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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For The Transition Period From ___________ To __________
Commission File Number: 000-33197
WARP TECHNOLOGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 88-0467845
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
535 WEST 34 STREET, 5TH FLOOR, NEW YORK, N.Y. 10001
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(Address of principal executive offices) (Zip Code)
(212) 962-9277
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(Registrants telephone number, including area code)
Abbott Mines Limited
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(Former Name, if Changed Since Last Report)
1040 West Georgia Street, St. 1160, Vancouver, B.C., Canada V6E 4H1
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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, 2002
(including the revenues of the registrant's subsidiary, WARP Solutions, Inc.,
for its six month period ended June 30, 2002) were $11,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 3, 2002 was $47,151,928 based on the closing bid price
of $1.28 per share as reported on the Over-the-Counter Bulletin Board ("OTC
Bulletin Board") operated by the National Association of Securities Dealers,
Inc. (this price reflects the three-for-one stock dividend declared by the
registrant on September 20, 2002 (the "September Stock Dividend") which is
described in greater detail on page 5 of this Form 10KSB).
The number of shares outstanding of the registrant's common stock, $0.00001 par
value, as of October 3, 2002 was 56,729,080 (the number of shares outstanding on
October 3, 2002 reflects the September Stock Dividend).
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS.
Forward-Looking Information
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Certain statements in this Form 10-KSB and elsewhere (such as in other
filings by the Company with the Securities and Exchange Commission (the
"Commission"), press releases, presentations by the Company or its management
and oral statements) may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include those relating to future opportunities, the
outlook of customers, the reception of new products and technologies, and the
success of new initiatives. In addition, such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Such factors include: (i) demand for the Company's products; (ii)
the actions of current and potential new competitors; (iii) changes in
technology; (iv) the nature and amount of the Company's revenues and expenses;
and (v) overall economic conditions and other risks detailed from time to time
in the Company's periodic earnings releases and reports filed with the
Commission, as well as the risks and uncertainties discussed in this Form
10-KSB.
Historical Background
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WARP Technology Holdings, Inc. (the "Company") was incorporated in the
State of Nevada on June 26, 2000 under the name Abbott Mines, Ltd. to engage in
the acquisition and exploration of mining properties. The Company obtained an
interest in one mining property with mining claims on land located near
Vancouver in British Columbia, Canada (the "Montana Property"). To finance its
exploration activities, the Company completed a public offering of its common
stock, par value $.00001 per share, on March 14, 2001 and listed its common
stock on the OTC Bulletin Board on July 3, 2001. The Company conducted its
exploration program on the Montana Property and the results did not warrant
further mining activity. The Company then attempted to locate other properties
for exploration but was unable to do so.
The Acquisition of WARP Solutions, Inc.
In March 2002, the Company and WARP Solutions Inc. ("WARP"), a Delaware
corporation, entered into discussions regarding a possible business combination
between the two companies. After completing due diligence reviews of each other,
the Company and WARP agreed that the Company would acquire WARP in a share
exchange transaction, that WARP would become a subsidiary of the Company and
that WARP's operations would become the operations of the Company.
On May 24, 2002 (the "Closing Date"), the Company and WARP closed a
share exchange transaction (the "Share Exchange") pursuant to a Share Exchange
Agreement (the "Exchange Agreement") dated as of May 16, 2002, by and among the
Company, Carlo Civelli,
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Mike Muzylowski, WARP, Karl Douglas, John Gnip and related Sellers. In
accordance with the terms and conditions of the Exchange Agreement, on May 24,
2002 the Company became obligated to issue up to 36,467,988 shares of its common
stock, after giving effect to the September Stock Dividend, for all of the
outstanding common stock of WARP. As of September 19, 2002, the Company had
issued 35,545,364 of those shares for approximately ninety-seven percent (97%)
of WARP's outstanding common stock. 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. The share exchange under the Exchange Agreement
is ongoing and the Company anticipates that additional WARP stockholders will
tender their WARP common stock for shares of the Company's common stock.
In connection with the Share Exchange, the following took place on or
subsequent to the Closing Date:
o Mike Muzylowski resigned from all positions as an officer and
director of the Company and Carlo Civelli resigned from all
positions as an officer of the Company.
o Mr. Muzylowski returned 6,250,000 shares of the Company's
common stock to the Company for cancellation.
o Mr. Civelli returned 6,250,000 shares of the Company's common
stock to the Company for cancellation.
o Karl Douglas and John Gnip were appointed members of the
Company's Board of Directors. The Company's Board of Directors
consists of Messrs. Douglas, Gnip and Civelli.
o The Company's Board of Directors appointed Karl Douglas as
President and Chief Executive Officer and John Gnip as Chief
Operating Officer and Secretary of the Company, and
o The Company relocated its executive offices from 1040 West
Georgia Street, Suite 1160, Vancouver, British Columbia,
Canada V6E 4H1 to 535 West 34 Street, 5th Floor, New York, New
York 10001.
Subsequent to the closing of the Share Exchange, the Company ceased all
mineral exploration activities and the sole operations of the Company are now
the operations of its subsidiary, WARP Solutions, Inc.
The Upstream Merger and Name Change
On August 19, 2002, the Board of Directors of the Company authorized
and approved the upstream merger of WARP Technology Holdings, Inc., a wholly
owned subsidiary of the
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Company, 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". Also in connection with the name change, the CUSIP number
for the Company's common stock was changed to 93464M105.
September Stock Dividend
On September 20, 2002, the Company's Board of Directors declared a
stock split in the form of a stock dividend (the "September Stock Dividend")
payable to the common stockholders of record on September 24, 2002 (the "record
date") of three (3) shares of common stock for each one (1) share issued and
outstanding on the record date. The September Stock Dividend became effective
and payable on October 2, 2002. All share information retroactively reflects the
September Stock Dividend.
Business of the Company: which is the business of WARP Solutions, Inc.
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The Company is operated as a holding company with one direct
subsidiary: WARP Solutions, Inc. ("WARP"). WARP was formed as a Delaware limited
liability company in July of 1999 and was converted to a Delaware corporation in
December 1999.
WARP is an information technology company that produces a computer
network appliance that seeks to improve the speed and reliability of the
transactions and information requests that are processed over Internet and
Intranet network systems. Internet and Intranet network systems are collectively
referred to herein as "networks."
Network traffic today consists largely of frequent requests for dynamic
content through network infrastructure. Such requests for dynamic content
require frequent and real-time database queries. How quickly and reliably an
enterprise's network infrastructure processes requests for dynamic content can
determine the satisfaction levels of the customers or employees who use the
network. Currently, most network infrastructures require that dynamic content
requests travel to the core, (i.e. through the application and data base server
layers) of that infrastructure for processing and then travel back to the user.
This can result in performance bottlenecks, slow response times, high
transactional costs and a lower overall quality of experience for the end user.
Generally, there are two types of content that are delivered through a
network infrastructure to a site seen on a user's computer screen. The static
content is the graphics, headers, pictures and other structural content that
determine how a site looks. The dynamic content is the information that changes
frequently and needs updating, such as responses to search requests or the
content of an online retailer's inventory. For example, if a network user wants
to browse a wireless company's cell phone selection, they may be presented with
a form
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where they type in their desired price range, color and features. The static
content determines the appearance of the form while the dynamic content is the
response to the users search request.
WARP has developed a unique and proprietary technology which
accelerates the processing speed of dynamic content requests, and improves the
efficiency of a network's infrastructure that handles such requests. WARP's
technology is incorporated into a network appliance that moves the processing of
dynamic content requests away from the core of an enterprises' network
infrastructure to the edge of that infrastructure. By doing so, WARP's
technology and product should enable an enterprise to improve the efficiency of
its network infrastructure resulting in:
i) The elimination of complex transaction-processing
bottlenecks,
ii) Increased response times,
iii) Lower hardware costs, and
iv) Lower wide area network costs.
WARP 2063 Application Pre-Processor
Currently, network infrastructure generally consists of four layers: i)
the internet network, ii) the web server layer, iii) the application layer, and
iv) the database layer. Network systems that offer dynamic content such as
travel sites, browser based corporate applications such as CRM, ERP and Supply
Chain Management applications, and eCommerce applications such as retail
merchandise sites all require that requests for dynamic content traverse all
four layers. The application and database layers are generally the slowest, with
100 simultaneous transactions per central processing unit instance at 10 second
intervals being typical. This can cause response times to be slow as the request
and response each have to traverse the four layers of infrastructure. In effect,
to the "core" of the infrastructure and back.
The WARP 2063 Application Pre-Processor (the "WARP 2063") eliminates
the need for repeated dynamic content requests to traverse through the
application and database layers of the infrastructure by storing (i.e. caching)
the responses for the most frequently requested information in its memory away
from the core of the infrastructure and diverting such requests to that memory
for processing. In doing so, the WARP 2063 reduces the amount of application
server and data server infrastructure required to process dynamic content
transactions. Additionally, the time required to process such transactions (i.e.
latency) can be dramatically shortened. Thus, the WARP 2063 creates greater
network response speed and increases network efficiency by accelerating the
processing of dynamic content requests at the web server, application server and
database server levels of the infrastructure. The result is increased
performance and reduced dependency on high end server infrastructure and
software licenses..
WARP believes that it can extend the core technology of the WARP 2063
to deliver similar functionality and efficiency to wireless transaction
processing over the next twenty-four months as part of its GTEN strategy. There
can be no assurances however that WARP will have the financial or manpower
resources necessary to develop and/or market the WARP 2063 or any future
products for wireless solutions.
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WARP believes that there is a growing market for its technology and
product. With broadband connectivity being more common, the volume of
transactions being processed over networks is increasing. WARP believes that the
increase in the number of broadband connections and the related increase in
transaction processing have contributed to application congestion in the
applications layers and database layers of network enabled applications. WARP
believes that the WARP 2063 can help relieve such application congestion by
increasing a network's efficiency through better management of the flow and
processing of dynamic transaction requests.
The market for the WARP 2063 and other application acceleration
technology is new and undeveloped. As a result, WARP believes that there is the
potential for reasonable growth in this market for the next five years.
Status of the WARP 2063
WARP completed version 1.0.0 of the WARP 2063 during the last three
months of the calendar year 2001. The product was beta tested at three
commercial sites between September and December 2001. The product was also
independently tested and reviewed on a limited basis by Network Computing
Magazine in December 2001. Management believes that the reaction from WARP's
beta test customers and Network Computing Magazine has been positive. The beta
test customers requested the addition of certain features, such as failover (a
common backup feature) and snmp reporting (a repeating signal which confirms
that the appliance is working), and they asked whether the WARP 2063 could
support various login security functions. Some customers also requested the
addition of reporting support for media collection software such as Click Stream
and DoubleClick. At the present time, we have added limited failover capability
and snmp functionality to the latest version of the WARP 2063. Additionally,
most media interfaces such as Click Stream are supported when WARP 2063 is used
in a Microsoft Windows Server environment. There is significant evidence to
suggest that over the next 12 to 24 months, customers will continue to request
additional features and reporting. WARP may have to continue to modify its
product to meet these requests. There can be no assurance that WARP's technology
will be able to satisfy all such customer requests, or that WARP will have the
financial or manpower resources to meet such requests, all of which could
adversely effect the marketability of the WARP 2063.
