U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934,
For The Fiscal Year Ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For The Transition Period From ___________ To __________
Commission File Number: 000-33197
WARP TECHNOLOGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 88-0467845
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
535 WEST 34 STREET, 5TH FLOOR, NEW YORK, N.Y. 10001
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(Address of principal executive offices) (Zip Code)
(212) 962-9277
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(Registrants telephone number, including area code)
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(Former Name, if Changed Since Last Report)
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(Former Address, if Changed Since Last Report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $0.00001 Per Share
(Title of Class)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Registrant's revenues for its most recent fiscal year ended June 30, 2003 were
$344,153.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 17, 2003 was $13,749,265 based on the closing bid
price of $0.27 per share as reported on the Over-the-Counter Bulletin Board
("OTC Bulletin Board") operated by the National Association of Securities
Dealers, Inc.
The number of shares outstanding of the registrant's common stock, $0.00001 par
value, as of September 17, 2003 was 67,262,586.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS.
Forward-Looking Information
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Certain statements in this Form 10-KSB and elsewhere (such as in other
filings by the Company with the Securities and Exchange Commission (the
"Commission"), press releases, presentations by the Company or its management
and oral statements) may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include those relating to future opportunities, the
outlook of customers, the reception of new products and technologies, and the
success of new initiatives. In addition, such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Such factors include: (i) demand for the Company's products; (ii)
the actions of current and potential new competitors; (iii) changes in
technology; (iv) the nature and amount of the Company's revenues and expenses;
and (v) overall economic conditions and other risks detailed from time to time
in the Company's periodic earnings releases and reports filed with the
Commission, as well as the risks and uncertainties discussed in this Form
10-KSB.
Historical Background
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WARP Technology Holdings, Inc. (the "Company") was incorporated in the
State of Nevada on June 26, 2000 under the name Abbott Mines, Ltd. to engage in
the acquisition and exploration of mining properties. The Company obtained an
interest in one mining property with mining claims on land located near
Vancouver in British Columbia, Canada (the "Montana Property"). To finance its
exploration activities, the Company completed a public offering of its common
stock, par value $.00001 per share, on March 14, 2001 and listed its common
stock on the OTC Bulletin Board on July 3, 2001. The Company conducted its
exploration program on the Montana Property and the results did not warrant
further mining activity. The Company then attempted to locate other properties
for exploration but was unable to do so.
The Acquisition of WARP Solutions, Inc.
In March 2002, the Company and WARP Solutions Inc. ("WARP"), a Delaware
corporation, entered into discussions regarding a possible business combination
between the two companies. After completing due diligence reviews of each other,
the Company and WARP agreed that the Company would acquire WARP in a share
exchange transaction, that WARP would become a subsidiary of the Company and
that WARP's operations would become the operations of the Company.
On May 24, 2002 (the "Closing Date"), the Company and WARP closed a share
exchange transaction (the "Share Exchange") pursuant to a Share Exchange
Agreement (the "Exchange Agreement") dated as of May 16, 2002, by and among the
Company, Carlo Civelli,
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Mike Muzylowski, WARP, Karl Douglas, John Gnip and related Sellers. Following
the closing of the Share Exchange, WARP became a subsidiary of the Company and
the operations of WARP became the sole operations of the Company.
Subsequent to the closing of the Share Exchange, the Company ceased all
mineral exploration activities and the sole operations of the Company were the
operations of its subsidiary, WARP Solutions, Inc.
The Upstream Merger and Name Change
On August 19, 2002, the Board of Directors of the Company authorized and
approved the upstream merger of WARP Technology Holdings, Inc., a wholly owned
subsidiary of the Company which had no operations, with and into the Company
pursuant to Chapter 92A of the Nevada Revised Statutes (the "Upstream Merger").
The Upstream Merger became effective on August 21, 2002, when the Company filed
Articles of Merger with the Nevada Secretary of State. In connection with the
Upstream Merger, and as authorized by Section 92A.180 of the Nevada Revised
Statutes, the Company changed its name from Abbott Mines Limited to WARP
Technology Holdings, Inc. As a result of the name change, the Company's common
stock now trades on the OTC Bulletin Board under the trading symbol "WRPT".
The Acquisition of Spider Software, Inc.
On January 10, 2003 (the "Closing Date"), the Company, through its
wholly-owned subsidiary 6043577 Canada Inc., acquired one hundred percent (100%)
of the issued and outstanding capital stock of Spider Software, Inc. ("Spider"),
a privately held Canadian corporation, through a share exchange transaction
pursuant to a Share Exchange Agreement dated as of December 13, 2002, by and
among the Company, 6043577 Canada Inc., Spider, the Spider Insiders and the
Sellers as Identified on Schedule A thereto. Pursuant to the Exchange Agreement
the Spider shareholders were issued 1,500,000 shares of the preferred stock of
6043577 Canada Inc., which in turn is convertible into shares of the Company's
common stock on a 1 for 1 basis, and the Company forgave outstanding Spider
promissory notes of approximately $262,000, all in exchange for one hundred
percent (100%) of the issued and outstanding capital stock of Spider.
In accordance with the terms and conditions of the Shares Exchange
Agreement, the Company caused 6043577 Canada Inc. to issue .197707 shares of the
preferred stock of 6043577 Canada Inc. for each one (1) share of Spider common
stock acquired. The Company owns 100% of the voting common stock of 6043577
Canada Inc. The preferred stock of 6043577 Canada Inc. has no voting rights or
other preferences but is convertible on a 1 for 1 basis into the common stock of
the Company. As a result, following the closing, Spider became a wholly-owned
subsidiary of 6043577 Canada Inc. and thereby a wholly-owned subsidiary of the
Company.
Subsequent to the acquisition the Company has incorporated certain features
and codes of the Spider software into its Warp 2063 product line.
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Business of the Company
-----------------------
The Company is an information technology company that produces a series of
application acceleration products that improve the speed and efficiency of
transactions and information requests that are processed over Internet and
Intranet network systems. The Company's GTEN suite of hardware and software
products and technologies is designed to accelerate network applications, reduce
network congestion, and reduce the cost of expensive server deployments for
enterprises engaged in high volume network activities. The goal of the Company
is to become the de facto standard in the application acceleration marketplace.
Products and Services
The Company's GTEN suite of applications includes both hardware and
software solutions. The hardware platform consists of the WARP 2063e, a
multi-function network appliance designed to improve the efficiency of network
applications by utilizing technologies such as static caching, dynamic caching,
TCP/IP session management, compression, and SSL acceleration. The Company's
software platform consists of SpiderSoftware, a pure dynamic caching solution,
and iMimic's DataReactor, a pure static caching solution. Together, these
products enable an enterprise to: (i) minimize complex transaction-processing
bottlenecks; (ii) increase response times; (iii) lower hardware costs; and (iv)
lower wide area network costs.
The WARP 2063e Appliance
------------------------
The WARP 2063e is a hardware platform that sits between the web server and
application server of an enterprise to accelerate the flow of transactional and
informational data over the network. This appliance runs in parallel with the
application servers and reduces the workload on these servers, thereby
minimizing the congestion at the network layer. It requires no changes to
existing applications of an enterprise by utilizing web server plug-in
architecture. Its rules based engine can be configured to specify the static and
dynamic content that can be cached to provide higher efficiency and speed in the
flow of data across networks. The WARP 2063e appliance utilizes the following
technologies to provide application acceleration: (i) static caching; (ii)
dynamic caching; (iii) TCP/IP session management; (iv) compression; and (v) SSL
acceleration. The fully loaded WARP 2063e appliance retails for $80,000 per
server; however, a client has the option to configure a lower cost model with
reduced functionality based on its unique requirements.
The WARP 2063e accelerates the back-end applications of a web platform to
ensure that end users always access the most current dynamic content. Working at
the application server layer of a web site's architecture, the WARP 2063e
inter-operates seamlessly with any web server and monitors all traffic passing
to the web site's database servers. Since the appliance resides above the
database layer, it can retrieve the most accurate dynamic content quickly while
minimizing the amount of back-end traffic at the web application layer.
The benefits of deploying the WARP 2063e appliance inside a web network
architecture are significant for enterprises. The WARP 2063e eliminates the need
for repeated dynamic content requests to traverse through the application and
database layers of the infrastructure by
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caching the responses for the most frequently requested information in its
memory away from the core of the infrastructure and diverting such requests to
that memory for processing. In doing so, the WARP 2063 reduces the amount of
application server and data server infrastructure required to process dynamic
content transactions. Additionally, the time required to process such
transactions can be dramatically shortened. The WARP 2063e creates greater
network response speed and increases network efficiency by accelerating the
processing of dynamic content requests at the web server, application server,
and database server levels of the infrastructure. The result is increased
performance and reduced dependency on high-end server infrastructure and
software licenses.
SpiderSoftware Solution
-----------------------
The SpiderSoftware product is a software solution designed to enable
caching of pure dynamic content at the web server layer. This product is
installed on the web server of an enterprise to allow network administrators to
select certain sections of its content to remain dynamic, a feature known as
partial page caching. The SpiderSoftware product retails for $5,000 to $10,000
per server license depending upon the functionality desired by a client.
Based upon the rule of 80/20 - that 80% of requested dynamic content is the
same, and 20% is unique - a typical web server is in fact processing the same
data over and over again. SpiderSoftware leverages this repetition by storing
requested page instances in a dynamic cache that sits within the site's web
server. The server does not need to compile and execute scripts when content is
served out of the cache, thereby reducing the load on database and application
servers.
The benefits of the SpiderSoftware solution are increased speed,
performance, scalability, availability and efficiency of a network
infrastructure's informational and transactional data flow. The primary
advantages of the SpiderSoftware solution include highly granular cache control,
support for both static and dynamic page caching, partial page caching, database
trigger support for dynamic cache management, clustering support, cross platform
web administration tool, real-time cache efficiency performance monitoring,
automatic image optimization, and support for multiple operating systems
including Windows NT, Linux, Solaris, and Unix.
iMimic's DataReactor Solution
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The iMimic DataReactor product is a software solution designed to enable
caching of purely static content at the web server layer. This product is
installed on the web server of an enterprise with an API (application program
interface) that allows the caching layer to be controlled from the application.
The Company currently offers this solution through a strategic partnership with
iMimic Networking, Inc. ("iMimic"). The DataReactor product retails for $5,000
per server license and has a current installed base of over 2,000 server
licenses worldwide. The DataReactor solution has been distributed on an OEM
basis through companies such as: Stratacache, Storigen, Microbits, Cintel, and
Pyramid. As of June 30, 2003 the Company did not have any sales relating to the
iMimic DataReactor product.
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The DataReactor solution enables a cache administrator to quickly and
easily configure multiple caches with similar parameters. Examples of
applications provided by the DataReactor's static caching platform include: (i)
rewriting requests to pick geographically closer servers; (ii) compression;
(iii) trans-coding images to improve transmission over low-bandwidth links; and
(iv) performing ad insertion or replacement.
The benefits of the DataReactor solution include high throughput, high hit
ratio on requests over the network, and low response times. This ideal
combination of performance metrics translates into reduced cost of ownership for
enterprises. The DataReactor installation should provide a substantial return on
investment (ROI) by enabling the Company's clients to reduce the number of cache
cluster units deployed while still maintaining a significant bandwidth savings.
The end result of an iMimic deployment is higher flexibility, scalability, and
portability for any network.
Sales and Marketing
The Company sells its products primarily to large enterprises that have a
need for significant web-based infrastructures. The Company believes that the
most logical users of its technology are on-line retailers, on-line travel
agents/sites, on-line auction sites, and providers of real time information such
as news and media sites and larger enterprises with a need to push information
to a worldwide sales force or customer base. The Company also targets large
enterprises that run corporate applications such as supply chain, customer
relationship management, and inventory management over the web.
The Company's sales and marketing strategy is generally four-fold: (i)
leverage customer references and case studies to win new contracts; (ii) use
references and endorsements from recognized industry sources (e.g. Gartner,
Giga, Forrester) to market its application acceleration products; (iii) engage
in targeted telephone and email campaigns to solicit effective reseller and
strategic relationships; and (iv) leverage the established and proven iMimic
product line to up-sell its other GTEN suite of products such as WARP 2063e and
SpiderSoftware.
Sales
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The Company anticipates that wholesale channels such as systems
integrators, managed service providers, and value added resellers (VARs) will be
the main distribution vehicles for the Company's GTEN suite of application
acceleration products. The Company has established channel relationships in
Europe and Asia for distribution of its products and has entered into reseller
agreements with Macnica Networks, Estafet, Morse, EMG, and Computer Centre.
Macnica Networks is a leading technology distributor for the Japanese market.
Additionally, the Company has established reseller agreements with Cable and
Wireless Europe and NTT Verio for its European target customer base. The Company
believes that it will need to establish relationships with fifteen to twenty
channel resellers in order to properly distribute the WARP 2063e,
SpiderSoftware, DataReactor, and other future products.
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Marketing
The Company will continue to educate the marketplace by informing the
various channel partners about its unique value propositions of increased
performance at the origin server level and the wide area network level. The
strategy of the Company is to position itself as the de facto standard for
application acceleration, and market at industry, channel, and end user levels
as follows:
o Industry - Direct Management Briefings to Technology Analysts (e.g.
Gartner, Forrester, Yankee Group, Giga, Meta) - Technology analysts carry
significant influence over the purchasing decisions of enterprise
customers. They also influence the product selections of value added
resellers, systems integrators, and original equipment manufacturers. The
Company has already briefed these analysts within the last 12 months, and
will continue to be active in soliciting their review and endorsement of
the GTEN suite of products and technologies.
o Industry - Public Relations and Press Releases - The Company will release
relevant news related to new product announcements, customer "wins" and
other significant accomplishments. Additionally, with each press release,
the Company has adopted the practice of re-releasing to an internal
database of prospects via email. This database is currently at about 3,000
names and is largely comprised of customers, sales leads, and other groups
that have expressed interest in the GTEN product line, and have elected to
receive emails from the Company. This practice targets the developing news
on the Company to the groups that either use, or are considering the use of
a GTEN product.
o Industry - Editorial Coverage - The Company's public relations agency,
SpringBoard Public Relations, maintains an editorial contact list, and
constantly polls editors that write about the application acceleration
marketplace. Through this relationship, the Company has been covered in
Network Computing Magazine, InformationWeek, and Network World.
o Channel - VAR Specific Marketing - The Company intends to advertise
consistently in VAR based publications, such as VAR Business and CRN
magazines. The campaigns can be cost effective, and when combined with
editorial coverage and analyst reviews, the message impact can be very
high.
o Channel - Channel Specific Events - The Company intends to participate in
focused marketing events such as the CMP Breakaway Exchanges. These events
allow the Company to present to industry specific VARs and systems
integrators and are generally effective in establishing relationships with
VARs.
o Channel/End User - Monthly Email Newsletter - The Company currently sends a
monthly newsletter to its database of contacts, which includes end users,
channel partners, and industry analysts. The email newsletter is a powerful
way of constantly communicating about the Company and its products. The
monthly newsletter contains
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links to case studies and serves to keep information about new developments
in front of customers.
o Channel/End User - Webinars - The Company will conduct a series of web
seminars (Webinars) over the Internet to inform customers and channel
participants about the benefits of its technology. These low cost webinars
save time and money while being very effective sales leads.
o Channel/End User - Search Engine listings - The Company maintains relevant
search engine terms, with "premium listing position" through Google and
Overture, which covers Yahoo! and AOL.
Customers
The Company views its potential customer base as the larger on-line
enterprises as well as the larger enterprises that have a significant web-based
infrastructure. In the fiscal year ending June 30, 2003, the Company sold units
directly to end users as well as through channel resellers. The product has been
installed at the AMP Group, Lastminute.com (Europe's largest travel web site),
and UEFA (the European Soccer League).
The Company believes that customer service is one of the cornerstones of
its product offerings. To effect the highest level of customer service, the
Company assigns a client service manager to each account in order to:
o Discover and meet client's needs;
o Provide 24-hour availability to requests;
o Be the single point of contact;
o Manage all aspects of a client's relationship;
o Act as an extension of a client's IT organization;
o Operate as a liaison between the Company's technology and a client's needs;
and
o Provide feedback from various markets to the Company's product development
organization in an effort to create new competitive products based upon
client demand.
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The Growth Strategy
The Company intends to position itself as the de facto standard in
application acceleration. It plans to grow by: (i) leveraging the underlying
growth of the application server market and (ii) providing its GTEN suite of
products to organizations facing dramatic expansion of web applications over
congested networks. In order to capitalize on this significant market
opportunity, the Company intends to execute on four critical success factors:
Build an Effective Sales and Marketing Organization
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The Company plans to recruit experienced sales and business development
staff from competitors that sell application acceleration and caching solutions.
