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, 2004
[ ] 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.)
151 Railroad Avenue, Greenwich, Connecticut 06830
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(Address of principal executive offices) (Zip Code)
(203) 422-2950
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(Registrants telephone number, including area code)
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(Former Name, if Changed Since Last Report)
708 Third Avenue, 6TH FLOOR, NEW YORK, N.Y. 10017
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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, 2004 were
$882,121.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 17, 2004 was $5,826,219 based on the closing bid
price of $0.06 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, 2004 was 97,111,483.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS.
Forward-Looking Information
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
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.
On May 24, 2002, the Company and WARP Solutions, Inc. ("WARP" or "WARP
Solutions") 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, 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.
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 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 (the "Spider Exchange Agreement") dated as of December 13,
2002. Pursuant to the Spider 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 main product line is based on
the Spider technology.
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 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 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.
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
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.
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 to market its
application acceleration products; (iii) engage in targeted telephone and email
campaigns to solicit effective reseller and strategic relationships; and (iv)
leverage established customer relationships to up-sell its other suite of
products.
Sales
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, SpiderSoftware,
DataReactor, and other future products.
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.
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, 2004, the Company sold units
directly to end users as well as through channel resellers.
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 three critical success factors:
Promote Significant Channel Growth
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 to date. 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.
Develop Strategic Alliances with Synergistic Partners
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.
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 its products 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.
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.
Research And Development
During the fiscal year 2004, the Company spent approximately $812,000 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 12 full time employees including the following
four executive officers: Rodney A. Bienvenu, Jr., its Chairman and Chief
Executive Officer; Gus Bottazzi, its President, Principal Financial Officer, and
Director; Ernest C. Mysogland, its Executive Vice President, Chief Legal
Officer, and Secretary; and Michael D. Liss, its Chief Operating Officer. The
Company has written employment contracts with these four 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 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, 2004 had an accumulated deficit of approximately $39,697,000
and at June 30, 2004 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 entered into a Series B-2 Preferred Stock
Purchase Agreement (the "Purchase Agreement"), as of August 4, 2004. The
Purchase Agreement related to the sale of 1,600 shares (the "Series B-2
Preferred Shares") of the Company's authorized but unissued shares of Preferred
Stock, $0.00001 par value per share, designated Series B-2 Preferred Stock (the
"Series B-2 Preferred Stock") at a purchase price of $1,000 per share, and
warrants, exercisable over five (5) years, to purchase an aggregate of 1,600
shares of Series B-2 Preferred Stock at an exercise price of $1,000 per share
(the "Warrants" and together with the shares of Series B-2 Preferred Stock,
collectively, the "Securities") to the Investors. The aggregate purchase price
for the Securities under the Purchase Agreement is $1,600,000, of which $500,000
was received by the Company in an initial closing (which occurred on August
4,2004)and the remaining $1,100,000 of the aggregate purchase price to be
received in a final closing no later that October 31, 2004.
In addition to the funds raised in connection with the sale of Series B-2
Preferred Stock, the Company anticipates that during its 2005 fiscal year it
will need to raise an additional $1,500,000 or more to support its working
capital needs and to continue to execute the requirements of its business plan.
Furthermore, the Company intends to pursue opportunities to acquire other
businesses, and may need to raise capital in order to pursue such acquisitions.
There can be no assurance that the Company will be successful in its
efforts to raise sufficient capital. Therefore, there can be no assurance that
the Company will have sufficient capital to support its working capital needs
through its 2005 fiscal year.
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 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
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:
- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- 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 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.
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 four employment agreements between the Company and its
executive officers (copies of which are included as exhibits hereto).
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 cash dividends in the foreseeable
future. The payment of cash dividends, if any, will be contingent upon our
revenues and earnings, if any, capital requirements, and general financial
condition. The payment of any cash 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 cash dividends in the foreseeable future.
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, 2004, the closing price for our
common stock, as quoted on the Over the Counter Bulletin Board, was $0.06 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, 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 151
Railroad, Avenue, Greenwich, Connecticut 06830. The Company has a month-to-month
lease on its current office space at a cost of $2,850 per month. The property
has a general purpose use for sales and administration, and will be sufficient
for our needs for the foreseeable future.
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 is currently in the process of moving out of its New York
office space at 708 3rd Avenue 6th floor, New York, NY 10017. The lease expires
in January 2005, The monthly expense is $6,900.
ITEM 3. LEGAL PROCEEDINGS.
Two former consultants to the Company who provided services to the
Company's U.K. subsidiary, Warp Solutions, Ltd., have made claims against the
Company under U.K. law, contending that they were employees under such laws,
were unfairly dismissed, and, therefore, entitled to certain benefits and
rights. The total claim is estimated to be approximately $180,000. The Company
has received a preliminary judgment from a U.K. Employment Tribunal determining
that two former consultants were employees within the (U.K.) Employment Rights
Act. The Company has appealed from this determination and intends to contest it
vigorously. The Company has accrued $50,000 relating to this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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.
Bid Price
---------
Fiscal Year Quarter Ended 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
December 31, 2003 .17 .29
March 31, 2004 .17 .30
June 30, 2004 $ .06 $ .17
2005 September 30, 2004 .06 .06
December 31, 2004
(As of [October 5, 2004]) .056 .06
As of October 5, 2004, the National Quotation Bureau, Inc. reported that
the closing bid and ask prices on the Company's common stock were $0.056 and
$0.06 respectively.
Holders
As of June 30, 2004, the Company's financial statements show 97,111,483
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. However, as of September 17, 2004, a nominal number
of shares of WARP Solutions, Inc. common stock had not been presented to the
Company for conversion.
At September 17, 2004, 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 as provided under the rights and preferences of the Company's Series B
10% Cumulative Convertible Preferred Stock (the "Series B Stock") and the rights
and preferences of the Company's Series B-2 Preferred Stock, in which restrict,
in each case, the payment of any dividend with respect to the common stock
without paying dividends on the Series B Stock and the Series B-2 Preferred
Stock, and which provide for a preference in the payment of the dividends on the
Series B Stock and the Series B-2 Preferred Stock requiring such dividends to be
paid before any dividend or distribution is made to the common stockholders.
Dividends on the preferred stock accrue at the rate of 10% of the stated value
of the preferred stock per annum, and are payable in cash or in shares of common
stock at the time of conversion of the preferred stock. In addition, dividends
may not be paid so as to render us insolvent.
Our 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 after June 30, 2004. 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.
The Company entered into a Series B-2 Preferred Stock Purchase Agreement
(the "Purchase Agreement"), as of August 4, 2004. The Purchase Agreement related
to the sale of 1,600 shares(the "Series B-2 Preferred Shares") of the Company's
authorized but unissued shares of Preferred Stock, $0.00001 par value per share,
designated Series B-2 Preferred Stock (the "Series B-2 Preferred Stock") at a
purchase price of $1,000 per share, and warrants, exercisable over five (5)
years, to purchase an aggregate of 1,600 shares of Series B-2 Preferred Stock at
an exercise price of $1,000 per share (the "Warrants" and together with the
shares of Series B-2 Preferred Stock, collectively, the "Securities") to the
Investors. The aggregate purchase price for the Securities is $1,600,000, of
Which $500,000 was received by Warp in an initial closing (which occurred on
August 4, 2004) in which 500 shares of Series B-2 Preferred Stock were issued
together with Warrants to acquire an additional 500 shares of Series B-2
Preferred Stock. Under the terms of the Purchase Agreement, the remaining
$1,100,000 purchase price is to be paid at a closing no later than October 31,
2004 in which 1,100 shares of Series B-2 Preferred Stock will be issued together
with Warrants to acquire an additional 1,100 shares of Series B-2 Preferred
Stock. At any time a holder of shares of Series B-2 Preferred Stock may convert
such shares into shares of Common Stock. In addition, if, upon the expiration of
five (5) years from the date of issuance, there remain any shares of Series B-2
Stock which have not been converted, such shares shall automatically convert
into shares of Common Stock. Each share of Series B-2 Preferred Stock is
convertible into 20,000 shares of common stock.