At present, the WARP 2063 is still considered to be an early stage
product. WARP believes that the product will require at least an additional
twelve to twenty-four months of customer requested feature enhancements to reach
maturity. We believe, despite the relative immaturity of our product, that we
will be able to attract customers to the WARP 2063 because of its potential
performance and cost saving benefits.
The WARP 2063 is one component in the technology portfolio that WARP
plans to develop. WARP's planned technology portfolio will consist of five
components, all of which are at the alpha stage or higher in terms of
development. The WARP 2063 Application Pre-Processor is one of the five
components. WARP chose to lead with the WARP 2063 because of its marketability
and the readiness of its technology. WARP has branded its technology portfolio
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"GTEN" which stands for "Global Transaction Enabled Network". The GTEN network
offering will be comprised of:
o WARP 2063 Application Pre-Processor - currently available for
sale.
o WARP 2063 Edge Transaction Accelerator - currently going into
beta cycle.
o WARP 2063 Edge Transaction Router - slated to go into beta
cycle in mid 2003
o WARP 2063 Transaction Session Manager - in beta cycle, planned
productization in 2003
o WARP Performance Cluster - alpha stage.
The central philosophy behind WARP's technology strategy is to optimize
the server stack, and then to distribute the stack in order to optimize the
network. To that extent, all of the GTEN components are designed to address the
prevalent unaddressed bottlenecks in the network.
In terms of timetable, WARP maintains a versioning system for the logic
on the WARP 2063 of 1.0.0. The number to the far right is a patch level which
consists of the latest "bug fixes". The middle digit is incremented with the
advent of new features. In order for a customer to participate in new features,
they must have a valid support contract in place. The number to the far left is
a major architectural update. Incrementation of the far left number triggers a
new generation of appliance. The customer is required to purchase new equipment
for the architecture changes. WARP anticipates new feature sets to be
incremented every four to six months. New architecture updates should take place
once per year. Patch level changes will be made on an as needed basis.
Sales And Marketing
Distribution
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The Company has decided to use wholesale resellers ("channel sales") as
the main distribution method for the WARP 2063. Such wholesale channels as
Systems Integrators, Managed Service Providers and Value Added Resellers will be
the main distribution vehicles for the WARP 2063. WARP believes it can establish
formal contractual relationships with these entities through reseller contracts
that specify the terms under which the WARP 2063 network appliance can be sold.
WARP believes that in order to promote successful channel sales, it may
be required to advertise and market its products to end buyers on behalf of its
channel partners, at a significant cost to WARP. We further believe that sales
concessions of up to 50% will be required to attract channel resellers, and to
successfully motivate the reseller's to place WARP's product with their
customers. Special sales lead generation programs may also be required.
WARP believes it will also engage in limited direct sales. If direct
sales opportunities are pursued, WARP will bring in a channel sales partner for
the completion of such sales. This approach should reduce conflicts between WARP
and its channel resellers and promote the firm's image and reputation within its
channel reseller group.
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The company has established reseller relationships in Europe and Asia
for distribution of the WARP 2063. WARP recently entered into reseller
agreements with Macnica Networks and CDI Technologies. Macnica Networks is a
leading technology distributor for the Japanese market and CDI Technologies is a
leading distributor for South Korea. Additionally, WARP has reseller agreements
with Cable and Wireless Europe and NTT Verio Europe. Cable and Wireless and NTT
Verio actively recommend the WARP 2063 as part of infrastructure recommendations
to their clients, and Macnica and CDI purchase and resell the WARP 2063. We
believe that we will need to establish relationships with fifteen to twenty
channel resellers in order to have a successful distribution network for the
WARP 2063 and other future products. WARP is currently focused on continuing the
expansion of its channel reseller network in North America, Asia and Europe.
WARP's current internal sales group consists of two direct WARP
employees and six independent contractors retained by WARP. On a general basis,
our sales employees and two independent contractors handle domestic and Asian
sales efforts and four of our independent contractors handle our sales efforts
in Europe. WARP's sales efforts are currently focused on developing its channel
reseller network.
Revenue Model
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WARP will derive its revenue from the sale of the WARP 2063 network
appliance and any future sales of the GTEN technology portfolio either through
channel sales to end users or, on a limited basis, by direct sales to end users.
Generally, all end users will enter into a service agreement with WARP under
which WARP will be paid an ongoing service fee for the installation and
maintenance of the WARP 2063 and any future WARP products.
Marketing
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WARP's current marketing efforts consist mainly of direct contacts
between our sales group and potential channel resellers or direct customers.
Such contacts generally take place either by telephone or in person. WARP is not
currently engaged in any general advertising campaigns.
Customers
WARP is in the very early stages of developing its customer base. As of
June 30, 2002, WARP had completed the sale of one unit to a channel reseller as
part of its distribution agreement with that reseller. As of September 30, 2002,
WARP had signed agreements with two additional customers. WARP is currently
dependent on those two customers for its revenues. Additionally, in the future,
based upon its chosen method of distribution, WARP could be dependent upon a
limited number of channel sellers and large hosting firms to resell its
products. Bankruptcies or consolidations of the major hosting firms may have an
adverse effect on the distribution of WARP's product and on WARP's ability to
penetrate the market for its product.
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Competition
There is significant competition among static and dynamic content
acceleration technology producers and service providers. IBM Corp., Oracle Corp.
and BEA Systems, Inc. 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, InfoLibria and
Network Appliances Corp. have developed frequent "time-to-live" ("TTL") cache
refresh based architectural approaches to dynamic content acceleration. Service
vendors such as Akamai Technologies, Inc. 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.
WARP has four main categories of competitor 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.
As described below, there are relative strengths and weaknesses to all of these
approaches:
Hardware Providers
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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 is 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 is 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.
WARP has designed the WARP 2063 as a hardware solution for content
acceleration and believes that this is the most effective means of incorporating
content acceleration into existing network architectures.
Software Providers
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Generally, software providers will add new computer software to the
existing hardware of a network infrastructure in an attempt to make that
infrastructure more efficient. The strengths of this approach are a high level
of flexibility and granularity down to the object layers of an application. The
weaknesses of this approach are its high cost of implementation, its slow
implementation time due to regression testing requirements, and the limited
performance improvement obtained since the optimization is included in the
transactional unit of work. Also, product complexity limits distribution to
direct sales and systems integrators.
We believe that we have a clear advantage over the software providers
due to the ease of installation and use of the WARP 2063 and the quickness of
its implementation. Oracle Corp.,
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BEA Systems, Inc., IBM and Chutney Technologies all offer software products
which address dynamic content acceleration.
Service Providers
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Generally, service providers offer customers the option of outsourcing
their access to content acceleration technology. The strength of this approach
is 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 is 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.
WARP believes that it has an advantage over service providers because
of the WARP 2063's flexibility, ease of implementation and the ability of its
users to maintain control over their networks. Akamai Technologies, Inc. and ESI
Systems, Inc. are both competitors of WARP who provide a service based solution
to dynamic content acceleration.
Static Caching Hardware & Software Providers
--------------------------------------------
Generally, static caching hardware and software is the existing
technology for content delivery over a network infrastructure. It is possible to
modify this technology to enable some level of dynamic caching and content
acceleration, and under such circumstances this modified technology would
compete with the WARP 2063. The strengths of this approach is that static
caching hardware and software already has significant market share and customers
may write scripts and other applications which enable their static cache
investment to be leveraged for limited dynamic caching by using frequent TTL
invalidation. The weaknesses of this approach are its limited effectiveness,
that it is not a true dynamic cache solution and that it is not designed to
handle certain security authentication protocols.
Network Appliances, Inc., Volera, Cisco Systems, Inc., Inktomi Corp.
and Squid - Freeware all offer modified static caching hardware and software as
solutions for dynamic caching and content acceleration.
The technology industry in general is highly competitive and WARP
expects significant competition for its dynamic content acceleration technology.
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 WARP. There can be no assurance as to the
degree to which we will be able to successfully compete in our industry.
Sources and Availability of Raw Materials and Names of Principal Suppliers
The WARP 2063 and the GTEN suite of products are based on an Intel
Pentium architecture running Sun Microsystem Inc.'s Solaris UNIX operating
system. WARP is not affiliated with either Intel Corp. or Sun Microsystems. WARP
licenses the right to use Solaris
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from Sun Microsystems and purchases their chipsets from Intel and other
suppliers. WARP does not anticipate any problems maintaining its licenses with
Sun Microsystems and Pentium chipsets are readily available on the market from a
wide array of suppliers.
WARP tunes the application of the WARP 2063 to take advantage of
specific features of the Solaris operating system, and of the specific chipsets.
This requires that WARP maintain a "recipe" comprised of software version
number, operating system version number and chipset model number. To that
extent, WARP will be required to modify its product as chipsets evolve and
supplies of current chipsets decline.
Sun Microsystems no longer offers formal support for the Solaris
operating system on Intel Pentium chipsets. Over the next three to four years,
this may require WARP to switch operating system suppliers. Should WARP switch
its operating system, it could take several months to reconfigure WARP's
products to operate with such new operating system which could have a resulting
negative effect on our ability to market our products.
The WARP 2063 systems are assembled by XRAM, a Virginia based server
manufacturer. WARP has not had any trouble with XRAM in the past and anticipates
that XRAM will not have trouble meeting WARP's production requirements for the
foreseeable future.
Research And Development
Prior to the Share Exchange, WARP spent approximately $3 million during
its prior fiscal year on the development of the WARP 2063, the technology
underlying the GTEN suite of products and a core library of software components
for enhancing network performance. The pricing of the WARP 2063 reflects, among
other things, the cost of its development as well as the cost of its component
parts and applicable license fees.
Patents and Trademarks
WARP intellectual property consists of copyrights, trademarks,
provisional patent applications and one awarded patent. The technology contained
in the WARP 2063 has a provisional patent application on file. This application
provides no protection until the patent application is awarded. This could take
up to two years and there is no guarantee that the application will be
successful. WARP's current awarded patent is for the use of a Fractional
Internet Protocol within a server cluster. This patent and the related
technology are not currently being used in the WARP 2063 and WARP does not
anticipate developing any new products that incorporate its awarded patent or
the related technology.
Employees
At present WARP has ten full time employees including Karl Douglas its
Chief Executive Officer and President and John Gnip its Chief Operating Officer
and Secretary. WARP also currently retains four independent contractors under
non-exclusive relationships to
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promote and manage WARP's European sales and marketing efforts and two
independent consultants to develop the North American sales strategy.
We do not have written employment contracts with any of our employees,
however, WARP does maintain Key Man life insurance policies on Karl Douglas and
John Gnip and our key employees and contractors have executed confidentiality
and non-compete agreements in favor of WARP.
Blue Suit Consulting
Between July 2000 and April 2001, WARP operated, through a subsidiary
called Blue Suit Consulting, a personnel consulting business specializing in
outsourcing its customer's computer technology personnel. In April 2001, WARP
ceased all operations at Blue Suit Consulting and since that date it has been an
inactive subsidiary of WARP with no employees, revenue or operations.
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.
