature page II-6)*
--------------------------
* Filed herewith
(1) Incorporated by reference from the exhibits included with the Company's
prior Report on Form 10-KSB filed with the Securities and Exchange Commission,
dated March 31, 2003.
(2) Incorporated by reference from the exhibits included in the Company's
Information Statement filed with the Securities and Exchange Commission, dated
August 1, 2003.
(3) Incorporated by reference from the exhibits included in the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 29, 2005.
(4) Incorporated by reference to the registration statement on Form SB-2 filed
on May 3, 2005
(5) Incorporated by reference from the exhibits included with the Company's
prior Report on Form SC 14F1 filed with the Securities and Exchange Commission,
dated April 8, 2003.
II-5
(6) Incorporated by reference from the exhibits included with the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission,
dated May 30, 2003.
(7) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission dated March
30, 2005.
(8) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission dated
September 22, 2005.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
Notwithstanding the forgoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation From the low or high end of the estimated
maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in the volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or
used or referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the
undersigned small business issuer or its securities provided
by or on behalf of the undersigned small business issuer; and
II-6
(iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Barbara, California, on this 13th day of March,
2007.
WARP 9, INC.
By: /s/ Louie Ucciferri
--------------------------
Louie Ucciferri
Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Louie Ucciferri his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
subsequent registration statements pursuant to Rule 462 of the Securities Act of
1933 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that attorney-in-fact or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Louie Ucciferri Chairman and Acting Chief March 13, 2007
Financial Officer (principal
financial and accounting officer)
/s/ Harinder Dhillon President and Chief Executive March 13, 2007
Officer, Director
(principal executive officer)
/s/ Kin Ng Director March 13, 2007
II-8