Attached files
file | filename |
---|---|
EX-31.1 - Cistera Networks, Inc. | form10qa093009ex31.htm |
EX-32.1 - Cistera Networks, Inc. | form10qa093009ex32.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDED
FORM 10-Q
AMENDMENT
5
(Mark
One)
[x]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30th, 2009
OR
[_]
|
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 0-17304
Cistera Networks,
Inc.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of incorporation or organization)
|
91-1944887
(I.R.S.
Employer Identification No.)
|
6509 Windcrest Drive, Suite
160, Plano,
Texas 75024
(Address
of principal executive
offices) (Zip
Code)
972-381-4699
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
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 check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” “non-accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
As of
November 19th, 2009, 17,423,410 shares of the registrant’s stock, $0.001 par
value per share, were outstanding.
CISTERA
NETWORKS, INC & SUBSIDIARY
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements:
|
|
Consolidated
Balance Sheets – September 30, 2009 (unaudited)(restated) and March 31,
2009 (audited)
|
6
|
|
Consolidated
Statements of Operations – For the three months ended September 30, 2009
and 2008
(unaudited)
|
7
|
|
Consolidated
Statements of Operations – For the six months ended September 30, 2009
and 2008
(unaudited)
|
8
|
|
Consolidated
Statements of Stockholders’ Deficit – September 30, 2009 (unaudited)
and March
31, 2009 (audited)
|
9
|
|
|
Consolidated
Statements of Cash Flows – For the six months ended September 30, 2009
and 2008
(unaudited)
|
10
|
Notes
to Consolidated Financial Statements (unaudited)
|
12
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
|
||
Item
4T.
|
Controls
and Procedures
|
29
|
PART
II: OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
30
|
Item
1A.
|
Risk
Factors
|
30
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
Item
5.
|
Other
Information
|
31
|
Item
6.
|
Exhibits
|
31
|
SIGNATURES
|
32
|
EXPLANATORY
NOTES
Amendment
No. 5 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal quarter
ended September 30, 2009 is filed for the purpose of amending the report as
“reviewed” by Robison, Hill and Company.
Amendment
No. 4 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal
quarter ended September 30, 2009 is filed for the purpose of amending the
report as “not-reviewed”. On April 7th the SEC provided a letter of comment
stating that the existing Independent Certified Accountant used to review the
report is not a member of the PCOAB. Subsequently the Company appointed Robison,
Hill & Company as the company’s independent accountants to review the
report.
Amendment
No. 3 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal
quarter ended September 30, 2009 is filed for the purpose of amending the
Section 302 Certifications, filed as Exhibits 31.1 and 31.2 to the original
Report. Additional the SFAS 140 discussion for the factoring agreement with
Allied Capital has been included.
Amendment
No. 2 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal
quarter ended September 30, 2009 is filed for the purpose of amending the
Section 302 Certifications, filed as Exhibits 31.1 and 31.2 to the original
Report.
There was
a mistake in the payroll accrual account that resulted in a positive $341,509
dating back to April 2009. The accrual error was caused and dated by duplicate
entries to that accrual dating from and solely to April 2009 through June 30,
2009. This has reduced the net income for quarter ended 30th
September 2009 from $342,500 to $106,215. This entry has been reversed for the
quarter ending September 30, 2009 and re-entered in the quarter ending June 30,
2009. Both these dated statements are being amended and
re-issued.
Although
the PP2 Note maturity has resulted in these Notes converting to default status
and therefore able to be called, the company has negotiated a stasis with over
90% of the Noteholders including all of the largest individual holdings.
Although the company believes that it is unlikely that these notes will be
called in the Fiscal Year 2010, the 10 Q filing for 30 September 2009 has been
amended to correct this change in assumption.
The
credit balances shown in Sales and Marketing and Software Development are
directly a result of the below accrual adjustment to payroll expenses dating
from April 1, 2009 to June 30, 2009. This adjusting entry made in the
quarter ending September 30, 2009 was made in error and has been corrected to
show the net effect for the correct quarter ending June 30, 2009 and is in the
corrected amendments. The credit balance shown in Depreciation
expense is due to an adjustment and correcting of the fixed asset depreciation
schedule dating back to April 1, 2009. The aggregate impact of this
adjustment is $68,425 or $34,213 per quarter and is not deemed material on a
quarterly basis.
ASC
FASB 250-10-50-7 Disclosure
The
effect of the correction on each financial statement line item for each prior
period is as follows:
·
|
The
total current liabilities have increased from $1,915,020 to $2,891,447 and
the corresponding long term liabilities have decreased from $2,195,835 to
$1,219,409.
|
·
|
Sales
and marketing has increased from ($2,075) to
$53,723.
|
·
|
Software
development has increased from ($16,843) to
$106,803.
|
·
|
Engineering
and Support has increased from $46,763 to
$73,122.
|
·
|
General
and Administrative has increased from 164,984 to
193.803.
|
·
|
Total
operating expenses has increased from $148,582 to
$384,867.
|
·
|
Total
Income from operations has decreased from $400,088 to
$163,803.
|
·
|
Net
Income has been reduced from $342,500 to $106,215 and from 2c per share to
1c per share.
|
This has
not resulted in any change in retained earnings or other appropriate components
of equity including net assets.
ASC
FASB 250-10-50-8 Disclosure
There was
a mistake in the payroll accrual account that resulted in a positive $341,509
dating back to April 2009. The accrual error was caused and dated by duplicate
entries to that accrual dating from and solely to April 2009 through June 30,
2009. This has reduced the net income for quarter ended 30th
September 2009 from $342,500 to $106,215. For quarter ending 30th June
2009 the loss has been reduced from $ 428,975 to $ 192,691.
Part
I. FINANCIAL INFORMATION
Item
1. Financial Statements
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
Restated
September
30, 2009
|
March
31st, 2009 (Audited)
|
|||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 35,378 | $ | 1,493 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $-0-
|
70,094 | 151,322 | ||||||
Inventory
|
91,658 | 124,656 | ||||||
Prepaid
expenses
|
46,307 | 37,341 | ||||||
Total
current assets
|
243,437 | 314,812 | ||||||
Property
and equipment, net
|
252,722 | 324,217 | ||||||
Intangible
assets, net
|
1,615,555 | 1,751,442 | ||||||
Total
long-term assets
|
1,868,277 | 2,075,659 | ||||||
TOTAL
ASSETS
|
$ | 2,111,714 | $ | 2,390,471 | ||||
Current
liabilities
|
||||||||
Accounts
payable
|
518,058 | 517,052 | ||||||
Accrued
liquidated damages – outside investors
|
177,402 | |||||||
Accrued
liabilities
|
613,446 | 1,527,811 | ||||||
Deferred
revenue
|
783,516 | 865,271 | ||||||
Convertible
promissory notes and other notes payable, net of discount
|
976,427 | 976,427 | ||||||
Note
payable
|
- | 7,781 | ||||||
Total
current liabilities
|
2,891,447 | 4,071,743 | ||||||
Accrued
liquidated damages – outside investors
|
177,402 | - | ||||||
Litigation
Reserve
|
650,000 | - | ||||||
Deferred
Revenue
|
- | 174,554 | ||||||
Other
long-term liabilities
|
392,007 | 58,031 | ||||||
Total
long-term liabilities
|
1,219,409 | 409,987 | ||||||
Total
liabilities
|
4,110,856 | 4,304,328 | ||||||
Commitments
and contingencies (Note 4)
|
||||||||
Stockholders'
deficit:
|
||||||||
Preferred
stock, $0.01 par value; 1,000,000 shares authorized;
-0-
shares issued and outstanding
|
- | - | ||||||
Common
stock, $0.001 par value; 50,000,000 shares authorized;
17,423,410 shares
issued and outstanding,
Respectively
|
17,423 | 17,423 | ||||||
Additional
paid-in capital
|
19,291,219 | 19,291,219 | ||||||
Accumulated
deficit
|
(21,307,784 | ) | (21,222,499 | ) | ||||
Total
stockholders' deficit
|
(1,999,142 | ) | (1,913,857 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 2,111,714 | $ | 2,390,471 |
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three
months ended September 30,
|
||||||||
Restated
2009
|
2008
|
|||||||
Revenues
|
||||||||
Convergence
solutions
|
$ | 380,403 | $ | 1,013,075 | ||||
Professional
services
|
98,018 | 45,125 | ||||||
Support
and maintenance
