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EX-32 - Cistera Networks, Inc. | form10ka033110ex32.htm |
EX-31 - Cistera Networks, Inc. | form10ka033110ex31.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K/A
Amendment No.
1
[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
Fiscal Year Ended: March 31,
2010
[ ]
TRANSITION REPORT UNDER 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.
(Name of
small business issuer in its charter)
Nevada
|
91-1944887
|
State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization
|
Identification
No.)
|
6509 Windcrest Drive, suite
160, Plano, Texas 75024
(Address
of principal executive offices) (zip code)
Issuer's
telephone
number (972)
381-4699
Securities
registered under Section 12(b) of the Act: NONE
Securities
registered under Section 12(g) of the Act:
Common Stock Par Value
$0.001
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. [ ] Yes [X]
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ]
Yes [X] No
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.[X] Yes [ ] 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 (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). [X] Yes
[ ] No
Indicate
by check mark 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 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. [ ]
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
the definitions of "accelerated filer," "large 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 Act). [ ] Yes [X] No
At July
14, 2010, the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the quoted market price $.05 at
which the common equity was sold as of was approximately $
901,130.
As of
July 14, 2010, 18,022,605 shares of the Issuer's $.001 par value common stock
were issued and outstanding.
i
CISTERA
NETWORKS, INC.
FORM
10-K
TABLE
OF CONTENTS
|
||
Item Number and Caption
|
Page
|
|
PART I
|
||
Item
1.
|
Business
|
1
|
Item
1A.
|
Risk
Factors
|
7
|
Item
1B.
|
Unresolved
Staff Comments
|
7
|
Item
2.
|
Properties
|
8
|
Item
3.
|
Legal
Proceedings
|
8
|
PART II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
|
8
|
Purchases
of Equity Securities
|
||
Item
6.
|
Selected
Financial Data
|
9
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and
|
9
|
Results
of Operations
|
||
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
17
|
Item
8.
|
Financial
Statements and Supplementary Data
|
17
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial
Disclosure
|
17
|
Item
9A.
|
Controls
and Procedures
|
17
|
Item
9B.
|
Other
Information
|
19
|
PART III
|
||
Item
10.
|
Directors,
Executive Officers, and Corporate Governance
|
19
|
Item
11.
|
Executive
Compensation
|
22
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related
Stockholder Matters
|
24
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
26
|
Item
14.
|
Principal
Accountant Fees & Services
|
26
|
PART IV
|
||
Item
15.
|
Exhibits,
Financial Statement Schedules
|
28
|
ii
EXPLANATORY NOTE
This
Amendment No. 1 to the Annual Report on Form 10-K (the “Report”) for the
fiscal year ended March 31, 2010 is filed for the purpose of amending the
following:
·
|
Amend
references to legacy GAAP have been updated to reflect FASB accounting
standards.
|
·
|
Additional
discussions have been included in the results of operations for costs of
revenues, operating expenses, or other income
(expense).
|
·
|
Additional
discussion on the evaluation of Disclosure Controlers and
Procedures
|
·
|
Additional
discussion on Internal Control over Financial
Reporting
|
·
|
A
correction to the use of the term “small business issuer” to “registrant”
in Exhibit 31.1
|
·
|
Correct
an error with certification incorrectly referring to December 31, 2009 in
Exhibit 32.1
|
·
|
Additional
discussion disclosing the use of non-GAAP EBITDA under 10(e) of Regulation
S-K in Exhibit 99.1
|
ASC
FASB 250-10-50-7 Disclosure
There are
no corrections to any financial statement line items required to be
disclosed.
ASC
FASB 250-10-50-8 Disclosure
There are
no FASB 250-10-50-8 disclosures required.
iii
PART
I
ITEM
1: DESCRIPTION OF BUSINESS
BACKGROUND
Cistera
Networks, Inc. (“we” or “the Company” or “Cistera”) was incorporated in Delaware
on April 15, 1987, under the name of I.S.B.C. Corp. The Company
subsequently changed its name first to Coral Companies, Inc., and then to CNH
Holdings Company. Domicile was changed to Nevada in
1997. The Company conducted an initial public and secondary offerings
during the 1980's. On June 15, 1998, the Company acquired Southport
Environmental and Development, Inc. This acquisition, however, was
subsequently rescinded by agreement between the parties and made a formal order
of the court effective April 19, 2000. This order put the Company in
the position that it occupied at June 14, 1998, as if none of the actions that
had occurred from that time to the date of rescission had
transpired.
The
Company was in the development stage from January 1, 1992 to May 5,
2003. On May 5, 2003, the Company formed Corvero Networks, Inc., a
Florida corporation as a wholly owned subsidiary to acquire the use of certain
technology known as the XBridge Technology. This technology was used
as its principal component of the Corvero Convergence Platform. The
acquisition was accomplished by entering into a license agreement with XBridge
Software, Inc., a Delaware corporation.
On August
31, 2004, as part of a corporate restructuring aimed at simplifying the
Company’s operating structure, Corvero Networks merged into CNH Holdings and
began doing business as Cistera Networks. As a continuation of this
restructuring, effective May 27, 2005, the Company acquired XBridge in a merger
of XBridge with a newly formed Company subsidiary.
On
September 27, 2005, we changed our name to Cistera Networks, Inc.
On
January 1st, 2010, Cistera Networks restructured the company around three core
operating markets and channels. Cistera Federal Systems, Inc. provides sales and
marketing for the US Federal Government market. Telmarine Communications, Inc.
develops and markets public safety wireless communications solutions and Cistera
Networks Inc, develops and markets solutions for the Cisco technology channels
and partners.
BUSINESS
OVERVIEW
We
provide an Enterprise Application Server for Unified Communications that
provides an advanced platform for the delivery of application services for
predominately the public safety, healthcare and federal markets. We offer our
solution sets predominately using a perpetual license and maintenance fee model
although we have deployed solutions on a subscription model for large
carriers.
In 2009
in response to a considerable deterioration of the global economy and the
unified communications markets in particular, Cistera began to restructure the
company and realign its business strategy towards “high value” markets and
solutions and away from highly competitive low margin unified communications
markets. With this in mind, the company has restructured into three divisions;
Federal Systems, Commercial (including Healthcare) and Public
Safety.
In 2007,
we began efforts to offer our solution sets to the United States Federal
Government. This market has unique compliance and procurement requirements
particular in the area of security and scalability. For example, in order for
the company to be eligible for Department of Defense contracts, our software
products must meet strict security configurations and profiles. The company has
invested considerable time and effort bringing the solution set into compliance
and as a consequence has been successfully deployed by various agencies of the
US Government including the Department of Defense. In December 2009, Cistera
formed a wholly owned subsidiary, Cistera Federal Systems Inc, to meet the
procurement requirements of the Government Services Agency and encapsulate the
federal activities of Cistera. It is the intention of the company to
considerably increase the activity and investment in the Federal Marketplace
through a combination of direct marketing and channel partner activity. We
expect that over time this will significantly contribute to the overall success
of the company. As of March 31, 2010, there are no significant
transactions for Cistera Federal.
1
In 2009
we began to offer our solution sets to the Healthcare markets, specifically in
enabling business workflow and communications in hospitals and other medical
facilities. Operational efficiency is a critical objective of healthcare
providers. Cistera provides solutions that marshal resources in real-time with
processes to allow timely resolution of key tasks. We have over the past year
seen solid success in implementing our solution in large hospital systems in
California, Texas and Florida and now have over 25 healthcare systems and
providers using Cistera capability. It is the intention of the company to
considerably increase the activity and investment in the Healthcare market
through a combination of direct marketing and partnerships to enhance our value
in this market. We expect that over time this will significantly contribute to
the overall success of the company.
Cistera
Networks has also believes that there are significant opportunities in the
public safety market dominated by Federal, State and Local government customers,
particularly Land Mobile Radio P.25 markets. In December 2009 Cistera Networks
Inc incorporated a wholly owned subsidiary Telmarine Communications Inc to
specifically focus on the development the market for Unified Communications for
Land Mobile Radio. Cistera has sold the LMRConnect product line to Telmarine
Communications. Telmarine is currently pursuing technology licensing agreements
and relationships with third parties to grow the product offering for the public
safety markets.
We began
operations in May 2003, and first introduced our convergence solutions in
September 2003. We initially offered our solutions at discounted
prices, to seed the market and to establish a reference-able customer
base. From May 2003 through June 2005, we staffed our operations,
grew our reseller channel, built our infrastructure, created, marketed and
delivered our solutions and obtained an initial base of commercial
customers. In April 2009 in response to the global recession and
collapse of the unified communications market, Cistera restructured the company
to reduce staff and overhead and focused the company on three key markets;
Commercial, Federal and Public Safety.
Our
revenues decreased from $3,714,272 in fiscal 2009 to $2,294,210 in fiscal 2010,
an decrease of 38% primarily due the global recession, however the Company, as a
result of restructuring, dramatically reduced losses from $4,628,117 in fiscal
2009 to $339,257 in fiscal 2010, a decrease of 93%. This has resulted in the
Company achieving positive (non-GAAP) EBITDA from operations for the fiscal year
end March 31, 2010.
Company
Business
Currently,
we offer new and existing customers a variety of packaged applications and
platform solutions for industry-specific requirements. We market and
sell our software and hardware solutions through a Value Added Reseller (VAR)
channel. To ensure growth scalability, our VAR channel is being
trained to deliver professional services for standard installations, which we
believe will allow us to focus on advanced professional services for complex
high value implementations.
We rely
heavily on recurring maintenance and support revenue as a core component of our
business. Currently we enjoy annualized maintenance revenue of approximately
$1,066,000 in recurring maintenance and support revenue and we expect this
number to grow over time. We have over 600 customers using our products
throughout North America and Europe and are aggressively pursuing opportunities
to grow value within our existing customer base.
We also
intend to increase our direct presence in the three key markets, Healthcare,
Finance and Public Safety. These markets purchase technology solutions based on
specific business needs and requirements. Cistera is building up its core
business competency in these markets through Account and Product Management. We
intend to invest heavily over the next few years in building out our market
presence in these areas and develop core internal competencies both on the sales
and research and development groups.
2
CURRENT
ECONOMIC ENVIRONMENT
The global economy has
without doubt been through one of the most difficult periods in memory. This
significantly impacted the market for unified communications solutions and
business investment overall. The Company was forced to respond to this market
reality and has over the last year responded accordingly. However Cistera has
taken this opportunity to reassess the business and the markets it participates
in. Cistera Networks is approximately half-way through a restructuring
plan designed to make the Company sustain-ably profitable and dominate in the
strongest key markets we operate in. We believe that our products are ideally
suited to Federal, Healthcare and Public Safety and continue to make strong
headway in these markets. We enjoy higher revenue per customer and gross margins
from these markets because we offer a higher value solution. 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.
We
currently have 15 full time and no part time employees located predominately in
North America.
REVERSE/FORWARD
SPLIT
Effective
May 13, 2009, the Company completed a reverse stock split of our common stock
followed immediately by a forward stock split of our common stock (the
"Reverse/Forward Stock Split"). As a result, we now have fewer than
300 stockholders of record, and are eligible to cease filing periodic reports
with the Commission, and we intend to cease public registration and terminate
the listing of our Common Stock on the OTC Bulletin Board. Once we cease public
registration and terminate the listing of our Common Stock, we will not be
required to provide our Stockholders with periodic or other reports regarding
the Company, although we intend to continue to provide similar information
through the Pink Sheets News Service.
We
believe that any material benefit derived from continued registration under the
Exchange Act is outweighed by the cost. We have been unable to
provide increased value to our stockholders as a public company, and
particularly as a result of the increased cost and tangible and intangible
burdens associated with being a public company following the passage of the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), we do not believe that
continuing our public company status is in the best interest of the Company or
our stockholders.
We
believe that the significant tangible and intangible costs of our being a public
company are not justified because we have not been able to realize many of the
benefits that publicly traded companies sometimes realize. We do not
believe that we are in a position to use our status as a public company to raise
capital through sales of securities in a public offering, or otherwise to access
the public markets to raise equity capital. In addition, our common
stock's extremely limited trading volume, stock price and public float have all
but eliminated our ability to use our common stock as acquisition currency or to
attract and retain employees.