In doing so, the Company can shorten the ramp-up time for new sales staff coming
on board to bring in new customer contracts. Additionally, the strategy of
hiring proven producers that have sold caching at other firms significantly
mitigates the risk of new sales staff failing to make the transition from one
product to another.
Maintain Continued Technology Leadership
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The Company intends to constantly refine its technology and technology
strategy. The Company has created a technology advisory board chaired by Greg
Parker, its current Chief Technology Officer. Additional participants are Alan
Cox, the Father of Free BSD Unix, and Vijay Pai, Founder of iMimic, and Kevin
Chen, the Company's current Vice President of Technology. The Company expects to
leverage these deep technology resources to maintain a position of leadership in
terms of features and performance. Additionally, the Company seeks to improve
the ease of use characteristics of its GTEN suite of products.
Promote Significant Channel Growth
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The Company is leveraging a network of commission based manufacturer
representatives to promote the recruitment of channel partners. The European
operations have recruited five channel partners during fiscal year 2003, and as
an organization, the Company anticipates adding an additional fifteen to twenty
channel partners during fiscal 2004. The Company recognizes that significant
revenue growth is predicated upon development of significant channels. Where
practical, products such as iMimic will also be sold through two tier
distributors like Ingram Micro and TechData, which are supported by their own
marketing programs.
The Company will attempt to develop OEM (Original Equipment Manufacturer)
relationships with large server manufacturers like Sun, HP, IBM and Dell.
Typically these relationships arise out of a customer request. To date, the
Company has been involved in customer promoted relationships with both HP and
IBM. The Company will attempt to further these relationships into full OEM
partnerships.
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Develop Strategic Alliances with Synergistic Partners
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The Company plans to develop strategic relationships with firms that can
promote the use of its GTEN suite of application acceleration products. In many
cases, ideal partners are firms that are in the business of performance
measurement and tuning.
Competition
There is significant competition among static and dynamic content
acceleration technology producers and service providers. IBM Corp., Oracle Corp.
and BEA Systems have each added functions to their application server products,
which increase the efficiency, on a limited basis, of static and dynamic content
delivery. Static caching vendors such as Volera (a unit of Novell), and Network
Appliances have developed frequent "time-to-live" ("TTL") cache refresh based
architectural approaches to dynamic content acceleration. Service vendors such
as Akamai Technologies have developed approaches to dynamic content
acceleration, which it offers to customers on an outsourcing basis. Chutney
Technologies, Zend, and other development stage companies, are also developing
technologies for dynamic content acceleration.
The Company has four main categories of competitors in the market for
dynamic content acceleration technology: (i) hardware providers; (ii) software
providers; (iii) service providers; and (iv) static caching hardware and
software providers.
Hardware Providers. Generally, hardware providers build a separate
self-contained appliance, which houses the content acceleration technology. This
appliance is built for a customer and is then added to the network
infrastructure of that customer. The strengths of this approach to content
acceleration are the ease of implementation, the resulting high performance
improvement, and the relative ease of distribution through channel sales.
Therefore, the hardware approach offers the ease of implementation of an
appliance, but also offers advanced invalidation capabilities such as XML
messaging and database triggers, which developers may leverage. The weaknesses
of the hardware approach are that it is generally not able to cache as much
detailed content (i.e. granularity) as a database and it is not currently
capable of partial page (i.e. object level) caching.
The Company has designed the WARP 2063e as a hardware solution for content
acceleration and believe that this is the most effective means of incorporating
content acceleration into existing network architectures.
Software Providers. Generally, software providers will add new software to
the existing hardware of a network infrastructure in an attempt to make that
infrastructure more efficient. The strengths of this approach are a high level
of flexibility and granularity down to the object layers of an application. The
weaknesses of this approach are its high cost of implementation, its slow
implementation time due to regression testing requirements, and the limited
performance improvement obtained since the optimization is included in the
transactional unit of work. Also, product complexity limits distribution to
direct sales and systems integrators.
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We believe that we have a clear advantage over the software providers due
to the ease of installation and use of the WARP 2063e and the quickness of its
implementation. Oracle Corp., BEA Systems, IBM and Chutney Technologies all
offer software products, which address dynamic content acceleration.
Service Providers. Generally, service providers offer customers the option
of outsourcing their access to content acceleration technology. The strengths of
this approach are that it allows the customer to quickly leverage the wide
network of infrastructure owned by the service provider and it provides a high
level of granularity down to the object layers. The weaknesses of this approach
are that it requires complex and risky modifications to the customer's
application server layer, it requires that the customer become "captive" to the
service provider's network, and it may only provide modest performance
improvement.
The Company believes that it has an advantage over service providers
because of the WARP 2063e's flexibility, ease of implementation, and the ability
of its users to maintain control over their networks. Akamai Technologies and
ESI Systems are both large competitors who provide a service-based solution to
dynamic content acceleration.
Static Caching Hardware & Software Providers. Generally, static caching
hardware and software is the existing technology for content delivery over a
network infrastructure. It is possible to modify this technology to enable some
level of dynamic caching and content acceleration, and under such circumstances
this modified technology would compete with the WARP 2063e. The strengths of
this approach are that static caching hardware and software already has
significant market share and customers may write scripts and other applications,
which enable their static cache investment to be leveraged for limited dynamic
caching by using frequent TTL invalidation. The weaknesses of this approach are
its limited effectiveness, lack of a true dynamic cache solution, and inability
to handle certain security authentication protocols.
Network Appliances, Volera, Cisco Systems, Inktomi Corp., and
Squid-Freeware all offer modified static caching hardware and software as
solutions for dynamic caching and content acceleration.
Sources and Availability of Raw Materials and Names of Principal Suppliers
The WARP 2063e and the GTEN suite of products are based on an Intel Pentium
architecture running Sun Microsystem Inc.'s Solaris UNIX operating system. The
Company is not affiliated with either Intel Corp. or Sun Microsystems. The
Company licenses the right to use Solaris from Sun Microsystems and purchases
it's chipsets from Intel and other suppliers. The Company does not anticipate
any problems maintaining its licenses with Sun Microsystems and Pentium chipsets
are readily available on the market from a wide array of suppliers.
The Company tunes the application of the WARP 2063e to take advantage of
specific features of the Solaris operating system, and of the specific chipsets.
This requires that the Company maintain a "recipe" comprised of software version
number, operating system version number and chipset model number. To that
extent, the Company will be required to modify its product as chipsets evolve
and supplies of current chipsets decline.
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Research And Development
During the fiscal year 2003, the Company spent approximately $ 672,000 on
research and the development of its products. The pricing of the Company's
products reflects, among other things, the cost of their development as well as
the cost of the component parts and applicable license fees.
Patents and Trademarks
The Company regards the protection of its intellectual property rights to
be an integral part of its success. The Company relies on a combination of
patent, trademark, copyright, service mark, and trade secret restrictions and
contractual provisions to protect its intellectual property rights.
The Company currently has one U.S. patent directed to its load balancing
system and method and one allowed US patent application directed to its dynamic
content routing system and method. In addition the Company has six additional US
patent applications and two pending international PCT applications relating
other aspect of its technology. The Company claims trademark rights in the mark
WARP SOLUTIONS(TM) and PARTNERWARE(TM). The mark WARP SOLUTIONS(TM) is
registered in Argentina, Australia, Switzerland, Chile, China, Israel and
Mexico, and the Company has applied for registrations of the WARP SOLUTIONS(TM)
name in the United States, Brazil, Canada, European Community, Japan, Malaysia,
Philippine, and Ukraine. It has also applied for registrations of the
PARTNERWARE(TM) name in Brazil.
Employees
The Company currently has 20 full time employees including Malcolm Coster,
its Chief Executive Officer and President and John Gnip, its Chief Operating
Officer and Secretary. The Company does not have any written employment
contracts with any of its employees.
Risk Factors
------------
In addition to other information in this Annual Report on Form 10-KSB
(including all exhibits hereto), the following risk factors should be carefully
considered in evaluating the Company and its business, as such factors currently
have a significant impact, or may have significant impact in the future, on the
Company's business, results of operations, financial condition and the value of
its outstanding securities.
We Have a Limited Operating History.
The Company has a limited operating history. Such limited operating history
makes it more difficult to predict whether or not we will be successful in the
future. Our future financial and operational success is subject to the risks,
uncertainties, expenses, delays and difficulties associated with managing a new
business, many of which may be beyond our control. In addition, the Company
competes in a relatively new market known as the information technology market.
Because this market is new and rapidly
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evolving, companies competing in it may face many uncertainties. Our success
will depend on many factors, including those described in this Risk Factors
section.
We Have a History of Losses and May Need Additional Financing.
We have experienced operating losses, as well as net losses, for each of
the years during which we have operated. We anticipate future losses and
negative cash flow to continue for the foreseeable future.
The Company has incurred recurring operating losses since its inception,
and as of June 30, 2003 had an accumulated deficit of approximately $27,000,000
and at June 30, 2003 had insufficient capital to fund all of its obligations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effect of the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
The Company's continuation as a going concern is dependant upon receiving
additional financing. The Company anticipates that during its 2004 fiscal year
it will need to raise over $4,000,000 to support its working capital needs and
to continue to execute the requirements of its business plan. In September 2003
the Company completed an offering of 975,940 shares of Series A cumulative
convertible preferred stock for approximately $976,000, of which $490,000 had
been received by June 30, 2003. Management of the Company is currently in a
process of another capital raise. There can be no assurance that the Company
will be successful in this capital raise or other attempts to raise sufficient
capital.
To date, we have received only limited revenue from the sale of our
products. We have incurred significant costs in connection with the development
of our technologies and proposed products and there is no assurance that they
will achieve sufficient revenues to offset anticipated operating costs. Although
we anticipate deriving revenues from the sale of our WARP 2063e, SpiderSoftware
and iMimic DataReactor products, no assurance can be given that these products
will be successfully marketed. Management anticipates that we may continue to
incur losses for at least the next twelve months. Included in such former and
future losses are research and development expenses, marketing costs, and
general and administrative expenses. We anticipate that our losses will continue
until we are able to generate sufficient revenues to support our operations. If
we achieve profitability, we cannot give any assurance that we would be able to
sustain or increase profitability on a quarterly or annual basis in the future.
Similarly, in the future, we may not generate sufficient revenue from
operations to pay our operating expenses. If we fail to generate sufficient cash
from operations to pay these expenses, our management will need to identify
other sources of funds. We may not be able to borrow money or issue more shares
of common stock to meet our cash needs. Even if we can complete such
transactions, they may not be on terms that are favorable or reasonable from our
perspective. As a result, you may lose your entire investment.
We May Not Be Able to Borrow Funds
14
There currently are no legal limitations on our ability to borrow funds to
increase the amount of capital available to us to carry out our business plan.
However, our limited resources and limited operating history will make it
difficult to borrow funds. The amount and nature of any such borrowings would
depend on numerous considerations, including our capital requirements, our
perceived ability to meet debt service on any such borrowings and the then
prevailing conditions in the financial markets, as well as general economic
conditions. There can be no assurance that debt financing, if required or
sought, would be available on terms deemed to be commercially acceptable by us
and in our best interest.
Rapidly Changing Markets
The markets for our products are characterized by:
o rapidly changing technologies;
o evolving and competing industry standards;
o changing customer needs;
o frequent new product introductions and enhancements;
o increased integration with other functions; and
o rapid product obsolescence.
To develop new products for our target markets, we must develop, gain
access to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise. In addition, we must
maintain close working relationships with key customers and potential customers
in order to develop new products that meet their changing needs.
Rapidly Changing Technology
The Company may not be able to identify new product opportunities
successfully, develop and bring to market new products, achieve design wins or
respond effectively to new technological changes or product announcements by its
competitors. In addition, we may not be successful in developing or using new
technologies or in developing new products or product enhancements that achieve
market acceptance. Our pursuit of necessary technological advances may require
substantial time and expense. Failure in any of these areas could harm our
operating results.
Our Ability to Compete Successfully Will Depend, In Part, On Our Ability to
Protect Our Intellectual Property Rights.
The Company relies on a combination of patent, trade secrets, copyrights,
nondisclosure agreements and other contractual provisions and technical measures
to protect its intellectual property rights. Policing unauthorized use of our
products, however, is difficult, especially in foreign countries. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and
15
financial condition regardless of the outcome of the litigation. In addition,
there can be no assurance that the courts will enforce the contractual
arrangements which the Company has entered into to protect its intellectual
property rights. Our operating results could be harmed by any failure to protect
our intellectual property rights.
Competition.
The Company is engaged in business in the highly competitive information
technology industry and we expect significant competition for our dynamic and
static content acceleration technologies. See "ITEM 1. BUSINESS - Business of
the Company - Competition" above. Many of our competitors, including some of
those identified above, have been in business for a number of years, have
established customer bases, are larger, and have greater financial resources
than the Company. There can be no assurance as to the degree to which we will be
able to successfully compete in our industry.
16
Development of Products
The Company is currently developing new products, as well as new
applications of its existing products. There can be no assurance that we will
not experience difficulties that could delay or prevent the successful
development, introduction or marketing of our products, or that our new or
enhanced products will adequately meet the requirements of our current or
prospective customers. Any failure by the Company to successfully design,
develop, test and introduce such new products, or the failure of the Company's
recently introduced products to achieve market acceptance, could prevent us from
maintaining existing customer relationships, gaining new customers or expanding
our markets and could have a material adverse effect on our business, financial
condition and results of operations.
Dependence Upon a Small Number of Customers
Because a small number of customer accounts are responsible for our
revenues, such revenues could decline due to the loss of one of these customer
accounts. An early termination by one of our customers, or the failure of a
potential customer to purchase our products, could harm our financial results as
it is unlikely that we would be able to rapidly replace that revenue source.
We are Dependent On Key Personnel
Our future success depends in part on the continued service of our key
design engineering, sales, marketing and executive personnel and our ability to
identify, recruit and retain additional personnel. At the date of this Form
10KSB, there were no employment agreements between the Company and its key
personnel.
Managing Growth and Expansion.
The Company is currently anticipating a period of growth as a result of its
recent marketing and sales efforts. The resulting strain on our managerial,
operational, financial and other resources could be significant. Success in
managing this expansion and growth will depend, in part, upon the ability of
senior management to manage effectively. Any failure to manage the anticipated
growth and expansion could have a material adverse effect on our business.
We Expect to Pay No Cash Dividends
We presently do not expect to pay dividends in the foreseeable future. The
payment of dividends, if any, will be contingent upon our revenues and earnings,
if any, capital requirements, and general financial condition. The payment of
any dividends will be within the discretion of our Board of Directors. We
presently intend to retain all earnings, if any, to implement our business plan,
accordingly, we do not anticipate the declaration of any dividends in the
foreseeable future.
17
Indemnification of Officers and Directors
Our Articles of Incorporation provide for the indemnification of our
officers and directors to the fullest extent permitted by the laws of the State
of Nevada and the federal securities laws. It is possible that the
indemnification obligations imposed under these provisions could result in a
charge against our earnings and thereby affect the availability of funds for
other uses.
Our Common Stock Is Subject To "Penny Stock" Restrictions Under Federal
Securities Laws, Which Could Reduce The Liquidity Of Our Common Stock
The Securities and Exchange Commission has adopted regulations, which
generally define penny stocks to be an equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exemptions. On September 17, 2003, the closing price for our
common stock, as quoted on the Over the Counter Bulletin Board, was $0.27 per
share and therefore, our common stock is designated a "Penny Stock." As a penny
stock, our common stock may become subject to Rule 15g-9 under the Exchange Act
or the Penny Stock Rules. These rules include, but are not limited to, Rules
3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities
Exchange Act of 1934, as amended. These rules impose additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by Rule 15g-9, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. As a result, this rule may affect the ability of broker-dealers to sell
our securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
The rules may further affect the ability of owners of our shares to sell
their securities in any market that may develop for them. There may be a limited
market for penny stocks, due to the regulatory burdens on broker-dealers. The
market among dealers may not be active. Investors in penny stock often are
unable to sell stock back to the dealer that sold them the stock. The mark-ups
or commissions charged by the broker-dealers may be greater than any profit a
seller may make. Because of large dealer spreads, investors may be unable to
sell the stock immediately back to the dealer at the same price the dealer sold
the stock to the investor. In some cases, the stock may fall quickly in value.
Investors may be unable to reap any profit from any sale of the stock, if they
can sell it at all.
For any transaction involving a penny stock, unless exempt, the rules
require delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the Securities and Exchange Commission relating to the
penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stock.