Because the Company was formed in July 2000 and WARP was formed in
December 1999, we have 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 starting
a new business, many of which may be beyond our control. In addition, WARP
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. WARP's 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. Similarly, in the future, we may not
generate sufficient revenue from operations to pay all of our operating or other
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.
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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.
The Market for WARP's Products May Change Rapidly
The markets for WARP's products are characterized by:
(1) rapidly changing technologies;
(2) evolving and competing industry standards;
(3) changing customer needs;
(4) frequent new product introductions and enhancements;
(5) increased integration with other functions; and
(6) rapid product obsolescence.
To develop new products for its target markets, WARP must develop, gain
access to and use leading technologies in a cost-effective and timely manner and
continue to expand its technical and design expertise. In addition, WARP must
maintain close working relationships with key customers in order to develop new
products that meet their changing needs.
The Technology in WARP's Industry May Change Rapidly
We cannot assure you that WARP will 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, WARP may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. WARP's pursuit of necessary
technological advances may require substantial time and expense. Failure in any
of these areas could harm its operating results.
WARP's Ability to Compete Successfully Will Depend, In Part, On Its Ability to
Protect Its Intellectual Property Rights.
WARP 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 its
products, however, is difficult, especially in foreign countries. Litigation may
be necessary in the future to enforce WARP's intellectual property rights, to
protect its 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
14
in substantial costs and diversion of resources and could harm WARP's 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 WARP has entered into to protect its
intellectual property rights. WARP's operating results could be harmed by the
failure to protect its intellectual property.
Competition.
The Company is engaged in business in the highly competitive
information technology industry and we expect significant competition for WARP's
dynamic content acceleration technology. See "ITEM 1. BUSINESS - Business of
WARP Solutions, Inc. - 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
WARP is currently developing new products, as well as new applications
of its existing products. There can be no assurance that WARP will not
experience difficulties that could delay or prevent the successful development,
introduction or marketing of these products, or that its new or enhanced
products will adequately meet the requirements of its current or prospective
customers. The failure by WARP to successfully design, develop, test and
introduce such new products, or the failure of WARP 's recently introduced
products to achieve market acceptance, could prevent WARP from maintaining
existing customers relationships, gaining new customers or expanding its markets
and could have a material adverse effect on WARP 's business, financial
condition and results of operations.
Dependence Upon a Small Number of Customers
As of June 30, 2002, WARP had completed the sale of one unit to a
channel reseller as part of its distribution agreement with that reseller.
Because a small number of customer accounts are responsible for WARP's revenues,
such revenues could decline due to the loss of one of these customer accounts.
An early termination by one of WARP's customers would harm its financial results
as it is unlikely that it would be able to rapidly replace that revenue source.
WARP Is Dependent On Key Personnel
WARP's future success depends in part on the continued service of its
key design engineering, sales, marketing and executive personnel and its ability
to identify, recruit and retain additional personnel. At the date of this Form
10KSB, there were no employment agreements between WARP and its key personnel.
WARP currently maintains key man life insurance policies on Karl Douglas and
John Gnip.
15
Managing Growth and Expansion.
WARP is currently anticipating a period of growth as a result of its
recent marketing and sales efforts. The resulting strain on WARP's 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 WARP's business.
We Expect to Pay No Cash Dividends
We presently do not expect to pay dividends in the foreseeable future.
The payment of dividends, if any, will be contingent upon our revenues and
earnings, if any, capital requirements, and general financial condition. The
payment of any dividends will be within the discretion of our Board of
Directors. We presently intend to retain all earnings, if any, to implement our
business plan, accordingly, we do not anticipate the declaration of any
dividends in the foreseeable future.
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.
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 535 West
34 Street, 5th Floor, New York, N.Y. 10001. The Company has a six-month lease on
its current office space at a cost of $5,000 per month. This lease expires in
November 2002. Thereafter, the Company will lease its offices under a
month-to-month lease. The property has a general purpose use for sales, research
and development, and administration and will be sufficient for our needs for the
foreseeable future. The Company believes that New York City is a suitable
location for its offices because of its labor resources and WARP's customer
locations.
From its inception in July 2000 until May 24, 2002, the Company engaged
in the acquisition and exploration of mining properties. The Company owned an
interest through an unrecorded deed in one mining property with mining claims
called the Montana Property. The recorded deed to the Montana Property was held
in the name of Mike Muzylowski, the Company's Chief Executive Officer and
President from inception to May 24, 2002. Subsequent to the closing of the Share
Exchange, the Company ceased all operations on the Montana Property, wrote off
the property as an asset on its financial statements and the unrecorded deed to
that property was abandoned by the Company.
From its inception in July 2000 until May 24, 2002, the Company's
principal executive offices were located at 1040 West Georgia Street, Suite
1160, Vancouver, B.C. Canada V6E 4H1. Subsequent to the closing of the Share
Exchange, the Company moved its offices to their
16
present location at 535 West 34 Street, 5th Floor, New York, N.Y. 10001. The
Company did not have a lease on the Vancouver offices and, as such, has no
ongoing rent obligations for those offices.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the fiscal year ended June 30, 2002.
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. The prices shown below are historical
prices, are for periods prior to the September Stock Dividend, but they reflect
the effect of the September Stock Dividend on the market price of the Company's
common stock.
Fiscal Year Quarter Ended Bid Price
----------- ------------- ---------
Low High
--- ----
2001 September 30 $ .01 $ .01
December 31 .07 .11
2002 March 31 .05 .30
June 30 .30 .98
September 30 .88 1.38
As of October 3, 2002, the National Quotation Bureau, Inc. reported
that the closing bid and ask prices on the Company's common stock were $1.28 and
$1.38 respectively.
Holders
As of June 30, 2002, the Company's financial statements show 57,145,360
shares of common stock outstanding. This number of shares outstanding reflects
the September Stock Dividend and assumes that all shares of WARP common stock
were converted to shares of the
17
Company's common stock pursuant to the Exchange Agreement as of May 24, 2002.
However, as of October 3, 2002, 167,000 shares of WARP common stock had not been
presented to the Company for conversion. Therefore, as of October 3, 2002, the
Company had 56,729,080 shares of common stock outstanding. Of those shares,
11,934,984 shares were owned by the Company's officers and directors. Such
shares are restricted stock and may only be resold in compliance with Rule 144
of the Securities Act of 1933.
At October 3, 2002, there were approximately 154 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. The Company has no outstanding options or warrants, or other
securities convertible into, common stock.
Dividends
We have not declared any cash dividends, nor do we intend to do so. We
are not subject to any legal restrictions respecting the payment of dividends,
except that they may not be paid to render us insolvent. Dividend policy will be
based on our cash resources and needs and it is anticipated that all available
cash will be needed for our operations in the foreseeable future.
On April 26, 2002, the Company's Board of Directors declared a stock
dividend (the "April Stock Dividend") payable to the common stockholders of
record on May 9, 2002 (the "Record Date") of one and a half (1.5) shares of
common stock for each one (1) share issued and outstanding on the Record Date.
On May 10, 2002, the Company's transfer agent issued the requisite number of
shares of the Company's common stock in payment of the April Stock Dividend.
On September 20, 2002, the Company's Board of Directors declared the
September Stock Dividend payable to the common stockholders of record on
September 24, 2002 (the "record date") of three (3) shares of common stock for
each one (1) share issued and outstanding on the record date. The September
Stock Dividend became effective and payable on October 2, 2002.
Recent Sales of Unregistered Securities
The following information relates to sales of unregistered securities
by the Company during fiscal year ended June 30, 2002. All of these sales of
securities were made in reliance upon the exemption from the registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"), set
forth in Sections 4(2) thereof and the rules and regulations under the
Securities Act, including Regulation D, as transactions by an issuer not
involving any public offering and/or sales to a limited number of purchasers who
were acquiring such securities for their own account for investment purposes and
not with a view to the resale or distribution thereof.
In connection with the Share Exchange (as defined and described in Item
1 above) and in accordance with the terms and conditions of the Exchange
Agreement, on May 24, 2002 the
18
Company became obligated to issue up to 36,467,988 shares of its common stock,
after giving effect to the September Stock Dividend, for all of the outstanding
common stock of WARP. As of September 19, 2002, the Company had issued
35,545,364 of those shares for approximately ninety-seven percent (97%) of
WARP's outstanding common stock. The shares of the Company's common stock issued
to the WARP stockholders are restricted shares and were issued in a transaction
exempt from the registration requirements of the Securities Act pursuant to Rule
506 of Regulation D thereunder. The shares issued under the Exchange Agreement
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 acquisition. The
Company paid no selling, finders, placement or other fees in connection with
this stock issuance. WARP has contacted each of the remaining WARP shareholders
and informed them of their ongoing option to exchange their WARP common stock
for shares of the Company's common stock.
Subsequent to the closing of the Share Exchange, the Company completed
the sale of 10,364,408 shares of its common stock, after giving effect to the
September Stock Dividend, in a private transaction with gross proceeds to the
Company from the sale equaling $2,591,102 (the "May Private Placement"). All of
the shares sold in the May Private Placement were offered and sold to accredited
investors (as defined in Rule 501 of Regulation D). The purchase price of the
May Private Placement shares was paid as follows: (i) cash in the amount of
$2,327,769, and (ii) the forgiveness by creditors of WARP of certain outstanding
bridge loans in the amount of $263,333. Pursuant to the terms of a Financial
Consulting Agreement between WARP and Lighthouse Capital Ltd. (the "Consulting
Agreement"), the Company paid fees in the amount of $430,000 in connection with
the Share Exchange and the May Private Placement. Under the Consulting
Agreement, Lighthouse Capital, Inc. provided merger and acquisition advice
related to the Share Exchange and introduced the Company to certain potential
investors for the May Private Placement. The shares of common stock issued in
the May Private Placement are restricted shares and were issued in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder. The
shares issued in the May Private Placement are subject to Rule 144 under the
Securities Act and therefore generally cannot be resold for a period of twelve
months from the date of purchase. No general solicitations were made in
connection with this transaction. The foregoing description of the Consulting
Agreement is not intended to be complete and is qualified in its entirety by the
complete text of that agreement, a copy of which is attached as Exhibit 10.3 to
this Form 10KSB.
On August 12, 2002, the Company issued 80,000 shares of common stock,
after giving effect to the September Stock Dividend, to Bradley L. Steere, Esq.
as consideration for legal services rendered to the Company in the amount of
$20,000. The shares issued to Mr. Steere are restricted shares and were issued
in a transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder. The shares issued to Mr. Steere 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 receipt.
On August 12, 2002, the Company issued 20,000 shares of common stock,
after giving effect to the September Stock Dividend, to James A. Prestiano, Esq.
as consideration for legal
19
services rendered to the Company in the amount of $5,000. The shares issued to
Mr. Prestiano are restricted shares and were issued in a transaction exempt from
the registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act and Rule 506 of Regulation D thereunder. The shares issued to
Mr. Prestiano 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
receipt.