|
272,488 | 230,303 | ||||||
Total
revenues
|
750,909 | 1,288,503 | ||||||
Cost
of revenues
|
||||||||
Convergence
solutions
|
123,366 | 276,710 | ||||||
Professional
services
|
56,627 | 42,500 | ||||||
Support
and maintenance
|
22,246 | 24,250 | ||||||
Total
cost of revenues
|
202,239 | 343,460 | ||||||
Gross
Profit
|
548,670 | 945,043 | ||||||
Operating
expenses
|
||||||||
Sales
and marketing
|
53,723 | 301,043 | ||||||
Software
development
|
106,803 | 226,875 | ||||||
Engineering
and support
|
73,112 | 201,969 | ||||||
General
and administrative
|
193,803 | 422,105 | ||||||
Depreciation
and amortization
|
(44,247 | ) | 100,674 | |||||
Total
operating expenses
|
384,867 | 1,252,666 | ||||||
Income
/ (Loss) from operations
|
163,803 | (307,623 | ) | |||||
Other
income (expense)
|
||||||||
Interest
income
|
- | - | ||||||
Other
income
|
7 | 86 | ||||||
Interest
expense
|
(57,595 | ) | (50,117 | ) | ||||
Abandonment
loss
|
- | |||||||
Charge
for inducements related to stock issued to convertible note
holders
|
- | (131,631 | ) | |||||
Amortization
of discount on convertible notes – outside investors
|
- | (108,918 | ) | |||||
Amortization
of discount on convertible notes – related parties
|
- | - | ||||||
Credit
(charge) for estimated liquidated damages
|
- | - | ||||||
Total
other income (expense)
|
(57,588 | ) | (290,580 | ) | ||||
Net
Income / (Loss)
|
$ | 106,215 | $ | (598,203 | ) | |||
Basic
& diluted net income / (loss) per share
|
$ | 0.01 | $ | (0.03 | ) | |||
Weighted
average shares outstanding – basic and diluted
|
17,423,410 | 17,274,687 |
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Six
months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
||||||||
Convergence
solutions
|
$ | 568,481 | $ | 1,535,468 | ||||
Professional
services
|
134,586 | 105,833 | ||||||
Support
and maintenance
|
505,808 | 447,762 | ||||||
Total
revenues
|
1,208,875 | 2,089,063 | ||||||
Cost
of revenues
|
||||||||
Convergence
solutions
|
226,379 | 409,742 | ||||||
Professional
services
|
104,345 | 93,000 | ||||||
Support
and maintenance
|
40,246 | 47,434 | ||||||
Total
cost of revenues
|
370,970 | 550,176 | ||||||
Gross
Profit
|
837,905 | 1,538,887 | ||||||
Operating
expenses
|
||||||||
Sales
and marketing
|
113,220 | 580,472 | ||||||
Software
development
|
136,235 | 423,333 | ||||||
Engineering
and support
|
140,905 | 406,400 | ||||||
General
and administrative
|
344,248 | 760,617 | ||||||
Depreciation
and amortization
|
53,413 | 198,830 | ||||||
Total
operating expenses
|
788,021 | 2,369,652 | ||||||
Income
/ (loss) from operations
|
49,884 | (830,765 | ) | |||||
Other
income (expense)
|
||||||||
Interest
income
|
- | 168 | ||||||
Other
income
|
63 | |||||||
Interest
expense
|
(124,629 | ) | (147,809 | ) | ||||
Abandonment
loss
|
(15,815 | ) | - | |||||
Charge
for inducements related to stock issued to convertible note
holders
|
- | (1,324,444 | ) | |||||
Amortization
of discount on convertible notes – outside investors
|
- | (1,188,855 | ) | |||||
Amortization
of discount on convertible notes – related parties
|
- | (41,060 | ) | |||||
Credit
(charge) for estimated liquidated damages
|
- | 11,299 | ||||||
Total
other income (expense)
|
(140,381 | ) | (2,690,701 | ) | ||||
Net
loss
|
$ | (90,497 | ) | (3,521,466 | ) | |||
Basic
& diluted net loss per share
|
$ | (0.00 | ) | $ | (0.26 | ) | ||
Weighted
average shares outstanding – basic and diluted
|
17,423,410 | 13,369,365 |
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - RESTATED
Preferred
Stock
|
Common
Stock
|
Additional
paid-in capital
|
Accumulated
deficit
|
Total
stockholders’ equity (deficit)
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
Balances
at June 30, 2009 (unaudited)
|
- | - | 17,423,410 | $ | 17,423 | $ | 19,291,219 | $ | (21,415,190 | ) | $ | (2,106,548 | ) | |||||||||||||||
Net
income / (loss)
|
106,215 | 106,215 | ||||||||||||||||||||||||||
Balance
Adjustment from June 30,2009
|
1,190 | 1,190 | ||||||||||||||||||||||||||
Balances
at September 30, 2009 (unaudited)
|
- | $ | - | 17,423,410 | $ | 17,423 | $ | 19,291,219 | $ | (21,307,784 | ) | $ | (1,999.142 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Six
months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (90,497 | ) | $ | (3,521,466 | ) | ||
Adjustments
used to reconcile net loss to net cash used in operating
activities:
|
||||||||
Charge
for inducement to convert debt to convertible promissory
notes
|
- | 1,324,444 | ||||||
Charge
(credit) for liquidated damages
|
- | (11,299 | ) | |||||
Charge
for stock issued for waiver of registration rights
payments
|
1,188,855 | |||||||
Amortization
of discount on convertible promissory notes
|
- | 41,060 | ||||||
Abandonment
loss
|
15,815 | - | ||||||
Gain
on disposition of assets
|
3,149 | - | ||||||
Depreciation
and amortization
|
53,414 | 198,830 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
81,228 | 118,172 | ||||||
Inventory
|
32,998 | (12,488 | ) | |||||
Prepaid
expenses
|
8,966 | (17,587 | ) | |||||
Accounts
payable
|
1,006 | (100,828 | ) | |||||
Accrued
liabilities
|
(231,973 | ) | 25,997 | |||||
Deferred
revenue
|
(256,309 | ) | (46,249 | ) | ||||
Other
long-term liabilities
|
333,976 | 45,378 | ||||||
Net
cash provided by (used) in operating activities
|
42,270 | (767,181 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment, net
|
- | (64,261 | ) | |||||
Net
cash used in investing activities
|
- | (64,261 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Decrease
in restricted cash
|
50,000 | |||||||
Net
borrowings (payments) on line of credit
|
(17,503 | ) | ||||||
Net
proceeds from short-term advances
|
- | |||||||
Net
proceeds from exercise of warrants
|
- | 843,604 | ||||||
Payments
on convertible promissory notes and other loans
|
- | (14,938 | ) | |||||
Payments
on other notes payable and capital lease
|
(8,386 | ) | - | |||||
Net
cash provided by (used) financing activities
|
(8,386 | ) | 861,163 | |||||
Net
increase in cash and cash equivalents
|
33,884 | 29,721 | ||||||
Cash
and cash equivalents at beginning of period
|
1,493 | 125,007 | ||||||
Cash
and cash equivalents at end of period
|
$ | 35,377 | $ | 154,728 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Six
months ended September 30
|
||||||||
2009
|
2008
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 8,435 | $ | 38,982 | ||||
Income
taxes
|
- | - | ||||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Conversion
of convertible promissory notes and related accrued interest
and accrued
liquidated damages to common stock
|
$ | - | $ | 3,287,116 | ||||
Conversion
of accounts payable and other accrued liabilities to
convertible promissory
notes
|
||||||||
Conversion
of accrued liabilities to common stock
|
- | 53,312 | ||||||
Transfer
of inventory to equipment
|
- | 20,399 |
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Cistera Networks,
Inc. (“Cistera” the “Company” or “we”) and its wholly-owned subsidiary have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). All significant intercompany transactions and balances have
been eliminated in consolidation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) have
been condensed or omitted pursuant to such rules and regulations. In the opinion
of management, the unaudited consolidated financial statements have been
prepared on the same basis as the annual audited consolidated financial
statements, and reflect all adjustments, consisting only of normal, recurring
adjustments necessary for a fair presentation in accordance with US GAAP. The
results of operations for interim period presented are not necessarily
indicative of the operating results for the full year. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (the “2009
10-K”).
Significant
Accounting Policies
The
Company prepares its financial statements in accordance with US GAAP. The
accounting policies most fundamental to understanding our financial statements
are those relating to recognition of revenue, our use of estimates and the
accounting for convertible debt and warrants. For a detailed discussion on the
application of these accounting policies, see Note 2 to our audited consolidated
financial statements contained in our 2009 10-K.
Recently
Issued Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115"(“SFAS 159”). SFAS 159 permits companies
to measure many financial instruments and certain other items at fair value at
specified election dates. Unrealized gains and losses on these items will be
reported in earnings at each subsequent reporting date. The fair value option
may be applied instrument by instrument (with a few exceptions), is irrevocable
and is applied only to entire instruments and not to portions of instruments.