The penny stock restrictions will no longer apply to our common stock if we
become listed on a national exchange. In any event, even if our common stock
were exempt from the penny stock restrictions, we would remain subject to
Section 15(b)(6) of the Exchange Act,
18
which gives the Securities and Exchange Commission the authority to restrict any
person from participating in a distribution of penny stock, if the Securities
and Exchange Commission finds that such a restriction would be in the public
interest.
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 535 West 34
Street, 5th Floor, New York, N.Y. 10001. The Company has a month-to-month lease
on its current office space at a cost of $8,000 per month. The property has a
general purpose use for sales, research and development, and administration and
will be sufficient for our needs for the foreseeable future. The Company
believes that New York City is a suitable location for its offices because of
its labor resources and our customer locations.
The Company maintains an executive office at 204-1529 West 6th Avenue,
Vancouver, British Columbia, Canada V6JLRL and has a month-to-month lease on the
space at a cost of approximately $2,500 per month. The property has a general
purpose use for sales, research and development, and administration related to
the Company's SpiderSoftware product and will be sufficient for such needs for
the foreseeable future.
The Company maintains an executive office at 6 New Bridge Street, London,
EC4V6AB and has a month-to-month lease on the space at a cost of approximately
$1,600 per month. The property has a general purpose use for sales, marketing
and administration related to the Company's European sales and marketing
activities and will be sufficient for such needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 3, 2003, the Board of Directors of the Company unanimously approved
the adoption of a proposed Amendment to the Articles of Incorporation of the
Company to: (a) increase the number of authorized shares of common stock, par
value $.00001 per share, of the Company from 100,000,000 shares to 500,000,000
shares, and (b) authorize the creation of 50,000,000 shares of par value $.00001
per share blank check preferred stock, subject to approval by a majority of the
Company's stockholders. On July 7, 2003, the holders of a majority of the
outstanding shares of our common stock approved the Amendment to the Articles of
Incorporation in writing. On August 12, 2003, the Company filed its Definitive
Schedule 14C Information Statement with the SEC describing this corporate action
and on August 18, 2003 this Information Statement was sent by first class mail
to the Company's stockholders of record who were not solicited for their consent
to this corporate action. Pursuant to Rule 14c-2 under the Securities Exchange
Act of 1934, as amended, the Amendment to the Articles of Incorporation
authorized by the Board of Directors and the stockholders could not become
effective until at least twenty days after the mailing of the Information
Statement. Such twenty-day period expired on September 7, 2003 and on September
12, 2003 the Company filed the Certificate of
19
Amendment to Articles of Incorporation with the Secretary of State of the State
of Nevada and the Amendment to the Articles of Incorporation of the Company
became effective.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock, par value $.00001 per share, is traded on the
OTC Bulletin Board operated by the National Association of Securities Dealers,
Inc. under the symbol "WRPT".
The following table sets forth the range of high and low closing bid prices
for the Company's common stock for the periods indicated as reported by the
National Quotation Bureau, Inc. These prices represent quotations between
dealers, do not include retail markups, markdowns or commissions, and do not
necessarily represent actual transactions.
Fiscal Year Quarter Ended Bid Price
----------- ------------- ---------
Low High
--- ----
2002 September 30, 2001 $ .01 $ .01
December 31, 2001 .07 .11
March 31, 2002 .05 .30
June 30, 2002 $.30 $.98
2003 September 30, 2002 .88 1.38
December 31, 2002 1.38 3.80
March 31, 2003 1.30 3.93
June 30, 2003 .31 1.52
2004 September 30, 2003 .15 .34
(as of Sept. 17)
As of September 17, 2003, the National Quotation Bureau, Inc. reported that
the closing bid and ask prices on the Company's common stock were $0.27 and
$0.28 respectively.
Holders
As of June 30, 2003, the Company's financial statements show 67,262,586
shares of common stock outstanding. This number of shares outstanding assumes
that all shares of WARP Solutions, Inc. common stock were converted to shares of
the Company's common stock pursuant to the Exchange Agreement as of May 24,
2002. However, as of September 17, 2003, a nominal number of shares of WARP
Solutions, Inc. common stock had not been presented to the Company for
conversion. As of September 17, 2003, the shareholders list for the Company
showed 67,262,586 shares of common stock outstanding. Of those shares,
16,169,252 shares were owned by the Company's officers and directors. Such
shares are restricted stock and may only be resold in compliance with Rule 144
of the Securities Act of 1933.
20
At September 17, 2003, there were approximately 169 common stockholders of
record, including shares held by brokerage clearing houses, depositories or
otherwise in unregistered form. The beneficial owners of such shares are not
known to us.
Dividends
We have not declared any cash dividends, nor do we intend to do so. We are
not subject to any legal restrictions respecting the payment of dividends,
except that they may not be paid to render us insolvent. Dividend policy will be
based on our cash resources and needs and it is anticipated that all available
cash will be needed for our operations in the foreseeable future.
Recent Sales of Unregistered Securities
The following information relates to sales of unregistered securities by
the Company during fiscal quarter ended June 30, 2003. All of these sales of
securities were made in reliance upon the exemption from the registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"), set
forth in Sections 4(2) thereof and the rules and regulations under the
Securities Act, including Regulation D, as transactions by an issuer not
involving any public offering and/or sales to a limited number of purchasers who
were acquiring such securities for their own account for investment purposes and
not with a view to the resale or distribution thereof.
In September 2003, the Company completed an offering of 975,940 shares of
Series A 8% Cumulative Convertible Preferred Stock (the "Shares") with gross
proceeds to the Company from the sale equaling $975,940 (the "September Private
Placement"). The Shares had a purchase price of $1.00 per share. The Shares have
a cumulative dividend of 8% per year, which is payable in cash or stock at the
time of conversion. During the first twelve months from the date of issuance
each Share is convertible into four shares of the common stock of the Company.
Thereafter, the Shares are convertible to common stock based upon the average
market price of the Company's common stock over the five-day period immediately
preceding the conversion date, subject to a minimum conversion price of $.75 per
share of common stock. The purchase price of the September Private Placement
Shares was paid in cash. All of the Shares sold in the September Private
Placement were offered and sold to accredited investors (as defined in Rule 501
of Regulation D). The Company paid finders and placement fees in the amount of
$166,375 in connection with the September Private Placement. The Shares and the
common stock underlying the Shares issued in the September Private Placement are
restricted securities and were issued in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) of the Securities Act. The Shares
and the common stock underlying the Shares issued in the September Private
Placement are subject to Rule 144 under the Securities Act and therefore
generally cannot be resold for a period of twelve months from the date of
purchase. No general solicitations were made in connection with the September
Private Placement.
21
Section 15(g) of the Exchange Act
The Company's shares are covered by Section 15(g) of the Securities
Exchange Act of 1934, as amended, and Rules 15g-1 through 15g-6 promulgated
there under, which impose additional sales practice requirements on
broker/dealers who sell our securities to persons other than established
customers and accredited investors.
Rule 15g-2 declares unlawful any broker-dealer transactions in penny stocks
unless the broker-dealer has first provided to the customer a standardized
disclosure document.
Rule 15g-3 provides that it is unlawful for a broker-dealer to engage in a
penny stock transaction unless the broker-dealer first discloses and
subsequently confirms to the customer the current quotation prices or similar
market information concerning the penny stock in question.
Rule 15g-4 prohibits broker-dealers from completing penny stock
transactions for a customer unless the broker-dealer first discloses to the
customer the amount of compensation or other remuneration received as a result
of the penny stock transaction.
Rule 15g-5 requires that a broker dealer executing a penny stock
transaction, other than one exempt under Rule 15g-1, disclose to its customer,
at the time of or prior to the transaction, information about the sales persons
compensation.
The Company's common stock may be subject to the foregoing rules. The
application of the penny stock rules may affect our stockholder's ability to
sell their shares because some broker/dealers may not be willing to make a
market in our common stock because of the burdens imposed upon them by the penny
stock rules.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read together with the Company's financial statements and the notes to
financial statements, which are included in this report.
On May 24, 2002 the Company acquired WARP in the Share Exchange
transaction. The transaction was effected by the issuance of 5.5254528 shares of
the Company's common stock for each one (1) share of WARP's common stock. This
resulted in the former WARP stockholders owning the majority of the outstanding
shares of the common stock of the Company. For financial reporting purposes, the
transaction is accounted for as a reverse acquisition, and WARP is treated as
the acquiring entity for accounting purposes.
Although the Company is the surviving legal entity in the share exchange,
the transaction was accounted for as an issuance of equity by WARP, and a
recapitalization of WARP under the capital structure of the Company in exchange
for $690 in net assets. Under the purchase method of accounting, the historical
results of WARP have been carried forward and the Company's
22
operations have been included in the financial statements commencing on the
Closing Date. Accordingly, all the historical results included are those of WARP
only. Results of operations after the Closing Date include the results of both
companies on a consolidated basis.
Results of Operations
The following table was created from previously disclosed financial statements
of the Company. For comparative purposes the table shows a full year of
operations for the period ending June 30, 2002.
Twelve Months Six Months Six Months Twelve Months Six Months
ended ended ended ended ended
June 30, 2002 June 30, 2002 December 31, 2001 December 31, 2001 June 30, 2001
------------- ------------- ----------------- ----------------- -------------
Revenue 11,333 11,333 -- 155,990 155,990
Cost of sales -- -- -- -- --
Product development 1,586,427 100,874 1,485,553 3,121,193 1,635,640
Sales, marketing and business 179,082 99,153 79,929 565,087 485,158
General and administrative 3,208,073 1,403,630 1,804,443 3,846,025 2,041,582
Non-cash Compensation -- -- -- -- --
Interest and Dividends 23,474 3,008 20,466 145,114 124,648
Interest expense 26,533 26,333 200 1,905 1,705
Twelve months ended June 30, 2003 vs. 2002
------------------------------------------
During the twelve months ending June 30, 2003 the Company recognized
approximately $344,000 of revenues compared to $11,000 for the twelve months
ended June 30, 2002. The increase in revenue was due primarily to the Company
having a full year to sell its products versus 2002 when the product was only
available for sale in the last quarter.
Cost of sales for twelve months ended June 30, 2003 was approximately $238,000
which included a write-off of approximately $165,000 of obsolete and damaged
WARP 2063 boxes.
Product development was approximately $672,000 for the twelve months ended June
30, 2003 as compared to approximately $1,586,000 for the twelve months ended
June 30, 2002. The decline was due to the Company completing its main product,
WARP 2063 in fiscal 2003.
Sales, marketing and business development was approximately $1,517,000 for the
twelve months ended June 30, 2003 as compared to approximately $179,000 for the
twelve months ended June 30, 2002. The increase represents the Company's focus
on selling its products for a full year by increasing its sales force and
marketing materials.
23
General and administrative expense was approximately $2,499,000 for the twelve
months ended June 30, 2003 as compared to approximately $3,208,000 for the
twelve months ended June 30, 2002. The decline was due to the Company cost
cutting efforts and stringent cost control.
Non-cash compensation for the period ending June 30, 2003 was approximately
$8,498,000. This represents the difference between the fair market price on the
date of grant less the exercise price of employees stock options and certain
guarantees provided with respect to the value of options granted during fiscal
2003.
Net interest and dividends for the twelve months ended June 30, 2003 was
approximately $26,800 as compared to $23,000 for the twelve months ended June
30, 2002. The increase was due to higher cash balances in fiscal 2003.
Six months ended June 30, 2002 vs. 2001:
---------------------------------------
During the six months ended June 30, 2002 the Company recognized revenues of
approximately $11,000, consisting of the sale of one WARP 2063 unit to a channel
reseller under a distribution agreement along with a maintenance agreement,
compared to revenues of approximately $156,000 during the six months ended June
30, 2001. Revenues for the six-month period ended June 30, 2001 were derived
from performing temporary and permanent recruitment services by WARP's
wholly-owned subsidiary, Blue Suit Consulting, which subsequently ceased
operations.
Product development costs were approximately $101,000 for the six months ended
June 30, 2002 compared to approximately $1,636,000 for the six months ended June
30, 2001. The decrease was due primarily to the cessation of the Company's
research and development efforts.
Sales, marketing and business development expenses were approximately $99,000
for the six months ended June 30, 2002 compared to approximately $485,000 for
the six months ended June 30, 2001. The decrease was due primarily to a change
in sales and marketing strategy, which resulted in reduction of sales and
business development expenses. The Company elected to focus on one single
product offering for the six months ended June 30, 2002.
General and administrative expenses were approximately $1,404,000 for the six
months ended June 30, 2002 compared to approximately $2,042,000 for the six
months ended June 30, 2001. The decrease was due primarily to cost cutting
measures.
During the six months ended June 30, 2002 the Company had net interest expense
of approximately $23,000 compared to net interest income of approximately
$123,000 for the six months ended June 30, 2001. The decrease is the result of a
decrease in cash balances available for investment.
Year ended December 31, 2001 vs. 2000:
-------------------------------------
Revenues for the year ended December 31, 2001 amounted to $156,000 compared to
$93,000 during the year ended December 31, 2000. All of the Company's revenues
related to performing temporary and permanent recruitment services by WARP's
wholly-owned subsidiary, Blue Suit Consulting.
24
Product development costs increased from approximately $1,147,000 during the
year ended December 31, 2000 to approximately $3,121,000 during the year ended
December 31, 2001. The increase was due primarily to increased scope of the
research and development efforts associated with the company's "GTEN" or "Global
Transaction Enabled Network" suite of components.
Sales, marketing and business development expenses decreased from approximately
$1,041,000 for the year ended December 31, 2000 to approximately $565,000 for
the year ended December 31, 2001. The decrease was due primarily to the firms
strategy to conserve cash in reaction to the economic downturn in the technology
sector at the time.
General and administrative expenses increased from approximately $3,402,000 for
the year ended December 31, 2000 to approximately $3,846,000 for the year ended
December 31, 2001. This increase was due primarily to administrative expenses
associated with business strategy modifications, downsizing requiring severance
payments, and seeking additional sources of financing.
Net interest and dividend income decreased from approximately $408,000 for the
year ended December 31, 2000 to approximately $143,000 during the year ended
December 31, 2001. The decrease is the result of a decrease in the cash balances
available for investment.
Net Operating Loss Carryforwards
At June 30, 2003, the Company has net operating loss carryforwards of
approximately $17,700,000 which may be used to reduce taxable income in future
years through the year 2023. Due to uncertainty surrounding the realization of
the favorable tax attributes in future returns, WARP has placed a full valuation
allowance against its net deferred tax asset. At such time as it is determined
that it is more likely than not that the deferred tax asset is realizable, the
valuation allowance will be reduced. Furthermore, the net operating loss
carryforward may be subject to further limitation pursuant to Section 382 of the
Internal Revenue Code.
Liquidity and Capital Resources
To date, the Company has financed its operations primarily through the sale of
equity securities and debt. As of June 30, 2003, the Company had approximately
$0.4 million in cash and marketable securities. The Company has never been
profitable and expects to continue to incur operating losses in the future. The
Company will need to generate significant revenues to achieve profitability and
to be able to continue to operate. The Company's consolidated financial
statements have been prepared on the assumption that the Company will continue
as a going concern. The Company's independent auditors have issued their report
dated October 9, 2003 that includes an explanatory paragraph stating that the
Company's recurring losses and accumulated deficit, among other things, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's historical sales have never been sufficient to cover its expenses
and it has been necessary to rely upon financing from the sale of equity
securities and debt to sustain operations.
25
The Company's ultimate future capital requirements will depend on many factors,
including cash flow from operations, continued progress in research and
development programs, competing technological and market developments, and the
Company's ability to successfully market its products. The Company has no firm
commitments from any sources to provide additional equity or debt financing. As
such, there can be no assurance that sufficient funds will be raised to finance
the operations of the Company through fiscal 2004. Moreover, any equity
financing could result in dilution to the existing shareholders and any debt
financing would result in higher interest expenses.
The Company anticipates that during its 2004 fiscal year it will need to raise
over $4,000,000 to support its working capital needs and to continue to execute
the requirements of its business plan. In September 2003, the Company completed
an offering of 975,940 shares of Series A cumulative convertible preferred stock
for approximately $976,000, of which $490,000 had been received by June 30,
2003. The Company is continuing its efforts to raise capital through private
equity transactions, subject to the provisions of Regulation D of the federal
securities laws, and, although there can be no assurances, the Company believes
that its current cash and anticipated proceeds from equity transactions and
operating cash flows, will be sufficient to meet the Company's requirements for
working capital and capital expenditures through the end of fiscal 2004.