Our
status as a public company has not only failed to benefit our stockholders
materially, but also, in the Company’s view, places an unnecessary financial
burden on us. That burden has only risen in recent years, since the
enactment of the Sarbanes-Oxley Act. As a public company, we incur
direct costs associated with compliance with the Commission's filing and
reporting requirements imposed on public companies. To comply with
the public company requirements, we incur an estimated $224,000 annually before
taxes in related expenses. Of these expenses, we anticipate that the
deregistration of our shares will result in a reduction of approximately
$198,000 in annual expenses as follows:
ESTIMATED
FUTURE ANNUAL SAVINGS TO BE REALIZED IF THE COMPANY GOES PRIVATE
Accounting
and Audit Fees
|
$ | 38,000 | ||
Internal
Control Compliance
|
$ | 140,000 | ||
Stockholder
Expenses
|
$ | 5,000 | ||
Legal
Fees
|
$ | 15,000 | ||
Total
|
$ | 198,000 |
3
The
estimates set forth above are only estimates. The actual savings that
we may realize may be higher or lower than the estimates set forth
above. In light of our current size, opportunities and resources, the
Board does not believe that such costs are justified. Therefore, we
believe that it is in our best interests and the best interests of our
stockholders to eliminate the administrative, financial and additional
accounting burdens associated with being a public company rather than continue
to subject the Company to these burdens.
Default
On Convertible Promissory Notes
Effective
April 10, 2010, the Company was in default on approximately $1,365,901 of
convertible promissory notes, including accrued interest related thereon. These
notes were originally issued in the Company’s private placement that was
consummated in April 2007. Interest on the notes, which was eight percent
(8%) per annum, compounded quarterly, began to accrue at eighteen percent (18%)
per annum until the notes are paid in full.
Effective
December 27, 2008 the Company was currently in default on approximately $148,000
of convertible promissory notes and accrued interest related thereto issued in
the Company’s private placement that occurred on December 29, 2006. The
notes were due and payable on December 29, 2008. As a result of this
default, interest on the notes, which was eight percent (8%) per annum,
compounded quarterly, began to accrue at eighteen percent (18%) per annum until
the notes are paid in full.
Resignation
Of CEO
Effective
April 30, 2009, Mr. Derek P. Downs resigned as President, Chief
Executive Officer, acting Chief Financial Officer and director of the Company,
andMr. Gregory T. Royal, became acting Chief Executive Officer and acting
Chief Financial Officer of the Company.
INDUSTRY
BACKGROUND
The term
"unified communications" covers a range of technologies, including voice-over-IP
(VoIP) and fax-over-IP services, which are carried over both the Internet and
private IP-based networks.
Unified
communications (UC) is the integration of real-time communication services such
as instant messaging (chat), presence information, Telephony (including Unified
communications), video conferencing, call control and speech recognition with
non real-time communication services. UC is not a single product, but a set of
products that provides a consistent unified user interface and user experience
across multiple devices and media types. UC also refers to a trend to offer
Business process integration, i.e. to simplify and integrate all forms of
communications in view to optimize business processes and reduce the response
time, manage flows and eliminate device and media dependencies.
Unified
communications is very useful for knowledge workers, information workers, and
service workers alike, many of whom may cross the lines between the three
sectors on a daily or hourly basis, depending on the task and the client. With
an increasingly mobile workforce, businesses are rarely centralized in one
location. Unified communications facilitates this on-the-go, always-available
style of communication.
A
subsection of Unified communications is Communication Enabled Business Process
(CEBP). The goal of CEBP is to optimize business process by reducing
the human latency that exists within a process flow. For example, a mortgage
approval process may be experiencing human latency because the person assigned
to providing an approval is on vacation or busy working on something else. To
reduce this latency, CEBP leverages Unified
communications capabilities (i.e. UC services) by embedding them into the
business process flow. The result is a more efficient, more automated
closed-loop process; translating into significant ROI.
4
THE
OPPORTUNITY FOR COMMUNICATION ENABLED BUSINESS PROCESSES
Traditionally
communications infrastructure has remained separated from existing data
networking infrastructure. In order to integrate the two systems together was
expensive and time consuming limiting this integration effort to very high value
business areas such as contact centers and trading floors. However within the
last 3 years with the adoption of voice-over-ip systems that reside on the data
network, there has been a significant growth in the integration of these two
platforms. At the heart of this is the integration of communications into
business processes significantly increasing operational capability.
Cistera
offers powerful CEBP solutions through a rich, open software platform,
applications and professional services capability. We have a suite of Unified
communications and CEBP applications available as off the shelf, packaged
solution sets for as well as a strong application configuration capability to
provide custom solutions that meet unique business requirements in the
healthcare, federal and public safety markets.
OUR
STRATEGY
Our
objective is to be the leading provider of communication enabled business
process for the Federal Government, Healthcare and Public Safety markets. To
achieve this objective, we are pursuing the following strategies:
Extend Our
Product and Technological Leadership. We believe our solution provides
some of the highest value unified communications solutions for business in the
industry. This has been proven consistently throughout our markets and we
successfully compete with lower-cost competitors and substitute products. We
have increased our focus towards driving value into our three core markets and
we continue to invest in enhancing value.
Expand Sales and
Distribution Channels. We intend to pursue a multi-channel
distribution strategy by expanding our key relationships with system
integrators, VARs, OEMs and distributors. We intend to increase our
presence directly in our key markets in order to engage customers at a higher
level and are retaining sales people specifically to address these
markets.
Capitalize on Our
Professional Services Capabilities. We have established what
we believe to be highly successful relationships with customers and VARs by
assisting them in designing, developing and deploying our convergence
solutions. Our professional services range from strategic and
architectural planning to complete integration and deployment of our
products. We encourage our indirect channel partners to build out
professional services practices to support the Cistera solutions by offering
certification-training classes. We also work directly with mid-market and
enterprise customers whose solution is large and complex. We are continuing to
aggressively market to enterprise customers and the Federal Government directly
and develop large-scale complex solutions.
Build a
comprehensive annuity business. Because the telecommunications industry
is predominately an annuity business, we intend to build out a platform and
services offering that creates a sustainable annuity structure, consisting of
the delivery of application services that are instrumental to customer’s
communications processes. Because of this value we have a strong
maintenance and support business that has been growing at a significant rate for
the past 3 years. We continue to develop in building a professional services
business that leverages the over 600 customers who use Cistera
solutions.
PRODUCTS
Our
convergence products consist of application appliances—hardware and software
combined to deliver a broad suite of feature-sets on a scalable
architecture:
Hardware platforms. The
Cistera platforms combine advanced software engines with hardware devices that
have been optimized and in some cases, specifically designed to deliver the
performance and scalability required for Unified communications application
environments.
5
Þ
|
Cistera ConvergenceServer™
(CCS™) the foundation of a Cistera IPT solution is available in
five form factors— the CCS 1500, the CCS 2500, the CCS 5500 and the CCS
7500 series are designed to support “medium”, “large” and
“service provider” performance requirements for specific customer
locations. The servers are rack-mountable, open standards-based
hardware systems.
|
Þ
|
Cistera ZoneController™ (CZC™)
and ZoneSpeak™ enables unified communications systems to work with
existing or newly installed overhead speakers to create a unified paging
system. Cistera’s solution is the only one that supports
simultaneous broadcasting to IP phones and
speakers.
|
Cistera 1.9 Software
Platform. The Cistera 1.9 software platform is a
component-based architecture that enables enhanced scalability and management of
advanced unified communications applications. This platform has built
in business process management; rules engine and media control elements that
combine together and configured to meet the needs of particular
markets.
Quality Assurance and Management
are systems that allow organizations to better respond to the needs of
their customers and their partners. This solution enables organizations to build
feedback loops by automating audit and compliance needs through recording and
monitoring systems. Quality Assurance and Management Systems include recording,
monitoring, screen capture, supervisory intervention and reporting tools that
increase the organization’s ability to view and response to customer
experiences.
The
application engines include:
Þ
|
QuickRecord™ - is a robust
unified communications compliance recorder and media management service
designed to support those environments requiring reliable call recording
functionality on an adhoc basis, using major unified communications
platforms like Cisco’s Call
Manager™.
|
Þ
|
QAMRecord™
Enterprise- is Cistera’s premier solution for large-scale contact
centers. It provides a comprehensive solution for unified contact centers
and builds on the functionality of Enhanced including tighter integration
with Cisco Unified Contact Center (TM) and Cistera QuickConnect outbound
dialer, remote desktop control as well as comprehensive dashboarding
functionality
|
Þ
|
LMRRecord -
is Cistera’s solution specifically designed to support Cisco’s IP
Interoperable Communications Solutions. Cistera is the first
and only recording solution designed and certified for Cisco’s IPICS
offering. With this solution, customers can record all two-way
radio, cell phone, and traditional analog systems in a single “talk
group”.
|
Event Alerting and Notification -
Event Alerting and Notification Solutions allow customers to use their
unified communications Platform as the core to their alerting and notification
strategy. Emergency alert and notification solutions help
organizations of all sizes communicate quickly and effectively during all types
of incidents and challenges
Þ
|
RapidBroadcast™ Enterprise
- Advanced, full-featured messaging service that links data and voice with
your business’ communication devices. Instantly transmit text or voice
messages or schedule pre-recorded broadcasts to your entire organization
through IP phones or external overhead speakers. Easy to configure and
administer, RapidBroadcast™, and the entire suite of Cistera Networks
applications, is managed via a web-based interface. Features include
Whisper, Intercom, paging, text messaging and numerous other
features.
|
Þ
|
LMRConnect™
- Two-way radios are a communications cornerstone for public
agencies, emergency operations and businesses around the world. However,
until today, proprietary technology confined push-to-talk radios to their
own networks—keeping them well-separated from convergence with unified
communications. Recognizing the need to integrate, Cistera Networks has
created the LandMobileRadio (LMR) Connect Application Engine—bringing
two-way radios into the IPT
network.
|
6
Þ
|
EANScheduler
- Cistera provides a comprehensive solution for scheduled alerting
and notification such as school bell ringing schedule. Using the popular
RapidBroadcast Application Engine and the Cistera Convergence Server
(CCS).
|
Þ
|
QuickConnect
- is the premier engine for the delivery of event alerting and
notification for cellular and analog phones. As part of the
Event Alerting and Notification Solution, QuickConnect extends the popular
RapidBroadcast to launch notifications beyond IP Phones, overhead paging
systems and two-way radios now to every communications device.
QuickConnect as an outbound dialing engine, can manage communications for
Contact Centers, Education facilities, Local Government and
Healthcare.
|
Our
convergence solutions have been designed to interoperate seamlessly within
network environments, by aligning with key industry standards. There
are occasions where integration with certain legacy platforms requires that our
solutions interact with some proprietary protocols. In these
situations, our convergence solution works to maintain open protocols for the
broad network functions, specifically Session Initiated Protocol (SIP) and for
more traditional networks, using bridging technology into the IP
network.
COMPETITION
Cistera
competes with a number of companies that derive revenues from telecommunications
budgets of Mid Market and Enterprise Businesses throughout the world and
specifically those that compete for the capital budgets for customer premise
equipment (CPE). Cistera earns 95% of its revenues currently from equipment
purchased as part of a unified communications Infrastructure and more recently
through VOIP based hosted service providers. At the top end of our
market we compete with more mature traditional solutions derived from digital
phone systems and ported to unified communications. They have a more complete
solution but we have been successful in positioning Cistera and indeed IP
communications as technology shift that has the ability to more deeply integrate
into existing business need.
We have a
broad offering of functionality and services that we combine together on a
platform to create compelling application services for our end users. Therefore
we predominately compete with other companies that either (a) provide point
solutions that compete with one aspect of our offering such as Nice Systems,
Verint and others or (b) compete with broader platforms solutions
with similar offerings such as Interactive Intelligence, Aspect and Genesys. We
also compete with vertical solutions such as Philips Emigen and others who have
focused vertical solutions. We expect this trend to continue as we
focus on more high value vertical customers.
We also
compete with potential substitute products that offer more basic and narrow
functionality. These predominately Windows based solutions offer low value and
cheap alternatives for price-sensitive markets such as education and contact
centers. There are a number of these in the Cisco Partner channel. The Company
has been successful in moving away from these price-sensitive markets and
subsequently directed towards vertical high value solutions. The Department of
Defense is a good example of this. Cistera is continuing to drive revenue
towards high value markets.
ITEM
1A: RISK FACTORS
As a
smaller reporting company, we are not required to provide this
information.
ITEM
1B: UNRESOLVED STAFF COMMENTS
None.
7
ITEM
2: PROPERIES
Our
corporate offices are located at 6509 Windcrest Drive, Plano,
TX 75024. We lease this office space, which contains
approximately 9,767 rentable square feet, from GK II Plano, L.P. Our
rent under this lease is approximately $14,479 per month and the lease expires
July 31, 2013.
Cistera
Networks by mutual agreement with the owners has terminated the lease at 17304
Preston Road, Suite 975 Dallas, TX 75252 (Dominion Plaza) and settled
all outstanding obligations.