On or about September 13, 2002, the Company closed an offering of
3,600,000 shares of its common stock, after giving effect to the September Stock
Dividend, in a private transaction with gross proceeds to the Company from the
sale equaling $900,000 (the "September Private Placement"). All of the shares
sold in the September Private Placement were offered and sold to accredited
investors (as defined in Rule 501 of Regulation D). The purchase price of the
September Private Placement shares was paid in cash. Pursuant to the terms of
the Consulting Agreement, the Company paid fees in the amount of $126,000 in
connection with the September Private Placement. Under the Consulting Agreement,
Lighthouse Capital, Inc. introduced the Company to certain potential investors
for the September Private Placement. The shares of common stock issued in the
September Private Placement are restricted shares and were issued in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder. The shares issued in the September Private Placement are subject to
Rule 144 under the Securities Act and therefore generally cannot be resold for a
period of twelve months from the date of purchase. No general solicitations were
made in connection with this transaction.
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
thereunder, 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
20
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, after giving effect to the September Stock Dividend,
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 is being 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.
Plan of Operations
The Company's plan of operation is to develop, manage and market the
products of WARP, its direct subsidiary. WARP has developed a unique and
proprietary technology which accelerates the processing speed of dynamic content
requests, and improves the efficiency of an internet or intranet network's
infrastructure that handles such requests. WARP's technology is incorporated
into a network appliance that moves the processing of dynamic content requests
away from the core of an enterprises' network infrastructure to the edge of that
infrastructure. By doing so, WARP's technology and product should enable an
enterprise to improve the efficiency of its network infrastructure resulting in:
i) The elimination of complex transaction-processing
bottlenecks,
ii) Increased response times,
iii) Lower hardware costs, and
iv) Lower wide area network costs.
21
WARP believes that it can extend the core technology of the WARP 2063
to deliver similar functionality and efficiency to wireless transaction
processing over the next twenty-four months as part of its GTEN strategy. There
can be no assurances however that WARP will have the financial or manpower
resources necessary to develop and or market the WARP 2063 or any future
products for wireless solutions.
WARP believes that there is a growing market for its technology and
product. With broadband connectivity being more common, the volume of
transactions being processed over networks is increasing. WARP believes that the
increase in the number of broadband connections and the related increase in
transaction processing have contributed to application congestion in the
applications layers and database layers of network enabled applications. WARP
believes that the WARP 2063 can help relieve such application congestion by
increasing a network's efficiency through better management of the flow and
processing of dynamic transaction requests.
The market for the WARP 2063 and other application acceleration
technology is new and undeveloped. As a result, WARP believes that there is the
potential for reasonable growth in this market for the next five years. At
present, the WARP 2063 is still considered to be an early stage product. WARP
believes that the product will require at least an additional twelve months of
customer requested feature enhancements to reach maturity. We believe, despite
the relative immaturity of our product, that we will be able to attract
customers to the WARP 2063 because of its potential performance and cost saving
benefits.
The WARP 2063 is one component in the technology portfolio that WARP
plans to develop. WARP planned technology portfolio will consist of five
components, all of which are at the alpha stage or higher in terms of
development. The WARP 2063 Application Pre-Processor is one of the five
components. WARP chose to lead with the WARP 2063 because of its marketability
and the readiness of its technology. WARP has branded its technology portfolio
"GTEN" which stands for "Global Transaction Enabled Network". The GTEN network
offering will be comprised of:
o WARP 2063 Application Pre-Processor - currently available for
sale.
o WARP 2063 Edge Transaction Accelerator - currently going into
beta cycle.
o WARP 2063 Edge Transaction Router - slated to go into beta
cycle in mid 2003
o WARP 2063 Transaction Session Manager - in beta cycle, planned
productization in 2003
o WARP Performance Cluster - alpha stage.
The central philosophy behind WARP's technology strategy is to optimize
the server stack, and then to distribute the stack in order to optimize the
network. To that extent, all of the GTEN components are designed to address the
prevalent unaddressed bottlenecks in the network.
WARP has decided to use wholesale resellers ("channel sales") as the
main distribution method for the WARP 2063. Such wholesale channels as Systems
Integrators, Managed Service Providers and Value Added Resellers will be the
main distribution vehicles for the WARP 2063.
22
The company has established reseller relationships in Europe and Asia for
distribution of the WARP 2063. WARP recently entered into reseller agreements
with Macnica Networks and CDI Technologies. Macnica Networks is a leading
technology distributor for the Japanese market and CDI Technologies is a leading
distributor for South Korea. Additionally, WARP has reseller agreements with
Cable and Wireless Europe and NTT Verio Europe. WARP is currently focused on
continuing the expansion of its channel reseller network in North America, Asia
and Europe.
Between July 2000 and April 2001, WARP operated, through a subsidiary
called Blue Suit Consulting, a personnel consulting business specializing in
outsourcing its customer's computer technology personnel. In April 2001, WARP
ceased all operations at Blue Suit Consulting and since that date it has been an
inactive subsidiary of WARP with no employees, revenue or operations.
Results of Operations
Six months ended June 30, 2002 vs. 2001:
---------------------------------------
During the six months ended June 30, 2002 the Company recognized revenues of
approximately $11,000, consisting of the sale of one WARP 2063 unit to a channel
reseller under a distribution agreement along with a maintenance agreement,
compared to revenues of approximately $156,000 during the six months ended June
30, 2001. Revenues for the six month period ended June 30, 2001 were derived
from performing temporary and permanent recruitment services by WARP's
wholly-owned subsidiary, Blue Suit Consulting, which subsequently ceased
operations.
Product development costs were approximately $101,000 for the six months ended
June 30, 2002 compared to approximately $1,636,000 for the six months ended June
30, 2001. The decrease was due primarily to the cessation of the Company's
research and development efforts.
Sales, marketing and business development expenses were approximately $99,000
for the six months ended June 30, 2002 compared to approximately $485,000 for
the six months ended June 30, 2001. The decrease was due primarily to a change
in sales and marketing strategy which resulted in reduction of sales and
business development expenses. The Company elected to focus on one single
product offering for the six months ended June 30, 2002.
General and administrative expenses were approximately $1,404,000 for the six
months ended June 30, 2002 compared to approximately $2,042,000 for the six
months ended June 30, 2001. The decrease was due primarily to cost cutting
measures.
During the six months ended June 30, 2002 the Company had net interest expense
of approximately $23,000 compared to net interest income of approximately
$123,000 for the six months ended June 30, 2001. The decrease is the result of a
decrease in cash balances available for investment.
23
Year ended December 31, 2001 vs. 2000:
-------------------------------------
Revenues for the year ended December 31, 2001 amounted to $156,000 compared to
$93,000 during the year ended December 31, 2000. All of the Company's revenues
related to performing temporary and permanent recruitment services by WARP's
wholly-owned subsidiary, Blue Suit Consulting.
Product development costs increased from approximately $1,147,000 during the
year ended December 31, 2000 to approximately $3,121,000 during the year ended
December 31, 2001. The increase was due primarily to increased scope of the
research and development efforts associated with the company's "GTEN" or "Global
Transaction Enabled Network" suite of components.
Sales, marketing and business development expenses decreased from approximately
$1,041,000 for the year ended December 31, 2000 to approximately $565,000 for
the year ended December 31, 2001. The decrease was due primarily to the firms
strategy to conserve cash in reaction to the economic downturn in the technology
sector at the time.
General and administrative expenses increased from approximately $3,402,000 for
the year ended December 31, 2000 to approximately $3,846,000 for the year ended
December 31, 2001. This increase was due primarily to administrative expenses
associated with business strategy modifications, downsizing requiring severance
payments, and seeking additional sources of financing.
Interest and dividend income decreased from approximately $408,000 for the year
ended December 31, 2000 to approximately $143,000 during the year ended December
31, 2001. The decrease is the result of a decrease in the cash balances
available for investment.
Net Operating Loss Carryforwards
At June 30, 2002, WARP has net operating loss carryforwards and other deferred
assets of approximately $13,600,000 which may be used to reduce taxable income
in future years through the year 2021. 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
Since inception, the Company has financed its operations primarily through the
sale of common and preferred stock and short-term borrowings.
Net cash used in operating activities for the six months ended June 30, 2002 and
the year ended December 31, 2001 was approximately $1,116,000 and $6,203,000,
respectively. During the six months ended June 30, 2002, net cash used in
operating activities consisted primarily of the net
24
loss of $1,579,000, adjusted for depreciation of $45,000, loss on abandonment of
assets of $299,000 and a loss from the forfeit of security deposits of $281,000.
During the year ended December 31, 2001, net cash used in operating activities
consisted principally of the net loss of $7,233,000 adjusted for depreciation of
$251,000, loss on abandonment of assets of $228,000, a loss from the forfeit of
security deposits of $325,000, and stock based compensation of $231,000.
Net cash used in investing activities during the year ended December 31, 2001 of
$179,000 consisted of the acquisition of security deposits of $127,000 and the
purchase of property and equipment of $52,000.
Net cash provided by financing activities during the six months ended June 30,
2002 of $2,204,000 consisted primarily of net proceeds from the issuance of
common stock.
Net cash used in financing activities during the year ended December 31, 2001 of
$34,000 consisted of payments to stockholders of $19,000 and payments on capital
lease obligations of $14,000.
As of June 30, 2002, the Company had working capital of $818,000, as compared to
a working capital deficiency of $343,000 at December 31, 2001. The Company's
cash and cash equivalents were $1,185,000 at June 30, 2002, compared to $97,000
at December 31, 2001.
In September 2002, the Company closed the offering of 3,600,000 restricted
shares of its common stock, after giving effect to the September Stock Dividend,
in a private transaction for gross proceeds of $900,000.
The Company has incurred losses and negative cash flows from operations for each
of the two years in the period ended December 31, 2001 and for the six month
period ended June 30, 2002, and as such has been dependent upon raising money
for short and long-term cash needs through the sale of common and preferred
stock in private placements and through debt.
During 2001, management took steps to reduce costs, including staff reductions,
salary reductions, and elimination of other employees fringe benefits.
Even with the reduction in expenses and an expected increase in sales, the
Company anticipates that during its 2003 fiscal year it will need to raise over
$2,000,000 million to support its working capital needs and to continue to
execute the requirements of the business plan, of which the Company had raised
$900,000 as of September 13, 2002.
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 commitments from any other
sources to provide additional equity or debt financing. As such, there can be no
assurance that sufficient funds will be raised. Moreover, any
25
equity financing would result in dilution to then existing shareholders and any
additional debt financing may result in higher interest expense.
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 2003.
Subsequent Events
On August 15, 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, 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.
On or about September 13, 2002, the Company closed an offering of
3,600,000 shares of its common stock, after giving effect to the September Stock
Dividend, in the September Private Placement for gross proceeds of $900,000. All
of the shares sold in the September Private Placement were offered and sold to
accredited investors (as defined in Rule 501 of Regulation D). The purchase
price of the September Private Placement shares was paid in cash. The Company
paid fees in the amount of $126,000 in connection with the September Private
Placement. The shares of common stock issued in the September Private Placement
are restricted shares and were issued in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) and
Rule 506 of Regulation D under that act. No general solicitations were made in
connection with this transaction. See "ITEM 5. - MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS - Recent Sales of Unregistered Securities".