Subsequent Events
On July 3, 2003, the Board of Directors of the Company unanimously approved the
adoption of a proposed Amendment to the Articles of Incorporation of the Company
to: (a) increase the number of authorized shares of common stock, par value
$.00001 per share, of the Company from 100,000,000 shares to 500,000,000 shares,
and (b) authorize the creation of 50,000,000 shares of par value $.00001 per
share blank check preferred stock, subject to approval by a majority of the
Company's stockholders. On July 7, 2003, the holders of a majority of the
outstanding shares of our common stock approved the Amendment to the Articles of
Incorporation in writing. On August 12, 2003, the Company filed its Definitive
Schedule 14C Information Statement with the SEC describing this corporate action
and on August 18, 2003 this Information Statement was sent by first class mail
to the Company's stockholders of record who were not solicited for their consent
to this corporate action. Pursuant to Rule 14c-2 under the Securities Exchange
Act of 1934, as amended, the Amendment to the Articles of Incorporation
authorized by the Board of Directors and the stockholders could not become
effective until at least twenty days after the mailing of the Information
Statement. Such twenty-day period expired on September 7, 2003 and on September
12, 2003 the Company filed the Certificate of Amendment to Articles of
Incorporation with the Secretary of State of the State of Nevada and the
Amendment to the Articles of Incorporation of the Company became effective.
During the first half of fiscal year 2004, the Company plans to implement a
voluntary cash salary reduction plan for its employees in order to reduce the
monthly cash flow requirements of the Company. The terms of the plan under
consideration would allow certain employees to receive a portion of their
salaries in shares of restricted common stock of the Company. Participation in
the plan will be voluntary. The specific requirements for such participation and
the terms under which the common stock will be issued in lieu of cash salary
have yet to be decided or approved by the Board of Directors of the Company. As
a result, the Company does not at this time know
26
what the level of participation will be in the plan or the terms under which any
common stock would be issued under the plan.
On August 13, 2003, Mr. Karl Douglas resigned from his positions as Co-Chairman
of the Board of Directors, Chief Executive Officer, and President of the
Company. Mr. Douglas believed it to be in the best interest of the Company going
into a new fiscal year that he resign from the positions he held at the Company
in order to allow the Company to recruit a candidate with more extensive
experience and connections. Mr. Douglas did not resign his positions as a member
of the Board or Audit Committee of the Board. At a meeting of the Board on
August 13, 2003, the Board accepted Mr. Douglas' resignation and appointed Mr.
Malcolm Coster, a member of the Board with extensive managerial experience,
Interim-Chief Executive Officer, President and Chairman of the Board. In
connection with Mr. Coster agreeing to take on these three positions, Mr. John
Gnip agreed to vacate his position as a Co-Chairman of the Board but continue as
a member of the Board.
In August 2003, the Company entered into a Consulting Agreement with Dr. David
Milch (the "Milch Agreement") pursuant to which Dr. Milch shall provide
management consulting services to the Company on a month-to-month basis and act
an advisor to the Board and to the Chief Executive Officer of the Company. The
terms of the Milch Agreement provide that the Company shall pay Dr. Milch a
monthly fee of twenty thousand dollars payable as ten thousand dollars in cash
and ten thousand dollars in shares of the common stock of the Company. In
addition as of the effective date of the Milch Agreement, Dr. Milch was issued
one million shares of the common stock of the Company. Such one million shares
of common stock shall vest over a four month period beginning in September 2003
with 10% of the shares vesting in the first month, 20% of the shares vesting in
the second month, 30% of the shares vesting in the third month and the remaining
40% of the shares vesting in the fourth month. The vesting of the shares in any
given month is conditioned upon the Board's determination that the Company has
successfully executed on its business plan for that month. Dr. Milch shall work
out of the Company's primary office space and shall be focusing full time on the
business of the Company. The Milch Agreement can be terminated by either party
upon 30 days written notice. For the complete terms and conditions of the Milch
Agreement, the reader is directed to the full text of that agreement, a copy of
which is attached hereto as Exhibit 10.12.
In September 2003, the Company completed an offering of 975,940 shares of Series
A 8% Cumulative Convertible Preferred Stock (the "Shares") with gross proceeds
to the Company from the sale equaling $975,940 (the "September Private
Placement"). The Shares had a purchase price of $1.00 per share. The Shares have
a cumulative dividend of 8% per year, which is payable in cash or stock at the
time of conversion. During the first twelve months from the date of issuance
each Share is convertible into four shares of the common stock of the Company.
Thereafter, the Shares are convertible to common stock based upon the average
market price of the Company's common stock over the five-day period immediately
preceding the conversion date, subject to a minimum conversion price of $.75 per
share of common stock. The purchase price of the September Private Placement
shares was paid in cash. The Company paid finders and placement fees in the
amount of $166,375 in connection with the September Private Placement. See "ITEM
5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Recent Sales of
Unregistered Securities".
27
In its Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
2003, the Company reported the completion of a private offering of 171,776 Units
with gross proceeds to the Company from the sale equaling $2,061,250 (the
"February Private Placement"). Each Unit had a purchase price of $12.00 and
consisted of sixteen (16) shares of the Company's common stock and a warrant to
purchase nine (9) shares of the Company's common stock at an exercise price of
$.10 per share. Based upon a review of records, the February Private Placement
consisted of the sale of 46,770 Units with gross proceeds to the Company from
the sale equaling $561,250. Concurrent with the February Private Placement, the
Company completed the sale of 3,125,015 shares of its common stock to three
accredited investors for gross proceeds to the Company of $1,500,000. In the
aggregate, the Company raised gross proceeds of $2,061,250 through the February
Private Placement and concurrent private sale of common stock. The Company paid
finders and placement fees in the aggregate of $293,000 in connection with the
February Private Placement and the concurrent private sale of common stock. The
common stock and warrants underlying the Units issued in the November Private
Placement and the common stock sold in the concurrent private sale are
restricted securities and were issued in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) of the Securities Act. The common
stock and warrants underlying the Units issued in the November Private Placement
and the common stock sold in the concurrent private sale are subject to Rule 144
under the Securities Act and therefore generally cannot be resold for a period
of twelve months from the date of purchase. No general solicitations were made
in connection with the February Private Placement or the concurrent private sale
of common stock.
Critical Accounting Policies
Revenue Recognition
-------------------
Pursuant to AICPA Statement of Position ("SOP") 97-2, Software Revenue
Recognition, the Company recognizes revenues from software licenses when
persuasive evidence a contractual arrangement exists, delivery has occurred, the
fee is fixed or determinable and collection is probable. The Company's software
licenses generally are marketed with certain post contract customer support
("PCS") and other obligations, which may include maintenance, delivery of
unspecified upgrades, and warranties regarding service response times. Revenue
under PCS agreements is recognized ratably over the term of the agreement. Under
SOP 97-2, the Company must allocate revenue to each element based on vendor
specific objective evidence ("VSOE") of each element's fair value. Since the
Company has just begun to market its products, VSOE of the fair value of each
element has not been clearly established. Accordingly, revenue from license
agreements are being recognized ratably over the term of the PCS agreement.
Licensing revenue from Spider Software are recognized upon product delivery
provided persuasive evidence of an arrangement exists, fees are fixed or
determinable and the resulting receivable is deemed collectible by management.
Product Development Costs
-------------------------
28
Product development costs incurred in the process of developing product
improvements and enhancements or new products are charged to expense as
incurred. Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon the completion of a working model.
Controls And Procedures
Within 90 days prior to the date of this Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2003, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and President, its principal
executive officer, and the Company's Chief Operating Officer, its principal
operating officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934. Based upon that evaluation, the principal
executive officer and principal operating officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company, including its consolidated
subsidiaries, that is required to be included in the Company's periodic SEC
filings. There were no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements and related notes responsive to this Item 7 are
included as an appendix to this report as indexed on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
In connection with its audits for the last two fiscal years and through
September 30, 2003, there have been no disagreements with Ernst & Young LLP, the
Company's independent accountants, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Ernst & Young LLP would
have caused them to make a reference thereto in their report on the financial
statements for such periods.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Officers and Directors
29
The following table sets forth the name, age and position of each of our
directors, executive officers and significant employees as of September 17,
2003. Each director will hold office until the next annual meeting of our
stockholders or until his or her successor has been elected and duly qualified.
Our executive officers are appointed by, and serve at the discretion of, the
Board of Directors.
Executive Officers Age Position
------------------ --- --------
Malcolm Coster 59 CEO, President, Chairman
John Gnip 36 COO, Secretary, Director
Greg Parker 40 Chief Technology Officer, Director
Karl Douglas 40 Director
Dr. David M. Milch 48 Advisor to the Board of Directors
Michael Beller 41 Consultant - Vice President of Operations
Gus Bottazzi 37 Vice President - Global Sales & Marketing
Background of Officers and Directors
Malcolm Coster: Chief Executive Officer, President, Chairman of the Board of
Directors. On August 13, 2003, Mr. Coster was appointed as Chairman, Chief
Executive Officer and President of the Company. Mr. Coster has been a director
of the Company since May 2003. Mr. Coster brings over 35 years of senior level
executive experience to the Company. He is an experienced businessman who has
held senior level international positions in both the Management Consultancy and
Information Technology industries. He has also been an experienced Chairman,
Board member and Non-executive Director of several well-known public companies.
He is the former President of Unisys, Europe and is currently Chairman of MTL
Instruments Group, plc., a Techmark company which is a global leader in process
control platforms technology. Mr. Coster currently also holds a non-executive
directorship on the Board of Directors of BTG Plc (British Technology Group) and
he has held executive and board level positions with British Petroleum and
Coopers and Lybrand. Mr. Coster graduated with special honors from Kings
College, University of London.
John Gnip: Chief Operating Officer, Secretary, Director. On May 24, 2002, Mr.
Gnip was appointed as a director, and the Chief Operating Officer and Secretary
of the Company. Since December 1999, Mr. Gnip has been the Chief Information
Officer and a director of WARP. Mr. Gnip has over 10 years experience delivering
mission critical commercial software applications. From 1998 to 1999, Mr. Gnip
was a Senior Technology Consultant whose client was Merrill Lynch and Co. From
1994 to 1998, Mr. Gnip was a Senior Technology Consultant whose client was JP
Morgan & Co. From 1992 to 1994, Mr. Gnip was a Senior Software Engineer at
Systems Strategies, Inc. in Melville, N.Y., where he was one of the original
lead engineers developing IBM's top selling middleware-messaging product "IBM MQ
Series". From 1990 to 1992, Mr. Gnip was a programmer analyst at the Federal
Reserve Bank of New York.
Greg Parker: Chief Technology Officer, Director. On Jan 2, 2003, Mr. Parker was
appointed Chief Technology Officer of the Company and on January 10, 2003 Mr.
Parker was appointed to the Board of Directors of the Company. Mr. Parker has
over 17 years of experience in the technology industry. Mr. Parker co-founded
and has been the CEO and President of
30
SpiderSoftware from June 2000. Prior to founding SpiderSoftware, from 1999 to
2000, Mr. Parker worked as Director of Technology and Development at
Branium.com, a leading-edge Internet company delivering educational multimedia
content. From 1998 to 1999, Mr. Parker was the Director of Product Planning and
Strategy for Enlogix Inc., a provider of utility billing and customer
relationship management solutions. From 1992 to 1998, Mr. Parker was head of IT
Planning and Architecture for Westcoast Energy Inc., a multinational energy
company. From 1989 to 1992, Mr. Parker was a Senior Consultant/Product Developer
at Oracle Corporation. Mr. Parker holds an Honors BSc in Astrophysics and
Computer Science from the University of Toronto.
Karl Douglas: Director. On May 24, 2002, Mr. Douglas was appointed as a director
of the Company. From May 24, 2002 to August 13, 2003, Mr. Douglas was the Chief
Executive Officer and President of the Company. From December 1999 to August 13,
2003, Mr. Douglas was the Chief Executive Officer and a director of WARP. Mr.
Douglas has over 15 years of experience managing enterprise level information
technology systems and departments for Fortune 500 companies. From August 1998
to December 1999, Mr. Douglas was a Vice President at Merrill Lynch and Co.
where he was a senior strategic technology manager. From August 1994 to August
1998, Mr. Douglas was a Vice President and a Global Technology Infrastructure
Manager for JP Morgan & Co.'s Financial Division, during which time he managed a
$105 million technology portfolio and a 125 person technology staff. From
January 1992 to August 1994, Mr. Douglas was a Vice President in the information
technology department at Bear Stearns, Inc.
Dr. David M. Milch: Consultant to the Board of Directors. Dr. Milch was engaged
as a consultant to the Company and an advisor to the Board of Directors in
January 2002. In 1988 Dr. Milch formed Davco Consultants, Inc., a privately held
management and technology consulting firm which specializes in the medical
services and information technology industries. Dr. Milch has advised or
partnered with a number of successful start-up or early-term growth enterprises
including Datatec Systems, Inc. (NASDAQ: DATC), a leading provider of technology
deployment services and software tools which he co-founded in 1992 and where he
currently serves as a member of the board of directors. From 1995 through 1998,
Dr. Milch was a consultant to MiniMed, Inc. From 1993 through 1995, Dr. Milch
was a consultant to and a member of the board of directors of OxiGene, Inc.
(NASDAQ NM: OXGN) a biopharmaceutical company developing a novel class of
vascular targeting agents. Dr. Milch graduated from Stanford University in 1976
and from Harvard Medical School in 1980.
Michael Beller: Consultant - Vice President of Operations. Mr. Beller has over
18 years of experience working with organizations ranging from technology
start-ups to Fortune 500 enterprises. This experience has involved developing
and implementing external business strategies and internal operating strategies
in the financial services, manufacturing, consumer services, and high tech
industries. From 1999 to 2003, Mr. Beller was Chief Operating Officer and Chief
Information Officer of TechSmart Inc. - a technology re-manufacturing and
re-marketing company funded by John Sculley (former Apple CEO) and Rho
Management. Mr. Beller participated as a key member of the senior management
team that grew TechSmart from 60 to 170 employees and monthly revenue from
$500,000 to $3,000,000 in less than 3 years. Mr. Beller was responsible for all
executive management related to operations, systems, and
31
technology. Prior to TechSmart, from 1994 through 1999, Mr. Beller was a
founding partner and principal of Diamond Technology Partners (now
DiamondCluster International) - a full service management consulting
organization where he helped the start-up achieve a successful IPO and 1200%
stock appreciation. Mr. Beller has also held senior management positions at
Technology Solutions Company and Accenture. Mr. Beller graduated from Cornell
University with a Bachelor of Science degree in Operations Research and
Industrial Engineering.
Gus Bottazzi: Vice President - Global Sales and Marketing. Mr. Bottazzi is an
entrepreneurial sales and marketing executive with over 15 years experience in
software, hardware and services sales and marketing management, both
domestically and abroad. Most recently, Mr. Bottazzi was a senior executive at
Novell, Inc., where he held general management responsibilities for their
caching division, Volera, Inc. Prior to Novell, Mr. Bottazzi held senior
positions with Globix, Inc., Call Sciences and was one of the original founding
managers of WinStar Communications. Mr. Bottazzi holds degrees in both
Mathematics and Biochemistry from New York University.
No director, executive officer, promoter or control person of the Company
has, within the last five years: (i) had a bankruptcy petition filed by or
against any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that
time; (ii) been convicted in a criminal proceeding or is currently subject to a
pending criminal proceeding (excluding traffic violations or similar
misdemeanors); (iii) been subject to any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; (iv) been found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission (the "Commission") or the
Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated. There are no family relationships among any directors and executive
officers of the Company.
Committees of the Board of Directors
Audit Committee
---------------
The functions of the Audit Committee are to recommend to the Board of
Directors the appointment of independent auditors and to analyze the reports and
recommendations of such auditors. The committee also monitors the adequacy and
effectiveness of our financial controls and reporting procedures and the
performance of our accounting consultants and independent auditors. During
fiscal 2003, the Audit Committee consisted of Mr. Malcolm Coster and Mr. Karl
Douglas. The Audit Committee was formed in May 2003 and therefore did not meet
during the fiscal year 2003. Members of the Audit Committee has met two times
since June 30, 2003, in connection with the preparation of this Annual Report on
Form 10-KSB.
Each of the members of the Audit Committee is not "independent" as defined
under the rules of the national securities exchanges or NASDAQ but each member
is financially literate, as
32
that qualification is interpreted by the Company's Board of Directors. The Board
of Directors has adopted a written charter with respect to the Audit Committee's
roles and responsibilities.
Management is responsible for the Company's internal controls and the
financial reporting process. The external auditor is responsible for performing
an independent audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards and to issue a report
thereon. The Audit Committee's responsibility is to monitor and oversee these
processes.