SFAS 159 is effective for fiscal years beginning after November 15,
2007. We do not believe it will have a material impact.
In December 2007, the FASB issued
SFAS No. 160, “Non-Controlling Interests in Consolidated Financial
Statements” (“SFAS 160”), which requires all entities to report non-controlling
(minority interests) in subsidiaries with equity in the consolidated financial
statements, but separate from the parent stockholders' equity. We do not believe
it will have a material impact.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces FASB Statement No. 141.
SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. The Statement also establishes disclosure
requirements that will enable users to evaluate the nature and financial effects
of the business combination. We do not believe it will have a material
impact.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
Research
and development expenditures are generally expensed as incurred. 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 completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been insignificant. Thereafter, all software production
costs shall be capitalized and subsequently reported at the lower of unamortized
cost or net realizable value. Capitalized costs are amortized based on current
and future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product.
Balance
Sheet Accounts
Accounts
receivable are comprised of the following:
September
30, 2009
|
March
31, 2009
|
|||||||
Receivables
assigned to factor
|
$ | 215,079 | $ | 125,402 | ||||
Advances
to (from) factor
|
(186,299 | ) | (70,570 | ) | ||||
Fees,
expenses and charges to reserve
|
(12,810 | ) | (792 | ) | ||||
Amounts
due from reserve account
|
4,293 | - | ||||||
Amounts
due from factor
|
20,263 | 54,040 | ||||||
Non-factored
Accounts Receivable
|
49,831 | 97,282 | ||||||
Total
accounts receivable
|
$ | 70,094 | $ | 151,322 |
Accrued
liabilities are comprised of the following:
September
30, 2009
|
March
31, 2009
|
|||||||
Accrued
expenses
|
$ | 80,350 | $ | 82,924 | ||||
Reserve
for litigation contingency
|
- | 650,000 | ||||||
Accrued
compensation and payroll taxes
|
272,767 | 545,626 | ||||||
Accrued
Interest
|
- | 225,330 | ||||||
Customer
Deposits
|
131,286 | - | ||||||
Other
|
129,043 | 23,931 | ||||||
Total
Accrued liabilities
|
$ | 613,446 | $ | 1,527,811 |
Other
long-term liabilities are comprised of the following:
September
30, 2009
|
March
31, 2009
|
|||||||
Deferred
rent
|
$ | 58,982 | $ | 58.031 | ||||
$ | 58,982 | $ | 58,031 |
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
Earnings
per Share
Basic
earnings (loss) per share is based on the weighted average number of common
shares outstanding.
Diluted
earnings (loss) per share is computed using the weighted average number of
common shares outstanding plus the number of common shares that would be issued
assuming exercise or conversion of all potentially dilutive common stock
equivalents. The Company had approximately 6.6 million and 6.5
million potentially dilutive common stock equivalents (in the form of stock
options and stock purchase warrants) outstanding as of September 30, 2009 and
2008, respectively. These potentially dilutive common stock equivalents have
been excluded from the diluted share calculations for the three months ended
September 30, 2009 and 2008, respectively, as they were anti-dilutive as a
result of the net losses incurred for those periods. Accordingly, basic shares
equal diluted shares for all periods presented.
Accounts
receivable and concentration of credit risk
The
Company has no significant off-balance sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
The
Company is subject to credit risk from accounts receivable with its customers.
The Company’s accounts receivable are due from both governmental and commercial
entities. Credit is extended based on evaluation of the customers’ financial
condition and, generally, collateral is not required. Accounts receivable are
generally due within 30 to 60 days and are stated at amounts due from customers
net of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due.
The
Company assesses potential reserves against its accounts receivable by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customers’
current ability to pay their obligations to the Company and economic and
industry conditions. Based on these factors, the Company has
concluded that an allowance for doubtful accounts as of September 30, 2009 and
March 31, 2009 is not required.
As of
September 30, 2009, the Company receives approximately 44% of its gross revenues
from its top three re-sellers. This represents an increase in
concentration of business from the 34% reported for the year ended June 30,
2009.
Reclassifications
Certain
reclassifications have been made in the fiscal year 2009 financial statements to
conform to the fiscal year 2010 presentation.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
2 - FINANCIAL CONDITION
The
accompanying consolidated financial statements have been prepared in conformity
with US GAAP (except with regard to omission of certain disclosures within
interim financial statements, as permitted by the SEC), which contemplate our
continuation as a going concern and do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary if we were unable to
continue as a going concern. However, the report of our independent registered
public accounting firm on our consolidated financial statements, as of and for
the year ended March 31, 2009, contains an explanatory paragraph expressing
substantial doubt as to our ability to continue as a going concern. The “going
concern” explanatory paragraph resulted from, among other things, the
substantial losses from operations we have incurred since inception, our
liquidity position and the net loss of $4.6 million for the year ended March 31,
2009, which included non-cash charges of $1.4 million related to amortization of
discounts associated with our sale and issuance of Senior Unsecured Convertible
Promissory Notes in the fiscal years 2007 and 2008 (the “PP2 Notes”) and
negative working capital (current liabilities in excess of current assets) of
$2.2 million as of June 30, 2009. In addition, we had a net loss of
$90,497 for the six months ended September 30, 2009. Also, as of
September 30, 2009, we have negative working capital (current liabilities in
excess of current assets) of $2.65 million.
Accordingly,
as of September 30, 2009, the recoverability of a major portion of the recorded
asset amounts is dependent on our continuing operations, which in turn is
dependent on our ability to maintain our current financing arrangements and our
ability to become profitable in our future operations through generating higher
revenues or lowering operating costs, or a combination of the two. These factors
raise substantial doubt about our ability to continue as a going concern. These
consolidated financial statements do not reflect adjustments that would be
necessary if we were unable to continue as a going concern.
SFAS
No. 140 – Disclosure of Accounting for Factoring
The
Company maintains a factoring facility with Allied Capital Partners, L.P.
(“Allied”) for up to $1,500,000 of the Company’s customer accounts
receivable. The facility allows for an advance rate up to 85.88% and
initial factoring charges are 1.75% of the total accounts receivable
balance. An additional funding agreement became effective in November
of 2008 allowing for the factoring of support renewals at an advance rate of
50.88% and initial factoring charges of 1.75% of the total accounts receivable
balance. Advances made by Allied are collateralized by the Company’s
accounts receivable, chattel paper, general intangibles, supporting obligations,
inventory and proceeds thereof. The term of the current agreement is
for a period of two years with an automatic one-year renewal
thereafter. Advances under the factoring facility at September 30,
2009 were $186,299 and are netted against total accounts receivable on the
Consolidated Balance Sheet.
SFAS
No.140, paragraph 9 states:
The
transferor has surrendered control over transferred assets if and only if all of
the following conditions are met:
a) The
transferred assets have been isolated from the transferor – put presumptively
beyond the reach of the transferor and it creditors, even in bankruptcy or other
receivership.
If the
transaction is determined by the bankruptcy court to be a true sale, and the
factor is the owner of the accounts receivable, then the accounts will not be
part of the bankruptcy proceeding.
The
November 2008 factoring agreement for Cistera states on page 1, item #3
–
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
Acceptance
of Offer - Allied may accept Seller’s offer to sell
Accounts . . . by either (i) paying the Purchase Price (less the
Reserve). . . (ii) by oral or written notice to Seller identifying the Accounts
which appear on the Schedule that Allied is unwilling to purchase and paying the
Purchase Price (less the Reserve) for the remaining accounts; and (xi) shall be
evidenced by an invoice which has been issued to and received by the Account
Debtor, and each such invoice shall have printed on the face thereof a statement
notifying the Account Debtor that the invoice has been sold and assigned to
Allied and is payable only to Allied . . .
Page 3
item #9 of Agreement, . . .Invoice (x) shall be reflected on Seller’s books and
records as having been transferred, sold and conveyed to Allied if Allied
purchases such Accounts.
Therefore,
it is Cistera’s position that this meets the test of a sale. The receivables are
isolated beyond the reach of Cistera, its creditors and any bankruptcy
proceedings.
b) Each
transferee has the right to pledge or exchange the assets it received, and no
condition both constrains the transferee from taking advantage of its right to
pledge or exchange and provides more than a trivial benefit to the
transferor.
As per
the agreement entered into between Cistera and Allied Capital (November 19th
2008), these invoices, also called receivables, are the property of Allied and
therefore such items can be used for collateral and bank financing if Allied so
chooses. The factoring agreement also states that Allied has the
right to sell these items on the “open and public market”. After a review of the
factoring agreement, no statements or language was found to contradict this
understanding of the agreement. There are no constraints on Allied
rights whether written or imputed in the November 2008 agreement. The
benefit for Allied is not trivial and involves the collection of the receivable,
interest income and factoring fees for each Account and invoice.
c) The
transferor does not maintain effective control over the transferred asset
through either (1) an agreement that both entitles and obligates the transferor
to repurchase or redeem them before their maturity or (2) the ability to
unilaterally cause the holder to return specific assets, other than through a
cleanup call.