ITEM
3: 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 March 31st, 2010, the
Company believes that this amount represents the best estimate of a potential
settlement.
PART
II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is presently traded in
the over-the-counter market and is listed on the Pink Sheets maintained by the
National Quotation Bureau, Inc., and on the Bulletin Board maintained by the
maintained by the Financial Industry Regulatory Authority (formerly known as the
National Association of Securities Dealers, Inc.), under the symbol CNWT. The
following table sets forth the range of high and low bid quotations for the
common stock during each calendar quarter beginning April 1, 2008, and ending
March 31, 2010. The figures have been rounded to the nearest whole
cent.
High
|
Low
|
|||||||
June 30,
2008
|
$ | 0.85 | $ | 0.63 | ||||
September 30,
2008
|
$ | 0.60 | $ | 0.16 | ||||
December 31,
2008
|
$ | 0.39 | $ | 0.22 | ||||
March 31,
2009
|
$ | 0.30 | $ | 0.06 | ||||
June 30,
2009
|
$ | 0.51 | $ | 0.51 | ||||
September 30,
2009
|
$ | 0.15 | $ | 0.06 | ||||
December 31,
2009
|
$ | 0.07 | $ | 0.04 | ||||
March 31,
2010
|
$ | 0.06 | $ | 0.06 |
The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
8
RECORD
HOLDERS
The
number of shareholders of record of the Company's issued and outstanding common
stock as of March 31, 2010 was approximately 207
post-split. Registered holders include brokerage firms and
clearinghouses holding our shares for their clientele, with each brokerage firm
and clearinghouse considered as one holder.
DIVIDENDS
The
Company has not paid any cash dividends to date and does not anticipate paying
cash dividends in the foreseeable future. It is the present intention
of management to utilize all available funds for the development of the
Company's business.
RECENT
SALES OF UNREGISTERED SECURITIES
Set forth
below is information regarding the issuance and sales of the Company’s
securities without registration during the period covered by this
Report. No such sales involved the use of an underwriter, no
advertising or public solicitation were involved, the securities bear a
restrictive legend and no commissions were paid in connection with the sale of
any securities.
In
January of 2010, the Company issued 600,000 shares of common stock upon
conversion of accrued interest and principal on a previously issued convertible
notes with an aggregate principal of $183,000. The amount of accrued
interest converted was $52,800. The principal and interest was
converted at $0.393 per share.
The
issuance of the shares of our common stock described above were made in private
transactions or private placements intending to meet the requirements of one or
more exemptions from registration. In addition to any noted exemption
below, we relied upon Regulation D and Section 4(2) of the Securities Act of
1933, as amended (the “Act”). The investors were not solicited
through any form of general solicitation or advertising, the transactions being
non-public offerings, and the sales were conducted in private transactions where
the investor identified an investment intent as to the transaction without a
view to an immediate resale of the securities; the shares were “restricted
securities” in that they were both legended with reference to Rule 144 as such
and the investors identified they were sophisticated as to the investment
decision and in most cases we reasonably believed the investors were “accredited
investors” as such term is defined under Regulation D based upon statements and
information supplied to us in writing and verbally in connection with the
transactions. We never utilized an underwriter for an offering of our
securities and no sales commissions were paid to any third party in connection
with the above-referenced sales. Other than the securities mentioned
above, we have not issued or sold any securities during the period covered by
this Report.
ITEM
6: SELECTED FINANCIAL DATA
As a
smaller reporting company, we are not required to provide this
information.
ITEM
7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear in this filing. In addition
to historical financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause
or contribute to these differences have been included throughout the public
filings from the Company.
9
OVERVIEW
OF BUSINESS
According
to industry analysts at Gartner, Inc., unified communications are the “direct
result of convergence in communication networks and applications.” The term
“unified communications” has also been defined in other ways, primarily the
integration of productivity tools from the desktop into the network
communications infrastructure. The convergence of voice and data communications,
typically on IP networks leveraging open standards software platforms and
integrated application suites, is a new standard for people, groups and
organizations to communicate. However Cistera has been a leading developer of
business process enablement through communications tools with over 600 customers
from banks to airlines to the Department of Defense and NASA.
Business
Process Automation and Communications-Based Process Automation
We
believe business process automation will improve a company’s competitive
position in the global marketplace and strengthen its foundation for growth. Our
solutions have long taken an intelligence-based approach to automation,
beginning with the ability to unify and integrate key public safety and customer
contact process, and build on processes structured according to an
organization’s business rules.
More
recently and more specifically, Communications enabled business processes
(“CEBP”) has combined these established communications automation practices with
the automation of formal business processes, such as public safety and security,
directory integration or quality assurance compliance reporting and
auditing. For the last four years Cistera has been leading the market
for this communications-based approach to automating business and interaction
processes with a full-featured process integration convergence
solution.
Broader
Integration to Business/Data Systems and End-User Devices
With the
increasing emphasis on business processes, automation is essential to broadening
the integration capability between a communications platform and business
applications, information systems, databases, knowledge bases and where the
employee works such as phone sets, headsets, hand-held devices, iPhones, iPads
and notebook computers. Compared to traditional closed communications hardware
systems and CTI, open standards solutions, such as SIP and XML, designed for IP
networks and consisting of IP-based applications and industry-standard servers
increase such integration capability to a wider range of business systems and
low-cost IP devices for users across an organization. Cistera has been steadily
increasing the reach and capability of it’s mobile solutions and continues to
address the ability to reach process to the mobile end point. For example,
Cistera recently integrated a large Floridian healthcare providers workflow into
mobile devices to improve their responsiveness. Employess in real-time are
notified of the status of security and property processes when and how they are
needed.
Business
Process Automation
Over the
past five years the Company’s core convergence platform was designed as a
platform to automate key processes and procedures for it’s customers. The core
business rules engine forms the based of integrating communications end points
and capability to create new and unique capability. While the Company initially
focused on transitioning existing capability to VOIP, it became apparent over
time that our communications-based approach to business process, such supporting
engineering teams, or the integration of city field staff, lends itself to
leveraging into virtually any industry looking to automate key business and
interaction processes.
Of
particular interest is that the Cistera Convergence Server can codify each step
in the business process to reduce latency, improve efficiency, reliability and
efficacy. In large part, business did not automate between communications
infrastructure and data systems because of the cost and complexity. The Cistera
CCS goes a long way to removing these barriers.
FISCAL
YEAR
Our
fiscal year ends on March 31. References to fiscal 2010, for example,
refer to the fiscal year ended March 31, 2010.
10
SOURCES
OF REVENUES
We derive
our revenues from three sources: (1) convergence solutions, which are comprised
of software and hardware solutions; (2) professional services revenues,
consisting primarily of installation, configuration, integration, training and
VAR support services; and (3) support and maintenance, which is comprised of
tiered technical support levels. Convergence solutions revenues
accounted for approximately 67% percent of total revenues during fiscal year
2009 and 43% percent of total revenues during fiscal year
2010. Professional services revenues accounted for approximately 6%
percent of total revenues during fiscal 2009 and 10% percent of total revenues
during fiscal year 2010.
Revenues
for our support and maintenance services made up approximately 27% percent of
total revenues during fiscal 2009 and 47% percent of total revenues in fiscal
2010.
Product
revenues are recognized once the software and hardware solution has been shipped
according to the customer order, and is fully installed and operational. Prior
to the adoption of this policy, the Company recognized revenues once orders were
received and shipped. Professional services revenues are recognized once the
services have been completed and the customer has approved the
service. Support and maintenance revenues are recognized on a monthly
basis over the life of the support contract. The typical support and
maintenance term is 12 months, although terms range from 12 to 48
months. Our support and maintenance contracts are non-cancelable,
though customers typically have the right to terminate their contracts for cause
if we fail to perform. We generally invoice our customers in annual or quarterly
installments and typical payment terms provide that our customers pay us within
30 to 45 days of invoice. Amounts that have been invoiced are
recorded in accounts receivable and in deferred revenue, or in revenue depending
on whether the revenue recognition criteria have been met. In
general, we collect our billings in advance of the support and maintenance
service period.
Professional
services and other revenues consist of fees associated with consulting and
implementation services and training. Our consulting and
implementation engagements are typically billed in advance of delivery with
standard rates applied. We also offer a number of classes on implementing, using
and administering our convergence solutions that are billed on a per class
basis. Our typical professional services payment terms provide that
our customers pay us within 30-45 days of invoice.
COST
OF REVENUES AND OPERATING EXPENSES
Cost of
Revenues
Cost of
convergence solutions revenue consists primarily of the purchase cost of
computer equipment that hosts our platform and applications
solutions. Cost of professional services revenue consists primarily
of employee related expenses from our field engineers and other employees and
contractors that configure, install, and integrate our convergence solutions for
our customers. The cost of support and maintenance revenues primarily
consists of employee-related costs associated with providing technical support
at various service levels and the costs associated with any required maintenance
provided to our customers’ convergence solutions equipment. The
Company estimates that approximately 80% of salary cost of employees whose
primary role is to provide professional services and support and maintenance is
attributable to the cost of securing those revenues.
To the
extent that our customer base grows, we intend to continue to invest additional
resources in building the channel infrastructure to enable our VARs and SIs to
provide the professional services associated with the standard convergence
solutions installation, configuration and training. The timing of
these additional expenses could affect our cost of revenues, both in terms of
absolute dollars and as a percentage of revenues, in a particular quarterly
period.
Cost of
Revenues
The total
cost of revenues was $628,513 or 27% of revenues for fiscal year ending 31 March
2010. The total cost of revenues for fiscal year ending 31 March 2010 was
$957,913 or 26% of revenue. The reduction of 35% was due to the decrease in
total revenues as a result of the global economic environment.
11
Research and
Development
Research
and development expenses consist primarily of salaries and related expenses, and
allocated overhead. We have historically focused our research and
development efforts on increasing the functionality and enhancing the
ease-of-use of our convergence platform and applications. Because of our open,
scalable and secure component-based architecture, we are able to provide our
customers with a solution based on a single version of our software application
platform. As a result, we do not have to maintain multiple versions, which
enables us to have relatively low research and development expenses as compared
to traditional enterprise software business models. We expect that in the
future, research and development expenses will increase in absolute dollars as
we support additional unified communications platforms, extend our solution
offerings and develop new technologies.
Marketing and
Sales
Marketing
and sales expenses are typically one of our largest costs, accounting for
approximately 30% of total revenues for fiscal 2009 and 8% of total revenues in
fiscal 2010. The decrease in marketing and sales costs for fiscal year 2010 is
indicative of the global economic downturn. Marketing and sales
expenses consist primarily of salaries and related expenses for our sales and
marketing staff, including commissions; payments to VARs; marketing programs,
which include advertising, events, corporate communications, public relations,
and other brand building and product marketing expenses, and allocated overhead.
The Company has made significant in-roads into lowering the sales and marketing
cost per revenue dollar over the last year, however the Company recognizes that
additional investment will need to be made in this area as the economy
improves.
General and
Administrative
General
and administrative expenses consist of salaries and related expenses for
executive, finance and accounting, and management information systems personnel,
professional fees, other corporate expenses and allocated overhead. The Company
has made a concerted effort to rely less on outside contractors and bring
critical functions in house, particularly the accounting functions.
Operating
Expenses
Operating
Expenses for fiscal year ending March 31, 2010 were $1,737,554 or 76% of Revenue
as compared to fiscal year ending March 31, 2009 of $4,413,040 or 119% of
revenue. This represents a deduction of $2,675,486 or 60%. This is primarily due
to the restructuring of the company that took place in calendar year 2009. The
company has bought costs into line with expected revenue.
Other Income
(Expense)
The
company took a charge of $237,231 for interest costs primarily as a result of
PP#2 notes. Although the company reduced the number of outstanding notes in
fiscal year 2010, the interest rate had increased proportionally. The company
took a charge of $30,103 for residual factoring fees, loss on abandoned assets,
and penalties paid on property taxes.
CRITICAL
ACCOUNTING POLICIES
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States (“US GAAP”). The
preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses, and related
disclosures. On an ongoing basis, we evaluate our estimates and
assumptions. Our actual results may differ from these estimates under
different assumptions or conditions.
We believe
that of our significant accounting policies, which are described in the notes to
our consolidated financial statements, the following accounting policies involve
a greater degree of judgment and complexity. Accordingly, these are the policies
we believe are the most critical to aid in fully understanding and evaluating
our consolidated financial condition and results of operations.