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 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
Twelve months ended June 30, 2004 vs. 2003
During the twelve months ending June 30, 2004 the Company recognized
approximately $882,000 of revenues compared to $344,000 for the twelve months
ended June 30, 2003. The increase in revenue was due primarily to the Company
focusing more of its efforts in sales and marketing. In addition, licensing
revenue in 2003 was recognized over the life of the contract because vendor
specific objective evidence was not determinable. During 2004, licensing
revenue was recognized upon delivery because pursuasive evidence of
arrangements and fees were fixed and determinable and the receivables was
deemed collectible by management.
Cost of sales for twelve months ended June 30, 2004 was approximately
$425,000 of which $328,000 was directly related to the write-off of inventory
relating to the change in its business model from a hardware to a software
company. For the period ended June 30, 2003 the cost of sales was approximately
$238,000 which included a write-off of approximately $165,000 of obsolete and
damaged WARP 2063 boxes.
Product development was approximately $812,000 for the twelve months ended
June 30, 2004 as compared to approximately $672,000 for the twelve months ended
June 30, 2003. The increase in product development was due to the Company
increased efforts in improving its core product.
Sales, marketing and business development was approximately $2,310,000 for
the twelve months ended June 30, 2004 as compared to approximately $1,517,000
for the twelve months ended June 30, 2003. The increase represents the Company's
focus on selling its products by increasing its sales force and marketing
materials.
General and administrative expense was approximately $2,461,000 for the
twelve months ended June 30, 2004 as compared to approximately $2,499,000 for
the twelve months ended June 30, 2003. The decline was due to the Company cost
cutting efforts and stringent cost control which was offset by increased legal
fees.
Non-cash compensation for the period ending June 30, 2004 was
approximately $6,007,000 as compared to $8,498,000. The decline represents less
options vesting for 2004, offset by shares and options given to employees and
consultants for services rendered and warrants given to stockholders for
penalties incurred.
Net Operating Loss Carryforwards
At June 30, 2004, the Company has net operating loss carryforwards of
approximately $21,850,000 which may be used to reduce taxable income in future
years through the year 2022. 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, 2004, the Company had
approximately $0.1 million in cash. 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 September 28,
2004, 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.
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 2005. Moreover, any equity
financing could result in dilution to the existing shareholders and any debt
financing would result in higher interest expenses.
In addition to the $500,000 raised in August and the $1.1 million due at
the final closing of the Series b-2 in connection with the sale of Series B-2
Preferred Stock, the Company anticipates that during its 2005 fiscal year it
will need to raise $1,500,000 or more to support its working capital needs and
to continue to execute the requirements of its business plan. Furthermore, the
Company intends to pursue opportunities to acquire other businesses, and may
need to raise capital in order to pursue such acquisitions.
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 2005.
However, there can be no assurance that the Company will have sufficient capital
to support its working capital needs through its 2005 fiscal year.
Subsequent Events
The Company entered into a Series B-2 Preferred Stock Purchase Agreement
(the "Purchase Agreement"), as of August 4, 2004. The Purchase Agreement related
to the sale of 1,600 shares (the "Series B-2 Preferred Shares") of the Company's
authorized but unissued shares of Preferred Stock, $0.00001 par value per share,
designated Series B-2 Preferred Stock (the "Series B-2 Preferred Stock") at a
purchase price of $1,000 per share, and warrants, exercisable over five (5)
years, to purchase an aggregate of 1,600 shares of Series B-2 Preferred Stock at
an exercise price of $1,000 per share (the "Warrants" and together with the
shares of Series B-2 Preferred Stock, collectively, the "Securities") to the
Investors. The aggregate purchase price for the Securities is $1,600,000, of
which $500,000 was received by Warp in an initial closing (which occurred on
August 4, 2004) in which 500 shares of Series B-2 Preferred Stock were issued
together with Warrants to acquire an additional 500 shares of Series B-2
Preferred Stock. Under the terms of the Purchase Agreement, the remaining
$1,100,000 purchase price is to be paid at a final closing no later than October
31, 2004 in which 1,100 shares of Series B-2 Preferred Stock will be issued
together with Warrants to acquire an additional 1,100 shares of Series B-2
Preferred Stock. At any time a holder of shares of Series B-2 Preferred Stock
may convert such shares into shares of Common Stock. In addition, if, upon the
expiration of five (5) years from the date of issuance, there remain any shares
of Series B-2 Stock which have not been converted, such shares shall
automatically convert into shares of Common Stock. Each share of Series B-2
Preferred Stock is convertible into 20,000 shares of common stock.
In connection with the Series B-2 financing ISIS Capital Management, LLC
("ISIS") and Warp entered into a Consulting Agreement, dated as of August 4,
2004, pursuant to which Warp will pay ISIS for services requested of ISIS from
time to time, including, without limitation, research services, at ISIS's
regular rates or at the cost incurred by ISIS to provide such services, and will
reimburse ISIS for any costs incurred by ISIS on behalf of Warp. ISIS is a
limited liability company whose managing members are Rodney A. Bienvenu, Jr.
("Bienvenu"), the Company's Chief Executive Officer and Chairman of the
Company's Board of Directors, and Ernest C. Mysogland ("Mysogland"), the
Executive Vice President and Chief Legal Officer of the Company. ISIS is the
managing member of ISIS Acquisition Partners II LLC ("IAP II"). IAP II is a
stockholder of the Company having purchased shares of the Company's Series B-2
Preferred Stock.
Employment Contracts
Subsequent to June 30, 2004 the Company entered into employment contracts
with following five executive officers: Rodney A. Bienvenu, Jr., its Chairman
and Chief Executive Officer; Gus Bottazzi, its President, Principal Financial
Officer, and Director; Ernest C. Mysogland, its Executive Vice President, Chief
Legal Officer, and Secretary; Michael D. Liss, its Chief Operating Officer.
Annual compensation under the employment agreements is $674,000 for the year
ended June 30, 2005; $368,000 for the year ended June 30, 2006. In connection
with the B-2 Financing, and the employment relationships entered into by the
Company and certain members of management, the Company granted options to
acquire shares of its Common Stock. The Company also amended its 2002 Employee
Stock Plan to increase the total number of shares authorized for issuance under
the plan to a total of 77,661,098 shares of Common Stock, and to reserve such
shares for issuance under the plan. The options granted by the Company were
granted to Bienvenu, Mysogland, Bottazzi and Liss. In addition, ISIS was granted
certain non-qualified options to acquire shares of Common Stock. The total
number of shares subject to these options is 66,971,236. All such options have
an exercise price of $0.0675 per share. The exercise of such options is subject
to the achievement of certain vesting and milestone terms (subject in each case
to the terms of the optionee's stock option agreement). Any of the
above-described options not previously exercisable shall be vested and
exercisable on the fifth anniversary of the initial closing of the B-2
Financing.
Management and Board Changes.
As part of the B-2 financing, Warp hired certain persons as officers. As
of the initial closing, Ron Bienvenu has become Chief Executive Officer of Warp,
as well as becoming a director of the Company and Chairman of the Board. In
addition, Ernest C. Mysogland became Executive Vice President and Chief Legal
Officer of Warp.
Further, as of such date, Gus Bottazzi resigned as Chief Executive
Officer, but continues to serve as President of the Company and a director. In
addition to his role as President, Bottazzi will serve the Company as its
Principal Financial Officer. Michael D. Liss, continues to serve the Company as
Chief Operating Officer.