In the
said factoring agreement, the Seller has no demands for the return of the
Accounts or invoices. Even at the time of termination of the
agreement, the invoices are still the full property of Allied to the limit of
the reserve amount remaining at such termination. What this means, is
the reserve amount remaining is netted as payment against the remaining
outstanding invoices and if the reserve is greater than those invoices, the
monies are then wired or transferred to Cistera. If the reserve is
less than the remaining outstanding invoices, Allied collects the payment on
those invoices and wires the “left over” monies caused by those
collections. Even after termination of the agreement, and
reconciliation of the reserve against the outstanding accounts, all payments are
still the property of Allied until the overage payments are transferred and
wired to Cistera.
As far as
obligation or entitlement to “repurchase” the Accounts or invoices, this
obligation is after the “maturity” or due date of the invoices plus 90
days. At which time the invoice is “offset” against the Reserve
account and no “monies” are exchanged. This Reserve account is separated on a
net basis from Cistera owned receivables in section Balance Sheet Accounts”
Table known as “Accounts receivable are comprised of the
following:”. It is the understanding and agreement of Cistera
management there is no obligation or entitlement to these Accounts after they
are sold to Allied. Therefore it is Cistera’s position that the
accounting practices used to maintain the records of the account receivables are
correct.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As
of that date, we began to accrue interest on the December PP2 Notes at a default
rate of 18% per annum, which is the maximum allowable rate as stipulated under
the PP2 Note purchase agreement. As of April 5, 2009, we were in
default on approximately $1,100,000 of principal and accrued interest on certain
PP2 Notes (the “April PP2 Notes”). As of that date, we began to
accrue interest on the April PP2 Notes at a default rate of 18% per annum, which
is the maximum allowable rate as stipulated under the PP2 Note purchase
agreement. We will need to renegotiate the payment or conversion of
the principal and interest due on all of the PP2 Notes, or raise additional
capital, or a combination of the two. If we need to raise additional capital it
could be in the form of equity or debt, or a combination of the two. The capital
markets are extremely challenging at this time and there can be no assurance
that we will be successful in raising additional funds and, if so, on favorable
terms or that the cost savings or required new capital will be
sufficient. We are also actively exploring other strategic
alternatives.
NOTE
3 – DEBT
As of
September 30, 2009, the Company had $976,426 of gross principal, accrued
interest of $333,010 and accrued liquidated damages of $177,402 outstanding on
its PP1 Notes and PP2 Notes. The PP1 Notes and the PP2 Notes were due
in December 2008 and April 2009 (the “April PP2 Notes”), respectively, and are
in default. The Notes bear interest at an annual rate of 18%,
compounded quarterly.
PP1
Notes and Warrants
The
outstanding principal and accrued interest are convertible into shares of common
stock at a conversion rate equal to the lesser of (a) $1.30 per share, or (b) a
25% discount to the average closing bid price of the Company’s common stock for
the five days including and immediately preceding the interest compounding date,
provided that in no event shall the conversion price per share be less than
$1.00 per share. The PP1 Notes may be converted, in whole or in part,
at the option of the PP1 Note holder on any interest compounding
date. The PP1 Notes converted in December 2005 were converted at
$1.00 per share.
The PP1
Warrants have a term of five years and are exercisable at an exercise price of
$1.30 per share. Subject to an effective registration statement
covering the resale of the shares of common stock issuable upon exercise of the
PP1 Warrants, the Company may, upon thirty days prior written notice, redeem the
PP1 Warrants for $0.10 per share, in whole or in part, if our common stock
closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15)
consecutive trading days.
PP2
Notes and Warrants
The
outstanding principal and accrued interest are convertible into shares of common
stock at a fixed rate of $0.75 per share. The PP2 Notes may be
converted, in whole or in part, at the option of the PP2 Note holder on any
interest compounding date. The Company may prepay the PP2 Notes in
whole or in part, upon thirty days prior written notice to note holders;
provided that partial prepayments may be made only in increments of $10,000 and,
provided further, that the PP2 Note holders may convert the amount of the
proposed prepayment into shares of our common stock at any time.
The PP2
Warrants have a term of five years and are exercisable at an exercise price of
$1.00 per share. Subject to an effective registration statement
covering the resale of the shares of common stock issuable upon exercise of the
PP2 Warrants, the Company may, upon thirty days prior written notice, redeem the
PP2 Warrants for $0.10 per share, in whole or in part, if our common stock
closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15)
consecutive trading days.
For the
three months ended June 30, 2008, the Company recorded $1,120,997 of
amortization of debt discounts associated with the PP2 Notes.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
STIIP
Under the
STIIP, which commenced on June 9, 2008, the Company temporarily modified the
terms of its outstanding PP1 Notes, PP2 Notes, PP1 Warrants and PP2 Warrants.
During the period beginning June 9, 2008 through June 24, 2008 (the “Conversion
Period”), the conversion prices of the PP1 Notes and PP2 Notes, which were $1.00
and $0.75 per share, respectively, were reduced to $0.53 per
share. In addition, the exercise prices for the PP1 Warrants and the
PP2 Warrants, which were $1.30 and $1.00 per share, respectively, were reduced
to $0.40 per share. Under the STIIP, certain PP2 Note holders
converted $3,240,290, comprised of $2,470,156 in principal and $770,134 in
accrued interest and liquidated damages into approximately 6.2 million shares of
the Company’s common stock at the reduced conversion price.
Also
under the STIIP, certain PP1 and PP2 Warrant holders exercised approximately 2.3
million PP1 and PP2 Warrants at an exercise price of $0.40 per
share. All PP1 and PP2 Warrant holders who exercised their warrants
also received three additional warrants (the “Bonus Warrants”) for every ten
warrants exercised. The Bonus Warrants were exercisable during the
Conversion Period at an exercise price of $0.30 per share, and if not exercised
on or before such date, the exercise price for such Bonus Warrants was increased
to $0.60 per share. A total of 507,675 Bonus Warrants were exercised at
$0.30 per share. The bonus warrants were valued using the Black-Scholes
option pricing model (“Black-Scholes model”) and a charge and a corresponding
credit to additional paid-in capital were recorded for the June 30, 2008 and
September 30, 2008 quarters in the amounts of $36,125 and $131,631,
respectively. The bonus warrants expire on April 6,
2012. The total cash proceeds received from the exercises of the PP1,
PP2 and Bonus Warrants was approximately $844,000.
The
Company accounted for the reduction in the conversion prices of the PP2 Notes
under the STIIP in accordance with FASB Statement No. 84, “Induced Conversions
of Convertible Debt an amendment of APB Opinion No. 26” (“SFAS
84”). Accordingly, the Company calculated and recorded an inducement
charge and a corresponding credit to additional paid-in capital in the June 30,
2008 quarter in the amount of $931,893 for the fair value of common stock issued
based on the reduced price in excess of the fair value of the common stock
issuable pursuant to the original conversion price.
The
Company accounted for the reduction in the exercise price of the PP1 and PP2
Warrants exercised under the STIIP in accordance with the guidance in SFAS
123(R), “Share-based payment” (“SFAS 123R”) and FASB Staff Position No. FSP FAS
123(R)-6, “Technical Corrections of FASB Statement No. 123(R)” for a
modification due to a short-term inducement. Accordingly, the Company
recorded a charge and a corresponding credit to additional paid-in capital in
the June 30, 2008 quarter in the amount of $202,743 for the difference between
the fair value of the PP1 and PP2 Warrants immediately before and after the
modification multiplied by the number of PP1 and PP2 Warrants that were
exercised during the Conversion Period of the STIIP. The fair value
of the PP1 and PP2 Warrants were calculated using the Black-Scholes model. The
total non-cash charge recorded for the inducement on the PP2 Notes and the
reduction in exercise price on the PP1 and PP2 Warrants was
$1,134,216.