12
Revenue
Recognition
We
recognize revenue from software, hardware and services once fully installed and
implemented. This method of revenue reporting does not reflect all orders
received and shipped during the reporting period, but only those orders
received, shipped and completely installed within the reporting
period.
We recognize
revenue according to ASC 985, formerly the American Institute of Certified
Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 97-2 (Software
Revenue Recognition) as defined by paragraphs 07-14 in SOP 97-2 and as amended
by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions). This SOP provides guidance on when
revenue should be recognized and in what amounts for licensing, selling, leasing
or otherwise marketing computer software (including computer hardware and
support services).
Deferred
revenue represents contracts for certain revenue to be recognized in the future
from support and maintenance contracts as well as product sales and professional
services that have been shipped and billed but not installed. Support
and maintenance contracts are executed on an annual basis and the revenue from
these contracts is recognized over the life of the contracts. Of the
total deferred revenue shown as a current liability in the amount of $966,869,
the deferred revenue for products and services was $301,106 as of March 31,
2010. The remainder of current deferred revenue and the long-term
deferred revenue of $665,763 relates to technical support and maintenance
services.
Technical
support services revenue is deferred and recognized ratably over the period
during which the services are to be performed, which is typically from one to
three years. Advanced services revenue is recognized upon delivery or
completion of performance.
We make sales
to distributors and retail partners and recognize revenue based on a
sell-through method using information provided by them.
Accounting for Sales
Commissions
During
fiscal year 2010, the Company adopted a sales commission plan that paid
commissions at various target rates of the contract
amount. Commissions payable are accrued in the period that the
customer accepts the product or service from the Company. In fiscal
year 2010, the Company amended the sales commission plan in order to provide a
more comprehensive compensation structure to the sales
organization. Sales commissions are generally paid on sales meeting
the criteria for sales commission payment in the subsequent accounting
period.
Convertible debt and
warrants
During
the fiscal years 2005 through 2008, the accounting for financial instruments -
convertible debt and detachable warrants - (and the potential derivative
accounting related to these financial instruments) was significant to our
financial statements because the accounting for such instruments requires the
use of management’s significant estimates and assumptions. This accounting
policy is also significant because of the potential fluctuations in the
estimated fair value from period to period, which are recorded as a benefit
(charge) to net loss on the statement of operations. We estimated the fair value
of the PP1 Warrants and PP2 Warrants using the Black-Scholes option pricing
model. This model requires the use of significant estimates and assumptions
related to the estimated term of the financial instruments, the volatility of
the price of our common stock, and interest rates, among other items.
Fluctuations in these assumptions may have a significant impact on the estimated
fair value of financial instruments, which, in turn, may have a significant
impact on our reported financial condition and results of
operations.
13
Registration payment
arrangements
Effective
April 1, 2007, the Company adopted ASC 815 (formerly 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.
Research and Development
Expenditures
Research
and development expenditures are generally expensed as incurred. ASC 985
(formerly 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.
14
Results of
Operations.
The
following discussion should be read in conjunction with the consolidated
statements of financial operations, in their entirety.
Overview
of Results of Operations for: Fiscal 2010, Ended March 31, 2010, and Fiscal
2009, Ended March 31, 2009.
For
the Year Ended March 31,
|
||||
2010
|
%
of rev
|
2009
|
%
of rev
|
|
Revenues:
|
||||
Convergence
Solutions
|
$ 989,465
|
43%
|
$ 2,498,763
|
67%
|
Professional
Services
|
238,510
|
10%
|
231,222
|
6%
|
Support
and Maintenance
|
1,066,235
|
46%
|
984,287
|
27%
|
Total
Revenues
|
2,294,210
|
100%
|
3,714,272
|
100%
|
Cost
of Revenues:
|
||||
Convergence
Solutions
|
502,295
|
22%
|
657,507
|
18%
|
Professional
Services
|
90,218
|
4%
|
209,680
|
6%
|
Support
and Maintenance
|
36,000
|
1%
|
90,726
|
2%
|
Total
Cost of revenues
|
628,513
|
27%
|
957,913
|
26%
|
Gross
Profit
|
1,665,697
|
73%
|
2,756,359
|
74%
|
Expenses:
|
||||
Sales
and marketing
|
174,942
|
8%
|
1,112,375
|
30%
|
Software
development
|
333,321
|
15%
|
823,040
|
22%
|
Engineering
and support
|
278,804
|
12%
|
706,167
|
19%
|
General
and administrative
|
780,523
|
34%
|
1,367,645
|
37%
|
Depreciation
and amortization
|
169,964
|
7%
|
403,813
|
11%
|
Total
expenses
|
1,737,554
|
76%
|
4,413,040
|
119%
|
Profit
(Loss) from operations
|
(71,857)
|
(3%)
|
(1,656,681)
|
(45%)
|
Other
income (expense)
|
||||
Interest
income
|
74
|
-
|
326
|
-
|
Interest
expense
|
(237,371)
|
(10%)
|
(233,886)
|
(6%)
|
Charge
for stock issued to convertible
promissory
note holders
|
-
|
-
|
(1.324,444)
|
(36%)
|
Amortization
of discount on convertible
notes
|
-
|
-
|
(1,434,353)
|
(39%)
|
Charge
for estimated liquidated damages
|
-
|
-
|
10,921
|
-
|
Other
income (expense)
|
(30,103)
|
(1%)
|
10,000
|
-
|
Total
other income (expense)
|
(267,400)
|
(12%)
|
(2,971,436)
|
(81%)
|
Net loss
|
$
(339,257)
|
(15%)
|
$ (4,628,117)
|
(126%)
|
Basic
& diluted net loss per share
|
$ (.02)
|
$ (0.30)
|
||
Weighted
average shares outstanding – basic and diluted
|
17,570,550
|
15,390,029
|
15
Our
revenues have decreased from $3,714,272 in fiscal 2009 to $2,294,210 in fiscal
2010, a reduction year-over-year of 38% on a recognized revenue basis. This was
primarily due to the global recession beginning in 2008 that resulted in a
significant number of new projects being cancelled or deferred. The Company
relies on the business capital investment cycle that contracted significantly in
2010 resulting in a large reduction in new license revenue. However maintenance
and renewal revenue increased year on year due to a strong value proposition
within the existing customer base.
Our gross
profit during the fiscal year 2009 was $2,756,359 or approximately 74% of
revenues. Gross profit for fiscal year 2010 was $1,665,297 or
approximately 73% of revenues. Cistera continues to provide strong Gross
Margins.
Our
operating loss for the fiscal year 2009 was $1,656,681 and for the fiscal year
2010 was $71,857, a reduction of 96% on the previous year. The reduction in
expenses was as a result of a large restructuring effort in 2010 that reflected
the significant economic downturn.
In accordance
with ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”)),
as of March 31, 2008 we have recorded a contingent liability and related charge
for outstanding litigation. While the Company may prevail in this
matter and disputes damages sought in the case, we have recorded a reserve of
$650,000 in accordance with the guidance of ASC 540.
LIQUIDITY
AND CAPITAL RESOURCES
From our
start of operations in May 2003 through the end of fiscal 2009, we funded our
operations primarily through financing obtained in two private placements—the
first in the third quarter of fiscal 2005 and the second initiated in the third
quarter of fiscal 2007.
At March
31, 2010, we had cash and cash equivalents of $12,954. Accounts
receivable at March 31, 2010 were $188,983.
On March
31, 2010, the Company had $350,853 in Accounts Payable and Accrued Liabilities
of $1,636,700.
Our future
capital requirements will depend on many factors including: our rate of revenue
growth; the expansion of our marketing and sales activities; the timing and
extent of spending to support product development efforts and expansion into new
territories; the timing of introductions of new services and enhancements to
existing services; and the continuing market acceptance of our
services.
Although
we are currently not a party to any agreement or letter of intent with respect
to potential investments in, or acquisitions of, complementary businesses,
services or technologies, we may enter into these types of arrangements in the
future, which could also require us to seek additional equity or debt
financing. Additional funds may not be available on terms favorable
to us or at all.
We do not
have any special purpose entities, and other than operating leases for office
space and computer equipment, which are described below, we do not engage in
off-balance sheet financing arrangements. On December 10th 2009, the factoring
facility was terminated by mutual agreement. We believe that the cost of this
facility outweighed the benefits to the Company. In addition, by terminating
this facility, we expect to save over $135,000 annually.
16
NON-GAAP
DISCLOSURES
EBITDA,
excluding special items, which represents earnings (excluding the impact of
certain nonrecurring items on our results) before depreciation and amortization,
interest and financing expenses, income taxes, and cumulative effect of a change
in accounting principle, net, is a supplemental measure of performance that is
not required by, or presented in accordance with, U.S. GAAP. We present EBITDA,
excluding special items, because we consider it an important supplemental
measure of our operations and financial performance. We believe EBITDA,
excluding special items, is more reflective of our operations as it provides
transparency to investors and enhances period-to-period comparability of our
operations and financial performance. EBITDA, excluding special items, should
not be considered as an alternative to net income determined in accordance with
U.S. GAAP.
ITEM
7A: QUANTITIAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a
smaller reporting company, we are not required to provide this
information.
ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements of the Company are included
as a separate section of this report
beginning on page F-1 immediately following the signature page to this
report.
ITEM
9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A: CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
As of
March 31, 2010, we carried out an initial analysis, under the supervision
and with the participation of our management, including our Chief Executive
Officer (the “Certifying Officer”), of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Certifying Officer concluded that our disclosure controls and procedures
were not effective as of the end of the period covered by this Annual Report on
Form 10-K (“Annual Report”).
The
Certifying Officer also previously determined as of December 31, 2007 that our
financial management team did not have sufficient experience in the preparation
of the narrative disclosures in notes to the interim financial statements to
ensure that the disclosure controls and procedures we maintain (as defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) that are designed to ensure that information
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Certifying Officers, as
appropriate, to allow timely decisions regarding required
disclosure.
In an
effort to remediate the insufficiency, we engaged an independent financial
consulting group to provide the personnel resources necessary for technical
accounting and for the recording of complex financial transactions, preparation
of financial statements, and management reporting and disclosure
reporting. This engagement resulted in a comprehensive review of our
Company’s financials, which resulted in the Company amending its fiscal year
2007 Annual Report and its Form 10-QSB filings for the quarterly periods ended
June 30, 2007 and September 30, 2007.
17
In April
2009, and for fiscal year ending March 31, 2010, the company embarked on a
complete restructuring in response to the Global economic crisis. With this
restructuring, the company also embarked on a complete overhaul of all
operational processes and procedures with particular attention on management and
financial accounting areas of the business. On April 1, 2010, the company moved
to a new and more sophisticated accounting system and overhauled the financial
processes to (a) verify the underlying historical information, and if necessary
make adjustments and (b) improve the speed and efficacy on which final
accounting and review processes are made. The company in fiscal year 2010 also
retained a management accountant specifically tasked with validating and
improving financial controls.
Although
a number of significant changes have been made to the financial operations, the
Certifying Officer determined that these changes were not significantly
completed in order to verify the effectiveness of the design and operation of
our disclosure controls and procedures for the reporting period. It is expected
that these changes will be completed in the fiscal year ending March 31,
2011.
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.
Our
management does not expect that our disclosure control procedures or our
internal control 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.
MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Our internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework established by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) as set forth in Internal Control - Integrated Framework. Based on
our evaluation under the framework in Internal Control — Integrated Framework,
our management concluded that our internal control over financial reporting was
not effective as of March 31, 2010. An independent financial firm will be
engaged to complete remediation measures that may include further evaluation,
remediation, implementation, documentation and testing of our key internal
controls.
The SEC
has extended the requirement date for non-accelerated filers of Section 404(b),
the OUTSIDE AUDITOR'S attestation, from being required for years ending December
15, 2009 or later to June 15, 2010 or later. The Section 404(a) MANAGEMENT
ASSESSMENT, however, is still in effect. This Annual Report does not include an
audit or attestation report of our registered public accounting firm regarding
our internal control over financial reporting. Our management’s report was not
subject to audit or attestation by our registered public accounting firm
pursuant to temporary rules of the SEC that permit us to provide only
management’s report in this annual report.
18
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has
been no change in the Registrant’s internal control over financial reporting
during the year ended March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, the Registrant’s internal control over
financial reporting.
ITEM
9B: OTHER INFORMATION
None.