In connection with the B-2 financing, as of August 4, 2004, Malcolm D.
Coster, resigned as Chairman of the Board, and as a director. Coster also
resigned as the Company's Principal Financial Officer. Coster has agreed to
consult with the Company on certain matters through October 31, 2004.
In connection with the Financing, as of August 4, 2004, Greg Parker
("Parker") resigned as a director of the Company.
Neither the resignation of Mr. Coster nor the resignation of Mr. Parker as
directors was due to any disagreement with the Company on any matter relating to
the Company's operations, policies or practices.
Critical Accounting Policies
Revenue Recognition
Pursuant to AICPA Statement of Position ("SOP") 97-2, Software Revenue
Recognition, the Company recognizes revenues from the sale of the WARP 2063e
product 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. Accordingly, revenue from license agreements is being recognized ratably
over the term of the PCS agreement. In January 2004 the Company has discontinued
marketing the 2063e product. Licensing revenues from Spider 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
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.
Goodwill and other Intangibles
Our long-lived assets include goodwill and other intangibles assets.
Statement of Financial Accounting Standards No.142 "Goodwill and Other
Intangible Assets" ("SFAS 142") required that goodwill be tested for impairment
on an annual basis and between annual testing in certain circumstances.
Application of the goodwill impairment test requires judgment including
estimating future cash flow, determining discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the fair
value. Statement of Financial Accounting Standards No. 144 "Accounting for the
impairment or Disposal of Long-Lived Assets" ("SFAS 144"), requires that we
record an impairment charge on finite-lived intangibles or long-lived assets to
be held and used when we determine that the carrying value of intangible assets
and long-lived assets may not be recoverable.
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.
We have not created, and are not party to, any special-purpose or off balance
sheet entities for the purpose of raising capital, incurring debt or operating
our business. We do not have any arrangements or relationships with entities
that are not consolidated into our financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources.
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.
Effective December 16, 2003 the Company discharged Ernst & Young LLP as
its independent accountants. The reports of Ernst & Young LLP on the Company's
consolidated financial statements for the past two fiscal years did not contain
an adverse or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. The Company's Audit Committee
participated in and approved the decision to change independent accountants.
In connection with its audits for the two most recent fiscal years and
through December 16, 2003, the Company had no disagreements with Ernst & Young
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
The Company requested that Ernst & Young LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statement.
A letter from Ernst & Young LLP dated December 18, 2003 was provided, and a Form
8K dated December 19, 2003 containing that letter was filed with the Securities
and Exchange Commission.
The Company has engaged Mahoney Cohen & Company, CPA, P.C. as its new
independent accountants. During the two most recent fiscal years and through
December 16, 2003 the Company has not consulted with Mahoney Cohen & Company,
CPA, P.C. regarding (i) the application of accounting principles to a specified
transaction either completed or proposed, or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, and no
written report or oral advice was provided to the Company concluding there was
an important factor to be considered by the Company in reaching a decision as to
an accounting, auditing, or financial reporting issue; (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instruction to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item 304(a)
(1) (iv) of Regulation S-K.
ITEM 8A. 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, 2004, 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 8B. OTHER INFORMATION.
None.
PART III
ITEMS 9, 10, 11, 12, and 14.
The information called for in Items 9, 10, 11, 12 and 14 of Part III of this
Form 10-KSB will be filed within 120 days after the end of the fiscal year
covered by this Form.
ITEM 13. 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.
Incorporated 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.
Incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K
filed by the Company on January 25, 2003.
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. Incorporated by reference to Exhibit 3.4 of
the Annual Report on Form 10-KSB filed by the Company on October 14, 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.
Incorporated by reference to Exhibit 3.5 of the Annual Report on Form 10-KSB
filed by the Company on October 14, 2003.
3.6* Form of Certificate Of Designations, Preferences And Rights Of Series A 8%
Cumulative Convertible Preferred Stock Of Warp Technology Holdings, Inc. as
filed with the Secretary of State of the State of Nevada on October 1, 2003.
Incorporated by reference to Exhibit 3.6 to the Quarterly Report on Form
10-QSB filed by the Company on November 14, 2003.
3.7* Form of Certificate Of Designations, Preferences And Rights Of Series B 10%
Cumulative Convertible Preferred Stock Of Warp Technology Holdings, Inc. as
filed with the Secretary of State of the State of Nevada on October 1, 2003.
Incorporated by reference to Exhibit 3.7 to the Quarterly Report on Form
10-QSB filed by the Company on November 14, 2003.
3.8* Certificate of Designations, Preferences, and Rights of Series B-2 Preferred
Stock, as filed with the Secretary of State of the State of Nevada on August
4, 2004. Incorporated by reference to Exhibit 10.02 to the Current Report on
Form 8-K filed by the Company on August 20, 2004.
4.01* Form of Warrant to Purchase Shares of Series B-2 Preferred Stock.
Incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K
filed by the Company on August 20, 2004.
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. Incorporated by reference to Exhibit
3.4 of the Annual Report on Form 10-KSB filed by the Company on October 14,
2003.
10.13* Form of Consulting Agreement between WARP Technology Holdings, Inc. and Mr.
Steven Antebi which was executed by the parties thereto on December 23, 2003.
Incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form
10-QSB filed by the Company on February 12, 2004.
10.14* Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Malcolm Coster which was executed by the parties thereto on November 17, 2003.
Incorporated by reference to Exhibit 10.14 to the Quarterly Report on Form
10-QSB filed by the Company on February 12, 2004.
10.15* Form of Consulting Agreement between WARP Technology Holdings, Inc. and Mr.
Noah Clark which was executed by the parties thereto on March 29, 2004.
Incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form
10-QSB filed by the Company on May 17, 2004.
10.16* Series B-2 Preferred Stock Purchase Agreement entered into as of August 4,
2004 between and among the Company and the Persons listed on Schedule 1.01
thereto. Incorporated by reference to Exhibit 10.01 to the Current Report on
Form 8-K filed by the Company on August 20, 2004.
10.17* Stockholders Agreement, dated as of August 4, 2004, between and among Warp,
the holders of the Series B-2 Preferred Stock and such other Stockholders as
named therein. Incorporated by reference to Exhibit 10.03 to the Current
Report on Form 8-K filed by the Company on August 20, 2004.
10.18# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Ron Bienvenu which was executed by the parties thereto on August 4, 2004.
10.19# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Gus Bottazzi which was
executed by the parties thereto on August 4, 2004.
10.20# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Ernest Mysogland which was executed by the parties thereto on August 4, 2004.
10.21# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Michael David Liss which was executed by the parties thereto on August 4,
2004.
10.22# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Ron Bienvenu which was executed by the parties thereto on August
4, 2004.
10.23# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Gus Bottazzi which was executed by the parties thereto on August
4, 2004.
10.24# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Ernest Mysogland which was executed by the parties thereto on
August 4, 2004.
10.25# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Michael David Liss which was executed by the parties thereto on
August 4, 2004.
10.26# Form of Consulting Agreement between WARP Technology Holdings, Inc. and ISIS
Capital Management, LLC which was executed by the parties thereto on August
4, 2004.
10.27# Form of Stock Option Agreement between WARP Technology Holdings, Inc. and
ISIS Capital Management, LLC which was executed by the parties thereto on
August 4, 2004.
21.1# Subsidiaries of the Company.
31.1# Certification of Periodic Report pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
31.2# Certification of Periodic Report pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
32.1# Certification pursuant to 18 U.S.C., Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002.
* Incorporated herein by reference.