On August 1, 2002, WARP entered into an exclusive distribution
agreement with Macnica Networks Company, a division of Macnica, Inc, a Japanese
information technology distributor. Under this agreement, Macnica Networks
Company will distribute the WARP 2063 in Japan. A copy of the Macnica
distribution agreement is attached as Exhibit 10.5 to this Form 10KSB.
On September 20, 2002, the Company's Board of Directors declared the
September Stock Dividend payable to the common stockholders of record on
September 24, 2002 (the "record date") of three (3) shares of common stock for
each one (1) share issued and outstanding on the record date. The September
Stock Dividend became effective and payable on October 2, 2002.
26
Critical Accounting Policies
Revenue Recognition
-------------------
Pursuant to AICPA Statement of Position ("SOP") 97-2, Software Revenue
Recognition, the Company recognizes revenues from software licenses when
persuasive evidence a contractual arrangement exists, delivery has occurred, the
fee is fixed or determinable and collection is probable. The Company's software
licenses generally are marketed with certain postcontract customer support
("PCS") and other obligations, which may include maintenance, delivery of
unspecified upgrades, and warranties regarding service response times. Revenue
under PCS agreements is recognized ratably over the term of the agreement. Under
SOP 97-2, the Company must allocate revenue to each element based on vendor
specific objective evidence ("VSOE") of each element's fair value. Since the
Company has just begun to market its products, VSOE of the fair value of each
element has not been clearly established. Accordingly, revenue from license
agreements are being recognized ratably over the term of the PCS agreement.
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.
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.
On August 29, 2002, the Company dismissed Williams & Webster, P.S. as
its prior independent accountants and engaged Ernst & Young LLP as its new
independent accountants as of August 28, 2002. In connection with its audits for
the last two fiscal years and through August 29, 2002, there have been no
disagreements with Williams & Webster, P.S. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Williams &
Webster, P.S. would have caused them to make a reference thereto in their report
on the financial statements for such periods. The Company reported its change in
independent accountants in a Current Report on Form 8-K filed with the
Commission on September 3, 2002, the content of which is incorporated herein by
reference.
27
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Officers and Directors
The following table sets forth the name, age and position of each of
our directors, executive officers and significant employees as of September 24,
2002. Each director will hold office until the next annual meeting of our
stockholders or until his or her successor has been elected and duly qualified.
Our executive officers are appointed by, and serve at the discretion of, the
Board of Directors.
Name Age Position
---- --- --------
Karl Douglas 39 CEO, President, Director
John Gnip 35 COO, Secretary, Director
Carlo Civelli 52 Director
Kevin Chen, Phd. 39 Vice-President Technology
Background of Officers and Directors
Karl Douglas: CEO, President and Director. On May 24, 2002, Mr. Douglas
was appointed as a director and the Chief Executive Officer and President of the
Company. Since December 1999, Mr. Douglas has been the Chief Executive Officer
and a director of WARP. Mr. Douglas has over 15 years of experience managing
enterprise level information technology systems and departments for Fortune 500
companies. From August 1998 to December 1999, Mr. Douglas was a Vice President
at Merrill Lynch and Co. where he was a senior strategic technology manager.
From August 1994 to August 1998, Mr. Douglas was a Vice President and a Global
Technology Infrastructure Manager for JP Morgan & Co.'s Financial Division,
during which time he managed a $105 million technology portfolio and a 125
person technology staff. From January 1992 to August 1994, Mr. Douglas was a
Vice President in the information technology department at Bear Stearns, Inc.
John Gnip: COO, Secretary and Director. On May 24, 2002, Mr. Gnip was
appointed as a director, and the Chief Operating Officer and Secretary of the
Company. Since December 1999, Mr. Gnip has been the Chief Information Officer
and a director of WARP. Mr. Gnip has over 10 years experience delivering mission
critical commercial software applications. From 1998 to 1999, Mr. Gnip was a
Senior Technology Consultant whose client was Merrill Lynch and Co. From 1994 to
1998, Mr. Gnip was a Senior Technology Consultant whose client was JP Morgan &
Co. From 1992 to 1994, Mr. Gnip was a Senior Software Engineer at Systems
Strategies, Inc. in Melville, N.Y., where he was one of the original lead
engineers developing IBM's top selling middleware-messaging product "IBM MQ
Series". From 1990 to 1992, Mr. Gnip was a programmer analyst at the Federal
Reserve Bank of New York.
28
Carlo Civelli: Director. Mr. Civelli has been a director of the Company
since its inception in June 2000. From June 2000 to May 24, 2002, Mr. Civelli
was the Secretary of the Company. Mr. Civelli resigned as Secretary of the
Company in connection with the Share Exchange. Since 1980, Mr. Civelli has been
a managing director of Clarion Finanz AG located in Zurich, Switzerland. Clarion
Finanz is engaged in the business of investment banking and money management.
Mr. Civelli is a full time employee of Clarion Finanz. Since March 1993, Mr.
Civelli has been a director of Spatilizer Audio Labs located in Los Angeles,
California. Spatilizer Audio is engaged in the business of automotive sound
systems. Since May 1994, Mr. Civelli has been a director of Namibian Minerals
located in London, England. Namibian Minerals is engaged in the business of
diamond exploration. Since February 1998, Mr. Civelli has been a director of
Callinan Mines Limited located in Vancouver, British Columbia. Since June 2000,
Mr. Civelli has been Secretary and a director of Keystone Mines Limited, a
Vancouver, British Columbia mining corporation.
Kevin Chen, Phd.: Vice-President Technology for WARP. Kevin Chen is an
expert in the area of content management and he has designed and distributed
architecture applications for complex network transaction environments. Dr. Chen
brings more than ten years of professional experience in developing large-scale,
robust distributed IT applications and commercial software products to Warp
Solutions' research and development team. Most recently, Dr. Chen was senior
technology consultant at JP Morgan. Prior to that, he was a technology
consultant at CitiBank. Mr. Chen has a PhD in physics and a M.S in computer
science from the City University of New York. He is the author and co-author of
several publications in top professional journals including Physics Review
Letter, Physics Review, Congressus Numerantium, and IEEE Trans. He is also
author or co-author of two pending patents. Dr. Chen has been widely published.
No director, executive officer, promoter or control person of the
Company has, within the last five years: (i) had a bankruptcy petition filed by
or against any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that
time; (ii) been convicted in a criminal proceeding or is currently subject to a
pending criminal proceeding (excluding traffic violations or similar
misdemeanors); (iii) been subject to any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities; (iv) been found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission (the "Commission") or the
Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated. There are no family relationships among any directors and executive
officers of the Company.
Committees of the Board of Directors
During the fiscal year ended June 30, 2002, the Board of Directors of
the Company had no standing board committees.
29
Section 16(a)
Section 16(a) of the Securities and Exchange Act of 1934 requires
certain defined persons to file reports of and changes in beneficial ownership
of a registered security with the Commission. Under the regulatory procedure,
officers, directors and persons who own more than ten percent of a registered
class of a company's equity securities are also required to furnish the Company
with copies of all Section 16(a) forms they filed.
To the Company's knowledge, and based solely upon a review of the
copies of such reports furnished to the Company and written representations that
no other reports were required during the fiscal year ended June 30, 2002, all
Section 16(a) filing requirements applicable to its officers, directors and 10%
or greater beneficial owners were complied with, except that the following forms
were filed late: Carlo Civelli's Form 4 reporting his surrender of 6,250,000
shares of common stock to the Company for cancellation pursuant to the terms of
the Share Exchange, and Len Primak's Form 3 reporting his receipt of 1,989,163
shares of the Company's common stock pursuant to the terms of the Share
Exchange.
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth information
concerning the annual and long-term compensation earned by our Chief Executive
Officer and each of the other most highly compensated executive officers
(collectively the " named executive officers"). This information includes the
dollar value of base salaries and bonus awards and the number of stock options
granted, and certain other compensation, if any.
30
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Other
Executive Annual Restricted Securities Annual
Officer and Compen- Stock Underlying LTIP Compen-
Principal Year Salary Bonus sation Awards Options/SAR Payouts sation
Position (US$) (US$) (US$) (#) (#) (US$) (US$)
Karl Douglas (1) 2002 90,000 75,000 0 0 0 0 0
CEO & President 2001 90,000 60,000 0 0 0 0 0
2000 90,000 35,000 0 0 0 0 0
John Gnip (2) 2002 90,000 75,000 0 0 0 0 0
COO & 2001 90,000 60,000 0 0 0 0 0
Secretary 2000 90,000 35,000 0 0 0 0 0
Mike Muzylowski 2002 0 0 0 0 0 0 0
Former CEO & 2001 0 0 0 0 0 0 0
President (3) 2000 0 0 0 249,261 0 0 0
Kevin Chen (4) 2002 130,000 0 0 0 0 0 0
Vice-President 2001 130,000 0 0 0 0 0 0
2000 110,000 0 0 0 0 0 0
(1) Karl Douglas is also the CEO and President of the Company's subsidiary; WARP
Solutions, Inc. The compensation shown in this Summary Compensation Table
represents the total compensation paid to Mr. Douglas for all executive
positions held by him at the Company and WARP.
(2) John Gnip is also the Chief Information Officer of the Company's subsidiary;
WARP Solutions, Inc. The compensation shown in this Summary Compensation Table
represents the total compensation paid to Mr. Gnip for all executive positions
held by him at the Company and WARP.
(3) Mike Muzylowski was a director and the CEO and President of the Company from
its inception until May 24, 2002 when he resigned from all of his director and
officer positions pursuant to the terms of the Share Exchange, as described in
greater detail in Item 1 of this Form 10-KSB.
(4) Kevin Chen is not employed by the Company but is a Vice-President of the
Company's subsidiary; WARP Solutions, Inc. The compensation shown in this
Summary Compensation Table represents the total compensation paid to Mr. Chen
for all executive positions held by him at WARP.
The compensation discussed herein addresses all compensation awarded
to, earned by, or paid to the Company's named executive officers for all the
positions held thereby with the Company and its subsidiary, WARP Solutions, Inc.
There are no other stock option plans, retirement, pension, or profit
sharing plans for the benefit of the Company's officers and directors other than
as described herein.
Long-Term Incentive Plan Awards
The Company does not have any long-term incentive plans that provide
compensation intended to serve as incentive for performance.
31
Compensation of Directors
The Company's directors do not receive any compensation for serving as
members of the board of directors.
Employment Contracts
The Company does not have written employment contracts with any of its
officers or employees.
Indemnification
Under our Articles of Incorporation and Bylaws, the Company may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in the Company's best interest. The Company
may advance expenses incurred in defending a proceeding. To the extent that the
officer or director is successful on the merits in a proceeding as to which he
is to be indemnified, the Company must indemnify him against all expenses
incurred, including attorney's fees. With respect to a derivative action,
indemnity may be made only for expenses actually and reasonably incurred in
defending the proceeding, and if the officer or director is judged liable, only
by a court order. The indemnification is intended to be to the fullest extent
permitted by the laws of the State of Nevada. Regarding indemnification for
liabilities arising under the Securities Act, which may be permitted to
directors or officers under Nevada law, the Company is informed that, in the
opinion of the Commission, indemnification is against public policy, as
expressed in the Act and is, therefore, unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of October 3, 2002, certain
information regarding the beneficial ownership (1) of the Company's common stock
outstanding by (i) each person who is known to the Company to own 5% or more of
its common stock, (ii) each director of the Company, (iii) certain executive
officers of the Company and (iv) all executive officers and directors of the
Company as a group. Unless otherwise indicated, each of the stockholders shown
in the table below has sole voting and investment power with respect to the
shares beneficially owned. The share numbers shown below reflect the issuance of
common stock by the Company pursuant to the September Stock Dividend. Unless
otherwise indicated, the address of each person named in the table below is c/o
WARP Technology Holdings, Inc., 535 West 34 Street, 5th Floor, New York, N.Y.