The
Company’s total debt as of September 30, 2009, all of which is current, is as
follows:
PP1
and PP2 Notes:
|
||||
Principal
|
$ | 976,426 | ||
Accrued
interest
|
333,010 | |||
Accrued
estimated liquidated damages
|
177,402 | |||
Total
|
$ | 1,486,838 |
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
Registration
Payment Arrangements
Effective
April 1, 2007, the Company adopted FASB Staff Position No. EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”), which
was applicable to the accounting for the liquidated damages on the PP2
Notes. Upon adoption, the Company recorded a cumulative effect of an
accounting change entry (i.e., a charge to the beginning balance of the
accumulated deficit) as of April 1, 2007 for the combination of: 1)
the reclassification of the Warrants from derivative liabilities to equity
securities (based on the criteria as outlined under EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock” (“EITF 00-19”)), and 2) a contingent liability for probable
future payment of liquidated damages (based on the Company’s best estimate as of
the date of adoption, which was through March 31, 2008). The amount
of the contingent liability recorded was approximately $289,000. The
difference between the Warrants as measured on the date of adoption of FSP EITF
00-19 and their original recorded value was approximately $466,000, and, as
stated above, was included in the charge to the beginning balance of the
accumulated deficit. The total cumulative effect of this accounting
change was $755,000.
On April
5, 2007, the Company closed the balance of its PP2 offering and, in accordance
with FSP EITF 00-19-2, recorded a contingent liability and related charge to the
consolidated Statement of Operations for estimated liquidated damages related to
this funding through March 31, 2008. The amount recorded was
$251,176.
As of
March 31, 2008, the Company estimated and accrued $671,342 related to liquidated
damages related to the PP2 Notes and concluded that this amount was the maximum
pay-out required. Under the STIIP, certain PP2 Note holders,
comprising approximately 70% of the original principal of PP2 Notes, converted
their outstanding PP2 Notes at a reduced price of $0.53. On June 30,
2008, the Company executed an agreement with the institutional investor in the
PP2 offering that had the contractual right to liquidated damages. In
exchange for the waiver from the investor, the Company issued to the investor
58,777 shares of its common stock. The agreement terminated any assessment of
liquidated damages beyond June 24, 2008. For the three months ended June 30,
2008, the Company recorded a charge and credit to additional paid-in capital for
the fair value of these shares issued in the amount of $22,041.
The table
below summarizes the cumulative effect entry recorded as of April 1, 2007 for
the adoption of FSP EITF 00-19-2:
Accumulated
deficit, April 1, 2007
|
$ | (10,586,847 | ) | |
Adjustments
for the cumulative effect of the change in accounting
principle:
|
||||
Contingent
liability recorded for estimated liquidated damages
|
(289,518 | ) | ||
Reclassification
of Warrants from derivative liabilities to equity
securities
|
(465,597 | ) | ||
Total
adjustments
|
(755,115 | ) | ||
Accumulated
deficit, April 1, 2007, as adjusted
|
$ | (11,341,962 | ) |
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
4 – COMMITMENTS AND CONTINGENCIES
The
Company and certain of its current and former officers and directors are
defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS.
GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH
HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No.
DV05-0600-G; G-134th District Court, Dallas County, Texas. The
plaintiff has alleged a number of complaints against the defendants, including
breach of fiduciary duty, misappropriation of corporate opportunities, fraud,
fraudulent inducement, breach of contract, tortuous interference with contract,
fraudulent transfer, and shareholder oppression arising in connection with the
license agreement between the Company and XBridge in May 2003 and the
acquisition of XBridge by the Company in May 2005. The parties held a
mediation conference in April 2006 and have come to an understanding with
respect to the principal elements of a potential settlement. The Company is
currently in the process of negotiating definitive settlement agreements. In
accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we
recorded a contingent liability in the amount of $650,000 as of March 31, 2008
related to the outstanding litigation. As of December 31, 2008, the
Company believes that this amount represents the best estimate of a potential
settlement.
NOTE
5 - RELATED PARTY TRANSACTIONS
On April
5, 2007, the Company issued PP2 Notes to the Company’s President, CEO and
director, Derek Downs, and the Company’s Chief Technology Officer and director,
Greg Royal for accrued, but unpaid base salary due to each as of this
date. On June 24, 2008, both individuals converted their PP2 notes
plus accrued interest as part of the STIIP. Mr. Downs and Mr. Royal
converted $38,940 and $91,871, respectively into 73,471 and 173,341 shares of
our common stock at a conversion price of $0.53. After this
conversion, the Company no longer had any indebtedness with either Mr. Downs or
Mr. Royal.
On
November 1, 2008, the Company issued to an employee 100,000 common stock
purchase warrants that were immediately exercisable at $0.40 per share and have
a five-year life. The Company calculated the fair value of the
warrants using the Black-Scholes model and recorded a charge in the amount
$22,728 for the December 2008 quarter.
On
December 4, 2008, an employee advanced the Company $25,000 for the period
through December 31, 2008. In consideration for this advance, the
Company issued to the employee 25,000 common stock purchase warrants that were
immediately exercisable at $0.40 per share and have a five-year
life. The Company calculated the fair value of the warrants using the
Black-Scholes model and recorded a charge in the amount $4,100 for the December
2008 quarter. As of June 30, 2009, the entire obligation has been
repaid.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
6 – SUBSEQUENT EVENTS
Reverse/Forward
Split
On the
25th June
2009, the Company filed a an Information Statement to inform the stockholders of
(i) the approval on June 9, 2009 of resolutions by the Board of Directors
proposing amendments to the Articles of Incorporation to effect a 3 for 1
reverse stock split of our common stock followed immediately by a 3 for 1
forward stock split of the common stock (the "Reverse/Forward Stock Split"), and
(ii) receipt of written consents dated June 9, 2009, approving such amendment by
stockholders holding 65.6% of the voting power of all of our stockholders
entitled to vote on the matter as of June 9, 2009. As a result of the
Reverse/Forward Stock Split, stockholders owning fewer than 3 shares of our
common stock will be cashed out at a price of $.14 per share, and the holdings
of all other stockholders will remain unchanged.
When the
Reverse/Forward Stock Split becomes effective, the Company will have fewer than
300 stockholders of record, and will be eligible to cease filing periodic
reports with the Commission, and the Company intends to cease public
registration and terminate the listing of our Common Stock on the OTC Bulletin
Board. Once the Company ceases public registration and terminates the listing of
our Common Stock, the Company will not be required to provide our Stockholders
with periodic or other reports regarding the Company, although they intend to
continue to provide similar information through the Pink Sheets News
Service.
The
Company estimates the cost of the Reverse/Forward Stock Split, to be
approximately $25,800. However, if on the date immediately preceding
the effective date of the Reverse/Forward Stock Split, they believe that the
cash required to pay for the Reverse/Forward Stock Split exceeds the reasonable
estimate of the amount of cash necessary to consummate the Reverse/Forward
Split, they reserve the right not to effect the Reverse/Forward Stock
Split.
The
Reverse/Forward Stock Split has been submitted to the Securities and Exchange
Commission for proposal and comment. If the Reverse/Forward Stock
Split is approved by the SEC, the transaction will become complete 20 days after
the shareholders have been notified by letter. Currently, Cistera
Networks, Inc. has 17,423,410 shares outstanding. If the transaction
is approved and completed, 477 shares will be repurchased at $0.14 per share or
$66.78, leaving 17,422,933 shares outstanding.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. In many but not all cases you can
identify forward-looking statements by words such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,”
“should,” “will” and “would” or the negative of these terms or other similar
expressions. These forward-looking statements include statements regarding
our expectations, beliefs, or intentions about the future, and are based on
information available to us at this time. We assume no obligation to update any
of these statements and specifically decline any obligation to update or correct
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. Actual events and results could differ materially from our expectations
as a result of many factors, including those identified in this report. We urge
you to review and consider those factors, and those identified from time to time
in our reports and filings with the SEC, for information about risks and
uncertainties that may affect our future results. All forward-looking statements
we make after the date of this filing are also qualified by this cautionary
statement and identified risks. Additional risk factors are discussed in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and our
other reports filed with the SEC, to which reference should be
made.
EXECUTIVE SUMMARY AND RECENT
BUSINESS DEVELOPMENTS
For the
second quarter ending 30th
September 2009, we saw a 41% decrease in revenues as compared to the same
quarter in the prior year. We experienced a drop in revenue on a
sequential quarter basis as a result of the deteriorating global economic
situation. High margin recurring revenue from support and maintenance
continues to become a more significant piece of our revenues as our installed
base grows. Despite the economic slowdown, our pipeline of opportunities is
increasing in both number of opportunities and project size.
Our
business model relies upon the leverage of a network of strong reseller partners
to sell our products. During the quarter, we continued to invest in
building out our internal technical, sales and business development
organizations to properly support our channel reseller program. This
program allows us to effectively apply our resources to focus on the partners
that are significant generators of revenue.
Even in a
period of economic constraints, we recognize the importance of continuing and
extending our R&D efforts to ensure that our products offer features and
functionality specific to industry requirements and that add measurable value
for our customers. Our ability to invest in R&D is limited. However we have
been successful in gaining R&D investments through existing customer and
federal government contracts.