PART
III
ITEM
10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
EXECUTIVE
OFFICERS AND DIRECTORS
The
following table sets forth the name, age, and position of each executive officer
and director of the Company as of the period ending March 31, 2010:
Director's Name
|
Age
|
Position
with Company
|
Greg
T. Royal
|
44
|
Chairman,
Chief Executive Officer, Chief Technology Officer and acting Chief
Financial Officer.
|
James
T Miller
|
50
|
President
and Secretary.
|
Our
directors hold office until the next annual meeting of shareholders and until
their respective successors have been duly elected and qualified. Our
officers are elected by the Board of Directors at the board meeting held
immediately following the shareholders' annual meeting and hold office until
their death or until they either resign or are removed from office. There are no
written or other contracts providing for the election of directors or term of
employment for executive officers, all of whom serve on an at will
basis.
Gregory T. Royal has served as
Executive Vice President and Chief Technology Officer, and has been a member of
the Board of Directors since May 2003. From April 2009, Mr Royal has served as
Chief Executive Officer. Mr. Royal is the original founder of XBridge Software,
and the inventor of the Convergence Server™ technology. Mr. Royal has
over 18 years of IT Sales, Marketing and Management experience in New Zealand,
Australia and the United States. He has held Senior Sales and
Marketing positions at Sycom Office Equipment, Eagle Technology, Network General
Corp. (NASDAQ:NETG) and Network Associates Inc (NASDAQ:NETA). Mr. Royal has
system certification with Compaq, IBM, Novell and Hewlett Packard. He also has
significant experience in designing and deploying large-scale IT systems
including experience in Banking and Finance, Government, and Retail and Property
Services. Mr. Royal holds an MBA from Rushmore University. Mr Royal
is also Chairman/CEO of Telmarine Communications Inc and Managing Director of
Blue Kiwi Group Ltd.
19
James T Miller has served as
President and Secretary of Cistera since December 2009. Prior to that Mr Miller
served as Director Operations since 2005. Prior to Cistera Networks Jim served
as President /CEO of T3, a technology systems integrator to large enterprise
companies across varied industries such as aerospace, transportation and energy.
Previous to T3, Jim served as CFO/COO for several application and network
management solutions companies that provided outsourced data management
solutions and technical consulting services for IBM and other F500
companies. Jim has over 28 years of solid business experience and
leadership with growing and developing growth stage companies. Mr Miller holds
an MBA from University of Florida. Mr Miller is also Chairman/CEO of Cistera
Federal Systems Inc.
BOARD
COMPOSITION AND COMMITTEES
Our Board
of Directors currently consists of one member, Gregory T. Royal. We
are planning to expand the number of members constituting our Board of Directors
and will seek persons who are “independent” within the meaning of the rules and
regulations of NASDAQ to fill vacancies created by any
expansion. Because of our current stage of development, we do not
have any standing audit, nominating or compensation committees, or any
committees performing similar functions. The Board meets periodically
throughout the year as necessity dictates. No current director has
any arrangement or understanding whereby they are or will be selected as a
director or nominee.
Audit Committee Financial
Expert
The
Company's Board of Directors does not have an "audit committee financial
expert," within the meaning of such phrase under applicable regulations of the
Securities and Exchange Commission, serving on its audit committee. As there is
no separately designated Audit Committee, the entire Board of Directors serves
as the Audit Committee. The Board of Directors believes that all members of its
Audit Committee are financially literate and experienced in business matters,
and that one or more members of the audit committee are capable of (i)
understanding generally accepted accounting principles ("GAAP") and financial
statements, (ii) assessing the general application of GAAP principles in
connection with our accounting for estimates, accruals and reserves, (iii)
analyzing and evaluating our financial statements, (iv) understanding our
internal controls and procedures for financial reporting; and (v) understanding
audit committee functions, all of which are attributes of an audit committee
financial expert. However, the Board of Directors believes that there is not any
audit committee member who has obtained these attributes through the experience
specified in the SEC's definition of "audit committee financial expert."
Further, like many small companies, it is difficult for the Company to attract
and retain board members who qualify as "audit committee financial experts," and
competition for these individuals is significant. The Board believes that its
current audit committee is able to fulfill its role under SEC regulations
despite not having a designated "audit committee financial expert."
Indebtedness of Directors
and Executive Officer
None of
our directors or our executive officers or their respective associates or
affiliates are indebted to us.
Family
Relationships
There are
no family relationships among our directors or CEO.
Compensation
Committee
The
Company does not maintain a standing Compensation Committee. Due to
the Company’s small size at this point in time, the Board has not established a
separate compensation committee. All members of the Board (with the exception of
any member about whom a particular compensation decision is being made)
participate in the compensation award process.
The
Company understands that in order to attract executive management talent, it
will need to offer competitive market salaries to senior management and board
members. The Company intends at a later date to retain an independent
compensation consultant to review executive compensation and advise the Company
on the best course of action in order to attract the necessary
capabilities.
20
Nominating
Committee
The
Company does not maintain a standing Nominating Committee and does not have a
Nominating Committee charter. Due to the Company’s small size at this
point in time, the Board has not established a separate nominating committee and
feels that all directors should have input into nomination decisions. As such,
all members of the Board generally participate in the director nomination
process. Under the rules promulgated by the SEC, the Board of Directors is,
therefore, treated as a “nominating committee.”
The Board
will consider qualified nominees recommended by shareholders. Shareholders
desiring to make such recommendations should submit such recommendations to the
Corporate Secretary, c/o Cistera Networks, Inc., 6509 Windcrest Drive, Suite
160, Plano, Texas 75024. The Board will evaluate candidates properly
proposed by shareholders in the same manner as all other
candidates.
With respect
to the nominations process, the Board does not operate under a written charter,
but under resolutions adopted by the Board of Directors. The Board is
responsible for reviewing and interviewing qualified candidates to serve on the
Board, for making recommendations for nominations to fill vacancies on the
Board, and for selecting the nominees for selection by the Company’s
shareholders at each annual meeting. The Board has not established
specific minimum age, education, experience or skill requirements for potential
directors. The Board takes into account all factors they consider
appropriate in fulfilling their responsibilities to identify and recommend
individuals as director nominees. Those factors may include, without
limitation, the following:
an
individual’s business or professional experience, accomplishments, education,
judgment, understanding of the business and the industry in which the Company
operates, specific skills and talents, independence, time commitments,
reputation, general business acumen and personal and professional integrity or
character;
the size
and composition of the Board of Directors and the interaction of its members, in
each case with respect to the needs of the Company and its shareholders;
and
regarding
any individual who has served as a director of the Company, his or her past
preparation for, attendance at, and participation in meetings and other
activities of the Board of Directors or its committees and his or her overall
contributions to the Board and the Company.
The Board
may use multiple sources for identifying and evaluating nominees for directors,
including referrals from the Company’s current directors and management as well
as input from third parties, including executive search firms retained by the
Board. The Board will obtain background information about candidates,
which may include information from directors’ and officers’ questionnaires and
background and reference checks, and will then interview qualified
candidates. The Board will then determine, based on the background
information and the information obtained in the interviews, whether to recommend
that a candidate be nominated to the Board of Directors. We strongly
encourage and, from time to time actively survey, our shareholders to recommend
potential director candidates.
Shareholder Communications
with the Company’s Board of Directors
Any
shareholder wishing to send written communications to the Company’s Board of
Directors may do so by sending them in care of Greg Royal, CEO, at the Company’s
principal executive offices. All such communications will be
forwarded to the intended recipient(s).
21
COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than 10% of a registered class of our equity securities, to file
initial reports of ownership and reports of changes in ownership with the
SEC. Such persons are required by SEC regulation to furnish us
with copies of all Section 16(a) forms they file. Based solely on
its review of the copies of such forms received by it
and representations from certain reporting persons
regarding their compliance with the relevant filing
requirements, the Company believes that all filing requirements applicable
to its officers, directors and 10% shareholders were complied
with during the fiscal year ended March 31,2009.
CODE
OF ETHICS
Due to
the current stage of the Company’s development, it has not yet developed a
written code of ethics for its directors or executive officers.
ITEM
11: EXECUTIVE COMPENSATION
SUMMARY
COMPENSATION
SUMMARY
COMPENSATION TABLE
The
following table sets forth, for our last two fiscal years, certain information
concerning the compensation paid by the Company to our Chief Executive Officer
and our other most highly paid executive officer who received in excess of
$100,000 in compensation during these periods.
SUMMARY COMPENSATION
TABLE
|
||||||||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
||||
Year
|
Non-Equity
|
Nonqualified
Deferred
|
All
Other
|
|||||||||
Ended
|
Stock
|
Option
|
Incentive
Plan
|
Compensation
|
Compen-
|
|||||||
Name
and
|
March
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Earnings
|
sation
|
Total
|
|||
Principal
Position
|
31
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||
James
T Miller
|
2010
|
$136,603
|
-
|
-
|
-
|
-
|
-
|
$136,603
|
||||
President
|
-
|
-
|
-
|
-
|
-
|
|||||||
Greg
T. Royal (1)
|
2010
|
$162,549
|
-
|
-
|
-
|
-
|
$162,549
|
|||||
CEO/Director
|
2009
|
$109,940
|
-
|
-
|
-
|
-
|
-
|
$109,940
|
(1) This
amount includes deferred compensation not paid to Mr Royal of $64,733 for
calendar year 2009.
There are
no compensatory plans or arrangements with respect to any of our executive
officers, which result or will result from the resignation, retirement or any
other termination of such individual’s employment with us or from a change in
control of the Company or a change in the individual’s responsibilities
following a change in control. No stock options, stock appreciation
rights or other stock based incentives were awarded to any of our named
executive officers during fiscal years 2009 and 2010.
22
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
Outstanding
Equity Awards at Fiscal Year-End
|
|||||
Option
Awards
|
|||||
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Number
of Securities Underlying Unexercised Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Derek
Downs
|
0
|
0
|
275,000(3)
|
1.30
|
2/6/2009
|
Cynthia
Garr
|
41,831(1)
|
0
|
0
|
0.46
|
4/1/2009
|
275,000(3)
|
1.10
|
10/1/2009
|
|||
Gregory
Royal
|
271,174(2)
|
0
|
0
|
0.46
|
5/3/2009
|
275,000(3)
|
1.10
|
10/1/2009
|
(1) Prior
to the Company’s acquisition of XBridge, XBridge awarded Ms. Garr options to
purchase shares of 15,426 shares of XBridge Software at an exercise price of
$1.25 per share. As part of the acquisition of XBridge by the
Company, these options were converted into options to purchase shares of our
common stock, on a basis of 2.71174 shares of our common stock for each share of
XBridge. This conversion ratio was the same ratio received by all
other XBridge stockholders.
(2) Prior
to the Company’s acquisition of XBridge, XBridge awarded Mr. Royal options to
purchase shares of 100,000 shares of XBridge Software at an exercise price of
$1.25 per share. As part of the acquisition of XBridge by the
Company, these options were converted into options to purchase shares of our
common stock, on a basis of 2.71124 shares of our common stock for each share of
XBridge. This conversion ratio was the same ratio received by all
other XBridge stockholders.
(3) Granted
pursuant to the Company’s 2004 Long Term Incentive Plan. These
options are subject to shareholder approval of the plan. The options
for 275,000 shares for each Messrs. Downs and Royal and Ms. Garr were terminated
effective April 1, 2007.
None of
our executive officers exercised options to purchase our common stock during
fiscal 2007, 2008, 2009 or 201
DIRECTOR
COMPENSATION
We do not
currently pay our directors a fee for attending scheduled and special meetings
of our board of directors. We reimburse each director for reasonable
travel expenses related to such director’s attendance at board of directors and
committee meetings. In the future we expect that we will offer
compensation to attract the caliber of board members the Company is seeking, and
intend at a later date to retain an independent compensation consultant to
advise the best course of action.
23
ITEM
12: SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
PRINCIPAL
SHAREHOLDERS
The
following table sets forth information, as of July 14, 2010, concerning
beneficial ownership of Common Stock, our only class of equity securities
currently outstanding, by (i) the only persons known to the Company to be
beneficial owners of more than 5% of the outstanding Common Stock, (ii) all
directors, (iii) all named executive officers and (iv) all directors
and named executive officers as a group.