Audit Fees
The aggregate fees billed by Ernst & Young LLP, our independent
accountants, for professional services rendered for the audit of our annual
financial statements for the fiscal year ended June 30, 2003 and for the review
of the financial statements included in our quarterly reports on Form 10-Q for
such fiscal year were approximately $160,000 and approximately $61,000 related
to other accounting and auditing services.
Financial Experts
At the present time no member of our Board of Directors serving on the
Audit Committee meets the SEC definition of "Financial Expert", which basically
is limited to those who have prepared or audited comparable public company
financial statements. While it might be possible to recruit a person who
qualifies, the Board has determined that in order to fulfill all functions of
our Board and our Audit Committee, each member of our Board and our Audit
Committee should meet the criteria that have been established by our Board for
board membership, and it is not in the best interests of our Company to nominate
someone who does not have all the experience, attributes and qualifications we
seek. Our Audit Committee consists of two directors, each of whom has been
selected for the Audit Committee by the Board based on the Board's determination
that they are qualified to monitor the performance of the Company, our internal
accounting operations and the independent auditors and are fully qualified to
monitor the disclosures of the Company to the end that they fairly present the
Company's financial condition and results of operations. In addition, the Audit
Committee has the ability on its own to retain independent
33
accountants or other consultants whenever it deems it appropriate. Our Board
believes that this is equivalent to having a "financial expert" on the Audit
Committee.
Section 16(a)
Section 16(a) of the Securities and Exchange Act of 1934 requires certain
defined persons to file reports of and changes in beneficial ownership of a
registered security with the Commission. Under the regulatory procedure,
officers, directors and persons who own more than ten percent of a registered
class of a company's equity securities are also required to furnish the Company
with copies of all Section 16(a) forms they filed.
To the Company's knowledge, and based solely upon a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended June 30, 2003, all Section
16(a) filing requirements applicable to its officers, directors and 10% or
greater beneficial owners were complied with, except that the following forms
were filed late: Karl Douglas' Form 4 reporting his gifting of 1,000,000 shares
of common stock of the Company and sale of additional shares under Rule 144, and
Malcolm Coster's Form 3 reporting his ownership of 5,400,000 shares of the
Company's common stock at the time of his appointment to the Board of Directors
of the Company.
34
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth information concerning
the annual and long-term compensation earned by our Chief Executive Officer and
each of the other most highly compensated executive officers (collectively the "
named executive officers"). This information includes the dollar value of base
salaries and bonus awards and the number of stock options granted, and certain
other compensation, if any.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Other
Executive Annual Restricted Securities Annual
Officer and Compen- Stock Underlying LTIP Compen-
Principal Year Salary Bonus sation Awards Options/SAR Payouts sation
Position (US$) (US$) (US$) (#) (#) (US$) (US$)
Malcolm Coster (1) 2003 0 0 0 0 0 0 0
CEO & President 2002 0 0 0 0 0 0 0
2001 0 0 0 0 0 0 0
John Gnip (2) 2003 182,175 0 0 0 0 0 0
COO & 2002 90,000 75,000 0 0 0 0 0
Secretary 2001 90,000 60,000 0 0 0 0 0
Karl Douglas 2003 181,147 167,900 0 0 0 0 0
Former CEO & 2002 90,000 75,000 0 0 0 0 0
President (3) 2001 90,000 60,000 0 0 0 0 0
Greg Parker (4) 2003 84,000 0 0 0 570,000 0 0
CTO 2002 0 0 0 0 0 0 0
2001 0 0 0 0 0 0 0
David Milch (5) 2003 112,000 0 0 0 1,400,000 0 0
Advisor to Board 2002 0 0 0 0 0 0 0
2001 0 0 0 0 0 0 0
Gus Bottazzi (6) 2003 56,250 0 0 0 200,000 0 0
V.P. Global Head 2002 0 0 0 0 0 0 0
of Sales 2001 0 0 0 0 0 0 0
Kevin Chen (7) 2003 130,000 0 0 0 1,600,000 0 0
Vice-President 2002 130,000 0 0 0 0 0 0
2001 130,000 0 0 0 0 0 0
Michael Beller (8) 2003 82,500 0 0 0 200,000 0 0
V.P. of Operations 2002 0 0 0 0 0 0 0
2001 0 0 0 0 0 0 0
35
(1) Malcolm Coster was appointed CEO and President of the Company on August 13,
2003. Mr. Coster does not draw any salary from the Company and has not received
any bonus or option awards from the Company.
(2) John Gnip is also the Chief Information Officer of the Company's subsidiary;
WARP Solutions, Inc. The compensation shown in this Summary Compensation Table
represents the total compensation paid to Mr. Gnip for all executive positions
held by him at the Company and WARP.
(3) Karl Douglas was the CEO and President of the Company from May 24, 2002
until August 13, 2003 when he resigned from those positions. Mr. Douglas
continues to be a director of the Company and an employee of the Company in a
non-executive level position.
(4) Greg Parker is the Chief Technology Officer of the Company and is also the
Chief Executive Officer of the Company's subsidiary; Spider Software, Inc. The
compensation shown in this Summary Compensation Table represents the total
compensation paid to Mr. Parker for all executive positions held by him at the
Company and Spider beginning January 13, 2003.
(5) David Milch is a consultant to the Company and an advisor to both the Board
of Directors and the Chairman of the Company. The compensation shown in this
Summary Compensation Table represents the total compensation paid to Dr. Milch
for all relationships between himself and the Company.
(6) Gus Bottazzi is employed directly by the Company and provides sales and
marketing services for the Company and all of its subsidiaries. The compensation
shown in this Summary Compensation Table represents the total compensation paid
to Mr. Bottazzi for all executive positions held by him at the Company beginning
April 15, 2003.
(7) Kevin Chen is not employed directly by the Company but is a Vice-President
of the Company's subsidiary; WARP Solutions, Inc. The compensation shown in this
Summary Compensation Table represents the total compensation paid to Mr. Chen
for all executive positions held by him at WARP Solutions, Inc.
(8) Michael Beller is a consultant to the Company who was retained in January
2003.
The compensation discussed herein addresses all compensation awarded to,
earned by, or paid to the Company's named executive officers for all the
positions held thereby with the Company and its subsidiaries.
There are no other stock option plans, retirement, pension, or profit
sharing plans for the benefit of the Company's officers and directors other than
as described herein.
Long-Term Incentive Plan Awards
2002 Stock Incentive Plan
-------------------------
In November 2002 the Company's Board of Directors approved and adopted the
WARP Technology Holdings, Inc. 2002 Stock Incentive plan (the "2002 Plan") as a
means through which the Company and its subsidiaries may attract, retain and
compensate employees and consultants. In fiscal 2003, the Board of Directors
issued 7,098,000 options to certain employees of the Company under the 2002 Plan
of which 1,700,000 were cancelled. Of those options, 1,833,333 vested on the
date of grant and the remainder vest over a two-year period. Such options have a
term of ten years and have an exercise price of $.25 per share. As of June 30,
2003, 2,785,833 of options were fully vested and immediately exercisable.
In fiscal 2003, the Company granted 420,000 options to employees at an exercise
price of $.25 per share. Under the terms of employment the Company has agreed to
compensate employees holding these options upon exercise, the difference between
one dollar and cash realized from the exercise of each option up to one dollar.
The total amount is capped at $400,000 and expires in December 2003. All 420,000
options were fully vested as of June 30, 2003.
In May 2003, the Company's Board of Director granted 300,000 options to certain
employees under the 2002. Of these options, 225,000 vested based on meeting
certain sales target as of June 30, 2003.
In fiscal 2003 the Company's Board of Directors granted 1,500,000 options to
consultants at an exercise price of $.25 per share. As of June 30, 2003 all
1,500,000 of these options have been vested. Under
36
the terms of employment the Company has agreed to compensate certain consultants
for 1,450,000 of these options upon exercise the difference between one dollar
and cash realized from the exercise of each option up to one dollar. The total
amount is capped at $294,000 and expires in December 2003.
In connection with the acquisition of Spider, in March 2003 the Board of
Directors issued 81,652 options to certain employees of Spider under the 2002
Plan in exchange for their existing Spider options.
Options Granted to Named Executive Officers
-------------------------------------------
The following table contains certain information regarding stock options we
have granted to our named executive officers.
Individual Option Grants Table
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/share) Date
------------------ ---------- ------------- ----------- ----------
Kevin Chen 1,600,000 17.2% $.25 11/29/2012
David M. Milch 1,400,000 15.0% $.25 1/25/2013
Greg Parker 570,000 6.1% $.25 2/15/2013
Gus Bottazzi 200,000 2.2% $.25 2/10/2013
Mike Beller 200,000 2.2% $.25 2/10/2013
Aggregate Option Exercises by Named Executive Officers and Option Values
------------------------------------------------------------------------
The following table contains certain information regarding stock options
exercised during the past twelve months and stock options held as of June 30,
2003, by each of our named executive officers. The stock options listed below
were granted without tandem stock appreciation rights. We have no freestanding
stock appreciation rights outstanding.
37
Option Exercise Table
Number of Securities Value of Underlying
Underlying Unexercised Options
Shares Options at 6/30/03 (#) at 6/30/03 (1)
Acquired ---------------------- -------------------
On Value Non- Non-
Name Exercise (#) Realized ($)(2) Exercisable Exercisable Exercisable Exercisable
---- ------------ --------------- ----------- ----------- ----------- -----------
Kevin Chen 0 $0 533,333 1,066,667 $ 32,000 $ 64,000
David M. Milch 0 $0 1,400,000 0 $ 84,000 $ N/A
Greg Parker 0 $0 0 570,000 $ 0 $ 34,200
Gus Bottazzi 0 $0 200,000 0 $ 12,000 $ N/A
Mike Beller 0 $0 200,000 0 $ 12,000 $ N/A
(1) Calculated on the basis of $ .06 per share, the last reported bid price of
the common stock on the over-the-counter market on June 30, 2003, less exercise
price payable for such shares.
(2) Calculated on the basis of the closing share price of the common stock on
the over-the-counter market on the date exercised, less the exercise price
payable for such shares.
Compensation of Directors
The Company's directors do not receive any compensation for serving as
members of the board of directors.
Employment Contracts
The Company does not have written employment contracts with any of its
officers or employees.
Indemnification
Under our Articles of Incorporation and Bylaws, the Company may indemnify
an officer or director who is made a party to any proceeding, including a
lawsuit, because of his position, if he acted in good faith and in a manner he
reasonably believed to be in the Company's best interest. The Company may
advance expenses incurred in defending a proceeding. To the extent that the
officer or director is successful on the merits in a proceeding as to which he
is to be indemnified, the Company must indemnify him against all expenses
incurred, including attorney's fees. With respect to a derivative action,
indemnity may be made only for expenses actually and reasonably incurred in
defending the proceeding, and if the officer or director is judged liable, only
by a court order. The indemnification is intended to be to the fullest extent
permitted by the laws of the State of Nevada. Regarding indemnification for
liabilities arising under the Securities Act, which may be permitted to
directors or officers under Nevada law, the Company is informed that, in the
opinion of the Commission, indemnification is against public policy, as
expressed in the Act and is, therefore, unenforceable.
38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of September 17, 2003, certain
information regarding the beneficial ownership (1) of the Company's common stock
outstanding by (i) each person who is known to the Company to own 5% or more of
its common stock, (ii) each director of the Company, (iii) certain executive
officers of the Company and (iv) all executive officers and directors of the
Company as a group. Unless otherwise indicated, each of the stockholders shown
in the table below has sole voting and investment power with respect to the
shares beneficially owned. Unless otherwise indicated, the address of each
person named in the table below is c/o WARP Technology Holdings, Inc., 535 West
34 Street, 5th Floor, New York, N.Y. 10001.
Number of Percent
Name and Address Company Position Shares owned of class
---------------- ---------------- ------------ --------
Malcolm Coster (2) Director, CEO 5,400,000 8.0%
John Gnip Director, COO 5,967,492 8.9%
Karl Douglas Director, 4,307,492 6.4%
Greg Parker (3) Director, CTO 494,268 0.7%
David M. Milch (4) Advisor to Board 3,750,000 5.3%
Lenny Primak (5) 4,480,000 6.7%
Lemire Corp. (6) 5,000,000 7.5%
Resolute Securities Ltd. (7) 4,275,000 6.4%
All directors and executive
officers as a group (4 persons) 16,169,252 24.1%
(1) As used in this table, a beneficial owner of a security includes any person
who, directly or indirectly, through contract, arrangement, understanding,
relationship or otherwise has or shares (a) the power to vote, or direct the
voting of, such security or (b) investment power which includes the power to
dispose, or to direct the disposition of, such security. In addition, a person
is deemed to be the beneficial owner of a security if that person has the right
to acquire beneficial ownership of such security within 60 days.
(2) Malcolm Coster is a citizen of the United Kingdom whose principle
residential address is 46 Golf Side, Sutton, Surry, SM27EZ, UK.
(3) In connection with the acquisition of SpiderSoftware, Inc. by the Company,
Mr. Parker received 494,268 shares of the preferred stock of 6043577 Canada,
Inc., a wholly-owned subsidiary of the Company. Mr. Parker's preferred shares
are currently exchangeable for 494,268 shares of the Company's common stock upon
notice to the Company.
(4) Dr. Milch owns 320,000 shares of the Company's common stock. In addition,
Dr. Milch has a contractual right to purchase up to 1,280,000 shares of the
Company's common stock from Mr. Primak which is currently exercisable. Dr. Milch
also holds 1,400,000 options to purchase the Company's common stock, which have
vested and are currently exercisable or which shall vest and be exercisable
within 60 days of the date of this filing. Pursuant to the terms of the Milch
Agreement, as described in this Form 10-KSB, Dr. Milch was granted 1,000,000
shares of restricted common stock of the Company of which 750,000 shares vested
or shall vest within 60 days.
(5) Mr. Primak was a founder of WARP Solutions, Inc. but is no longer an officer
or director of that company. Mr. Primak's address is 284 Mott Street, New York,
N.Y.
(6) The Toro Trust is the owner and controlling shareholder of Lemire Corp., and
makes all the investment decisions for Lemire Corp. The Toro Trust is an
irrevocable trust the beneficiary of which is the adult son of Mr. John A.
Roberts. Mr. Roberts is not the trustee of the trust and does not make the
investment decisions of the trust. Mr. Roberts' son does not live with Mr.
Roberts. Mr. Roberts therefore denies beneficial ownership of the shares owned
by Lemire Corporation. Lemire Corporation has its registered offices at Calle
54, Avenida Samuel Lewis, Urbanizacion Obarrio, Panama, Republic of Panama. The
Toro Trust has its registered office at Bergstrasse 389, P.O. Box 777, 9497
Triesenberg, Principality of Liechtenstein.
(7) Mr. John A. Roberts is the controlling shareholder of Resolute Securities
Limited, which owns its shares of the Company's common stock for the benefit of
Mr. Roberts. Mr. Roberts makes all the investment decisions for Resolute
Securities Limited. Mr. Roberts is deemed to be the beneficial owner of the
shares owned by Resolute Securities Limited. Resolute Securities Limited has its
offices at The Private Trust Corporation Ltd., Charlotte House, Charlotte
Street, P.O. Box N-65, Nassau, Bahamas.
39
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth as of June 30, certain information regarding
the securities authorized for issuance under the 2002 Stock Incentive Plan,
which is the sole equity compensation plan of the Company.
Equity Compensation Plan Information
Number Of Securities
Remaining Available For
Number Of Securities To Be Weighted-Average Exercise Future Issuance Under Equity
Issued Upon Exercise Of Price Of Outstanding Compensation Plans
Outstanding Options, Options, Warrants And (Excluding Securities
Plan Category Warrants And Rights Rights Reflected In Column (a))
(a) (b) (c)
Equity compensation plans 0 0 0
approved by security holders.
Equity compensation plans
not approved by security holders. 7,699,652 $0.25 2,300,348
Total 7,699,652 $0.25 2,300,348
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The following documents heretofore filed by the Company with the Securities
and Exchange Commission are hereby incorporated by reference:
Exhibit
Number Description Of Document
------ -----------------------
2.1* Form of Share Exchange Agreement dated as of May 16, 2002 by and among
Abbott Mines, Ltd., Carlo Civelli, Mike Muzylowski, WARP Solutions, Inc.,
Karl Douglas, John Gnip and the Persons Identified on Schedule A thereto.
Incorporate by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed by the Company on June 10, 2002.
2.2* Form of Share Exchange Agreement dated as of December 13, 2002 by and among
WARP Technology Holdings, Inc., 6043577 Canada Inc., Spider Software Inc.,
the Spider Insiders and the Persons Identified on Schedule A thereto.
Incorporate by reference to Exhibit 2.2 to the Current Report on Form 8-K
filed by the Company on January 25, 2003.