We
continued to make good penetration into the public sector markets where our
solutions are increasingly well received as the answer to critical communication
challenges. This quarter, we have extended our efforts to enter the
Federal market and have invested a significant amount of time and effort in
extending our relationships with the federal government.
In light
of the significant downturn in the U.S. economy, we are carefully monitoring our
sales pipeline and have refocused our solutions selling efforts onto our top
reseller relationships. Further, beginning January 1, 2009, we
instituted additional operating expense reductions, including salary reductions
for the management team, employee terminations and marketing program
elimination. We are seeing market segments, such as government and healthcare
are more resilient to the current economic conditions, primarily due to
continued demand for event alerting and notification solutions for public safety
infrastructure. With the demographics of an aging population, healthcare is also
an industry that is continuing to grow. Because there are fewer
employees to operate facilities, the efficiencies and increased productivity our
products provide can measurably enhance business operations.
On the
14th May
2009, the company announced the release of version 1.9 of the Cistera
Convergence Server. Cistera ConvergenceServer Version1.9 is the result of over
five years of work on enterprise application platforms for Unified
Communications and is the most advanced solution set available
today.
On the
10th June
2009, the company announced the the addition of the ZoneSpeak™ IP Speaker to its
successful Event Alerting and Notification Solution Set.
On the
16th
September 2009, the company announced the release of the latest
version of its award-winning platform, the Cistera ConvergenceServer (CCS)
Version 1.9 has successfully completed Interoperability Verification Testing
(IVT) for Cisco Unified Communications Manager (CUCM 7.1).
On the
29th
October 2009, the company announces the release of the newest configuration of
its award-winning platform, the Cistera ConvergenceServer 9500 (CCS 9500)
specifically tailored for large-scale applications.
We remain
focused on maintaining profitability, and believe our emphasis on strong
presence in key markets will lead to the continued pipeline growth, completed
installations and increased average deal size that will be necessary to maintain
profitability.
We
believe that our products are ideally suited to Federal, State and Local
Government applications and continue to make strong headway in these markets. We
believe that this focus will continue the trending of our product mix toward the
higher value in key markets as well as a strong emphasis on maintenance revenue
will allow us to maintain strong profitability into the future. Our product is
extremely well received by customers and forms a cornerstone of their
communications strategy.
RESULTS
OF OPERATIONS
Selected
Consolidated Statements of Operations Data
The
following tables present consolidated statements of operations data for the
three and six months ended September 30, 2009 and 2008 based on the percentage
of revenue for each line item, as well as the dollar and percentage change of
each of the items.
Results
of Operations for the Three Months Ended September 30, 2008
Compared
to the Three Months Ended September 30, 2007
For
the three months ended September 30,
|
||||
2009
|
%
of revenue
|
2008
|
%
of revenue
|
|
Revenues:
|
||||
Convergence
solutions
|
$380,403
|
51%
|
$ 1,013,075
|
79%
|
Professional
services
|
98,018
|
13%
|
45,125
|
3%
|
Support
and maintenance
|
272,488
|
36%
|
230,303
|
18%
|
Total
revenues
|
750,909
|
100%
|
1,288,503
|
100%
|
Cost
of revenues:
|
||||
Convergence
solutions
|
123,366
|
16%
|
276,710
|
22%
|
Professional
services
|
56,627
|
8%
|
42,500
|
3%
|
Support
and maintenance
|
22,246
|
3%
|
24,250
|
2%
|
Total
cost of revenues
|
202,239
|
27%
|
343,460
|
27%
|
Gross
Profit
|
548,670
|
73%
|
945,043
|
73%
|
Operating
expenses:
|
||||
Sales
and marketing
|
53,723
|
7%
|
301,043
|
23%
|
Software
development
|
106,803
|
14%
|
226,875
|
18%
|
Engineering
and support
|
73,112
|
10%
|
201,969
|
15%
|
General
and administrative
|
193,476
|
26%
|
422,105
|
36%
|
Depreciation
and amortization
|
(44,247)
|
(5%)
|
100,674
|
10%
|
Total
operating expenses
|
384,867
|
52%
|
1,252,666
|
97%
|
Profit
(loss) from operations
|
163,803
|
(22%)
|
(307,623)
|
(24%)
|
Other
income (expense)
|
||||
Interest
income
|
7
|
-%
|
86
|
-%
|
Interest
expense
|
(57,595)
|
(8%)
|
(50,117)
|
(8%)
|
Amortization
of discount on convertible notes
|
-
|
(108,918)
|
(8%)
|
|
Charge
for inducements related to stock
issued
to convertible note holders
|
-
|
(131,631)
|
(10%)
|
|
Total
other income (expense)
|
(57,588)
|
(8%)
|
(209,580)
|
(22%)
|
Net
Profit (loss)
|
$ 106,215
|
14%
|
$ (598,203)
|
(46%)
|
Revenue
Revenue
for the quarter ended September 30, 2009 decreased $537,504 or approximately 41%
from the comparable prior year quarterly period primarily due to the
deteriorating global economic environment. Revenue from professional
services increased 117% from the prior year quarter primarily due to the timing
of completion of certain project service engagements and as a result of a change
of certifying reseller partners to handle installations in lieu of performing
them ourselves, as well as decreased sales activity. We have also refocused our
efforts on high-value markets where customers are significantly less sensitive
to price. This has resulted in lower revenues but more profitable
contracts.
Gross Profit and Gross
Margin
Gross
profit for the quarter ended September 30, 2009 decreased $396,373 or
approximately 41% from the comparable prior year quarter primarily due to
decreased revenue. Gross margin also maintained a constant level as a
percentage of sales at 73%.
Operating
Expenses
Operating
expenses, excluding depreciation and amortization decreased from $1,252,666 in
the September 2008 quarter to $384,867 in the September 2009 quarter, a decrease
of $867,799 or approximately 69%. This dramatic reduction was as a result of the
intense restructuring effort in response to the significant drop in the United
States economy in 2009. The market for unified communications suffered a serious
decline in new license revenue and the company was forced to respond
accordingly.
The
decrease was primarily attributable to:
·
|
Decrease
headcount in all departments;
|
·
|
Decrease
in payroll taxes as a result of reduced
personnel;
|
·
|
Reductions
in travel, marketing and sales
expenses;
|
·
|
Decrease
in software licensing costs;
|
·
|
Elimination
of all unnecessary professional services and
fees.
|
Sales and
Marketing costs reduced from $301,043 to $53,723 through reductions in
headcount, commissions payable, travel and marketing expenses across the
board.
Software
development costs reduced from $226,875 to $106,803 through reductions in
headcount and general expenses.
Engineering
and Support costs reduced from $201,969 to $73,112 through reductions in
headcount and travel related expenses. The company has dramatically increased
the number of remote installations significantly reducing costs.
General
and Administrative costs have been reduced from $422,105 to $193,476 through
reduction in headcount and the elimination of all unnecessary professional
services and fees.
The Depreciation and
Amortization is a reduction from $100,674 to ($44,247) as compared to same
quarter 2008 and is due to an adjustment and correcting of the fixed
asset depreciation schedule dating back to April 1, 2009. The
aggregate impact of this adjustment is $68,425 or $34,213 per quarter and is not
deemed material on a quarterly basis.
An error
in the Payroll accrual account was made which resulted in a reversal of $393,810
of duplicate expense to the payroll expense accounts. After reversal
of this accrual, payroll was accrued for $52,301 reflecting the pay period
September 15 – September 30, 2009. The net effect to the profits of
the company were a positive $341,509. The filings for period 30 June 2009 have
been amended to reflect this change as it relates to that period.
Interest
Expense
Interest
expense for the September 2009 quarter increased $7,478 from the
September 2008 quarter primarily due to the decrease in accrued interest on the
PP2 Notes due to the decrease in the PP2 Notes as a result of the conversions
under the STIIP in June 2008. Offsetting the overall interest expense
decrease generated from the PP2 Notes was an increase in interest on our
accounts receivable factoring facility as a result of higher factorings in the
September 2009 quarter as compared to the September 2008 quarter.