Title
of
|
Name
and Address
|
Nature
and Amount
|
||||||||
Class
|
Of
Beneficial Owners
|
of
Beneficial Ownership
|
Percent
|
|||||||
Common
|
Gregory
T. Royal(1)
|
1,396,159
|
(2)
|
7.75
|
%
|
|||||
Common
|
Cynthia
A. Garr
5935
Buffridge Trail
Dallas
TX 75252
|
1,330,191
|
(3)
|
7.38
|
%
|
|||||
Common
|
Kingdon
Hughes
16475
Dallas Pkwy, Suite 440
Addison,
TX 75001
|
1,465,593
|
(4)
|
8.13
|
%
|
|||||
Common
|
Roaring
Fork Capital Management
5350
South Roslyn St., Suite 380
Greenwood
Village, CO 80111
|
3,533,379
|
(5)
|
19.60
|
%
|
|||||
All
Officers and Directors as a Group
|
1,396,159
|
7.75
|
%
|
*
|
Less
than 1%
|
|
(1)
|
Mr. Royal
is the Company’s only Director and its Chief Executive Officer, President
and acting Chief Financial Officer. The business address for
Mr. Royal is 6509 Windcrest Drive, Suite 160, Plano, Texas
75024.
|
|
(2)
|
Includes
options to purchase 271,174 shares resulting from the post merger
conversion of options to purchase shares of XBridge common stock that are
presently exercisable.
|
|
(3)
|
Includes
options to purchase 41,831 shares resulting from the post merger
conversion of options to purchase shares of XBridge common stock that are
presently exercisable.
|
|
(4)
|
Includes
189,822 shares subject to warrants that are presently
exercisable.
|
|
(5)
|
Roaring
Fork has a $200,000 note, currently convertible into 367,742 shares of
common stock. These shares are included in the above
number.
|
24
EQUITY
COMPENSATION PLAN INFORMATION
On
January 9, 2004, our Board of Directors approved a long-term incentive plan (the
“Plan”), under which we may issue compensation, including stock grants and stock
options up to a maximum of 2,000,000 shares. The Plan has not yet
been approved by our shareholders. As of August 5, 2008, we have
outstanding options to purchase 140,000 shares of common stock issued under the
Plan, subject to stockholder approval of the Plan. In addition, in
connection with our acquisition of XBridge Software, options to purchase 150,246
shares of XBridge Software stock were converted into options to purchase 407,917
shares of our common stock.
The
following table summarizes our equity compensation plan information as of July
14, 2010.
Equity Compensation Plan
Information
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||
Equity
Compensation Plans approved by security holders
|
-
|
-
|
2,000,000
|
|||
Equity
Compensation Plans not approved by security holders
|
558,163
|
$0.63
|
1,452,083
|
|||
Total
|
558,163
|
$0.63
|
1,452,083
|
EQUITY
COMPENSATION PLAN GRANTS NOT APPROVED BY SECURITY HOLDERS.
Under the
provisions of the Plan, on February 6, 2004, the Company granted non-statutory
options for 100,000 shares of common stock, to various employees in
consideration for employment with and services provided to the Company, and
non-statutory options for 275,000 shares of common stock to Mr. Derek Downs, our
past Chief Executive Officer, interim Chief Financial Officer and a past
Director. These options were issued with an exercise price of $1.30,
which was the closing trading price per share on the date of the grant. These
options vest over 4 years from the date of the grant, and may be exercised at
any time after vesting through January 2009.
Under the
provisions of the Plan, on October 1, 2004, the Company granted non-statutory
options for 550,000 shares of common stock, including options to purchase
275,000 shares to each of Mr. Greg Royal, our acting Chief Executive Office,
acting Chief Financial Officer, Executive Vice President, Chief Technology
Officer and Director and Ms. Cynthia Garr in consideration for employment with
and services provided to the Company. These options were issued with
an exercise price of $1.10, which was the closing trading price per share on the
date of the grant. Fifty percent of these options vested immediately
and the other 50% vested one year from the grant date and could be exercised at
any time after vesting through October 2009.
On April
1, 2007, the options granted to each of Messrs. Downs and Royal and Ms. Garr
were mutually cancelled by the parties.
25
On
October 1, 2004, the Company issued 90,000 non-statutory options for 90,000
shares of common stock to various outside service providers and
employees. These options vested over a range of immediately to four
years and have five year contractual lives. Additionally, under the provisions
of the Plan, on January 3, 2005, the Company granted 304,550 restricted shares
of common stock to various employees and consultants as consideration for
employment with and services provided to the Company. Of these
shares, 123,132 restricted shares were granted to Mr. Downs. The
market price of our common stock on January 3, 2005, the date of these grants,
was $3.00. On April 1, 2006, the Company granted an additional 2,000
restricted shares of our common stock under the provisions of the Plan to
another employee as consideration for employment with the
Company. The market price of our common stock on April 1, 2006 was
$0.95.
EQUITY
COMPENSATION PLAN GRANTS APPROVED BY SECURITY HOLDERS.
On January 28th, 2010, our Board of
Directors approved a long-term incentive plan (the “Plan”), under which we may
issue compensation, including stock grants and stock options up to a maximum of
2,000,000 shares. On June 8, 2010 the Company received majority shareholder
approval for the long-term incentive plan. The Company has not issued any stock
options under this plan as at June 30, 2010.
ITEM
13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE
On
December 1, 2009, the Company entered into a professional services agreement
with Blue Kiwi Group Ltd. This agreement provides for the services of Mr. Royal
to act as Company Board Member and CEO of the Company. The consideration is
$150,000 per annum for a period of two years. The agreement is attached as
exhibit 10.4.
On December 9, 2009, the Company issued
an Unsecured Promissory Note for $13,942.38 to Gregory Royal for unpaid expense
claims for years 2008, 2009 and 2010. The note is for two (2) years at an
interest rate of prime plus one and one half percent (1.5%) per
annum.
On
December 9, 2009, the Company issued an Unsecured Promissory Note for $64,733.76
to Gregory Royal for unpaid salary for calendar year 2009. Mr. Royal took
voluntary partial salary deferral for that calendar period of approx forty
percent (40%) of his salary. The note is for two (2) years at an interest rate
of prime plus one and one half percent (1.5%) per annum.
None of
our directors are independent, as defined by Rule 4200(a) (15) of the Nasdaq’s
listing standards.
ITEM
14: PRINCIPAL ACCOUNTANT FEES & SERVICES
The
following is a summary of the fees billed to us by Farmer, Fuqua & Huff PC
for professional services rendered for the years ended March 31, 2010 and
2009:
Service
|
2010
|
2009
|
||||||
Audit
Fees
|
$ | 55,000 | ||||||
Audit-Related
Fees
|
2,000 | - | ||||||
Tax
Fees
|
- | |||||||
All
Other Fees
|
- | - | ||||||
Total
|
$ | 2,000 | $ | 55,000 |
Audit Fees. Consists of fees
billed for professional services rendered for the audits of our consolidated
financial statements, reviews of our interim consolidated financial statements
included in quarterly reports, services performed in connection with filings
with the Securities & Exchange Commission and related comfort letters and
other services that are normally provided by Farmer, Fuqua & Huff PC in
connection with statutory and regulatory filings or engagements.
26
Tax Fees. Consists of fees
billed for professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal, state and local
tax compliance and consultation in connection with various transactions and
acquisitions.
Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent
Auditors
As there
is no separately designated Audit Committee, the entire Board of Directors
serves as the Audit Committee. A function of the Audit Committee is
to pre-approve all audit and non-audit services provided by the independent
auditors. These services may include audit services, audit-related services, tax
services and other services as allowed by law or
regulation. Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specifically approved
amount. The independent auditors and management are required to
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval and
the fees incurred to date. The Audit Committee may also pre-approve particular
services on a case-by-case basis.
27
PART
IV
ITEM
15: EXHIBITS
The
following exhibits are included as part of this report:
Ex.
Number
|
Title
of Document
|
3(i)
|
Restated
Articles of Incorporation (Incorporated by reference from Exhibit 3(i) to
the Company’s Quarterly Report of Form 10-Q for the fiscal quarter ended
December 31, 2008)
|
3(ii)
|
Bylaws
(Incorporated by reference from Exhibit 3(ii) to the Company’s Quarterly
Report of Form 10-Q for the fiscal quarter ended December 31,
2008)
|
4.1
|
Form
of Convertible Note Purchase Agreement dated as of December 13, 2004
(Incorporated by reference from Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed with the Commission on December 20,
2004)
|
4.2
|
Form
of Senior Unsecured Convertible Note (Incorporated by reference from
Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the
Commission on December 20, 2004)
|
4.3
|
Form
of Warrant (Incorporated by reference from Exhibit 4.3 to the Company’s
Current Report on Form 8-K filed with the Commission on December 20,
2004)
|
4.4
|
Registration
Rights Agreement dated as of December 13, 2004 (Incorporated by reference
from Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with
the Commission on December 20, 2004)
|
4.5
|
Form
of Convertible Note Purchase Agreement dated as of April 5, 2007
(Incorporated by reference from Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed with the Commission on April 12,
2007)
|
4.6
|
Form
of Senior Unsecured Convertible Note (Incorporated by reference from
Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the
Commission on April 12, 2007)
|
4.7
|
Form
of Warrant (Incorporated by reference from Exhibit 4.3 to the Company’s
Current Report on Form 8-K filed with the Commission on April 12,
2007)
|
4.8
|
Registration
Rights Agreement dated as of April 7, 2005 (Incorporated by reference from
Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the
Commission on April 12, 2007)
|
6.1
|
License
Agreement (incorporated by reference to Exhibit 10.1 to the Company’s
Annual Report on Form 10-KSB for the fiscal year ended March 31,
2004)
|
10.1
|
Employment
Agreement between Richard McDowell and Cistera Networks, Inc. dated as of
March 12, 2008 (Incorporated by reference from Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on March
17, 2008)
|
10.2
|
Waiver
Agreement dated as of June 30, 2008, by and between Cistera Networks,
Inc., and Roaring Fork Capital SBIC, LP. (Incorporated by reference from
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on July 3, 2008)
|
10.3
|
Factoring
Agreement dated as of November 19, 2008, by and between Allied
Capital Partners, LP and Cistera Networks, Inc. (Incorporated by reference
from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with
the Commission on December 15, 2008)
|
10.4
|
Professional
Services Agreement between Blue Kiwi
Group Ltd and Cistera Networks, Inc. (Incorporated by reference from
Exhibit 10.1 to the Company’s Current Report on Form 10-Q filed with the
Commission on February 16 2010.
|
10.5
|
Asset
Sale and Purchase Agreement between Telmarine Communications Inc and
Cistera Networks, Inc dated March 10 2010.
|
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.
|
28
SIGNATURES
Pursuant
to the requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CISTERA
NETWORKS, INC.
Dated: 9
August
2010 By /S/ Gregory
T Royal
Gregory T Royal
Chief Executive Officer
(Principal Executive
Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 9 day of August
2010.
Signatures Title
|
/S/ Gregory
T. Royal
|
CEO/President/Chief
Technology
|
|
Gregory
T. Royal
|
Officer
and Director
|
29
Index
to Financial Statements
|
Page
|
Report
of Independent Registered Public Accountants
|
F –
2
|
Report
of Independent Registered Public Accountants
|
F –
3
|
Consolidated
Balance Sheet
|
|
March
31, 2010 and 2009
|
F -
4
|
Consolidated
Statements of Operations for the
|
|
Years
Ended March 31, 2010 and 2009
|
F -
5
|
Consolidated
Statements of Stockholders' Equity for the
|
|
Years
Ended March 31, 2010 and 2009
|
F -
6
|
Consolidated
Statements of Cash Flows for the
|
|
Years
Ended March 31, 2010 and 2009
|
F -
7
|
Notes
to Consolidated Financial Statements
|
F -
9
|
F -
1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
To the
Board of Directors and Shareholders
Cistera
Networks, Inc. & Subsidiaries
We have
audited the accompanying consolidated balance sheet of Cistera Networks, Inc.
and Subsidiaries as of March 31, 2010 and the related consolidated statements of
operations, stockholders’ equity and cash flows for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cistera Networks, Inc. and
Subsidiaries as of March 31, 2010 and the results of its operations and its cash
flows for the year ended March 31, 2010 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Robison, Hill &
Co.__
Salt Lake
City, Utah
July 14,
2010
F -
2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Cistera
Networks, Inc. & Subsidiary
We have
audited the accompanying consolidated balance sheet of Cistera Networks, Inc.
& Subsidiary as of March 31, 2009 and the related consolidated statement of
operations, stockholders’ equity and cash flows for the year ended March 31,
2009. Cistera Networks, Inc.’s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cistera Networks, Inc. and
Subsidiary as of March 31, 2009, and the consolidated results of their
operations and their cash flows for the years ended March 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Farmer, Fuqua &
Huff, P.C.