10001.
32
Number of Percent
Name and Address Company Position Shares owned of class
---------------- ---------------- ------------ --------
Karl Douglas Director, CEO 5,967,492 10.5 %
John Gnip Director, COO 5,967,492 10.5 %
Carlo Civelli (2) Director - 0 - - 0 -
Lenny Primak (3) 7,956,652 14.0 %
Morgan Stanley 4,334,724 7.7 %
Dean Witter (4)
All directors and executive officers
as a group (2 persons) 11,934,984 21.0 %
(1) As used in this table, a beneficial owner of a security includes any person
who, directly or indirectly, through contract, arrangement, understanding,
relationship or otherwise has or shares (a) the power to vote, or direct the
voting of, such security or (b) investment power which includes the power to
dispose, or to direct the disposition of, such security. In addition, a person
is deemed to be the beneficial owner of a security if that person has the right
to acquire beneficial ownership of such security within 60 days.
(2) Mr. Civelli's address is Gerbergasse 5, Zurich, Switzerland 8001. On May 24,
2002, Mr. Civelli returned 6,250,000 shares of common stock to the Company for
cancellation pursuant to the terms of the Share Exchange, as described in
greater detail in Item 1 of this Form 10-KSB.
(3) Mr. Primak was a founder of WARP Solutions, Inc. but is no longer an officer
or director of that company. Mr. Primak's address is 284 Mott Street, New York,
N.Y.
(4) Morgan Stanley Dean Witter owns the above shares through several entities
under its common control. Morgan Stanley Dean Witter is located at 1221 Avenue
of the Americas, 22nd Floor, New York, N.Y. 10020
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On May 16, 2002, the Company entered into a Financial Consulting
Agreement (the "May Consulting Agreement") with Lighthouse Capital, Ltd.
pursuant to which Lighthouse; i) provides consulting services to the Company
including advising the Company on public relations and the proper presentation
of its business plan to financial services companies, ii) makes presentations to
institutional funds and stockbrokers, and distributes published materials to
such persons, and iii) introduces the Company to certain financial analysts and
portfolio managers, all with the intention of keeping the investment community
well informed regarding the Company and its operations. The Company pays
Lighthouse a fee of $10,000 per month under this agreement. The foregoing
description of the May Consulting Agreement is not intended to be complete and
is qualified in its entirety by the complete text of that agreement, a copy of
which is attached as Exhibit 10.4 to this Form 10KSB.
33
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The following documents heretofore filed by the Company with the
Securities and Exchange Commission are hereby incorporated by reference:
Exhibit
Number Description Of Document
------ -----------------------
2.1* Form of Share Exchange Agreement dated as of May 16, 2002 by
and among Abbott Mines, Ltd., Carlo Civelli, Mike Muzylowski,
WARP Solutions, Inc., Karl Douglas, John Gnip and the Persons
Identified on Schedule A thereto. Incorporate by reference to
Exhibit 2.1 to the Current Report on Form 8-K filed by the
Company on June 10, 2002.
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.
10.3# The form of the Financial Consulting Agreement dated March 5,
2002 between WARP Solutions, Inc. and Lighthouse Capital, Inc.
10.4# The form of the Financial Consulting Agreement dated May 16,
2002 between the Company and Lighthouse Capital, Inc.
10.5# Form of Master Distributor Agreement between Macnica Networks
Company and WARP Solutions, Inc. dated as of August 1, 2002.
10.6# Form of Master Distributor Agreement between CDI Technologies,
Inc. and WARP Solutions, Inc. dated as of September 1, 2002.
22.1# Subsidiaries of the Company.
---------------------
* Incorporated herein by reference.
# Filed herewith.
(b) Reports on Form 8-K:
The following reports on Form 8-K have been filed during the last
quarter of the period covered by this report:
34
On May 13, 2002, the Company filed a Current Report on Form 8-K which
disclosed that on April 26, 2002 the Company had declared a stock dividend of
one and a half (1.5) shares of common stock for each one (1) share of common
stock outstanding on May 9, 2002 and also disclosed, pursuant to Section 14(f)
of the Securities Exchange Act of 1934 and Regulation 14f-1 thereunder, certain
information related to Karl Douglas and John Gnip who had been nominated to the
Company's Board of Directors pursuant to the Share Exchange.
On June 10, 2002, the Company filed a Current Report on Form 8-K which
disclosed that on May 24, 2002 the Company closed a share exchange transaction
and thereby acquired the majority of the issued and outstanding capital stock of
WARP Solutions, Inc., a Delaware corporation.
On August 7, 2002, the Company filed an Amendment to Current Report on
Form 8-K/A to amend the Current Report on Form 8-K which was filed on June 10,
2002. The August 7, 2002 Form 8-K/A contained financial statements of the
business acquired and pro forma financial information.
On September 3, 2002, the Company filed a Current Report on Form 8-K
which disclosed that on August 21, 2002 it had closed the upstream merger of its
subsidiary WARP Technology Holdings, Inc. with and into the Company and thereby
changed the Company's name to WARP Technology Holdings, Inc. In this September
3, 2002 Form 8-K, the Company also reported that on August 29, 2002 it changed
its independent accountant from Williams & Webster P.S. to Ernst & Young LLP.
35
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 3, 2002
WARP TECHNOLOGY HOLDINGS INC
By: /s/ Karl Douglas
---------------------------
Karl Douglas, CEO and President
Principle Executive Officer
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/ Karl Douglas /s/ Carlo Civelli
---------------------------------- ----------------------------------
Karl Douglas Carlo Civelli
President, Chief Executive Director
Officer and Director October 3, 2002
Principal Executive Officer
October 3, 2002
/s/ John Gnip
----------------------------------
John Gnip
Director
October 3, 2002
36
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Form 10-KSB of the Company for the fiscal year
ended June 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Karl Douglas, the Chief Executive Officer and
President of the Company, hereby certify, based on my knowledge and solely for
the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed the Report;
(2) Based on my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of
the circumstances under which such statements were made, not
misleading;
(3) Based on my knowledge, the financial statements, and other
financial information included in the Report, fairly present
in all material respects the financial condition and results
of operations of the Company as of, and for, the periods
presented in the Report;
(4) I am responsible for establishing and maintaining disclosure
control procedures for the Company; the Company has designed
such disclosure controls and procedures to ensure that
material information is made known to me, particularly during
the period in which this Report is being prepared; I have
evaluated the effectiveness of the Company's disclosure
controls and procedures within 90 days of the date of this
Report, and have presented in this Report conclusions about
the effectiveness of the disclosure controls and procedures
based on the required evaluation;
(5) I have disclosed to the Company's auditors and to the Board of
Directors of the Company, all significant deficiencies in the
design or operation of internal controls which could adversely
affect the Company's ability to record, process, summarize and
report financial data and have identified for the Company's
auditors any material weaknesses in internal controls, and any
fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
(6) I have indicated in the Report whether or not there were
significant changes in internal controls subsequent to the
date of their evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: October 3, 2002
By /s/ Karl Douglas
------------------------------
Karl Douglas, Chief Executive
Officer and President
37
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
Report of Independent Auditors
To the Stockholders of
WARP Technology Holdings, Inc.
We have audited the accompanying consolidated balance sheets of WARP Technology
Holdings, Inc. (the "Company") as of June 30, 2002 and December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the six months ended June 30, 2002, the two years
ended December 31, 2001 and the period from July 16, 1999 to December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WARP Technology
Holdings, Inc. as of June 30, 2002 and December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for the six months
ended June 30, 2002, the two years ended December 31, 2001 and the period from
July 16, 1999 to December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
October 1, 2002
New York, New York
F-2
WARP Technology Holdings, Inc.
Consolidated Balance Sheets
June 30 December 31
2002 2001 2001 2000
---------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,184,652 $2,647,200 $ 96,659 $ 6,512,881
Accounts receivable 68,000 30,953 - 101,940
Prepaid expenses and other 160,473 57,291 6,892 74,802
Due from stockholder 19,000 74,440 74,440 55,580
---------------------------------------------------------------
Total current assets 1,432,125 2,809,884 177,991 6,745,203
---------------------------------------------------------------
Property and equipment, net 97,367 772,121 441,082 867,097
---------------------------------------------------------------
Other assets:
Restricted cash - 27,064 21,553 20,652
Security deposit 3,500 285,560 284,902 482,818
---------------------------------------------------------------
Total other assets 3,500 312,624 306,455 503,470
---------------------------------------------------------------
Total assets $ 1,532,992 $3,894,629 $ 925,528 $ 8,115,770
===============================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 149,286 $ 85,658 $ 80,660 $ 113,121
Accrued expenses 408,142 245,078 431,875 388,641
Deferred revenue 56,667 - - 90,000
Capital lease obligation, current - 17,430 7,974 15,004
---------------------------------------------------------------
Total current liabilities 614,095 348,166 520,509 606,766
Long-term liabilities:
Deferred rent - 55,045 32,265 127,254
Capital lease obligation - - - 6,890
---------------------------------------------------------------
Total liabilities 614,095 403,211 552,774 740,910
---------------------------------------------------------------
Stockholders' equity:
Convertible preferred stock, Series A;
$.01 par value; 1,000,000 shares
designated, issued and outstanding
(liquidation preference $3,000,000) - 10,000 10,000 10,000
Convertible preferred stock, Series B;
$.01 par value; 2,000,000 shares
designated, issued and outstanding
(liquidation preference $10,000,000) - 20,000 20,000 20,000
Common stock, $.00001 par value;
100,000,000 shares authorized,
57,145,360 shares issued and 572 199 199 199
outstanding
Additional paid-in capital 14,868,554 12,446,135 12,677,135 12,446,135
Accumulated deficit (13,950,229) (8,984,916) (12,334,580) (5,101,474)
---------------------------------------------------------------
Total stockholders' equity 918,897 3,491,418 372,754 7,374,860
---------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,532,992 $3,894,629 $ 925,528 $ 8,115,770
===============================================================
See accompanying notes to consolidated financial statements.
F-3
WARP Technology Holdings, Inc.