Results
of Operations for the Six Months Ended September 30, 2009
Compared
to the Six Months Ended September 30, 2008
For
the six months ended September 30,
|
||||
2009
|
%
of revenue
|
2008
|
%
of revenue
|
|
Revenues:
|
||||
Convergence
solutions
|
$ 568,481
|
47%
|
$ 1,535,468
|
73%
|
Professional
services
|
134,586
|
11%
|
105,833
|
6%
|
Support
and maintenance
|
505,808
|
42%
|
447,762
|
21%
|
Total
revenues
|
1,208,875
|
100%
|
2,089,063
|
100%
|
Cost
of revenues:
|
||||
Convergence
solutions
|
226,379
|
19%
|
409,742
|
20%
|
Professional
services
|
104,345
|
9%
|
93,000
|
4%
|
Support
and maintenance
|
40,246
|
3%
|
47,434
|
2%
|
Total
cost of revenues
|
370,970
|
31%
|
550,176
|
26%
|
Gross
Profit
|
837,905
|
69%
|
1,538,887
|
74%
|
Operating
expenses:
|
||||
Sales
and marketing
|
113,220
|
9%
|
580,472
|
28%
|
Software
development
|
136,235
|
11%
|
423,333
|
20%
|
Engineering
and support
|
140,905
|
12%
|
406,400
|
19%
|
General
and administrative
|
344,248
|
28%
|
760,617
|
36%
|
Depreciation
and amortization
|
53,413
|
5%
|
198,830
|
10%
|
Total
operating expenses
|
788,021
|
65%
|
2,369,652
|
113%
|
Profit
(Loss) from operations
|
49,884
|
4%
|
(830,765)
|
(40%)
|
Other
income (expense)
|
||||
Interest
income
Other
income
Charge
for inducements related to stock
Issued
to convertible note holders
Amortization
of discount on convertible
Notes
Abandonment
loss
|
-
63
-
-
(15,815)
|
-%
-%
-%
-%
(1)%
|
168
(1,324,444)
(1,188,855)
|
-%
(64%)
(57%)
|
Interest
expense
|
(124,629)
|
(10)%
|
(147,809)
|
(7%)
|
Credit
(charge) for estimated liquidated
Damages
|
-
|
-%
|
-%
|
|
Total
other income (expense)
|
(140,381)
|
(11)%
|
(2,690,701)
|
(128%)
|
Net
Profit (Loss)
|
$ (90,497)
|
(7)%
|
(3,521,466)
|
(168%)
|
Revenue
Revenue
for the six months ended September 30, 2009 decreased $880,188 or approximately
42% from the comparable prior year six months primarily due to the deteriorating
global economic environment. Revenue from professional services
increased 27% from the prior year quarter primarily due to the timing of
completion of certain project service engagements and as a result of a change of
certifying reseller partners to handle installations in lieu of performing them
ourselves, as well as decreased sales activity. We have also refocused our
efforts on high-value markets where customers are significantly less sensitive
to price. This has resulted in lower revenues but more profitable
contracts.
Gross
Profit and Gross Margin
Gross
profit for the six months ended September 30, 2009 decreased $700,982 or
approximately 45% from the comparable prior year quarter primarily due to
decrease revenue. Gross margin increased in the six months ending
September 2009 as compared to the September 2008 six months to 74% from
69%. This increase was primarily due to product mix on convergence
solutions offset by higher margins on support and maintenance as a result of the
higher installed base.
Operating
Expenses
Operating
expenses, excluding depreciation and amortization, decreased from $2,369,652 in
the September 2008 six months to $788,021 in the six-month ending September
2009, a decrease of $1,581,631 or approximately 67%. This dramatic
reduction was as a result of the intense restructuring effort in response to the
significant drop in the United States economy in 2009. The market for unified
communications suffered a serious decline in new license revenue and the company
was forced to respond accordingly.
The
decrease was primarily attributable to:
·
|
Decrease
headcount in all departments;
|
·
|
Decrease
in payroll taxes as a result of reduced
personnel;
|
·
|
Reductions
in travel, marketing and sales
expenses;
|
·
|
Decrease
in software licensing costs;
|
·
|
Elimination
of all unnecessary professional services and
fees.
|
Sales and
Marketing costs reduced from $580,472 to $113,220 through reductions in
headcount, commissions payable, travel and marketing expenses across the
board.
Software
development costs reduced from $423,333 to $136,235 through reductions in
headcount and general expenses.
Engineering
and Support costs reduced from $406,400 to $140,905 through reductions in
headcount and travel related expenses. The company has dramatically increased
the number of remote installations significantly reducing costs.
General
and Administrative costs have been reduced from $760, 617 to $344, 248 through
reduction in headcount and the elimination of all unnecessary professional
services and fees.
An error
in the Payroll accrual account was made which resulted in a reversal of $393,810
of duplicate expense to the payroll expense accounts. After reversal
of this accrual, payroll was accrued for $52,301 reflecting the pay period
September 15 – September 30, 2009. The net effect to the profits of
the company were a positive $341,509. The filings for period 30 June 2009 have
been amended to reflect this change as it relates to that period.
Interest
Expense
Interest
expense for the six months ending September 2009 quarter decreased $23,180 from
the six months ended September 2008 quarter primarily due to the decrease in
accrued interest on the PP2 Notes due to the decrease in the PP2 Notes as a
result of the conversions under our “Short Term Investment Incentive Plan” (the
“STIIP”). Offsetting the overall interest expense decrease was an
increase in the interest rate on the PP1 and PP2 Notes due to a default on the
notes.
Amortization
of Debt Discount
The
amortization of debt discount on our PP2 Notes in the six months ending
September 2009 quarter decreased $1,188,855 from the June 2008 quarter primarily
as a result of the amortization of the debt discount was completed recorded at
March 31, 2009. As required under GAAP, all unamortized debt discount
outstanding at the date of the conversion was expensed. See further
discussion of the STIIP under “Liquidity” under this Item.
Charge
for Inducements Related to Stock Issued to Convertible Note Holders
As part
of the STIIP, we lowered the conversion price of our PP2 Notes and the exercise
price of both our PP1 and PP2 Warrants. As required under US GAAP, we
recorded non-cash charges for the June 2008 quarter in the amounts of $1,192,813
related to these inducements. See further discussion of the STIIP
under “Liquidity and Capital Resources.”
Liquidated
Damages
The
decrease in the charge for liquidated damages from the three months ended
September 2009 was primarily the result of the settlement of future liquidated
damages as of June 24, 2008. As of June 30, 2008, we recorded an
adjustment to the amount of accrued liquidated damages for PP2 Note holders who
did not convert their notes in the STIIP. As part of an agreement
dated June 30, 2008 with the investor in the PP2 offering that had the
contractual right to liquidated damages, we issued to the investor 58,777 shares
of our common stock in exchange for a waiver on future liquidated damages after
June 24, 2008. The agreement terminated any assessment of liquidated damages
beyond June 24, 2008.
Liquidity
and Capital Resources
The
unaudited consolidated financial statements contained in this report have been
prepared in conformity with US GAAP (except with regard to omission of certain
disclosures within interim financial statements, as permitted by the SEC), which
contemplate our continuation as a going concern and do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary if
we were unable to continue as a going concern. However, the report of our
independent registered public accounting firm on our consolidated financial
statements, as of and for the year ended March 31, 2009, contains an explanatory
paragraph expressing substantial doubt as to our ability to continue as a going
concern. The “going concern” explanatory paragraph resulted from, among other
things, the substantial losses from operations we have incurred since inception,
our liquidity position and net loss of $4.6 million for the year ended March 31,
2009, which included non-cash charges of $1.4 million related to amortization of
discounts associated with our PP2 Notes and negative working capital (current
liabilities in excess of current assets) of $3.0 million as of March 31,
2009. In addition, we had a net loss of $90,497 for the six months
ended September 30, 2009. Also, as of September 30, 2009, we
have negative working capital (current liabilities in excess of current assets)
of $1.7 million.
Accordingly,
as of September 30, 2009, the recoverability of a major portion of the recorded
asset amounts is dependent on our continuing operations, which in turn is
dependent on our ability to maintain our current financing arrangements and our
ability to become profitable in our future operations through generating higher
revenues or lowering operating costs, or a combination of the two. These factors
raise substantial doubt about our ability to continue as a going concern. These
consolidated financial statements do not reflect adjustments that would be
necessary if we were unable to continue as a going concern.
Our
primary source of working capital liquidity is a factoring facility we have with
Allied Capital Partners, L.P. (“Allied”), which allows for cash advances of up
to $1,500,000 on our customer accounts receivable, subject to the approval of
Allied of the customer and the type of product or service that is
invoiced. The facility allows for an advance rate up to 85.88% and
initial factoring charges are 1.75% of the total accounts receivable
balance. An additional funding agreement became effective in November
of 2008 allowing for the factoring of support renewals at an advance rate of
50.88% and initial factoring charges of 1.75% of the total accounts receivable
balance. Advances made by Allied are collateralized by our accounts
receivable, chattel paper, general intangibles, supporting obligations,
inventory and proceeds thereof. The term of the current agreement is
for a period of two years with an automatic one-year renewal
thereafter. Advances under the factoring facility at September, 2009
were $186,299 and are netted against total accounts receivable on our
Consolidated Balance Sheet.