Plano,
Texas
July 14,
2009
F -
3
CISTERA
NETWORKS, INC. & SUBSIDIARY
|
||||||||
CONSOLIDATED
BALANCE SHEET
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 12,954 | $ | 1,493 | ||||
Accounts
receivable, net of allowance for doubtful accounts $-0-
|
188,983 | 151,322 | ||||||
Inventory
|
45,000 | 124,656 | ||||||
Prepaid
expenses
|
113,565 | 37,341 | ||||||
Total current
assets
|
360,502 | 314,812 | ||||||
Property
and equipment, net
|
206,960 | 324,217 | ||||||
Intangible
assets, net
|
1,479,667 | 1,751,442 | ||||||
Total
long-term assets
|
1,686,627 | 2,075,659 | ||||||
TOTAL
ASSETS
|
$ | 2,047,129 | $ | 2,390,471 | ||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 350,853 | $ | 517,052 | ||||
Accrued
liquidated damages – outside investors
|
177,402 | 177,402 | ||||||
Accrued
liabilities
|
1,636,700 | 1,527,811 | ||||||
Deferred
revenue
|
609,532 | 865,271 | ||||||
Related
party payables
|
78,676 | - | ||||||
Note
payable
|
- | 7,781 | ||||||
Convertible
promissory notes – outside investors, net of discount
|
793,426 | 976,426 | ||||||
Total
current liabilities
|
3,646,589 | 4,071,743 | ||||||
Convertible
promissory notes – outside investors, net of discount
|
- | - | ||||||
Convertible
promissory notes – related parties, net of discount
|
- | - | ||||||
Deferred
revenue
|
357,337 | 174,554 | ||||||
Other
long-term liabilities
|
45,722 | 58,031 | ||||||
Total
long-term liabilities
|
403,059 | 232,585 | ||||||
TOTAL
LIABILITIES
|
4,049,648 | 4,304,328 | ||||||
Stockholders’
deficit:
|
||||||||
Preferred
stock, $0.001 par value; 1,000,000 shares authorized;
|
- | - | ||||||
-0-
shares issued and outstanding
|
||||||||
Common
stock, $0.001 par value; 50,000,000 shares authorized;
|
||||||||
18,022,605
and 17,422,605 shares issued and outstanding
|
18,023 | 17,423 | ||||||
Additional
paid-in capital
|
19,541,214 | 19,291,219 | ||||||
Accumulated
deficit
|
(21,561,756 | ) | (21,222,499 | ) | ||||
Total
stockholders’ deficit
|
(2,002,519 | ) | (1,913,857 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’DEFICIT
|
$ | 2,047,129 | $ | 2,390,471 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
F -
4
CISTERA
NETWORKS, INC. & SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
Years
ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Convergence
Solutions
|
$ | 989,465 | $ | 2,498,763 | ||||
Professional
Services
|
238,510 | 231,222 | ||||||
Support
and Maintenance
|
1,066,235 | 984,287 | ||||||
Total
revenues
|
2,294,210 | 3,714,272 | ||||||
Cost
of revenues
|
||||||||
Convergence
Solutions
|
502,295 | 657,507 | ||||||
Professional
Services
|
90,218 | 209,680 | ||||||
Support
and Maintenance
|
36,000 | 90,726 | ||||||
Total
cost of revenues
|
628,513 | 957,913 | ||||||
Gross
Profit
|
1,665,697 | 2,756,359 | ||||||
Expenses:
|
||||||||
Sales
and marketing
|
174,942 | 1,112,375 | ||||||
Software
development
|
333,321 | 823,040 | ||||||
Engineering
and support
|
278,804 | 706,167 | ||||||
General
and administrative
|
780,523 | 1,367,645 | ||||||
Depreciation
and amortization
|
169,964 | 403,813 | ||||||
Total
expenses
|
1,737,554 | 4,413,040 | ||||||
Profit
(Loss) from operations
|
(71,857 | ) | (1,656,681 | ) | ||||
Other
income (expense)
|
||||||||
Interest
income
|
74 | 326 | ||||||
Interest
expense
|
(237,371 | ) | (233,886 | ) | ||||
Amortization
of discount on convertible notes – outside investors
|
- | (1,393,293 | ) | |||||
Amortization
of discount on convertible notes – related parties
|
- | (41,060 | ) | |||||
Charge
for inducements related to stock issued to convertible note
holders
|
- | (1,324,444 | ) | |||||
Charge
for estimated liquidated damages – outside investors
|
- | 10,921 | ||||||
Other
income (expense)
|
(30,103 | ) | 10,000 | |||||
Total
other income (expense)
|
(267,400 | ) | (2,971,436 | ) | ||||
Net
loss
|
$ | (339,257 | ) | $ | (4,628,117 | ) | ||
Basic
& diluted net loss per share
|
$ | (0.02 | ) | $ | (0.30 | ) | ||
Weighted
average shares outstanding – basic and diluted
|
17,570,550 | 15,390,029 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
F -
5
CISTERA
NETWORKS, INC. & SUBSIDIARIES
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
|
Additional
paid-in
|
Accumulated
|
Total
stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
deficit
|
equity
(deficit)
|
||||||||||||||||||||||
Balances
at March 31, 2008
|
- | $ | - | 8,820,192 | $ | 8,820 | $ | 13,764,517 | $ | (16,594,382 | ) | $ | (2,821,045 | ) | ||||||||||||||
Reduction
of shares due to cancellation of
|
||||||||||||||||||||||||||||
fractional
shares from reverse/forward
|
||||||||||||||||||||||||||||
stock
split
|
- | - | (805 | ) | - | - | - | - | ||||||||||||||||||||
Stock
issued from the conversion of
|
||||||||||||||||||||||||||||
convertible
notes
|
- | - | 6,175,857 | 6,176 | 3,280,940 | - | 3,287,116 | |||||||||||||||||||||
Stock
issued from the exercise of
|
||||||||||||||||||||||||||||
Warrants
|
2,368,584 | 2,368 | 894,547 | - | 896,915 | |||||||||||||||||||||||
Stock
issued for waiver of registration
|
- | - | ||||||||||||||||||||||||||
rights
payments
|
58,777 | 59 | 21,983 | - | 22,042 | |||||||||||||||||||||||
Inducement
charges related to conversion of
|
||||||||||||||||||||||||||||
convertible
notes and exercise of warrants
|
- | - | - | - | 1,302,403 | - | 1,302,403 | |||||||||||||||||||||
Charge
for issuance of warrants
|
- | - | - | - | 26,829 | - | 26,829 | |||||||||||||||||||||
Net
loss
|
(4,628,117 | ) | (4,628,117 | ) | ||||||||||||||||||||||||
Balances
at March 31, 2009
|
- | $ | - | 17,422,605 | 17,423 | $ | 19,291,219 | $ | (21,222,499 | ) | $ | (1,913,857 | ) | |||||||||||||||
Stock
issued from the conversion of
|
||||||||||||||||||||||||||||
convertible
notes
|
- | - | 600,000 | 600 | 235,200 | - | 235,800 | |||||||||||||||||||||
Accrued
interest reclassified as to paid-in
|
||||||||||||||||||||||||||||
capital
related to converted notes
|
- | - | - | - | 14,795 | - | 14,795 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (339,257 | ) | (339,257 | ) | |||||||||||||||||||
Balances
at March 31, 2010
|
- | $ | - | 18,022,605 | $ | 18,023 | $ | 19,541,214 | $ | (21,561,756 | ) | $ | (2,002,519 | ) | ||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
F -
6
CISTERA
NETWORKS, INC. & SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
Years
ended March 31
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (339,257 | ) | $ | (4,628,117 | ) | ||
Adjustments
used to reconcile net loss to net cash used in operating
activities:
|
||||||||
Charge
for inducement to convert debt to convertible promissory
notes
|
- | 1,324,443 | ||||||
Amortization
of discount on convertible promissory notes – outside
investors
|
- | 1,393,293 | ||||||
Amortization
of discount on convertible promissory notes – related
parties
|
- | 41,060 | ||||||
Charge
(credit) for estimated liquidated damages – outside
investors
|
- | (10,921 | ) | |||||
Share-based
compensation
|
- | 26,829 | ||||||
Abandonment
Loss
|
18,052 | - | ||||||
Depreciation
and amortization
|
373,796 | 403,813 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(37,661 | ) | 72,734 | |||||
Related
party receivables
|
- | 15,837 | ||||||
Inventory
|
79,656 | 17,940 | ||||||
Prepaid
expenses
|
(76,224 | ) | 8,689 | |||||
Accounts
payable
|
(166,199 | ) | 95,844 | |||||
Related
party payables
|
78,676 | (129,702 | ) | |||||
Accrued
sales commissions
|
- | (54,177 | ) | |||||
Accrued
interest
|
237,371 | (136,956 | ) | |||||
Other
accrued liabilities
|
(60,856 | ) | 742,036 | |||||
Deferred
revenue
|
(72,956 | ) | (157,566 | ) | ||||
Other
long-tem liabilities
|
(12,309 | ) | 41,832 | |||||
Net
cash used in operating activities
|
22,089 | (933,088 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment, net
|
(2,847 | ) | (55,479 | ) | ||||
Net
cash used in investing activities
|
(2,847 | ) | (55,479 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
(Increase)Decrease
in restricted cash
|
- | 50,000 | ||||||
Net
proceeds from short-term advances
|
- | 25,630 | ||||||
Net
borrowings (payments) on line of credit
|
- | (17,503 | ) | |||||
Net
proceeds from exercise of warrants
|
- | 843,604 | ||||||
Payments
on convertible promissory notes and other loans
|
- | (36,678 | ) | |||||
Payments
on other notes payable and capital lease
|
(7,781 | ) | - | |||||
Net
cash provided by financing activities
|
(7,781 | ) | 865,053 | |||||
Net
increase (decrease) in cash and cash equivalents
|
11,461 | (123,514 | ) | |||||
Cash
and cash equivalents at beginning of year
|
1,493 | 125,007 | ||||||
Cash
and cash equivalents at end of year
|
12,954 | $ | 1,493 | |||||
F -
7
CISTERA
NETWORKS, INC. & SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
(continued)
|
||||||||
Years
ended March 31
|
||||||||
2010
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 19,598 | $ | 62,696 | ||||
Income
taxes
|
- | - | ||||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Conversion
of convertible promissory notes and related accrued interest
to
|
||||||||
common
stock
|
$ | 235,800 | $ | 3,287,116 | ||||
Conversion
of accounts payable and other accrued liabilities to
convertible
|
||||||||
promissory
notes
|
- | 53,312 | ||||||
Conversion
of other notes payable to common stock
|
- | - | ||||||
Allocation
of discount on convertible promissory notes to warrants
|
- | - | ||||||
Conversion
of accrued liabilities to common stock
|
- | 45,364 | ||||||
Discount
related to beneficial conversion feature on convertible
promissory
|
||||||||
Notes
|
- | - | ||||||
OTHER
NON-CASH TRANSACTIONS:
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
F -
8
CISTERA NETWORKS, INC. &
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE
1 - NATURE OF OPERATIONS AND GOING CONCERN
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States (“US GAAP”),
which contemplate the Company as a going concern. However, the
Company has sustained substantial operating losses in recent years and has used
substantial amounts of working capital in its operations. Realization
of a major portion of the assets reflected on the accompanying balance sheet is
dependent upon continued operations of the Company which, in turn, is dependent
upon the Company's ability to meet its financing requirements and succeed in its
future operations. Management believes that actions presently being
taken to revise the Company’s operating and financial requirements provide them
with the opportunity for the Company to continue as a going
concern.
These
consolidated financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a “going
concern”. While management believes that the actions already taken or
planned, will mitigate the adverse conditions and events which raise doubt about
the validity of the “going concern” assumption used in preparing these financial
statements, there can be no assurance that these actions will be
successful.
If the
Company were unable to continue as a “going concern,” then substantial
adjustments would be necessary to the carrying values of assets, the reported
amounts of liabilities, the reported revenues and expenses, and the balance
sheet classifications used.
Organization and Basis of
Presentation
On
August 31, 2004, CNH Holdings Company absorbed its wholly-owned subsidiary
Corvero Networks, and began doing business as Cistera Networks, Inc. (“Cistera
Networks,” the “Company” or “we”). All Corvero products adopted the
Cistera name.
On
May 27, 2005, the Company acquired XBridge Software, Inc. through a merger
between XBridge and a Company subsidiary. XBridge is a wholly-owned
subsidiary of the Company.
On
September 27, 2005, the Company changed its name from CNH Holdings Company to
Cistera Networks, Inc.
In
December 2009 the Company incorporated two wholly owned subsidiaries, Cistera
Federal Systems, Inc. and Telmarine Communications, Inc. On March 10 2010,
Cistera transferred the assets and intellectual property for the LMR Connect
line of products into Telmarine Communications Inc.