Consolidated Statements of Operations
Period from July 16,
1999 to December 31,
2000 cumulative
Six Months ended June 30 Year ended December 31 during development
2002 2001 2001 2000 stage
------------------------------------------------------------------------------------
(Unaudited)
Revenue $ 11,333 $ 155,990 $ 155,990 $ 93,121 $ 249,111
------------------------------------------------------------------------------------
Expenses
Product development 100,874 1,635,640 3,121,193 1,146,892 4,268,085
Sales, marketing and business
development 99,153 485,158 565,087 1,040,533 1,605,620
General and administrative 1,403,630 2,041,582 3,846,025 3,402,342 7,261,924
------------------------------------------------------------------------------------
Total expenses 1,603,657 4,162,380 7,532,305 5,589,767 13,135,629
------------------------------------------------------------------------------------
Interest and dividend income 3,008 124,648 145,114 409,883 551,938
Interest expense (26,333) (1,700) (1,905) (1,651) -
------------------------------------------------------------------------------------
Net loss $(1,615,649) $ (3,883,442) $ (7,233,106) $(5,088,414) $ (12,334,580)
====================================================================================
Basic and diluted net loss per $ (0.06) $ (0.20) $ (0.36) $ (0.26) $ (0.62)
share
====================================================================================
Weighted-average number common
shares--basic and diluted 26,684,492 19,981,630 19,981,630 19,981,630 19,981,630
====================================================================================
See accompanying notes to consolidated financial statements.
F-4
WARP Technology Holdings, Inc.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2000 and 2001
and the six months ended June 30, 2002
Convertible Convertible
Preferred Stock, Preferred Stock,
Series A Series B Common Stock
---------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
Balance--January 1, 2000 1,000,000 $ 10,000 - $ - 19,891,630 $ 199
Issuance of convertible preferred stock,
Series B (March--July 2000) - - 2,000,000 20,000 - -
Costs incurred in connection with issuance - - - - - -
Collection of subscription receivable - - - - - -
Warrants issued for services - - - - - -
Net loss for the year ended December 31, - - - - - -
2000
----------------------------------------------------------------------------
Balance--December 31, 2000 1,000,000 10,000 2,000,000 20,000 19,891,630 199
Stock-based compensation - - - - - -
Net loss for the year ended December 31, - - - - - -
2001
----------------------------------------------------------------------------
Balance--December 31, 2001 1,000,000 10,000 2,000,000 20,000 19,891,630 199
Conversion to common stock (1,000,000) (10,000) (2,000,000) (20,000) 16,576,358 166
Shares issued in connection with
recapitalization--reverse merger - - - - 10,312,964 103
Costs incurred in connection with the
merger and issuance of common stock - - - - - -
Bridge Loan- Stock Conversion - - - - 1,053,332 11
Sale of common stock - - - - 9,311,076 93
Net loss for six months ended June 30, 2002 - - - - - -
----------------------------------------------------------------------------
Balance--June 30, 2002 - $ - - $ - 57,145,360 $ 572
============================================================================
Additional Common Stock
Paid-in Accumulated Subscription
Capital Deficit Receivable Total
---------------------------------------------------------
Balance--January 1, 2000 $ 2,981,678 $ (13,060) $(35,999) $ 2,942,818
Issuance of convertible preferred stock,
Series B (March--July 2000) 9,980,000 - - 10,000,000
Costs incurred in connection with issuance (582,859) - - (582,859)
Collection of subscription receivable - - 35,999 35,999
Warrants issued for services 67,316 - - 67,316
Net loss for the year ended December 31, - (5,088,414) - (5,088,414)
2000
------------------------------------------------------------
Balance--December 31, 2000 12,446,135 (5,101,474) - 7,374,860
Stock-based compensation 231,000 - - 231,000
Net loss for the year ended December 31, - (7,233,106) - (7,233,106)
2001
------------------------------------------------------------
Balance--December 31, 2001 12,677,135 (12,334,580) - 372,754
Conversion to common stock 29,834 - - -
Shares issued in connection with
recapitalization--reverse merger 587 - - 690
Costs incurred in connection with the
merger and issuance of common stock (430,000) - - (430,000)
Bridge Loan- Stock Conversion 263,322 - - 263,333
Sale of common stock 2,327,676 - - 2,327,769
Net loss for six months ended June 30, 2002 - (1,615,649) - (1,615,649)
------------------------------------------------------------
Balance--June 30, 2002 $14,868,554 $(13,950,229) $ - $ 918,897
============================================================
See accompanying notes to consolidated financial statements.
F-5
WARP Technology Holdings, Inc.
Consolidated Statements of Cash Flows
Period from July 16,
1999 to December 31,
Six months ended June 30 Year ended December 31 2001 cumulative during
2002 2001 2001 2000 development stage
----------------------------------------------------------------------------------
(Unaudited)
Operating activities
Net loss $(1,578,649) $(3,883,442) $(7,233,106) $(5,088,414) $ (12,334,580)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 44,836 136,135 250,591 112,352 362,943
Loss on abandonment of assets 298,879 - 227,566 - 552,566
Loss from forfeit of security deposits 281,402 - 325,000 - -
Interest expense--bridge loan 26,333 - - - -
Deferred rent (32,265) (72,209) (94,989) 127,254 32,265
Stock-based compensation 231,000 67,316 298,316
Changes in operating assets and
liabilities:
Accounts receivable (68,000) 70,987 101,940 (101,940) -
Prepaid expenses and other (153,581) (1,349) 67,910 (62,969) (6,892)
Accounts payable and accrued expenses 7,893 (171,026) 10,773 501,762 512,535
Deferred revenue 56,667 (90,000) (90,000) 90,000 -
----------------------------------------------------------------------------------
Net cash used in operating activities (1,116,485) (4,010,904) (6,203,315) (4,354,639) (10,582,847)
----------------------------------------------------------------------------------
Investing activities
Security deposits - 197,258 (127,084) (474,712) (609,902)
Purchase of property and equipment - (41,159) (52,142) (936,833) (1,001,591)
----------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities - 156,099 (179,226) (1,411,545) (1,611,493)
----------------------------------------------------------------------------------
Financing activities
Proceeds from issuance of common stock, net
of issuance costs 1,898,459 - - 35,999 36,000
Proceeds from bridge loan 237,000 - - - -
Proceeds from issuance of preferred stock,
net of issuance costs - - - 9,417,141 12,373,018
Proceeds/advances of stockholder/officer's loan 55,440 (18,860) (73,652) (74,440)
Principal payments on capital lease obligation (7,974) (4,464) (13,920) (8,106) (22,026)
Restricted cash 21,553 (6,412) (901) (20,652) (21,553)
----------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities 2,204,478 (10,876) (33,681) 9,350,730 12,290,999
----------------------------------------------------------------------------------
Net (decrease) increase in cash 1,087,993 (3,865,681) (6,416,222) 3,584,546 96,659
Cash--beginning of period 96,659 6,512,881 6,512,881 2,928,335 -
----------------------------------------------------------------------------------
Cash--end of period $1,184,652 $2,647,200 $ 96,659 $ 6,512,881 $ 96,659
==================================================================================
Supplemental disclosure of cash flow
Information
Assets acquired under capital lease $ $ $ $ 30,000 $ 30,000
Conversion of debt to equity $ 237,000 $ - $ - $ - $ -
==================================================================================
See accompanying notes to consolidated financial statements.
F-6
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
1. Organization Merger and Description of Business
On May 24, 2002 ("the Closing Date") Abbott Mines, Ltd. ("AMI"), 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 AMI's common stock, or
5.5254528 shares of AMI'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 AMI and joined the board
of directors of AMI, replacing AMI's officers and one of the AMI directors who
resigned their positions at the Closing Date. This resulted in the former WARP
stockholders owning the majority of the outstanding shares of AMI. 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 AMI is the surviving legal entity in the Share Exchange, the
transaction is being accounted for as an issuance of equity by WARP, and a
recapitalization of WARP under the capital structure of AMI in exchange for $690
in net assets. Under the purchase method of accounting, the historical results
of WARP have been carried forward and AMI'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 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 is effective and payable on October 2, 2002.
All common share amounts have been reflected in the accompanying financial
statements and related footnotes as if the Share Exchange and the September
Stock Dividend had occurred as of January 1, 2000.
Subsequent to the Closing Date, the Company issued 10,364,408 shares of common
stock for gross proceeds of approximately $2,300,000 in cash and the conversion
of approximately $237,000 of bridge notes obtained in 2002.
In connection with the Share Exchange and sale of AMI common stock, the Company
paid consulting fees of $430,000.
F-7
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization Merger and Description of Business (continued)
AMI was incorporated on June 26, 2000, for the purpose of acquiring, exploring
and developing mining properties. Subsequent to the Closing Date, AMI 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. WARP is creating software solutions,
which allow web-sites to handle more traffic and provide a reliable web
experience. WARP 2063, which was completed and available for general release in
2002, is WARP's sole product. WARP is actively selling WARP 2063 worldwide,
focusing on the United States, the United Kingdom, and the Far East.
Additionally, WARP Solutions is developing products that permit secure and
private transactions over the Internet.
Blue Suit Consulting ("Blue Suit"), a wholly-owned subsidiary of WARP, was
established in July 2000, for the purpose of performing temporary and permanent
recruitment services. Effective April 2001, management ceased the operations of
Blue Suit.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of WARP
and its wholly-owned subsidiary, (collectively the "Company"). All material
intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation
The Company was a development stage enterprise through December 31, 2001. In
2002, the Company began to generate revenues and ceased to be a development
stage enterprise.
F-8
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Change of Year End
During 2002, the Company announced a fiscal year end change from December 31 to
June 30. The consolidated financial statements display data as of and for the
six-month transition periods ended June 30, 2002 and 2001 (unaudited), and the
calendar years ended December 31, 2001 and 2000, respectively.
Unaudited Information
The unaudited financial statements as of and for the six months ended June 31,
2001 have been included for comparative purposes and reflect all adjustments
(consisting of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair statement of the results of the period
presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of cash and cash equivalents. From time to time, the
Company has cash balances at certain financial institutions in excess of
federally insured limits. However, the Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.
F-9
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided by the straight-line method over the estimated useful
lives of the assets, ranging from two to five years. Leasehold improvements are
amortized on a straight line basis over the lesser of their estimated useful
lives or the life of the underlying lease.
Revenue Recognition
Pursuant to AICPA Statement of Position ("SOP") 97-2, Software Revenue
Recognition, the Company recognizes revenues from software licenses when
persuasive evidence of a contractual arrangement exists, delivery has occurred,
the fee is fixed or determinable and collection is probable. The Company's
software licenses generally are marketed with certain postcontract customer
support ("PCS") and other obligations, which may include maintenance, delivery
of unspecified upgrades, and warranties regarding service response times.
Revenue under PCS agreements are recognized ratably over the term of the
agreement. Under SOP 97-2, the Company must allocate revenue to each element
based on vendor specific objective evidence ("VSOE") of each element's fair
value. Since the Company has just begun to market its products, VSOE of the fair
value of each element has not been clearly established. Accordingly, revenue
from license agreements are being recognized ratably over the term of the PCS
agreement.
Revenue from recruiting services for temporary staffing is on a time and
material basis and is recognized as such services are performed. Revenue from
recruiting services for permanent staffing is recognized upon completion of the
acceptance period (typically 90 days).
Restricted Cash
In connection with a capital lease, the Company obtained an irrevocable standby
letter of credit for the benefit of the lessor. Cash collateralizing the letter
of credit at December 31, 2001, amounting to $21,553, was on deposit in an
interest-bearing account. During 2002 the Company terminated the capital lease
and collected the collateralized cash.