# Filed herewith.
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 12, 2004
WARP TECHNOLOGY HOLDINGS INC
By: /s/ Ron Bienvenu
----------------------------------------
Ron Bienvenu, CEO, Chairman
as Registrant's duly authorized officer
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/ Ron Bienvenu /s/ Gus Bottazzi
---------------------------------- ------------------------------------
Ron Bienvenu Gus Bottazzi
Chairman, Chief Executive President, Director
Officer and Director October 12, 2004
October 12, 2004
EXHIBIT INDEX
The following documents are filed herewith:
Exhibit
Number Description Of Document
------- -----------------------
10.18# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Ron Bienvenu which was executed by the parties thereto on August 4, 2004.
10.19# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Gus Bottazzi which was executed by the parties thereto on August 4, 2004.
10.20# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Ernest Mysogland which was executed by the parties thereto on August 4, 2004.
10.21# Form of Employment Agreement between WARP Technology Holdings, Inc. and Mr.
Michael David Liss which was executed by the parties thereto on August 4,
2004.
10.22# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Ron Bienvenu which was executed by the parties thereto on August
4, 2004.
10.23# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Gus Bottazzi which was executed by the parties thereto on August
4, 2004.
10.24# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Ernest Mysogland which was executed by the parties thereto on
August 4, 2004.
10.25# Form of Incentive Stock Option Agreement between WARP Technology Holdings,
Inc. and Mr. Michael David Liss which was executed by the parties thereto on
August 4, 2004.
10.26# Form of Consulting Agreement between WARP Technology Holdings, Inc. and ISIS
Capital Management, LLC which was executed by the parties thereto on August
4, 2004.
10.27# Form of Stock Option Agreement between WARP Technology Holdings, Inc. and
ISIS Capital Management, LLC which was executed by the parties thereto on
August 4, 2004.
21.1# Subsidiaries of the Company.
31.1# Certification of Periodic Report pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
31.2# Certification of Periodic Report pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
32.1# Certification pursuant to 18 U.S.C., Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.... F-2
Report of Independent Registered Public Accounting Firm.... F-2.1
Consolidated Balance Sheet................................ 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 Registered Public Accounting Firm
To the Board of Directors and Shareholders of
WARP Technology Holdings, Inc.
We have audited the accompanying consolidated balance sheet of WARP Technology
Holdings, Inc. and subsidiaries (the "Company") as of June 30, 2004, and the
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit provides 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. and subsidiaries as of June 30, 2004, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that WARP
Technology Holding, Inc. and subsidiaries 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, 2004. 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.
Mahoney Cohen & Company, CPA, P.C.
September 28, 2004
New York, New York
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders of
WARP Technology Holdings, Inc.
We have audited the accompanying, consolidated statements of operations,
stockholders' equity, and cash flows of Warp Technology Holding, Inc. ("the
Company") for the year ended June 30, 2003. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations, cash flows and
stockholders' equity of the Company for the year ended June 30, 2003 in
conformity with U.S. generally accepted accounting principles.
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.
Ernst & Young LLP
October 9, 2003
New York, New York
F-2.1
WARP Technology Holdings, Inc.
Consolidated Balance Sheets
June 30,
2004
Assets
Current assets:
Cash $ 115,491
Accounts receivable 117,847
Prepaid expenses and other 15,850
Deferred product cost 14,028
------------
Total current assets 263,216
Property and equipment, net 36,312
Intangible assets, net of accumulated
amortization of 277,083 252,917
Goodwill 3,893,294
------------
Total assets $ 4,445,739
============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 672,105
Accrued expenses 336,496
Deferred revenue 155,826
Deferred compensation 444,000
------------
Total current liabilities 1,608,427
Commitments and contingencies -
Stockholders' equity:
Preferred stock (Canadian subsidiary) 4
Cumulative convertible preferred stock,
Series A; $.00001 par value; 0 shares
issued and outstanding --
Cumulative convertible preferred stock,
Series B; $.00001 par value; 2,915 shares
issued and outstanding
(Liquidation value $2,915,100) 2,915,100
Shares to be issued, cumulative, convertible
Preferred stock of Series B (393 shares) 392,939
Common stock, $.00001 par value;
500,000,000 shares authorized,
97,111,483 shares issued and
outstanding 971
Additional paid-in capital 40,121,816
Deferred compensation (891,833)
Accumulated other comprehensive loss (4,990)
Accumulated deficit (39,696,695)
------------
Total stockholders' equity 2,837,312
------------
Total liabilities and stockholders' equity $ 4,445,739
============
See accompanying notes to consolidated financial statements.
F-3
WARP Technology Holdings, Inc.
Consolidated Statements of Operations
Year ended Year ended
June 30 June 30
2004 2003
------------ ------------
Revenue $ 882,121 $ 344,153
Product cost 425,334 237,594
Product development 811,725 672,298
Sales, marketing and business development 2,310,055 1,517,443
Non-cash compensation, consulting and other fees 6,007,255 8,497,708
General and administrative 2,461,130 2,498,975
------------ ------------
Loss before interest (11,133,378) (13,079,865)
Interest income 63,073 26,750
------------ ------------
Net loss $(11,070,305) $(13,053,115)
============ ============
Computation of loss Applicable to Common Shareholders
Net loss before beneficial conversion and preferred
dividends $(11,070,305) $(13,053,115)
Beneficial conversion and preferred dividends (1,623,046) --
------------ ------------
Loss attributable to common stockholders $(12,693,351) $(13,053,115)
============ ============
Basic and diluted net loss per share attributable to
common stockholders $ (0.17) $ (0.21)
============ ============
Weighted-average number common shares--basic and diluted 76,551,082 63,445,109
============ ============
See accompanying notes to consolidated financial statements.
F-4
WARP Technology Holdings, Inc.