40
3.1* Articles of Incorporation of WARP Technology Holdings, Inc. Incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form SB-2
(Registration No. 333-46884) filed by the Company on August 28, 2000 as
amended (the "Registration Statement").
3.2* By-laws of WARP Technology Holdings, Inc. Incorporated by reference to
Exhibit 3.2 to the Registration Statement.
3.3* The form of the Articles of Merger of Abbott Mines Limited and WARP
Technology Holdings, Inc. Incorporated by reference to Exhibit 3.5 to the
Current Report on Form 8-K filed by the Company on September 3, 2002.
3.4# Form of Certificate of Amendment to Articles of Incorporation of WARP
Technology Holdings, Inc. filed with the Secretary of State of the State of
Nevada on September 12, 2003.
3.5# Form of Charter of the Audit Committee of the Board of Directors of WARP
Technology Holdings, Inc. as adopted by the Unanimous Consent of the Board
of Directors of the Company in May 2003 which governs the make-up, powers
and responsibilities of the Audit Committee of the Board of Directors.
10.3* The form of the Financial Consulting Agreement dated March 5, 2002 between
WARP Solutions, Inc. and Lighthouse Capital, Inc. Incorporated by reference
to Exhibit 10.3 to the Annual Report on Form 10-KSB filed by the Company on
October 7, 2002.
10.4* The form of the Financial Consulting Agreement dated May 16, 2002 between
the Company and Lighthouse Capital, Inc. Incorporated by reference to
Exhibit 10.4 to the Annual Report on Form 10-KSB filed by the Company on
October 7, 2002.
10.5* Form of Master Distributor Agreement between Macnica Networks Company and
WARP Solutions, Inc. dated as of August 1, 2002. Incorporated by reference
to Exhibit 10.5 to the Annual Report on Form 10-KSB filed by the Company on
October 7, 2002.
10.6* Form of Master Distributor Agreement between CDI Technologies, Inc. and
WARP Solutions, Inc. dated as of September 1, 2002. Incorporated by
reference to Exhibit 10.6 to the Annual Report on Form 10-KSB filed by the
Company on October 7, 2002.
10.8* The WARP Technology Holdings, Inc. 2002 Stock Incentive Plan. Incorporated
by reference to Exhibit 10.8 to the Quarterly Report on Form 10-QSB filed
by the Company on February 14, 2003.
10.9* Form of Stock Option Grant agreement for options granted pursuant to The
WARP Technology Holdings, Inc. 2002 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.9 to the Quarterly Report on Form 10-QSB filed by
the Company on February 14, 2003.
10.10* Form of Strategic Alliance Agreement dated as of April 7, 2003 between
Mirror Image Internet, Inc. and WARP Solutions, Inc. Incorporated by
reference to Exhibit 10.10 to the Quarterly Report on Form 10-QSB filed by
the Company on May 16, 2003.
10.11* Form of iMimic/OEM Software License Agreement dated April 2003 between
iMimic Networking, Inc. and WARP Technology Holdings, Inc. Incorporated by
reference to Exhibit 10.11 to the Quarterly Report on Form 10-QSB filed by
the Company on May 16, 2003.
10.12# Form of Consulting Agreement between WARP Technology Holdings, Inc. and
Dr. David Milch dated as of August 1, 2003.
22.1# Subsidiaries of the Company.
99.1# Certification of Malcolm Coster pursuant to 18 U.S.C. Section 1350.
41
99.2# Certification of John Gnip pursuant to 18 U.S.C. Section 1350.
--------------------
* Incorporated herein by reference.
# Filed herewith.
(b) Reports on Form 8-K:
The following reports on Form 8-K have been filed during the last quarter
of the period covered by this report:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
October 14, 2003
WARP TECHNOLOGY HOLDINGS INC
By: /s/ Malcolm Coster
-----------------------------------
Malcolm Coster, CEO, President
Principal Executive Officer and
Principal Financial Officer
as Registrant's duly authorized officer
42
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ Malcolm Coster /s/ Karl Douglas
---------------------------------- ----------------------------------
Malcolm Coster Karl Douglas
President, Chief Executive Director
Officer and Director October 14, 2003
Principal Executive Officer and
Principal Financial Officer
October 14, 2003
/s/ John Gnip /s/ Greg Parker
---------------------------------- ----------------------------------
John Gnip Greg Parker
Director Director
October 14, 2003 October 14, 2003
43
Certification of Chief Executive Officer and Principal Financial Officer
(Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report on Form 10-KSB of WARP Technology
Holdings, Inc. (the "Company") for the period ended June 30, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Malcolm Coster, Chief Executive Officer and Principal Financial Officer of the
Company, certify that:
1. I have reviewed this annual report on Form 10-KSB;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 14, 2003
By /s/ Malcolm Coster
---------------------------------------
Malcolm Coster, Chief Executive Officer
Principal Financial Officer and President
44
Certification of Chief Operating Officer
(Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
In connection with the Annual Report on Form 10-KSB of WARP Technology
Holdings, Inc. (the "Company") for the period ended June 30, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John Gnip, Chief Operating Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-KSB;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 14, 2003
By /s/ John Gnip
-------------------------------------
John Gnip, Chief operating Officer
and Secretary
45
EXHIBIT INDEX
The following Exhibits are filed herewith:
Exhibit
Number Description of Document
------ -----------------------
3.4 Form of Certificate of Amendment to Articles of Incorporation of WARP
Technology Holdings, Inc. filed with the Secretary of State of the State
of Nevada on September 12, 2003.
3.5 Form of Charter of the Audit Committee of the Board of Directors of WARP
Technology Holdings, Inc. as adopted by the Unanimous Consent of the Board
of Directors of the Company in May 2003 which governs the make-up, powers
and responsibilities of the Audit Committee of the Board of Directors.
10.12 Form of Consulting Agreement between WARP Technology Holdings, Inc. and
Dr. David Milch dated as of August 1, 2003.
22.1 Subsidiaries of the Company
99.1 Certification of Malcolm Coster pursuant to 18 U.S.C. Section 1350.
99.2 Certification of John Gnip pursuant to 18 U.S.C. Section 1350.
46
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors............................. F-2
Consolidated Balance Sheets................................ F-3
Consolidated Statements of Operations...................... F-4
Consolidated Statements of Stockholders' Equity............ F-5
Consolidated Statements of Cash Flows...................... F-6
Notes to Consolidated Financial Statements................. F-7
F-1
Report of Independent Auditors
To the Stockholders of
WARP Technology Holdings, Inc.
We have audited the accompanying consolidated balance sheets of WARP Technology
Holdings, Inc. (the "Company") as of June 30, 2003, and 2002 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the twelve months ended June 30, 2003, six months ended June 30, 2002 and the
year ended December 31, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WARP Technology
Holdings, Inc. as of June 30, 2003 and 2002, consolidated results of their
operations and their cash flows for the twelve months ended June 30, 2003, six
months ended June 30, 2002, and the year ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that WARP
Technology Holding, Inc. will continue as a going concern. As more fully
described in Note 1 to the financial statements, the Company has incurred
recurring operating losses and has a working capital deficiency at June 30,
2003. These conditions raise 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 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
October 9, 2003
New York, New York
F-2
WARP Technology Holdings, Inc.
Consolidated Balance Sheets
Year ending June 30,
2003 2002
Assets
Current assets:
Cash and cash equivalents $ 360,064 $ 1,184,652
Accounts receivable 7,692 68,000
Inventory 207,000 91,992
Prepaid expenses and other 63,723 68,481
Deferred product cost 14,556 --
Due from stockholder -- 19,000
-----------------------------
Total current assets 653,035 1,432,125
Property and equipment, net 83,936 97,367
Intangible assets, net of
accumulated amortization of 87,083 442,917 --
Goodwill 3,893,294 --
Other assets 28,111 3,500
-----------------------------
Total assets $ 5,101,293 $ 1,532,992
=============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 358,024 $ 149,286
Accrued expenses 580,462 408,142
Prepaid subscription 490,000 --
Deferred revenue 94,712 56,667
Note payable 120,000 --
Deferred compensation payable 694,000 --
-----------------------------
Total current liabilities 2,337,198 614,095
Stockholders' equity:
Preferred stock 15 --
Common stock, $.00001 par value;
100,000,000 shares authorized,
67,262,586 (2003) and 57,145,360
(2002) shares issued and
outstanding 673 572
Additional paid-in capital 37,658,978 14,868,554
Deferred compensation (7,911,000)
Foreign currency translation 18,773
Accumulated deficit (27,003,344) (13,950,229)
-----------------------------
Total stockholders' equity 2,764,095 918,897
-----------------------------
Total liabilities and stockholders' equity $ 5,101,293 $ 1,532,992
=============================
See accompanying notes to consolidated financial statements.
F-3
WARP Technology Holdings, Inc.
Consolidated Statements of Operations
Year ended Six Months Year ended
June ended June 30 December 31
2003 2002 2001
-----------------------------------------------
Revenue $ 344,153 $ 11,333 $ 155,990
Product cost 237,594
Product development 672,298 100,874 3,121,193
Sales, marketing and business
development 1,517,443 99,153 565,087
Non-cash compensation 8,497,708 -- --
General and administrative 2,498,975 1,403,630 3,846,025
-----------------------------------------------
Loss before interest (13,079,865) (1,592,324) (7,376,315)
Interest and dividend income 26,750 3,008 145,114
Interest expense -- (26,333) (1,905)
-----------------------------------------------
Net loss $(13,053,115) $ (1,615,649) $ (7,233,106)
===============================================
Basic and diluted net loss per $ (0.21) $ (0.06) $ (0.36)
===============================================
Weighted-average number common
shares--basic and diluted 63,445,109 26,684,492 19,981,630
===============================================
See accompanying notes to consolidated financial statements.
F-4
WARP Technology Holdings, Inc.
Consolidated Statements of Stockholders' Equity
Convertible Convertible
Preferred Stock, Preferred Stock, Convertible Common Stock
Series A Series B Preferred
Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
Balance--January 1, 2000 1,000,000 10,000 - - 19,891,630 199
Issuance of convertible preferred stock,
Series B (March--July 2000) - - 2,000,000 20,000 - -
Costs incurred in connection with issuance - - - - - -
Warrants issued for services - - - - - -
Net loss for the year ended December 31, 2000 - - - - - -
----------------------------------------------------------------------------------------
Balance--December 31, 2000 1,000,000 10,000 2,000,000 20,000 19,891,630 199
Stock-based compensation - - - - - -
Net loss for the year ended December 31, 2001 - - - - - -
----------------------------------------------------------------------------------------
Balance--December 31, 2001 1,000,000 10,000 2,000,000 20,000 19,891,630 199
Conversion to common stock (1,000,000)(10,000) (2,000,000) (20,000) 16,576,358 166
Acquisition of Abbott Mines, Inc
Recapitalization - reverse merger 10,312,964 103
Costs incurred in connection with
the merger and issuance of common stock
Bridge Loan- Stock Conversion 1,053,332 11
Issuance of common stock 9,311,076 93
Net loss for six months ended June 30, 2002 - - - - - -
----------------------------------------------------------------------------------------
Balance--June 30, 2002 57,145,360 572
Issuance of common stock 3,600,000 36
Cost in connection with issuance
Issuance of common stock 2,100,000 21
Cost in connection with issuance
Issuance of stock with options 3,873,346 39
Cost in connection with issuance
Non -cash compensation
relating to stock options
Amortization of stock options
Reversal of forfeited stock options
Equity issued for Spider acquisition 1,500,000 15
Non -cash compensation
Relating to stock options
Warrants exercised 543,880 5
Foreign currency translation
Net loss for 12 months ended June 30,
2003
----------------------------------------------------------------------------------------
Balance June 30, 2003 - - - - 1,500,000 15 67,262,586 673
========================================================================================
See accompanying notes to consolidated financial statements.
F-5
WARP Technology Holdings, Inc.
Consolidated Statements of Stockholders' Equity
Paid-in Deferred Foreign
Capital Deficit Compensation Translation Total
--------------------------------------------------------------------------
Balance--January 1, 2000 2,981,678 (13,060) 2,978,817
Issuance of convertible preferred stock,
Series B (March--July 2000) 9,980,000 -- 10,000,000
Costs incurred in connection with issuance (582,859) -- (582,859)
Warrants issued for services 67,316 -- 67,316
Net loss for the year ended December 31, 2000 -- (5,088,414) (5,088,414)
--------------------------------------------------------------------------
Balance--December 31, 2000 12,446,135 (5,101,474) 7,374,860
Stock-based compensation 231,000 -- 231,000
Net loss for the year ended December 31, 2001 -- (7,233,106) (7,233,106)
--------------------------------------------------------------------------
Balance--December 31, 2001 12,677,135 (12,334,580) 372,754
Conversion to common stock 29,834 -- --
Acquisition of Abbott Mines, Inc 690
Recapitalization - reverse merger 587
Costs incurred in connection with the
merger and issuance of common stock issuance (430,000) (430,000)
Bridge Loan- Stock Conversion 263,322 263,333
Issuance of common stock 2,327,676 2,327,769
Net loss for six months ended June 30, 2002 -- (1,615,649) (1,615,649)
--------------------------------------------------------------------------
Balance--June 30, 2002 14,868,554 (13,950,229) 918,897
Issuance of common stock 899,964 900,000
Cost in connection with issuance (177,899) (177,899)
Issuance of common stock 499,979 500,000
Cost in connection with issuance (93,769) (93,769)
Issuance of common stock and warrants 2,061,211 2,061,250
Cost in connection with issuance (292,608) (292,608)
Non -cash compensation relating to stock options 18,996,000 (18,996,000) --
Amortization of stock options 7,678,333 7,678,333
Forfeited stock options (3,406,667) 3,406,667 --
Equity issued for Spider acquisition 4,178,843 4,178,858
Non -cash compensation relating to stock options 125,375 125,375
Warrants exercised (5) --
Foreign currency translation 18,773 18,773
Net loss for 12 months ended June 30, 2003 (13,053,115) (13,053,115)
--------------------------------------------------------------------------
Balance--June 30, 2003 37,658,978 (27,003,344) (7,911,000) 18,773 2,764,095
==========================================================================
See accompanying notes to consolidated financial statements.
F-5
WARP Technology Holdings, Inc.
Consolidated Statements of Cash Flows
Twelve months Six months Year Ended
Ended June 30, Ended June 30, December 31,
2003 2002 2001
--------------------------------------------------
Operating activities
Net loss $(13,053,115) $ (1,615,649) $ (7,233,106)
Adjustments to reconcile net loss to net cash
used in operating activities, net of
business acquired:
Depreciation 93,940 44,836 250,591
Amortization 87,083
Loss on abandonment of assets -- 298,879 227,566
Loss from forfeit of security deposits -- 281,402 325,000
Interest expense--bridge loan 26,333 --
Deferred rent (32,265) (94,989)
Stock-based compensation 8,497,708 -- 231,000
Changes in operating assets and
liabilities:
Accounts receivable 130,841 (68,000) 101,940
Inventory (115,008) (91,992) --
Prepaid expenses and other 4,762 (61,589) 67,910
Accounts payable and accrued expenses 246,346 44,893 10,773
Deferred cost of sales (14,556) -- --
Deferred revenue 32,053 56,667 (90,000)
--------------------------------------------------
Net cash used in operating activities (4,089,946) (1,116,485) (6,203,315)
--------------------------------------------------
Investing activities
Security deposits (24,615) -- (127,084)
Cash acquired in the Spider acquisition 41,592 --
Acquisition consideration (335,766) --
Purchase of property and equipment (13,431) -- (52,142)
--------------------------------------------------
Net cash (used in) provided by investing
activities (332,220) -- (179,226)
--------------------------------------------------
Financing activities
Proceeds from issuance of common stock, net
of issuance costs 2,896,974 1,898,459 --
Proceeds from bridge loan 120,000 237,000 --
Proceeds/advances of stockholder/officer's loan 19,000 55,440 (18,860)
Prepaid subscription 490,000 -- --
Principal payments on capital lease obligation -- (7,974) (13,920)
Restricted cash -- 21,553 (901)
--------------------------------------------------
Net cash (used in) provided by financing
activities 3,525,974 2,204,478 (33,681)
--------------------------------------------------
Net (decrease) increase in cash (896,192) 1,087,993 (6,416,222)
Effects on foreign currency translation 71,604 -- --
Cash--beginning of period 1,184,652 96,659 6,512,881
--------------------------------------------------
Cash--end of period $ 360,064 $ 1,184,652 $ 96,659
==================================================
See accompanying notes to consolidated financial statements.