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As
of that date, we began to accrue interest on the December PP2 Notes at a default
rate of 18% per annum, which is the maximum allowable rate as stipulated under
the PP2 Note purchase agreement. We will need to renegotiate the
payment or conversion of the principal and interest due on all of the PP2 Notes,
of which approximately $1.1 million is due in April 2009, or raise additional
capital, or a combination of the two. If we need to raise additional capital it
could be in the form of equity or debt, or a combination of the two. The capital
markets are extremely challenging at this time and there can be no assurance
that we will be successful in raising additional funds and, if so, on favorable
terms or that the cost savings or required new capital will be
sufficient. We are also actively exploring other strategic
alternatives.
As of
April 5, 2009, we were in default on approximately $1,100,000 of principal and
accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of
that date, we began to accrue interest on the April PP2 Notes at a default rate
of 18% per annum, which is the maximum allowable rate as stipulated under the
PP2 Note purchase agreement. We will need to renegotiate the payment
or conversion of the principal and interest due on all of the PP2 Notes or raise
additional capital, or a combination of the two. If we need to raise additional
capital it could be in the form of equity or debt, or a combination of the two.
The capital markets are extremely challenging at this time and there can be no
assurance that we will be successful in raising additional funds and, if so, on
favorable terms or that the cost savings or required new capital will be
sufficient. We are also actively exploring other strategic
alternatives.
Cash
and Cash Flows
Our cash
and cash equivalents at September 30, 2009 were $35,377. For the six months
ended September 30, 2009, net cash provided by operations was
$42,270. The primary use of cash was the loss from operations
incurred for the period of $90,427 adjusted for non-cash charges of $72,378 for
depreciation and amortization, abandonment loss and gain from disposition of
assets.
Contractual
Obligations
Our
current material contractual obligations are our current and former corporate
office leases and the principal, accrued interest and accrued liquidated damages
under our PP1 and PP2 Notes. In December 2008, we executed a sublease
for our former corporate office facility at approximately $4,100 per month for
the remaining lease term, which is through November 2009. On May 29,
2009 the property manager informed us that our sub-lessee had vacated the
premises. We are actively seeking a new sublease for this space but
given the short timeframe to lease termination it is unlikely that we will find
a subtenant for this space.
Critical
Accounting Policies
We
prepare our financial statements in accordance with US GAAP. The accounting
policies most fundamental to understanding our financial statements are those
relating to recognition of revenue, our use of estimates and the accounting for
convertible debt and warrants. For a detailed discussion on the application of
these accounting policies, see Note 2 to our audited consolidated financial
statements contained in our 2009 10-K.
Research
and Development – Software Development
Research
and development expenditures are generally expensed as incurred. 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 completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been insignificant. Thereafter, all software production
costs shall be capitalized and subsequently reported at the lower of unamortized
cost or net realizable value. Capitalized costs are amortized based on current
and future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product. Cistera’s software development costs capitalized as of the 30th of
September are $1,102,200 and for the six months ending September 30,2009 are
$135,888.
Recently
Issued Accounting Pronouncements
We
discuss the potential impact of recent accounting pronouncements in Note 1 to
the unaudited consolidated financial statements contained in this
report.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
As a
smaller reporting company, we are not required to provide this
information.
Item
4(T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) are designed to ensure that information required to be
disclosed in reports filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC
rules and forms and that such information is accumulated and communicated to
management, including our Chief Executive Officer, who is also currently our
interim Chief Financial Officer (the “Certifying Officer”), to allow timely
decisions regarding required disclosures.
As of
September 30, 2009, we carried out an analysis, under the supervision and with
the participation of our management, including our Certifying Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. As a result of this analysis, our Certifying Officer concluded that
our disclosure controls and procedures and internal controls over financial
reporting continued to be not effective and identified remediation measures to
be implemented.
We
estimate that the Certifying Officer, along with the Company’s other management
personnel, will need to complete remediation measures that may include engaging
an independent consulting firm to further evaluate, remediate, implement,
document and test the internal controls in these key areas:
1.
|
Financial
Reporting, including technical accounting surrounding complex accounting
transactions
|
2.
|
Order
Entry Accounting & Reporting
|
3.
|
Debt/Equity
Accounting & Compliance
|
4.
|
Cash
& Other Working Capital
Management
|
5.
|
Compensation
Accounting & Administration
|
6.
|
Other
Assets & Liability Account
Management
|
We will
also monitor our disclosure controls and procedures on a continuing basis to
ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management,
including its principal executive and principal financial officers, as
appropriate, to allow timely decisions regarding required disclosure. In the
future as such controls change in relation to developments in the our business
and financial reporting requirements, our evaluation and monitoring measures
will also address any additional corrective actions that may be
required.
Inherent
Limitations of Internal Controls
Our
management does not expect that our disclosure control procedures or our
internal controls over financial reporting will prevent all errors and fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
The
Company and certain of its current and former officers and directors are
defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS.
GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH
HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No.
DV05-0600-G; G-134th District Court, Dallas County, Texas. The
plaintiff has alleged a number of complaints against the defendants, including
breach of fiduciary duty, misappropriation of corporate opportunities, fraud,
fraudulent inducement, breach of contract, tortuous interference with contract,
fraudulent transfer, and shareholder oppression arising in connection with the
license agreement between the Company and XBridge in May 2003 and the
acquisition of XBridge by the Company in May 2005. The parties held a
mediation conference in April 2006 and have come to an understanding with
respect to the principal elements of a potential settlement. The Company is
currently in the process of negotiating definitive settlement agreements. In
accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we
recorded a contingent liability in the amount of $650,000 as of March 31, 2008
related to the outstanding litigation. As of December 31, 2008, the
Company believes that this amount represents the best estimate of a potential
settlement.
Item
1A. Risk Factors
We may
need to raise additional capital to fund our operations.
Our
ability to continue as a going concern is in doubt and we may not be successful
in generating revenue and gross profit at levels sufficient to cover our
operating costs and cash investment requirements. Our current and
primary source of cash availability is a $1.5 million credit facility with an
accounts receivable “factoring” institution, Allied Capital. Funds
available to us under the credit line with Allied Capital are limited by the
amount of eligible accounts receivable we hold at any given time. Additionally,
fluctuations in the timing of customer orders adversely affect our ability to
draw on the line when required. Allied Capital may declare the loan in default
if we do not meet certain financial covenants, and the inability to continue
factoring accounts receivable would result in a significant loss of working
capital liquidity.
Additionally,
we purchase over half of our products from one supplier—Equus Computer Systems.
(“Equus”). Equus provides us with open trade credit on 30 day terms
based on a pre-established credit limit and, historically, has provided
additional credit to support larger purchase order demands on a “one-off
basis.” We purchase most of our other products from our other
suppliers on open trade credit terms with set dollar limits. If Equus
or our other significant suppliers were to cease to sell to us on trade credit
terms, or were to substantially lower the credit limits they have set, we would
need to accelerate our payments to those vendors, creating additional demands on
our cash resources, or we would need to find other sources for those
goods.
We
will need to renegotiate or extend the currently outstanding PP2 Notes and
related interest.
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes. In addition, as of April 5,
2009, we were in default of approximately $1,100,000 of principal and accrued
interest on certain PP2 Notes. Currently, we are accruing interest on
these PP2 Notes at a default rate of 18% per annum, which is the maximum
allowable rate as stipulated under the PP2 Note purchase
agreement. If we need to raise additional capital it could be in the
form of equity or debt, or a combination of the two. There can be no assurance
that we will be successful in raising additional funds and, if so, on favorable
terms or that the cost savings or required new capital will be
sufficient.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item
3. Defaults Upon Senior Securities
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As
of this date, we began to accrue interest on the December PP2 Notes at a default
rate of 18% per annum, which is the maximum allowable rate as stipulated under
the PP2 Note purchase agreement. In addition, as of April 5, 2009, we
were in default on approximately $1,100,000 of principal and accrued interest on
certain PP2 Notes. As of this date, we began to accrue interest on
the April PP2 Notes at a default rate of 18% per annum. We will
likely need to renegotiate the payment or conversion of the principal and
interest due on all of the PP2 Notes, or raise additional capital, or a
combination of the two. If we need to raise additional capital it could be in
the form of equity or debt, or a combination of the two. There can be no
assurance that we will be successful in raising additional funds and, if so, on
favorable terms or that the cost savings or required new capital will be
sufficient.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
31.1 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Press
release dated November 20, 2009
SIGNATURE
Pursuant
to the requirements 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.
CISTERA
NETWORKS, INC.
Date:
July 15, 2010
|
/s/ Gregory T.
Royal
|
Gregory
T. Royal
|
|
Chief
Executive Officer and interim
|
|
Chief
Financial Officer
|
|
(Principal
Executive, Financial and
|
|
Accounting
Officer)
|