Consolidated Statements of Stockholders' Equity
CANADIAN CONVERTIBLE CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
PREFERRED SERIES A SERIES B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- -------- ---------- -------- -----------
BALANCE--JUNE 30, 2002
Issuance of common stock
Cost in connection with issuance
Issuance of common stock
Cost in connection with issuance
Issuance of common stock and warrants
Cost in connection with issuance
Non-cash compensation relating to stock options
Amortization of stock options
Forfeited stock options
Equity issued for Spider acquisition 1,500,000 15
Non-cash compensation relating to stock options
Warrants excercised
Foreign Currency translation
Net loss for the year ended June 30, 2003
---------- ---- -------- --------- ------ ----------
BALANCE--JUNE 30, 2003 1,500,000 15 -
---------- ---- -------- --------- ------ ----------
Issuance of common stock to a Consultant
Issuance of Series A shares and Warrants 975,940 975,940
Cost in connection with Series A issuance
Conversion of Series A to Series B stock (975,940) (975,940) 976 975,940
Issuance of Series B shares and Warrants 3,706 3,705,780
Cost in connection with issuance
Warrant exchange program
Issuance of common stock
Cost in connection with issuance
Amortization of stock options
Forfeited stock options
Issuance of common stock to a Consultant
Issuance of common stock
Warrants issued to investors
Penalties on Series B stock 73 73,115
Dividends on Series B stock 60 60,000
Conversion of Series B stock (1,900) (1,899,735)
Shares issued to employees
Beneficial Conversion
Foreign Currency
Canadian Conversion of Preferred Stock (1,073,446) (11)
Net Loss for the year ended June 30, 2004
---------- ---- -------- --------- ------ ----------
BALANCE-JUNE 30, 2004 426,554 4 - - 2,915 2,915,100
========== ==== ======== ========= ====== ==========
SHARES TO
BE ISSUED COMMON STOCK PAID IN DEFERRED
AMOUNT SHARES AMOUNT CAPITAL COMP
--------- ---------- ------ ----------- ------------
BALANCE--JUNE 30, 2002 57,145,360 572 14,868,554
Issuance of common stock 3,600,000 36 899,964
Cost in connection with issuance (177,899)
Issuance of common stock 2,100,000 21 499,979
Cost in connection with issuance (93,769)
Issuance of common stock and warrants 3,873,346 39 2,061,211
Cost in connection with issuance (292,608)
Non-cash compensation relating to stock options 18,996,000 (18,996,000)
Amortization of stock options 7,678,333
Forfeited stock options (3,406,667) 3,406,667
Equity issued for Spider acquisition 4,178,843
Non-cash compensation relating to stock options 125,375
Warrants excercised 543,880 5 (5)
Foreign Currency translation
Net loss for the year ended June 30, 2003
-------- ---------- ----- ---------- -----------
BALANCE--JUNE 30, 2003 0 67,262,586 673 37,658,978 (7,911,000)
-------- ---------- ----- ---------- -----------
Issuance of common stock to a Consultant 5,000,000 50 949,950
Issuance of Series A shares and Warrants
Cost in connection with Series A issuance (60,000)
Conversion of Series A to Series B stock
Issuance of Series B shares and Warrants
Cost in connection with issuance (368,258)
Warrant exchange program 4,437,387 44 658,814
Issuance of common stock 1,600,000 16 287,984
Cost in connection with issuance (28,000)
Amortization of stock options 3,203,483
Forfeited stock options (3,815,684) 3,815,684
Issuance of common stock to a Consultant 5,000,000 50 949,950
Issuance of common stock 130,247 1 24,410
Warrants issued to investors 285,193
Penalties on Series B stock 202,882
Dividends on Series B stock 190,057
Conversion of Series B stock 10,554,086 105 1,899,630
Shares issued to employees 2,053,731 21 305,860
Beneficial Conversion 1,372,989
Foreign Currency
Canadian Conversion of Preferred Stock 1,073,446 11
Net Loss for the year ended June 30, 2004
-------- ---------- ----- ---------- -----------
BALANCE-JUNE 30, 2004 392,939 97,111,483 971 40,121,816 (891,833)
======== ========== ===== ========== ===========
ACCUMULATED OTHER ANNUAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE
INCOME (LOSS) DEFICIT INCOME (LOSS) TOTALS
----------------- ------------ ------------- ------------
BALANCE--JUNE 30, 2002 (13,950,229) 918,897
Issuance of common stock 900,000
Cost in connection with issuance (177,899)
Issuance of common stock 500,000
Cost in connection with issuance (93,769)
Issuance of common stock and warrants 2,061,250
Cost in connection with issuance (292,608)
Non-cash compensation relating to stock options -
Amortization of stock options 7,678,333
Forfeited stock options -
Equity issued for Spider acquisition 4,178,858
Non-cash compensation relating to stock options 125,375
Warrants excercised -
Foreign Currency translation 18,773 18,773 18,773
Net loss for the year ended June 30, 2003 (13,053,115) (13,053,115) (13,053,115)
------------- ----------- ------------ -----------
BALANCE--JUNE 30, 2003 18,773 (27,003,344) (13,034,342) 2,764,095
------------- ----------- ------------ -----------
Issuance of common stock to a Consultant 950,000
Issuance of Series A shares and Warrants 975,940
Cost in connection with Series A issuance (60,000)
Conversion of Series A to Series B stock -
Issuance of Series B shares and Warrants 3,705,780
Cost in connection with issuance (368,258)
Warrant exchange program 658,858
Issuance of common stock 288,000
Cost in connection with issuance (28,000)
Amortization of stock options 3,203,483
Forfeited stock options -
Issuance of common stock to a Consultant 950,000
Issuance of common stock 24,411
Warrants issued to investors 285,193
Penalties on Series B stock 275,997
Dividends on Series B stock (250,057) -
Conversion of Series B stock -
Shares issued to employees 305,881
Beneficial Conversion (1,372,989) -
Foreign Currency (23,763) (23,763) (23,763)
Canadian Conversion of Preferred Stock -
Net Loss for the year ended June 30, 2004 (11,070,305) (11,070,305) (11,070,305)
------------- ----------- ------------ -----------
BALANCE-JUNE 30, 2004 (4,990) (39,696,695) (11,094,068) 2,837,312
============= =========== ============ ===========
F-5
WARP Technology Holdings, Inc.
Consolidated Statements of Cash Flows
Year ended Year ended
June 30, June 30,
2004 2003
------------ ------------
Operating activities
Net loss $(11,070,305) $(13,053,115)
Adjustments to reconcile net loss to net cash used in operating activities, net of
business acquired:
Depreciation 51,017 93,940
Amortization 190,000 87,083
Stock-based compensation, consulting and other fees 6,007,255 8,497,708
Changes in operating assets and liabilities:
Accounts receivable (105,398) 130,841
Inventory 207,000 (115,008)
Prepaid expenses and other 47,875 4,762
Accounts payable and accrued expenses 63,956 246,346
Deferred product cost 528 (14,556)
Deferred revenue 58,002 32,053
Deferred compensation payable (250,000) -
------------ ------------
Net cash used in operating activities (4,800,070) (4,089,946)
------------ ------------
Investing activities
Security deposits 28,115 (24,615)
Cash acquired in the Spider acquisition -- 41,592
Acquisition consideration -- (335,766)
Purchase of property and equipment (3,179) (13,431)
------------ ------------
Net cash provided by (used in) investing
activities 24,936 (332,220)
------------ ------------
Financing activities
Proceeds from issuance of preferred and common stock, net of issuance costs 4,682,320 2,896,974
(Repayment) Proceeds from bridge loan (120,000) 120,000
Proceeds/advances of stockholder/officer's loan -- 19,000
Prepaid subscription -- 490,000
------------ ------------
Net cash provided by financing activities 4,562,320 3,525,974
------------ ------------
Effect of exchange rate changes on cash (31,759) 71,604
------------ ------------
Net (decrease) in cash (244,573) (824,588)
Cash--beginning of year 360,064 1,184,652
------------ ------------
Cash--end of year $ 115,491 $ 360,064
============ ============
Supplemental disclosure of cash flow Information Income tax paid $ 2,546 $ -
============ ============
Supplemental disclosure of non-cash investing and finance activities
For the year ended June 30, 2004, the Company recorded $392,939 for the issuance
of approximately 393 shares of Series B Convertible Preferred Shares in
connection with penalties and dividends due to preferred stockholders.
See accompanying notes to consolidated financial statements.
F-6
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements
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 July 1, 2002.
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-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 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 a Canadian Corporation. Effective
January 13, 2003 the Company, through its wholly owned subsidiary 6043577
Canada, Inc acquired SpiderSoftware, Inc.(See note 6)
Basis of Presentation
The Company has incurred recurring operating losses since its inception, as of
June 30, 2004 had an accumulated deficit of approximately $39,697,000 and at
June 30, 2004 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. In August 2004 the Company entered into a Series B-2
Preferred Stock Purchase Agreement for the sale of 1,600 shares of Series B-2
Preferred stock, and received approximately $500,000 of cash from the sale of
Series B -2 shares and anticipates that it will receive $1,100,000 of cash from
the sales of Series B-2 shares in the final closing under the Purchase
Agreement. The Company anticipates that during its 2005 fiscal year in addition
to the $500,000 received and the $1,100,000 to be received from the sale of
Series B-2 preferred stock it will need to raise over $1,500,000 to support its
working capital needs and to continue to execute the requirements of its
business plan. Management of the Company is currently in a process of trying to
secure additional capital. There can be no assurance that the Company will be
successful in this capital raise or other attempts to raise sufficient capital.
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.
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 of America
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.
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 the sale of the WARP 2063e
product 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. Accordingly, revenue from license agreements is being recognized ratably
over the term of the PCS agreement. In January 2004 the Company has discontinued
marketing the 2063e product. Licensing revenues from Spider 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 and Goodwill
Intangible assets are primarily comprised of trademark, software, non-compete
agreements and workforce assembly. 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 of goodwill is necessary
and goodwill is tested for impairment on an annual basis. All other intangibles
are being amortized over their estimated useful life of two to three years.
Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists primarily of accounts receivable. The
Company performs on going credit evaluations of its customers and maintains
allowances for potential credit issues. Historically, such loses have been
within management's expectations. For the year ended June 30, 2004, four
customers accounted for approximately 84% of revenues.
F-9
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies (continued)
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.
Inventory
At June 30, 2003,inventory consisted of finished goods and was valued at the
lower of cost or market. As of March 31, 2004 the Company changed its business
model from selling hardware and software to selling only software. As a result
the Company wrote off all of its remaining hardware inventory of approximately
$328,000 in the third quarter of 2004.
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 attributable to common stockholders by
the weighted-average common shares outstanding during the period. Diluted loss
per share is calculated by dividing net loss attributable to common stockholders
by the weighted-average common shares outstanding. The dilutive effect of
preferred stock, warrants and options convertible into an aggregate of
approximately 41,852,000 and 10,061,000 of common shares as of June 30, 2004 and
June 30, 2003 respectively, are not included as the inclusion of such would be
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 5).
Year ended Year ended
June 30, 2004 June 30, 2003
Net loss, as reported $(11,070,305) $(13,053,115)
Add: Total stock-based employee
compensation expense included in
reported net loss 3,203,483 8,497,708
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards (3,702,564) (8,722,466)
------------ ------------
Net loss, pro forma $(11,569,386) $(13,277,873)
Beneficial conversion and preferred dividends (1,623,046) --
------------ ------------
Net loss attributable to common stockholders -
Proforma (13,192,432) (13,277,873)
============ ============
Basic and diluted net loss
per share attributable to common stockholders,
as reported $ (0.17) $ (0.21)
============ ============
Basic and diluted net loss per share
attributable to common stockholders pro forma $ (0.17) $ (0.21)
============ ============
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. The fair value for these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Year ended June 30,
2004 2003
------------------------------------------------------------
Expected life 3 years 3 years
------------------------------------------------------------
Risk-fee interest rate 2.13% 3.56%
------------------------------------------------------------
Expected volatility 183% 112%
------------------------------------------------------------
Dividend yield 0% 0%
------------------------------------------------------------
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.
Fair Value of Financial Instruments
For financial statement instruments, including cash, 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
Foreign Currency
The functional currency of the Company's international subsidiaries is the local
currency. The financial statements of these subsidiaries are translated to
United States dollars using period-end rates of exchanges for assets and
liabilities, and average rates of exchanges for the year for revenues and
expenses. Translation gains (losses) are recorded in accumulated other
comprehensive income (losses) as a component of stockholders' equity. Net gain
and losses resulting from foreign exchange transactions are included in other
income, net and were not significant during the period presented.
Recent Accounting Pronouncement
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, except as for provisions that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 30, 2003, which should continue to be applied in accordance with
their respective dates. The adoption of SFAS No. 149 has not and is not expected
to have a material impact on the Company's financial condition, results of
operations, and cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
requires that certain financial instruments that, under previous guidance,
issuers could account for as equity be classified as liabilities in statements
of financial position. Most of the guidance in SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 has not and is not expected to have a
material impact on the Company's financial condition, results of operations, and
cash flows.
In December 2003, the FASB issued FASB interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN46"). FIN46 requires that a variable interest
entity be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual return or both. The consolidation
requirements apply to the first fiscal or interim period ending after December
15, 2004. The adoption of FIN46 is not expected to have a material impact on the
Company's financial condition, results of operations, and cash flows.
Note 3. Property and Equipment
At June 30, 2004 property and equipment consists of the following:
Purchased software $ 84,283
Computer equipment 144,596
Furniture, fixtures and equipment 98,679
---------
327,558
Accumulated depreciation (291,246)
---------
$ 36,312
=========
Note 4. Accrued Expenses
At June 30, 2004 accrued expenses consists of the following
Accrued professional fees $ 95,563
Accrued vendor costs 96,000
Other accrued expenses 144,933
--------
$336,496
========
F-12
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 5. Stockholders' Equity
Common and Preferred Stock
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.
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.
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.
On September 30, 2003, the Company completed an offering of 975,940 shares of
its Series A 8% Cumulative Convertible Preferred Stock (the "A Shares") with
gross proceeds to the Company from the sale equaling $975,940. All of the A
Shares sold in this offering were offered and sold to accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
pursuant to Section 4(2) of that Act. No general solicitation was made in
connection with the sale of the A Shares. Pursuant to a "most favored nation"
provision of the A Shares offering, the holders of the A Shares were entitled to
receive the better terms of any offering that was completed subsequent to the
closing of the A Shares offering. As a result, the Company has cancelled all
975,940 A Shares which were to be issued and has instead issued 975.94 B Shares
to the A Share subscribers. The A Share subscribers also received warrants with
the same terms as the B Share subscribers. The conversion to common stock of all
the B Shares issued to the A Share subscribers will result in the Company
issuing approximately 5,422,000 shares of common stock to the A Share
subscribers. Pursuant to a registration rights agreement between the Company and
the B Share subscribers, the Company was obligated to register the shares of
common stock issuable upon conversion of the B Shares within 45 days of issuance
of the B Shares. This registration rights agreement contained a penalty
provision that required the Company to issue the number of shares of common
stock equal to 2% of the shares of common stock issuable upon conversion of the
B Shares for each 30 day period until such shares were registered. When the
March Form S-2 was declared effective, the Company was obligated to issue an
aggregate of 1,242,698 shares of common stock pursuant to this penalty
F-13
Note 5. Stockholders Equity (continued)
Common and Preferred Stock (continued)
provision. Exercise of all the warrants held by the A Share subscribers will
result in the issuance of approximately 2,711,000 shares of common stock to the
A Share subscribers. The Company recorded approximately $271,000 as beneficial
conversion relating to this transaction because the fair market value of the
common stock was greater than the conversion price. The March Form S-2, declared
effective on March 31, 2004, covered the common shares issuable upon the
conversion of the B Shares and warrants held by the A Share subscribers. The
Company recorded approximately $60,000 for fees relating to this private
placement.
On November 4, 2003, the Company completed an offering of 2,647.78 shares of
Series B 10% Cumulative Convertible Preferred Stock (the "B Shares") with gross
proceeds to the Company from the sale equaling $2,647,780. All of the B Shares
sold in this offering were offered and sold to accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
pursuant to Section 4(2) of that Act. No general solicitation was made in
connection with the sale of the B Shares. The B Shares have a cumulative
dividend of 10% per year, which is payable in cash or stock at the time of
conversion. Each B Share is convertible into approximately 5,556 shares of the
common stock of the Company. The conversion to common stock of all the B Shares
sold in the offering will result in the Company issuing approximately 14,710,000
shares of common stock to the B Share subscribers. The B Share subscribers also
received warrants to purchase a number of common shares equal to 50% of the
common shares such subscriber would receive upon the conversion of their B
Shares to common shares. The exercise price of the warrants is $.33 per share of
common stock. Exercise of all the warrants held by the B Share subscribers would
result in the issuance of approximately 7,355,000 shares of common stock. The
Company recorded approximately $736,000 as beneficial conversion relating to
this transaction because the fair market value of the common stock was greater
than the conversion price. The March Form S-2, declared effective on March 31,
2004, covered the common shares issuable upon the conversion of the B Shares and
warrants sold in this offering. However, the Company was not able to get the
March Form S-2 declared effective before the passing of certain deadlines and as
such the Company is required to pay a penalty equivalent to 6% of the common
shares underlying the B Shares sold in this offering. The Company has recorded a
charge of approximately $276,000 relating to this penalty (including the penalty
relating to the Series A subscribers described above) in March 2004. In
addition, the Company incurred approximately $250,000 of dividends to the Series
B shareholders. The Company has not issued approximately 393 Series B shares for
the penalty and dividend. The Company paid approximately $262,000 in finders'
fees relating to this private placement.