F-10
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
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 have been insignificant.
Income Taxes
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are recognized with respect to the
future tax consequences attributable to differences between the tax basis of
assets and liabilities and their carrying amounts for financial statement
purposes. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
Loss Per Share
Basic and diluted net loss per share information for all periods is presented
under the requirements of SFAS No. 128, Earnings Per Share. Basic loss per share
is calculated by dividing the net loss by the weighted-average common shares
outstanding during the period. Diluted loss per share is calculated by dividing
net loss by the weighted-average common shares outstanding plus the dilutive
effect of convertible preferred stock, warrants and stock options. The dilutive
effect of preferred stock, warrants and options is not included as the inclusion
of such is anti-dilutive for all periods presented.
Segment Information
The Company operates in one segment.
F-11
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company measures compensation expense related to the granting of stock
options and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, under which compensation expense, if any, is generally based on
the difference between the exercise price of an option or the amount paid for
the award, and the market price or fair value of the underlying common stock at
the date of the award. Stock-based compensation arrangements involving
nonemployees are accounted for under SFAS No. 123, Accounting for Stock-Based
Compensation, and Emerging Issues Task Force Issue 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, under which such arrangements are
accounted for based on the fair value of the option or award. As required by
SFAS 123, the Company discloses pro forma net loss information reflecting the
effect of applying SFAS 123 fair value measurement to employee arrangements.
Fair Value of Financial Instruments
For financial statement instruments, including cash and cash equivalents,
accounts receivable and accounts payable, the carrying amount approximated fair
value because of their short maturity.
Impact of Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No.'s 141 and 142, Business Combinations, and
Goodwill and Other Intangible Assets. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. SFAS 142 concluded that purchased goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
adoption of SFAS No. 142 did not have an impact on the results of operations or
the financial position of the Company.
F-12
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations, for a disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company adopted SFAS 144 on January 1, 2002. The
Statement did not have a significant impact on the Company's financial position
or results of operations.
Reclassification
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
3. Property and Equipment
Property and equipment consists of the following:
June 30 December 31
2002 2001 2001 2000
---------------------------------------------------------------
Purchased software $ 84,283 $ 95,312 $ 95,312 $ 95,312
Computer equipment 131,405 397,300 369,889 372,190
Office equipment 34,580 35,578 35,578 35,578
Furniture and fixtures 3,835 64,306 61,478 64,305
Leasehold improvements - 428,112 178,690 412,064
---------------------------------------------------------------
254,103 1,020,608 740,947 979,449
Accumulated depreciation (156,736) (248,487) (299,865) (112,352)
---------------------------------------------------------------
$ 97,367 $ 772,121 $ 441,082 $ 867,097
===============================================================
Office equipment includes $30,000 of equipment under capital lease at June 30,
2002 and December 31, 2001 and 2000. Accumulated depreciation of the asset under
capital lease amounted to $30,000, $23,750 and $8,750 at June 30, 2002 and
December 31, 2001 and 2000, respectively.
F-13
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. Stockholders' Equity
Preferred Stock
WARP was authorized to issue 6,000,000 shares of preferred stock, par value $.01
per share, of which 1,000,000 were designated as "Series A Convertible Preferred
Stock" and 2,000,000 were designated as "Series B Convertible Preferred Stock".
During 1999, WARP issued 1,000,000 shares of its Series A Convertible Preferred
Stock in exchange for $3,000,000 in cash, net of capital issuance costs of
$44,123. During 2000, WARP issued 2,000,000 shares of its Series B Convertible
Preferred Stock in exchange for $10,000,000 in cash, net of capital issuance
costs of $582,859.
The Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock ranked, with respect to dividend rights and rights on liquidation,
dissolution and winding up of the affairs of WARP whether voluntary or
involuntary, (i) equal with each other and any other class or series of capital
stock of WARP subsequently created specifically ranking by its terms on parity
with the Convertible Preferred Stock; (ii) senior and prior to all of WARP's
Common Stock, $.01 par value per share; (iii) prior to any class or series of
capital stock of WARP subsequently created not specifically ranking by its terms
senior to or on parity with the Convertible Preferred Stock; and (iv) junior to
any other class or series of capital stock of WARP subsequently created
specifically ranking by its terms senior to the Convertible Preferred Stock.
Each share of the Convertible Preferred Stock was convertible, at any time, into
four shares of WARP's common stock, subject to certain antidilution adjustments,
and automatically converted in the event WARP consummated a qualified initial
public offering of its common stock with certain defined aggregate gross
proceeds.
The holders of Convertible Preferred Stock were entitled to vote on all matters
on an as converted basis.
On the Closing Date, the holders of the WARP Series A and Series B Convertible
Preferred Stock consented to the conversion of their shares into 16,576,358
shares of the Company's common stock, after giving effect to the Share Exchange
and the September Stock Dividend.
F14
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. Stockholders' Equity (continued)
Common Stock
During December 1999, WARP received subscriptions for 19,891,630 shares of its
common stock. The subscriptions receivable, totaling $35,999, was received in
August 2000. Subsequent to the Closing Date, the Company issued 10,364,408
shares of common stock for proceeds of approximately $2,300,000 in cash and the
conversion of approximately $237,000 of bridge notes obtained in 2002.
Stock Options
On December 15, 1999, WARP adopted the 1999 WARP Solutions Stock Incentive Plan
(the "1999 Plan") to allow for the granting of various equity instruments to key
employees, consultants and directors. Under the 1999 Plan, 16,576,358 shares of
common stock were reserved for issuance. The Board of Directors is responsible
for determining the type of award, when and to whom awards are granted, the
number of shares and terms of the awards, and the exercise price.
No options were granted prior to 2001. Detailed information concerning the
activity under the 1999 Plan is as follows:
Weighted-
Weighted- Average
Average Fair Value
Options Exercise Price Of Grants
-------------------------------------
Options granted, exercise price less than market price 1,933,908 $ 0.002 $0.179
Options granted, exercise price exceeds market price 5,043,114 0.553 $0.000
Options cancelled (2,278,321) 0.510
----------------------------
Options outstanding at December 31, 2001 4,698,701 0.548
----------------------------
Options cancelled (2,446,831) 0.438
----------------------------
Options outstanding at June 30, 2002 2,251,870 $ 0.671
============================
F-15
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. Stockholders' Equity (continued)
During 2001, WARP issued an option to an employee to purchase 1,933,908 shares
of its common stock at an exercise price below the fair value of the underlying
stock. In connection therewith, WARP recorded a noncash charge to operations of
$231,000. Such options were cancelled in December 2001 in connection with the
employee's termination of employment.
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if Warp had accounted for its employees' stock options under
the fair value method provided by this statement. All options were issued prior
to Closing Date and the fair value for these options was estimated at the date
of grant using the minimum value option-pricing model with the following
weighted-average assumptions:
Assumption
----------
Risk-free interest yield 3.56%
Dividend yield 0%
Average life 3 years
Option pricing models require the input of highly subjective assumptions.
Because WARP's employee stock has characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period of the options. For the periods
ended June 30, 2002, December 31, 2001 and 2000, the impact of the proforma net
loss and proforma loss per share was not material.
F-16
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
4. Stockholders' Equity (continued)
The following table summarizes information about stock options outstanding at
June 30, 2002:
Weighted-Average
Exercise Options Options Remaining
Prices Outstanding Exercisable Contractual Life
-----------------------------------------------------------------------------
$0.271 631,742 156,553 9.15 years
0.543 348,104 265,222 7.60 years
0.905 1,272,024 911,663 8.43 years
---------------------------------------
2,251,870 1,333,438 8.50 years
=======================================
All outstanding options were issued above market value.
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.
On August 1, 2000, WARP issued warrants to purchase 110,509 shares of its common
stock to an outside consultant for services rendered. The warrants have an
exercise price of $0.905 per share and expire on the fifth anniversary of
issuance. WARP valued the warrants at $67,316 and, in connection therewith,
recorded a noncash charge, which is included in general and administrative
expenses in the accompanying consolidated statement of operations for the year
ended December 31, 2000.
At June 30, 2002, WARP has reserved 1,174,159 shares for the exercise of
warrants.
F-17
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
WARP has a net operating loss carryforward and other deferred assets of
approximately $13,600,000 at June 30, 2002, which may be used to reduce taxable
income in future years through the year 2021, resulting in a deferred tax asset
of approximately $4,700,000. 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.
6. Commitments
Leases
WARP leased its office facilities under noncancelable operating leases that
expire through April 2005.
During the year ended December 31, 2001, WARP terminated a lease for a portion
of its office facilities. In connection therewith, leasehold improvements of
approximately $226,000 were written off and WARP forfeited $325,000 of security
deposits. The total write-off in connection with this lease termination of
approximately $551,000 was charged to general and administrative expenses in
2001 in the accompanying consolidated statement of operations.
In April 2002, WARP entered into a lease termination agreement for the remaining
portion of its office facilities. Pursuant to this agreement, WARP agreed to
forfeit its security deposit together with accumulated interest (approximately
$281,000). This forfeiture, together with the related leasehold improvements
write-off, was charged to general and administrative expenses in 2002.
Rent expense amounted to approximately $43,100, $449,000 and $365,000 for the
six months ended June 30, 2002 and the years ended December 31, 2001 and 2000,
respectively.
On May 15, 2002, WARP entered into a six-month operating lease for new office
facilities. As of June 30, 2002, the future minimum lease payments amount to
$15,000.
F-18
Warp Technology Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
7. Subsequent Events
On August 12, 2002, the Company's Board of Directors authorized and approved the
establishment of a subsidiary in the state of Nevada with the name WARP
Technology Holdings, Inc. In addition, the Company's Board of Directors
authorized and approved the issuance of 100,000 shares of the Company's common
stock, to its attorneys for legal services.
On August 15, 2002, the Company's Board of Directors authorized and approved the
upstream merger of WARP Technology Holdings, Inc., the Company's wholly-owned
subsidiary, with and into the Company pursuant to Chapter 92A of the Nevada
Revised Statutes of the State of Nevada ("the Upstream Merger"). The Upstream
Merger became effective on August 21, 2002, when the Company filed Articles of
Merger, and as authorized by Section 92A.180 of the Nevada Revised Statutes of
the State of Nevada, the Company changed its name from Abbott Mines, Ltd. to
WARP Technology Holdings, Inc.
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 $900,000 in
cash. The Company paid finders and placement fees in the amount of $126,000 in
connection with this transaction.
F-19
EXHIBIT INDEX
The following Exhibits are filed herewith:
Exhibit
Number Description of Document
----------- --------------------------------
10.3 The form of the Financial Consulting Agreement dated March 5,
2002 between WARP Solutions, Inc. and Lighthouse Capital, Inc.
10.4 The form of the Financial Consulting Agreement dated May 16,
2002 between the Company and Lighthouse Capital, Inc.
10.5 Form of Master Distributor Agreement between Macnica Networks
Company and WARP Solutions, Inc. dated as of August 1, 2002.
10.6 Form of Master Distributor Agreement between CDI Technologies,
Inc. and WARP Solutions, Inc. dated as of September 1, 2002.
22.1 Subsidiaries of the Company
38