F-6
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements
June 30, 2003
Note 1. Organization Merger, Description of Business and Basis of Presentation
On May 24, 2002 ("the Closing Date") Abbott Mines, Ltd. ("the Company"), a
Nevada corporation, acquired the outstanding common stock of WARP Solutions,
Inc. ("WARP") in a Share Exchange transaction (the "Share Exchange"). The
transaction was effected by the issuance of 1.3813632 shares of the Company's
common stock, or 5.5254528 shares of the Company's common stock after giving
effect to the September Stock Dividend described below. In connection with the
Share Exchange, the officers and directors of WARP became the officers of the
Company and joined the board of directors of the Company, replacing the
Company's officers and one of the Company's directors who resigned their
positions at the Closing Date. This resulted in the former WARP stockholders
owning the majority of the outstanding shares of the Company. For financial
reporting purposes, the transaction is accounted for as a reverse acquisition,
and WARP has been treated as the acquiring entity for accounting purposes.
Although the Company was the surviving legal entity in the Share Exchange, the
transaction was accounted for as an issuance of equity by WARP, and a
recapitalization of WARP under the capital structure of the Company in exchange
for $690 in net assets. Under the purchase method of accounting, the historical
results of WARP have been carried forward and the Company's operations have been
included in the financial statements commencing on the Closing Date.
Accordingly, all the historical results included are those of WARP only.
On August 19, 2002, the Board of Directors of the Company authorized and
approved the upstream merger of WARP Technology Holdings, Inc., a wholly owned
subsidiary of the Company which had no operations, with and into the Company
pursuant to Chapter 92A of the Nevada Revised Statutes (the "Upstream Merger").
The Upstream Merger became effective on August 21, 2002, when the Company filed
Articles of Merger with the Nevada Secretary of State. In connection with the
Upstream Merger, and as authorized by Section 92A.180 of the Nevada Revised
Statutes, the Company changed its name from Abbott Mines Limited to WARP
Technology Holdings, Inc. WARP is a wholly owned subsidiary of WARP Technology,
Holding, Inc. (the "Company")
On September 20, 2002, the Company's Board of Directors declared a stock split
in the form of a dividend (the "September Stock Dividend") payable to the common
stockholders of record on September 24, 2002 (the "record date") of three shares
of common stock for each one share issued and outstanding on the record date.
The Dividend was effective and payable on October 2, 2002.
All common share amounts have been reflected in the accompanying financial
statements and related footnotes as if the Share Exchange and the September
Stock Dividend had occurred as of January 1, 2000.
Subsequent to the Closing Date, the Company issued 10,364,408 shares of common
stock for gross proceeds of approximately $2,300,000 in cash and the conversion
of approximately $237,000 of bridge notes obtained in 2002.
In connection with the Share Exchange and sale of the Company's common stock,
the Company paid consulting fees of $430,000.
F-7
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 1. Organization Merger, Description of Business and Basis of Presentation
(continued)
The Company was incorporated on June 26, 2000, for the purpose of acquiring,
exploring and developing mining properties. Subsequent to the Closing Date, the
Company ceased all exploration activities.
WARP was organized as a Delaware Limited Liability Company ("LLC") on July 16,
1999, for the purpose of developing Internet performance and security software.
On December 14, 1999, the LLC was reorganized as a Delaware corporation and
changed it name to WARP Solutions, Inc.
The Company is an information technology company that produces a series of
application acceleration products that improve the speed and efficiency of
transactions and information requests that are processed over Internet and
Intranet network systems. The Company's GTEN suite of hardware and software
products and technologies is designed to accelerate network applications, reduce
network congestion, and reduce the cost of expensive server deployments for
enterprises engaged in high volume network activities.
6043577 Canada, Inc. a wholly-owned subsidiary of the Company, was established
in January 2003 to acquire SpiderSoftware, Inc. Effective January 13, 2003 the
Company acquired SpiderSoftware, Inc.(See note 5)
Basis of Presentation
The Company has incurred recurring operating losses since its inception, as of
June 30, 2003 had an accumulated deficit of approximately $27,000,000 and at
June 30, 2003 had insufficient capital to fund all of its obligations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effect of the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
The Company's continuation as a going concern is dependant upon receiving
additional financing. The Company anticipates that during its 2004 fiscal year
it will need to raise over $4,000,000 to support its working capital needs and
to continue to execute the requirements of its business plan. In September 2003
the Company completed an offering of 975,940 shares of Series A cumulative
convertible preferred stock for approximately $976,000, of which $490,000 had
been received by June 30, 2003. Management of the Company is currently in a
process of another capital raise. There can be no assurance that the Company
will be successful in this capital raise or other attempts to raise sufficient
capital.
The Company was a development stage enterprise through December 31, 2001. In
2002, the Company began to generate revenues and ceased to be a development
stage enterprise.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of WARP
and its wholly-owned subsidiaries, (collectively the "Company"). All
inter-company transactions and balances have been eliminated in consolidation.
Change of Year End
During 2002, the Company announced a fiscal year end change from December 31 to
June 30. The consolidated financial statements display data for the six-month
transition period ended June 30, 2002, and the calendar years ended December 31,
2001.
F-8
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of cash and cash equivalents. From time to time, the
Company has cash balances at certain financial institutions in excess of
federally insured limits. However, the Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided by the straight-line method over the estimated useful
lives of the assets, ranging from two to five years. Leasehold improvements are
amortized on a straight line basis over the lesser of their estimated useful
lives or the life of the underlying lease.
Revenue Recognition
Pursuant to AICPA Statement of Position ("SOP") 97-2, Software Revenue
Recognition, the Company recognizes revenues from software licenses when
persuasive evidence of a contractual arrangement exists, delivery has occurred,
the fee is fixed or determinable and collection is probable. The Company's
software licenses generally are marketed with certain post-contract customer
support ("PCS") and other obligations, which may include maintenance, delivery
of unspecified upgrades, and warranties regarding service response times.
Revenue under PCS agreements are recognized ratably over the term of the
agreement. Under SOP 97-2, the Company must allocate revenue to each element
based on vendor specific objective evidence ("VSOE") of each element's fair
value. Since the Company has just begun to market its products, VSOE of the fair
value of each element has not been clearly established. Accordingly, revenue
from license agreements are being recognized ratably over the term of the PCS
agreement.
Licensing revenue from Spider Software are recognized upon product delivery
provided persuasive evidence of an arrangement exists, fees are fixed or
determinable and the resulting receivable is deemed collectible by management.
Intangible Assets
Intangible assets are primarily comprised of goodwill, trademark, software,
non-compete agreements. Goodwill represents acquisition costs in excess of the
net assets of businesses acquired. In accordance with SFAS 142, "Goodwill and
Other Intangible Assets", no amortization is necessary and goodwill and other
intangibles with indefinite lives are tested for impairment on an annual basis.
Other intangible assets with definitive lives are being amortized over their
estimated useful life of two to three years.
F-9
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies (continued)
Restricted Cash
In connection with a capital lease, the Company obtained an irrevocable standby
letter of credit for the benefit of the lessor. Cash collateralizing the letter
of credit at December 31, 2001, amounting to $21,553, was on deposit in an
interest-bearing account. During 2002 the Company terminated the capital lease
and collected the collateralized cash.
Product Development Costs
Product development costs incurred in the process of developing product
improvements and enhancements or new products are charged to expense as
incurred. Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon the completion of a working model. Costs incurred by the Company between
the completion of the working model and the point at which the product is ready
for general release has been insignificant.
Reclassification
Certain amounts in the prior periods have been reclassified to conform to the
current year's presentation.
Comprehensive Loss
Comprehensive loss for the twelve months ended June 30, 2003 was approximately
$13,034,000
Inventory
Inventory consists of finished goods and is valued at the lower of cost or
market.
Income Taxes
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are recognized with respect to the
future tax consequences attributable to differences between the tax basis of
assets and liabilities and their carrying amounts for financial statement
purposes. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
Loss Per Share
Basic and diluted net loss per share information for all periods is presented
under the requirements of SFAS No. 128, Earnings Per Share. Basic loss per share
is calculated by dividing the net loss by the weighted-average common shares
outstanding during the period. Diluted loss per share is calculated by dividing
net loss by the weighted-average common shares outstanding plus the dilutive
effect of convertible preferred stock, warrants and stock options. The dilutive
effect of preferred stock, warrants and options is not included as the inclusion
of such is anti-dilutive for all periods presented.
Segment Information
The Company operates in one segment.
Stock-Based Compensation
Stock-based compensation is accounted for by using the intrinsic value-based
method in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for financial statements
for fiscal years and interim periods ending after December 15, 2002. The Company
has adopted the disclosure provisions of SFAS No. 148. SFAS No. 148 did not
require the Company to change to the fair value method of accounting for
stock-based compensation. Accordingly, the Company only records compensation
expense for any stock options granted with an exercise price that is less than
the fair market value of the underlying stock at the date of grant.
F-10
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
The following table details the effect on net income and earnings per share had
stock-based compensation expense been recorded based on the fair value method
under SFAS No. 123, as amended (see note 4).
Six Months Year ended
Year ended ended December 31
June 30, 2003 June 30,2002 2001
Net loss, as reported $(13,053,115) $ (1,615,649) $ (7,233,106)
Add: Total stock-based employee
compensation expense included in
reported net loss 8,497,708 -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards (8,722,466)
------------ ------------ ------------
Net loss, pro forma $(13,277,873) $ (1,615,649) $ (7,233,106)
============ ============ ============
Basic and diluted net loss
per share, as reported $ (0.21) $ (0.06) $ (0.36)
============ ============ ============
Basic and diluted net loss per share,
pro forma $ (0.21) $ (0.06) $ (0.36)
============ ============ ============
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if Warp had accounted for its employees' stock options under
the fair value method provided by this statement. All options were issued prior
to Closing Date and the fair value for these options was estimated at the date
of grant using the minimum value option-pricing model with the following
weighted-average assumptions:
Assumption
----------
Risk-free interest yield 3.56%
Dividend yield 0%
Average life 3 years
Option pricing models require the input of highly subjective assumptions.
Because WARP's employee stock has 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.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. For the periods
ended June 30, 2003, June 30, 2002, December 31, 2001, the impact of the pro
forma net loss and pro forma loss per share was not material.
Fair Value of Financial Instruments
For financial statement instruments, including cash and cash equivalents,
accounts receivable and accounts payable, the carrying amount approximated fair
value because of their short maturity.
F-11
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies (continued)
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 provides guidance on the timing of the
recognition of costs associated with exit or disposal activities. The new
guidance requires costs associated with exit or disposal activities to be
recognized when incurred. Previous guidance required recognition of costs at the
date of commitment to an exit or disposal plan. The provisions of the statement
are to be adopted prospectively after December 31, 2002. Although SFAS No. 146
may impact the accounting for costs related to exit or disposal activities the
Company may enter into in the future, particularly the timing of recognition of
these costs, the adoption of the statement did not have an impact on the
Company's present financial condition or results of operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations, for a disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company adopted SFAS 144 on January 1, 2002. The
Statement did not have a significant impact on the Company's financial position
or results of operations.
Note 3. Property and Equipment
Property and equipment consists of the following:
June 30
2003 2002
----------------------
Purchased software $ 84,283 $ 84,283
Computer equipment 144,596 131,405
Furniture, fixtures and equipment 95,286 38,415
----------------------
324,165 254,103
Accumulated depreciation (240,229) (156,736)
----------------------
$ 83,936 $ 97,367
======================
Furniture, fixtures and equipment includes $30,000 of equipment under capital
lease at June 30, 2002. Accumulated depreciation of the asset under capital
lease amounted to $30,000, $23,750 June 30, 2002.
F-12
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 4. Stockholders' Equity
In September 2002, the Company closed an offering of 3,600,000 restricted shares
of its common stock in a private transaction for gross proceeds of approximately
$900,000 in cash. The Company paid finders and placement fees in the amount of
approximately $178,000 in connection with this transaction.
In November 2002 the Company closed an offering of 2,100,000 restricted shares
of its common stock in a private transaction for gross proceeds of approximately
$500,000 in cash. The Company paid finders and placement fees in the amount of
$94,000 in connection with this transaction.
In fiscal 2003, the Board of Directors issued 7,098,000 options to certain
employees of the Company under the 2002 Plan. Of those options, 1,833,333 vested
on the date of grant and the remainder vest over a two to three year period.
Such options have a term of ten years and have an exercise price of $.25 per
share. For financial statement purposes the Company recorded deferred
compensation of $18,996,000, representing the difference between the market
price of the Company's stock and $.25 on the date of grant. As of June 30, 2003,
2,785,833 of options were fully vested and immediately exercisable. Deferred
compensation is being amortized for financial reporting purposes over the
vesting period of the options. The amount recognized as expense for the period
ending June 30, 2003 was $7,678,333.
In fiscal 2003, the Company granted 420,000 options to employees at an exercise
price of $.25 per share. Under the terms of employment the Company has agreed to
compensate employees holding these options upon exercise, the difference between
one dollar and cash realized from the exercise of each option up to one dollar
in cash or stock. The total amount is capped at $400,000 and expires in December
2003. As of June 30, 2003 the Company recorded a liability for this amount. All
420,000 options were fully vested and exercisable as of June 30, 2003.
In May 2003, the Company's Board of Director granted 300,000 options to certain
employees under the 2002 Plan. Of these options, 225,000 vested based on the
Company meeting certain sales target as of June 30, 2003. The Company recognized
$87,250 as expense for the period ending June 30, 2003.
In fiscal 2003 the Company's Board of Directors granted 1,500,000 options to
consultants at an exercise price of $.25 per share. As of June 30, 2003 all
1,500,000 of these options have been vested. Under the terms of employment the
Company agreed to compensate certain consultants for 1,450,000 of these options
upon exercise the difference between one dollar and cash realized from the
exercise of each option up to one dollar in cash or stock. The total amount is
capped at $294,000 and expires in December 2003. As of June 30, 2003 the Company
recorded a liability for this amount. The Company recognized $38,125 of expense
on the remaining 50,000 options using the fair value method.
Pursuant to the exchange agreement in connection with the Spider acquisition,
the Spider shareholders were issued 1.5 million shares of preferred stock of
6043577 Canada, Inc., a wholly owned subsidiary of the Company, which is
convertible into shares of the Company's common stock on a one for one basis.
The preferred stock has no preferences, no redemption or voting rights.
F-13
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 4. Stockholders' Equity (continued)
In its Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
2003, the Company reported the completion of a private offering of 171,776 Units
with gross proceeds to the Company from the sale equaling $2,061,250 (the
"February Private Placement"). Each Unit had a purchase price of $12.00 and
consisted of sixteen (16) shares of the Company's common stock and a warrant to
purchase nine (9) shares of the Company's common stock at an exercise price of
$.10 per share. Based upon a review of records, the February Private Placement
consisted of the sale of 46,770 Units with gross proceeds to the Company from
the sale equaling $561,250. Concurrent with the February Private Placement, the
Company completed the sale of 3,125,015 shares of its common stock to three
accredited investors for gross proceeds to the Company of $1,500,000. In the
aggregate, the Company raised gross proceeds of $2,061,250 through the February
Private Placement and concurrent private sale of common stock. The Company paid
finders and placement fees in the aggregate of approximately $293,000 in
connection with the February Private Placement and the concurrent private sale
of common stock. The common stock and warrants underlying the Units issued in
the November Private Placement and the common stock sold in the concurrent
private sale are restricted securities and were issued in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to Section 4(2) of the Securities Act. The
common stock and warrants underlying the Units issued in the November Private
Placement and the common stock sold in the concurrent private sale are subject
to Rule 144 under the Securities Act and therefore generally cannot be resold
for a period of twelve months from the date of purchase. No general
solicitations were made in connection with the February Private Placement or the
concurrent private sale of common stock.
WARP Preferred Stock
WARP was authorized to issue 6,000,000 shares of preferred stock, par value $.01
per share, of which 1,000,000 were designated as "Series A Convertible Preferred
Stock" and 2,000,000 were designated as "Series B Convertible Preferred Stock".
During 1999, WARP issued 1,000,000 shares of its Series A Convertible Preferred
Stock in exchange for $3,000,000 in cash, net of capital issuance costs of
$44,123. During 2000, WARP issued 2,000,000 shares of its Series B Convertible
Preferred Stock in exchange for $10,000,000 in cash, net of capital issuance
costs of $582,859.
The Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock ranked, with respect to dividend rights and rights on liquidation,
dissolution and winding up of the affairs of WARP whether voluntary or
involuntary, (i) equal with each other and any other class or series of capital
stock of WARP subsequently created specifically ranking by its terms on parity
with the Convertible Preferred Stock; (ii) senior and prior to all of WARP's
Common Stock, $.01 par value per share; (iii) prior to any class or series of
capital stock of WARP subsequently created not specifically ranking by its terms
senior to or on parity with the Convertible Preferred Stock; and (iv) junior to
any other class or series of capital stock of WARP subsequently created
specifically ranking by its terms senior to the Convertible Preferred Stock.