In December 2003, the Company issued 5,000,000 shares of common stock to Blue &
Gold Enterprises LLC ("Blue & Gold") as consideration for financial consulting
services provided by Mr. Steven Antebi pursuant to the Consulting Agreement
dated December 2003 between the Company and Mr. Antebi. The shares issued to Mr.
Antebi were restricted shares on the date of issuance. The April Form S-2,
declared effective on April 29, 2004, registered the shares of common stock
issued to Mr. Antebi under his consulting agreement. In connection with this
agreement the Company recorded approximately $950,000 as non-cash compensation.
On February 10, 2004, the Company closed an offering of 1,600,000 restricted
shares of its common stock and 800,000 warrants to purchase common stock in a
private transaction for gross proceeds of $288,000 in cash. The exercise price
of the warrants is $.33 per share of common stock and the exercise price is only
payable with cash. The March Form S-2, declared effective on March 31, 2004,
registered the shares sold in this offering and the common stock issuable upon
the exercise of the warrants sold in this offering. The Company paid
approximately $28,000 in placement agent fees relating to this private
placement.
On February 10, 2004, the Company completed an offering of 1,058 shares of
Series B 10% Cumulative Convertible Preferred Stock (the "B Shares") with gross
proceeds to the Company from the sales equaling $1,058,000. The B Shares had a
purchase price of $1,000.00 per share. The purchase price of the B Shares was
paid in cash. The B Shares have a cumulative dividend of 10% per year, which is
payable in cash or stock at the time of conversion at the election of the
Company. Each B Share is convertible into approximately 5,556 shares of the
common stock of the Company. The conversion to common stock of all the B Shares
sold in the offering will result in the Company issuing approximately 5,877,800
shares of common stock to the B Share subscribers. The B Share subscribers also
received warrants to purchase a number of common shares equal to 50% of the
common shares such subscriber would receive upon the conversion of their B
Shares to common shares. The exercise price of the warrants is $.33 per share of
common stock and the exercise price is only payable with cash. Exercise of all
the warrants held by the B Share subscribers would result in the issuance of
approximately 2,938,900 shares of common stock. The Company recorded
approximately $235,000 as beneficial conversion relating to this transaction
because the fair market value of the common stock was greater than the
conversion price. On March 22, 2004, the Company filed an Amendment Number 2 to
a Registration Statement on Form S-2 originally filed on February 12, 2004
(hereinafter referred to as the "March Form S-2"), which covered the common
shares issuable upon the conversion of the all B Shares and warrants sold in
this offering. On March 31, 2004, the March Form S-2 was declared effective by
the Securities and Exchange Commission File No. 333-112771. The Company paid
approximately $106,000 in placement agent fees relating to this private
placement.
In March 2004, several holders of the preferred stock of 6043577 Canada, Inc., a
wholly-owned subsidiary of the Company established to complete the acquisition
of Spider, converted their preferred stock to shares of the Company's common
stock. Such conversions resulted in the issuance of 1,073,446 shares of common
stock.
In 2004, holders of 1,766.62 shares of the Company's Series B 10% Cumulative
Convertible Preferred Stock ("B Shares") converted their B Shares into shares of
the Company's common stock. Such conversions resulted in the issuance of
9,814,556 shares of common stock. The 9,814,556 common shares issued on the
conversions is derived from the B Shares' $.18 conversion price. In connection
with the conversion an additional 330,548 shares were issued as payment of the B
Shares 10% cumulative dividend, and 408,982 shares were issued as payment of a
6% penalty for the failure by the Company to cause its March Form S-2 (as
defined below) to be declared effective in a timely manner.
On March 12, 2004, the Company approved the issuance of 97,608 shares of common
stock to Bradley L. Steere, Esq. as consideration for legal services rendered to
the Company in the amount of approximately $18,500.
On March 12, 2004, the Company approved the issuance of 32,639 shares of common
stock to Mr. Wesley Ramjeet as consideration for professional accounting
services rendered to the Company in the amount of approximately $5,900.
On March 12, 2004, the Company approved the issuance of 555,554 shares of common
stock to Mr. Malcolm Coster pursuant to the terms and conditions of his
Employment Contract as compensation for services rendered by Mr. Coster to the
Company in the amount of approximately $111,000 as its interim Chief Executive
Officer.
On March 29, 2004, the Company issued 5,000,000 shares of common stock to Noah
Clark as consideration for financial consulting services beginning April 1,
2004, to be provided by Mr. Clark pursuant to the Consulting Agreement dated
March 26, 2004 between the Company and Mr. Clark (the "Consulting Agreement").
The Company recognized approximately $950,000 of expense relating to this
agreement. The shares issued to Mr. Clark were restricted shares on the date of
issuance. On April 26, 2004, the Company filed an Amendment Number 1 to a
Registration Statement on Form S-2 originally filed on April 4, 2004
(hereinafter referred to as the "April Form S-2"), which covered the shares of
common stock issued to Mr. Clark under his consulting agreement. On April 29,
2004, the April Form S-2 was declared effective by the Securities and Exchange
Commission (File No. 333-114296). A copy of the Consulting Agreement is attached
hereto as Exhibit 10.15 and the reader is referred to that exhibit for the full
text of that agreement.
On April 22, 2004 the Company approved the issuance of 1,498,177 shares of
common stock to employees. In connection with this issuance the Company recorded
compensation of approximately $195,000.
F-14
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 5. 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.
The amount recognized as expense for the period ending June 30, 2004 and 2003
was $3,562,241 and $7,678,333, respectively.
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 price of $.25 of each option up
to one dollar in cash or stock. The total amount is capped at $400,000 and
expired in December 2003. As of June 30, 2004 the Company recorded a liability
of $200,000.
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, 2004 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 expired in December 2003. As of June 30, 2004, the
Company recorded a liability of $244,000.
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.
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 2004, the Board of Directors granted 4,513,000 options to certain
employees of the Company under the 2002 Plan. Of those options, 2,256,500 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 $.13 per share, the fair
market price of the stock on the date of grant.
Detailed information concerning WARP Technology Holding, Inc activity for the
2002 Plan is as follows:
Weighted- Average
Average Fair Value
Options Exercise Price Of Grants
-----------------------------------------
Options outstanding at June 30, 2002 -- -- --
Options granted 9,399,652 $ 0.25 $ .225
Options cancelled (1,700,000) 0.25
-----------------------------------------
Options outstanding at June 30, 2003 7,699,652 $ 0.25
Options cancelled (3,179,334) .23
Options granted 4,513,000 .13 $ 0.13
-----------------------------------------
Options outstanding at June 30, 2004 9,033,318 $ 0.22
=========================================
The following table summarizes information about options outstanding at June 30,
2004.
Options Outstanding Options Exercisable
------------------ -------------------
Weighted average
Number remaining contractual Weighted average Number Weighted average
Exercise Price Outstanding life (in years) exercise price exercisable exercise price
--------------------------------------------------------------------------------------------------------
$0.13 4,273,000 9.8 $0.13 2,444,512 $0.13
$0.25 4,760,318 8.0 $0.25 3,562,267 $0.25
--------------------------------------------------------------------------------------------------------
As of June 30, 2004, there were 966,682 shares available for future grants under
the 2002 Plan.
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,
2004 2003
------------------------------------------------------
Expected life 3 years 3 years
------------------------------------------------------
Risk-fee interest rate 2.13 1.53 -2.0
------------------------------------------------------
Expected volatility 183% 112%
------------------------------------------------------
Dividend yield 0% 0%
------------------------------------------------------
During 2004, no options were issued or exercised under the Warp Solutions, Inc.
1999 Plan. Additionally, all previously outstanding options were canceled.
Therefore, as of June 30, 2004, there are no options outstanding under the Warp
Solutions, Inc. 1999 Plan.
F-15
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 5. Stockholders' Equity (continued)
Warrants
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.
In connection with the February, 2003 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. In
fiscal 2004, 135,000 of these warrants were exercised, the Company received
approximately, $13,500.
In January 2004, the Company issued 1,500,000 warrants to Mr. Ray Musson and
Killick & Co. as a settlement for not registering previously sold shares. The
warrants have a (5) five-year term, an exercise price of $.36 per share and no
cashless exercise provision. The Company recorded as expense $180,000 relating
to this warrants issuance. The March Form S-2, declared effective on March 31,
2004, registered the shares of common stock issuable upon the exercise of the
warrants issued to Mr. Musson and Killick & Co.
On March 5, 2004, the Company initiated a warrant exchange program (the
"Program") applicable to all of the Company's outstanding warrants (collectively
the "Original Warrants"). The Program was an opportunity for the Company's
warrant holders to choose whether they wanted to keep their Original Warrants or
exchange them for new warrants (the "Exchanged Warrants"). The Exchanged
Warrants had an exercise price of $0.15 per share, as compared to the Original
Warrants, which have exercise prices of $0.36, $0.33, $0.25, or $0.18 per share,
and were required to be exercised immediately after their issuance. The Program
closed on March 18, 2004, and resulted in the exchange of 4,302,387 Original
Warrants for Exchanged Warrants. The immediate exercise of the Exchanged
Warrants caused the issuance by the Company of 4,302,387 shares of common stock
for gross proceeds to the Company of $645,358. The Company recorded
approximately $132,000 as a beneficial conversion dividend relating to this
transaction because the fair market value of the common stock was greater than
the conversion price.
In April 2004,the Company issued warrants to purchase 860,000 shares of common
stock at an exercise price of $0.25 per share to Lighthouse Capital Ltd and
warrants to purchase 150,000 shares of common stock at an exercise price of
$0.25 to Peter Bailey in payment of services provided by Lighthouse Capital Ltd
to the Company under the terms of a consulting agreement. In connection with
this issuance the Company recorded an expense of approximately $105,000.
F-17
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 6. 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
==========
Amortization expense relating to intangible assets for the remaining useful
lives, is expected as follows:
June 30, 2005 $ 171,667
June 30, 2006 81,250
----------
Total amortization $ 252,917
==========
Note 7. Note Payable
On June 12, 2003 a shareholder loaned the Company $120,000 on an unsecured
basis. The interest rate was 1% per month and was due on June 30, 2003. The
Company repaid $75,000 of the loan in September 2003 and the balance was repaid
in November 2003.
F-18
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 8. Income Taxes
The Company has a U.S. Federal net operating loss carryforward of approximately
$21,850,000 as of June 30, 2004, which may be used to reduce taxable income in
future years through the year 2024. The deferred tax asset primarily resulting
from net operating losses was approximately $7,429,000. 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 9. Commitments and Contingencies
Leases
Rent expense amounted to approximately $201,000 and $125,000 for the year ended
June 30, 2004 and 2003, respectively.
Legal Proceedings
Two former consultants to the Company who provided services to the Company's
U.K. subsidiary, Warp Solutions, Ltd., have made claims against the Company
under U.K. law, contending that they were employees under such laws, were
unfairly dismissed, and, therefore, entitled to certain benefits and rights. The
total claim is estimated to be approximately $180,000. The Company has received
a preliminary judgment from a U.K. Employment Tribunal determining that two
former consultants were employees within the (U.K.) Employment Rights Act. The
Company has appealed from this determination and intends to contest it
vigorously. The Company has accrued $50,000 relating to this claim.
F-19
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
Note 10. Subsequent Events
Series B-2 Preferred Stock Financing.
The Company entered into a Series B-2 Preferred Stock Purchase
Agreement (the "Purchase Agreement"), as of August 4, 2004. The Purchase
Agreement related to the sale of 1,600 shares (the "Series B-2 Preferred
Shares") of the Company's authorized but unissued shares of Preferred Stock,
$0.00001 par value per share, designated Series B-2 Preferred Stock (the "Series
B-2 Preferred Stock") at a purchase price of $1,000 per share, and warrants,
exercisable over five (5) years, to purchase an aggregate of 1,600 shares of
Series B-2 Preferred Stock at an exercise price of $1,000 per share (the
"Warrants" and together with the shares of Series B-2 Preferred Stock,
collectively, the "Securities") to the Investors. The aggregate purchase price
for the Securities is $1,600,000, of which $500,000 was received by Warp in an
initial closing (which occurred on August 4, 2004) in which 500 shares of Series
B-2 Preferred Stock were issued together with Warrants to acquire an additional
500 shares of Series B-2 Preferred Stock. Under the terms of the Purchase
Agreement, the remaining $1,100,000 purchase price is to be paid at a closing no
later than October 31, 2004 in which 1,100 shares of Series B-2 Preferred Stock
were to be issued together with Warrants to acquire an additional 1,100 shares
of Series B-2 Preferred Stock. At any time a holder of shares of Series B-2
Preferred Stock may convert such shares into shares of Common Stock. In
addition, if, upon the expiration of five (5) years from the date of issuance,
there remain any shares of Series B-2 Stock which have not been converted, such
shares shall automatically convert into shares of Common Stock. Each share of
Series B-2 Preferred Stock is convertible into 20,000 shares of common stock.
ISIS Capital Management, LLC ("ISIS") and Warp entered into a Consulting
Agreement, dated as of August 4,2004, pursuant to which Warp will pay ISIS for
services requested of ISIS from time to time, including, without limitation,
research services, at ISIS's regular rates or at the cost incurred by ISIS to
provide such services, and will reimburse ISIS for any costs incurred by ISIS on
behalf of Warp. ISIS is a limited liability company whose managing members are
Rodney A. Bienvenu, Jr. ("Bienvenu"), the Company's Chief Executive Officer and
Chairman of the Company's Board of Directors, and Ernest C. Mysogland
("Mysogland"), the Executive Vice President and Chief Legal Officer of the
Company. ISIS is the managing member of ISIS Acquisition Partners II LLC ("IAP
II"). IAP II is a stockholder of the Company having purchased shares of the
Company's Series B-2 Preferred Stock.
Employment Contracts
Subsequent to June 30, 2004 the Company entered into employment contracts with
following four executive officers: Rodney A. Bienvenu, Jr., its Chairman and
Chief Executive Officer; Gus Bottazzi, its President, Principal Financial
Officer, and Director; Ernest C. Mysogland, its Executive Vice President, Chief
Legal Officer, and Secretary and Michael D. Liss, its Chief Operating Officer.
Annual compensation under the employment agreements is $674,000 for the year
ended June 30, 2005; $368,000 for the year ended June 30, 2006. In connection
with the B-2 Financing, and the employment relationships entered into by the
Company and certain members of management, the Company granted options to
acquire shares of its Common Stock. The Company also amended its 2002 Employee
Stock Plan to increase the total number of shares authorized for issuance under
the plan to a total of 77,661,098 shares of Common Stock, and to reserve such
shares for issuance under the plan. The options granted by the Company were
granted to Bienvenu, Mysogland, Bottazzi and Liss. In addition, ISIS was granted
certain non-qualified options to acquire shares of Common Stock. The total
number of shares subject to these options is 66,971,236. All such options have
an exercise price of $0.0675 per share. The exercise of such options is subject
to the achievement of certain vesting and milestone terms (subject in each case
to the terms of the optionee's stock option agreement). Any of the
above-described options not previously exercisable shall be vested and
exercisable on the fifth anniversary of the initial closing of the B-2
Financing.
F-20