Each share of the Convertible Preferred Stock was convertible, at any time, into
four shares of WARP's common stock, subject to certain anti-dilution
adjustments, and automatically converted in the event WARP consummated a
qualified initial public offering of its common stock with certain defined
aggregate gross proceeds. The holders of Convertible Preferred Stock were
entitled to vote on all matters on an as converted basis.
On the Closing Date of the Share Exchange described in Note 1, the holders of
the WARP Series A and Series B Convertible Preferred Stock consented to the
conversion of their shares into shares of WARP's common stock, which in turn was
converted into 16,576,358 shares of the Company's common stock, after giving
effect to the Share Exchange and the September Stock Dividend.
F-14
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 4. Stockholders' Equity (continued)
Stock Options
In November 2002 the Company's Board of Directors approved and adopted the Warp
Technology Holdings, Inc. 2002 Stock Incentive plan (the "2002 Plan") as a means
through which the Company and its subsidiaries may attract, retain and
compensate employees and consultants. In fiscal 2003, the Board of Directors
issued 7,098,000 options to certain employees of the Company under the 2002
Plan. Of those options, 1,833,333 vested on the date of grant and the remainder
vest over a two-year period. Such options have a term of ten years and have an
exercise price of $.25 per share. For financial statement purposes the Company
recorded deferred compensation of $18,996,000, representing the difference
between the market price of the Company's stock and $.25 on the date of grant.
As of June 30, 2003, 2,785,833 of options were fully vested and immediately
exercisable. Deferred compensation is being amortized for financial reporting
purposes over the vesting period of the options. The amount recognized as
expense for the period ending June 30, 2003 was $7,678,333.
In fiscal 2003, the Company granted 420,000 options to employees at an exercise
price of $.25 per share. Under the terms of employment the Company has agreed to
compensate employees holding these options upon exercise, the difference between
one dollar and cash realized from the exercise of each option up to one dollar.
The total amount is capped at $400,000 and expires in December 2003. All 420,000
options were fully vested as of June 30, 2003.
In May 2003, the Company's Board of Director granted 300,000 options to certain
employees under the 2002 Plan. Of these options, 225,000 vested based on the
Company meeting certain sales target as of June 30, 2003. The Company recognized
$87,250 as expense for the period ending June 30, 2003.
In fiscal 2003 the Company's Board of Directors granted 1,500,000 options to
consultants at an exercise price of $.25 per share. As of June 30, 2003 all
1,500,000 of these options have been vested. Under the terms of employment the
Company has agreed to compensate certain consultants for 1,450,000 of these
options upon exercise the difference between one dollar and cash realized from
the exercise of each option up to one dollar. The total amount is capped at
$294,000 and expires in December 2003.
In connection with the acquisition of Spider, in March 2003 the Board of
Directors issued 81,652 options to certain employees of Spider under the 2002
Plan in exchange for their existing Spider options.
Detailed information concerning WARP Technology Holding, Inc activity for 2002
Plan is as follows:
Weighted- Average
Average Fair Value
Options Exercise Price Of Grants
--------------------------------------------
Options granted, exercise price
less than market price 9,399,652 $ 0.25 $0.225
Options cancelled (1,700,000) 0.25
--------------------------------------------
Options outstanding at June 30, 2003 7,699,652 $ 0.25
--------------------------------------------
The following table summarizes information about options outstanding at December
31, 2002:
-----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------- ----------- ------- -----------
-----------------------------------------------------------------------------------------------------------------------
Exercise Price Number Weighted average Weighted average Number Weighted average
outstanding as of remaining contractual exercise price exercisable as exercise price
6/30/2003 life (in years) of 6/30/2003
-----------------------------------------------------------------------------------------------------------------------
$0.25 7,699,652 9.5 $0.25 4,705,833 $0.25
-----------------------------------------------------------------------------------------------------------------------
As of June 30, 2003, there were 2,300,348 shares available for future grants
under the 2002 Plan.
The per share weighted average fair value of options granted were $2.60 for the
fiscal year ending June 30, 2003. The fair value for options have been estimated
on the date of grant using the Black-Scholes option pricing model thereafter,
with the following assumptions:
-------------------------------------------------------
Year ended June 30, 2003
-------------------------------------------------------
Expected life 3 years
-------------------------------------------------------
Risk-fee interest rate 1.53 -2.00
-------------------------------------------------------
Expected volatility 112%
-------------------------------------------------------
Dividend yield 0%
-------------------------------------------------------
See note 2 for the Company's accounting policy for stock based
compensation, as well as the effect on net loss and net loss per share had
compensation for the stock plans been determined consistent with the provisions
of SFAS No. 123, as amended.
F-15
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 4. Stockholders' Equity (continued)
Stock Options (continued)
On December 15, 1999, WARP adopted the 1999 WARP Solutions Stock Incentive Plan
(the "1999 Plan") to allow for the granting of various equity instruments to key
employees, consultants and directors. Under the 1999 Plan, 16,576,358 shares of
common stock were reserved for issuance. The Board of Directors is responsible
for determining the type of award, when and to whom awards are granted, the
number of shares and terms of the awards, and the exercise price.
No options were granted prior to 2001.
Detailed information concerning the activity under the WARP 1999 Plan is as
follows:
Weighted-
Weighted- Average
Average Fair Value
Options Exercise Price Of Grants
-------------------------------------
Options granted, exercise price less than market price 1,933,908 $ 0.002 $0.179
Options granted, exercise price exceeds market price 5,043,114 0.553 $0.000
Options cancelled (2,278,321) 0.510
---------------------------------------
Options outstanding at December 31, 2001 4,698,701 0.548
Options cancelled (2,446,831) 0.438
---------------------------------------
Options outstanding at June 30, 2002 2,251,870 $ 0.671
Options cancelled (1,358,018) 0.438
---------------------------------------
Options outstanding at June 30, 2003 893,852 $ 0.60
=======================================
During 2001, WARP issued an option to an employee to purchase 1,933,908 shares
of its common stock at an exercise price below the fair value of the underlying
stock. In connection therewith, WARP recorded a non-cash charge to operations of
$231,000. Such options were cancelled in December 2001 in connection with the
employee's termination of employment.
F-16
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 4. Stockholders' Equity (continued)
The following table summarizes information about stock options outstanding at
June 30, 2003:
Weighted-Average
Exercise Options Options Remaining
Prices Outstanding Exercisable Contractual Life
-----------------------------------------------------------------------------
$0.271 248,645 248,645 9.07 years
0.543 309,426 309,426 7.61 years
0.905 335,782 335,782 8.23 years
----------------------------------
893,853 893,853 8.25 years
==================================
All outstanding options were issued above market value. Options granted under
the Warp 1999 Plan are not convertible into Warp Technology Holding, Inc. common
shares.
Warrants
In connection with the February private placement the Company issued 420,930
warrants to purchase shares of its common stock at an exercise price of $.10 per
share. The warrants expire on the fifth anniversary of issuance.
During 2000, in conjunction with the sale of its Series B Convertible Preferred
Stock to certain investors, WARP issued warrants to purchase 1,063,650 shares of
its common stock at an exercise price of $0.905 per share. The warrants expire
on the fifth anniversary of issuance. In fiscal 2003 certain holders of these
warrants converted 733,410 of these warrants in a cashless exercise for 543,880
shares of the Company's common stock.
On August 1, 2000, WARP issued warrants to purchase 110,509 shares of its common
stock to an outside consultant for services rendered. The warrants have an
exercise price of $0.905 per share and expire on the fifth anniversary of
issuance. WARP valued the warrants at $67,316 and, in connection therewith,
recorded a non-cash charge, which is included in general and administrative
expenses in the accompanying consolidated statement of operations for the year
ended December 31, 2000.
F-17
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 5. SpiderSoftware, Inc. Acquisition
On August 13, 2002 the Company entered into a memorandum of understanding (the
"MOU") to enter into a business combination transaction with SpiderSoftware,
Inc. ("Spider"), a Canadian corporation. On January 10, 2003 the Company
completed the acquisition by issuing one million five hundred thousand shares of
preferred stock of 6043577 Canada, Inc., a wholly owned subsidiary of the
Company, stock options valued at $178,328 and assumed debt of $335,766
(including advances made by the Company) for all of the outstanding capital
shares of Spider. The acquisition was valued at $4,514,621 based upon an
independent valuation. The acquisition has been accounted for using the purchase
method of accounting, and accordingly the purchase price has been allocated to
the assets acquired and the liabilities assumed based on their fair values at
the date of acquisition. The primary reason for the acquisition of Spider was
access to its technology. The excess of the purchase price over the estimated
fair values of net assets acquired has been recorded as goodwill. For financial
statement purposes the preferred stock issued by the Company's subsidiary,
6043577 Canada, Inc. is presented in the stockholder's equity.
The purchase price for Spider was allocated as follows:
Working capital, including cash acquired $ 41,772
Property and equipment 49,555
Intangible assets 530,000
Goodwill 3,893,294
------------
Total purchase price $4,514,621
============
The results of operations for Spider from the period beginning January 10, 2003
through June 30, 2003 have been included in the consolidated statements of
operations.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the
consolidated operations of the Company as if the fiscal year 2003 acquisition of
Spider had occurred as of the beginning of fiscal year 2002, after giving effect
for amortizations expense related to Spider's pre-acquisition goodwill and
intangible assets.
The following unaudited pro forma financial information is provided for
informational purposes only and should not be construed to be indicative of the
Company`s consolidated results of operations had the acquisitions been
consummated on the dates assumed and does not project the Company`s results of
operations for any future period:
Twelve Months ended June 30,
2003 2002
----- ----
Revenues $ 372,184 $ 66,423
------------- -------------
Net loss $(12,966,049) $ (5,841,229)
------------- -------------
Basic and diluted net loss per share $ ($0.20) $ ($0.22)
Note 6. Note Payable
On June 12, 2003 a shareholder loaned the Company $120,000 on an unsecured
basis. Such amount bears interest at 1% per month and was due on June 30, 2003.
The Company repaid $75,000 of the loan in September 2003 and the due date for
the balance was extended to earlier of October 31, 2003 or the closing of a
sufficient funding, as defined in the related agreement.
F-18
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 7. Income Taxes
The Company has a net operating loss carryforward and other deferred assets of
approximately $17,700,000 at June 30, 2003, which may be used to reduce taxable
income in future years through the year 2021, resulting in a deferred tax asset
of approximately $5,800,000. Due to uncertainty surrounding the realization of
the favorable tax attributes in future tax returns, the Company has placed a
full valuation allowance against its net deferred tax asset. At such time as it
is determined that it is more likely than not that the deferred tax asset is
realizable, the valuation allowance will be reduced. Furthermore, the net
operating loss carryforward may be subject to further limitation pursuant to
Section 382 of the Internal Revenue Code.
Note 8. Commitments and Contingencies
Leases
During the year ended December 31, 2001, WARP terminated a lease for a portion
of its office facilities. In connection therewith, leasehold improvements of
approximately $226,000 were written off and WARP forfeited $325,000 of security
deposits. The total write-off in connection with this lease termination of
approximately $551,000 was charged to general and administrative expenses in
2001 in the accompanying consolidated statement of operations.
In April 2002, WARP entered into a lease termination agreement for the remaining
portion of its office facilities. Pursuant to this agreement, WARP agreed to
forfeit its security deposit together with accumulated interest approximately
$281,000. This forfeiture, together with the related leasehold improvements
write-off, was charged to general and administrative expenses in 2002.
Rent expense amounted to approximately $125,000, $43,100, and $449,000 for the
year ended June 30, 2003, six months ended June 30, 2002 and the year ended
December 31, 2001, respectively.
Legal Proceedings
The Company is subject to legal proceedings and claims in the ordinary course of
business from time to time. Management of the Company believes that the outcome
of such claims will not have a material adverse affect on the financial
statements.
Note 9. Subsequent Events
On July 3, 2003, the Board of Directors of the Company unanimously approved the
adoption of a proposed Amendment to the Articles of Incorporation of the Company
to: (a) increase the number of authorized shares of common stock, par value
$.00001 per share, of the Company from 100,000,000 shares to 500,000,000 shares,
and (b) authorize the creation of 50,000,000 shares of par value $.00001 per
share blank check preferred stock, subject to approval by a majority of the
Company's stockholders. On July 7, 2003, the holders of a majority of the
outstanding shares of our common stock approved the Amendment to the Articles of
Incorporation in writing. On August 12, 2003, the Company filed its Definitive
Schedule 14C Information Statement with the SEC describing this corporate action
and on August 18, 2003 this Information Statement was sent by first class mail
to the Company's stockholders of record who were not solicited for their consent
to this corporate action. Pursuant to Rule 14c-2 under the Securities Exchange
Act of 1934, as amended, the Amendment to the Articles of Incorporation
authorized by the Board of Directors and the stockholders could not become
effective until at least twenty days after the mailing of the Information
Statement. Such twenty-day period expired on September 7, 2003 and on September
12, 2003 the Company filed the Certificate of Amendment to Articles of
Incorporation with the Secretary of State of the State of Nevada and the
Amendment to the Articles of Incorporation of the Company became effective.
F-19
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 9. Subsequent Events (continued)
During the first half of fiscal year 2004, the Company plans to implement a
voluntary cash salary reduction plan for its employees in order to reduce the
monthly cash flow requirements of the Company. The terms of the plan under
consideration would allow certain employees to receive a portion of their
salaries in shares of restricted common stock of the Company. Participation in
the plan will be voluntary. The specific requirements for such participation and
the terms under which the common stock will be issued in lieu of cash salary
have yet to be decided or approved by the Board of Directors of the Company. As
a result, the Company does not at this time know what the level of participation
will be in the plan or the terms under which any common stock would be issued
under the plan.
On August 13, 2003, Mr. Karl Douglas resigned from his positions as Co-Chairman
of the Board of Directors, Chief Executive Officer, and President of the
Company. Mr. Douglas believed it to be in the best interest of the Company that
he resign from the positions he held at the Company in order to allow the
Company to recruit a candidate with more extensive experience. Mr. Douglas did
not resign his positions as a member of the Board or Audit Committee of the
Board. At a meeting of the Board on August 13, 2003, the Board accepted Mr.
Douglas' resignation and appointed Mr. Malcolm Coster, a member of the Board,
Interim-Chief Executive Officer, President and Chairman of the Board. In
connection with Mr. Coster agreeing to take on these three positions, Mr. John
Gnip agreed to vacate his position as a Co-Chairman of the Board but continue as
a member of the Board.
In August 2003, the Company entered into a Consulting Agreement with Dr. David
Milch (the "Milch Agreement") pursuant to which Dr. Milch shall provide
management consulting services to the Company on a month-to-month basis and act
an advisor to the Board and to the Chief Executive Officer of the Company. The
terms of the Milch Agreement provide that the Company shall pay Dr. Milch a
monthly fee of twenty thousand dollars payable as ten thousand dollars in cash
and ten thousand dollars in shares of the common stock of the Company. In
addition as of the effective date of the Milch Agreement, Dr. Milch was issued
one million shares of the common stock of the Company. Such one million shares
of common stock shall vest over a four month period beginning in September 2003
with 10% of the shares vesting in the first month, 20% of the shares vesting in
the second month, 30% of the shares vesting in the third month and the remaining
40% of the shares vesting in the fourth month. The vesting of the shares in any
given month is conditioned upon the Board's determination that the Company has
successfully executed on its business plan for that month. Dr. Milch shall work
out of the Company's primary office space and shall be focusing full time on the
business of the Company. The Milch Agreement can be terminated by either party
upon 30 days written notice.
In September 2003, the Company completed an offering of 975,940 shares of Series
A 8% Cumulative Convertible Preferred Stock (the "Shares") with gross proceeds
to the Company from the sale equaling $975,940 (the "September Private
Placement"). The Shares had a purchase price of $1.00 per share. The Shares have
a cumulative dividend of 8% per year, which is payable in cash or stock at the
time of conversion. During the first twelve months from the date of issuance
each Share is convertible into four shares of the common stock of the Company.
Thereafter, the Shares are convertible to common stock based upon the average
market price of the Company's common stock over the five-day period immediately
preceding the conversion date, subject to a minimum conversion price of $.75 per
share of common stock. The purchase price of the September Private Placement
shares was paid in cash. In June, 2003, the Company received $490,000 in
anticipation of the September Private Placement and has recorded it as a prepaid
stock subscription in the accompanying balance sheet as of June 30, 2003.
F-20