Nature of
Operations
Cistera
Networks provides IP network-based application appliances and services that add
features and enhanced functionality to the telecommunications services used by
large enterprises, small and mid-sized organizations, both in the commercial and
public sector. Our software-based and hardware-based solutions
are delivered on our open-architecture, component-based platform known as the
Cistera ConvergenceServer™, which allows administrators to centrally manage
advanced applications for Unified communications environments across large
single-site and multi-site private voice/data networks. Although the
origins of the solution started back in 2000, we began operations in May 2003 as
a public entity under the name of CNH Holdings Company.
F -
9
NOTE
2 - SUMMARY OF ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements as of March 31, 2010 and 2009 and for the
years ended March 31, 2010 and 2009 include the accounts of Cistera Networks,
Inc. and its wholly-owned subsidiary XBridge Software, Inc. XBridge
Software, Inc. was acquired by the Company on May 27, 2005.
In
December 2009 the Company incorporated two wholly owned subsidiaries, Cistera
Federal Systems, Inc. and Telmarine Communications, Inc. On March 10 2010,
Cistera transferred the assets and intellectual property for the LMR Connect
line of products into Telmarine Communications Inc.
The
results of subsidiaries acquired or sold during the year are consolidated from
their effective dates of acquisition through their effective dates of
disposition.
All
significant intercompany balances and transactions have been
eliminated.
Use
of Estimates
Our
consolidated financial statements are prepared in accordance with US
GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, costs and expenses, and related
disclosures. On an ongoing basis, we evaluate our estimates and
assumptions. Our actual results may differ from these estimates under
different assumptions or conditions.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents to the extent the funds are not
being held for investment purposes.
Accounts
Receivable
Accounts
receivable is comprised of the following at March 31, 2010 and
2009:
Receivables
Assigned to Factor
|
$
|
-
|
$
|
125,402
|
||||
Advances
to (from) Factor
|
-
|
(70,570
|
)
|
|||||
Fees,
Expenses and Charges to Reserve
|
-
|
(792
|
)
|
|||||
Amounts
Due from Factor
|
-
|
54,040
|
||||||
Unfactored
Accounts Receivable
|
188,983
|
97,282
|
||||||
Total
Receivables
|
$
|
188,983
|
$
|
151,322
|
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.
F -
10
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 March 31, 2010 is not
required.
As of
March 31, 2010, the Company receives approximately 18% of its gross
revenues from its top three re-sellers. This represents a decrease in
concentration of business from the 37% reported for the year ended
March 31, 2009.
The
Company maintained a factoring facility with Allied Affiliated Funding (formerly
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 agreements are for a period of two
years with an automatic one year renewal thereafter.
On
December 10, 2009, the factoring facility was terminated by mutual agreement. We
believe that the cost of this facility outweighed the benefits to the
Company.
Inventory
Inventory
consists of equipment that has been purchased but not yet shipped, shipped but
not yet installed, and equipment that has been returned to the Company because
the customer has cancelled the project or there were problems with the
hardware. The inventory assets are recorded at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Liabilities
Accrued
liabilities are comprised of the following at March 31, 2010 and
2009:
2010
|
2009
|
|||||||
Accrued
expenses
|
$
|
148,484
|
$
|
82,924
|
||||
Reserve
for litigation contingency
|
650,000
|
650,000
|
||||||
Accrued
compensation and payroll taxes
|
299,663
|
545,626
|
||||||
Accrued
interest
|
395,075
|
225,330
|
||||||
Other
|
143,478
|
23,931
|
||||||
Total
Accrued Liabilities
|
$
|
1,636,700
|
$
|
1,527,811
|
Other
long-term liabilities are comprised of the following at March 31, 2010 and
2009:
Accrued
interest
|
$
|
—
|
$
|
—
|
||||
Deferred
rent
|
45,722
|
58,031
|
||||||
Total
Other Long-Term Liabilities
|
$
|
45,722
|
$
|
58,031
|
Revenue
recognition
We
recognize revenue when:
·
|
persuasive
evidence of an arrangement exists,
|
·
|
delivery
has occurred or services have been
rendered,
|
·
|
the
sales price is fixed or determinable,
and
|
·
|
collect-ability
of the resulting accounts receivable is reasonably
assured.
|
F -
11
The
Company recognizes revenue from software, hardware and services once fully
installed and implemented. This method of revenue reporting does not reflect all
orders received and shipped during the reporting period, but only those orders
received, shipped and completely installed within the reporting
period.
The
Company recognizes revenue according to ASC 985, formerly the American Institute
of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 97-2
(Software Revenue Recognition) as defined by paragraphs 07-14 in SOP 97-2 and as
amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions). This SOP provides guidance on when
revenue should be recognized and in what amounts for licensing, selling, leasing
or otherwise marketing computer software (including computer hardware and
support services).
Deferred
revenue represents contracts for certain revenue to be recognized in the future
from support and maintenance contracts as well as product sales and professional
services which have been shipped and billed but not installed. Support and
maintenance contracts are executed on an annual basis and the revenue from these
contracts is recognized over the life of the contracts. Of the total deferred
revenue shown as a current liability in the amount of $966,869, the deferred
revenue for products and services was $301,106 as of March 31, 2010. The
remainder of current deferred revenue and the long term deferred revenue of
$665,762 related to technical support and maintenance services.
Technical
support services revenue is deferred and recognized ratably over the period
during which the services are to be performed according to the term of the
contract, which is typically from one to three years. Advanced services revenue
is recognized upon delivery or completion of performance.
We make
sales to distributors and retail partners and recognize revenue based on a
sell-through method using information provided by them.
Accounting for Sales
Commissions
During
fiscal year 2008, the Company adopted a sales commission plan that paid
commissions at a target rate of 3.75% of the contract amount. Commissions
payable are accrued in the period that the customer accepts the product or
service from the Company. In fiscal year 2009, the Company amended the sales
commission plan in order to provide a more comprehensive compensation structure
to the sales organization. Sales commissions are generally paid on sales meeting
the criteria for sales commission payment in the subsequent accounting period.
In fiscal 2010 the company made no changes to the sales commission
structure.
Depreciation and
Amortization
Property
and equipment are recorded at cost and depreciated using straight-line and
accelerated methods over the estimated useful lives of the assets which range
from three to seven years. Property and equipment consisted of the following at
March 31, 2010 and 2009:
2010
|
2009
|
|||||||
Computer
Equipment
|
$
|
241,899
|
$
|
234,277
|
||||
Trade
Show Booth & Fixtures
|
15,637
|
15,637
|
||||||
Office
Equipment
|
322,200
|
399,537
|
||||||
Leasehold
Improvements
|
22,164
|
22,164
|
||||||
Property
held under capital leases
|
-
|
10,205
|
||||||
Less
accumulated depreciation
|
(394,941
|
)
|
(357,603
|
)
|
||||
Total
|
$
|
206,960
|
$
|
324,217
|
Maintenance
and repairs are charged to operations; betterments are capitalized. The cost of
property sold or otherwise disposed of and the accumulated depreciation thereon
is eliminated from the property and related accumulated depreciation accounts,
and any resulting gain or loss is credited or charged to income or
expense.
F -
12
Total
depreciation expense for the years ended March 31, 2010 and 2009 was
$102,020 and $132,037, respectively.
Long
Term Investments
On March
10, 2010,
Cistera Networks sold the intellectual property and assets for the Land Mobile
Radio product range to wholly owned subsidiary Telmarine Communications, Inc.
for the sum of $300,000, in exchange for 300,000 shares of common
stock, which was 100% of the outstanding stock in
Telmarine. The purchase contract is attached to this Report as
Exhibit 10.5. All significant intercompany balances and transactions
have been eliminated.
Intangible Assets
The
Company has adopted ASC 350 (formerly the Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets.”). ASC 350 requires, among
other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, ASC 350 requires that
the Company identify reporting units for the purposes of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets with
an indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in ASC 350.
Intangible Assets consisted of the following at March 31, 2010 and
2009:
Intangible
Asset
|
2010
|
2009
|
Amortization
Period
|
||||||
Intellectual
Property
|
$
|
2,717,755
|
$
|
2,717,755
|
10
Years
|
||||
Software
Development
|
366,040
|
366,040
|
4
Years
|
||||||
Less
accumulated amortization
|
(1,604,128
|
)
|
(1,332,353
|
)
|
|||||
Total
|
$
|
1,479,667
|
$
|
1,751,442
|
The
software development costs were acquired in the acquisition of XBridge Software,
Inc. Capitalized software development costs are amortized on a
product-by-product basis over their expected useful life, which is over the term
of the customer license agreement, which is generally four years. The annual
amortization related to software to be sold is the greater of the amount
computed using (a) the ratio that current gross revenue for a product
compares to the total of current and anticipated future gross revenue for that
product or (b) the straight-line method over the remaining estimated
economic life of the product.
Research
and development expenses consist primarily of salaries and related expenses, and
allocated overhead related to increasing the functionality and enhancing the
ease of use of the convergence platform and applications.
On
May 27, 2005, the Company issued 2,000,000 shares of common stock to
acquire the assets and liabilities of XBridge Software, Inc. The shares were
valued at the market price on the effective date of the acquisition, which was
$2.65 per share. The Company acquired net assets valued at $782,245 and
intellectual property valued at $2,717,755. The Company has determined that the
intellectual property has a useful life of 10 years, and is using
straight-line amortization.
Total
amortization expense for the fiscal years ended March 31, 2009 were
$271,776 and 2010 were $271,776.
The
estimated amortization for the next five years is as follows:
2011
|
$
|
271,776
|
||
2012
|
271,776
|
|||
2013
|
271,776
|
|||
2014
|
271,776
|
|||
2015
|
271,776
|
|||
Total
|
$
|
1,358,880
|
F -
13
Long-Lived Assets
The
Company evaluates the carrying value of long-lived assets, including
identifiable intangible assets with a finite useful life, whenever events or
changes in circumstances indicate the carrying amount may not be fully
recoverable. If that analysis indicates that an impairment has occurred, the
Company measures the impairment based on a comparison of discounted cash flows
or fair values, whichever is more readily determinable, to the carrying value of
the related asset.
Loss 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 6.6 million potentially dilutive common stock
equivalents (in the form of stock options and stock purchase warrants)
outstanding as of March 31, 2010 and 2009, respectively. These potentially
dilutive common stock equivalents have been excluded from the diluted share
calculations for the years ended March 31, 2010 and 2009, respectively, as
they were non-dilutive as a result of the net losses incurred for those periods.
Accordingly, basic shares equal diluted shares for all periods
presented.
Reclassifications
Certain
reclassifications have been made in the 2009 financial statements to conform to
the 2010 presentation.
Stock Options
Effective
April 1, 2006, the Company adopted the provisions of ASC 718 and 505
(formerly SFAS No. 123(R). “Share-based payment” (“SFAS 123R”)), applying
the modified prospective method. ASC 718 and 505 requires all equity-based
payments to employees to be recognized in the Consolidated Statements of
Operations at the fair value of the award on the grant date. Under the modified
prospective method, the Company is required to record equity-based compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards outstanding as of the date of adoption. The
fair values of all stock options granted by the Company are determined using the
Black-Scholes model (“BS Model”).
Fair Value of Financial
Instruments
The
carrying value of the Company’s financial instruments, including accounts
payable and accrued liabilities at March 31, 2010 approximates their fair
values due to the short-term nature of these financial instruments.
Recently Issued Accounting
Pronouncements
In April
2009, the FASB updated ASC 820 to provide additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have
decreased significantly. ASC 820 also provides guidance on identifying
circumstances that indicate a transaction is not orderly. The implementation of
ASC 820 did not have a material effect on the Company’s financial
statements.
In April
2009, the FASB updated ASC 825 regarding interim disclosures about fair value of
financial instruments. ASC 825 requires disclosures about fair value
of financial instruments in interim reporting periods of publicly traded
companies that were previously only required to be disclosed in annual financial
statements. The implementation of ASC 825 did not have a material effect on the
Company’s financial statements.
In April
2009, the FASB updated ASC 320 for proper recognition and presentation of
other-than-temporary impairments. ASC 320 provides additional
guidance designed to create greater clarity and consistency in accounting for
and presenting impairment losses on securities. The implementation of
ASC 320 did not have a material effect on the Company’s consolidated financial
statements.
F -
14
In June
2009, the FASB created the Accounting Standards Codification, which is codified
as ASC 105. ASC 105 establishes the codification as the single
official non-governmental source of authoritative accounting principles (other
than guidance issued by the SEC) and supersedes and effectively replaces
previously issued GAAP hierarchy framework. All other literature that
is not part of the codification will be considered
non-authoritative. The codification is effective for interim and
annual periods ending on or after September 15, 2009. The Company has
applied the codification, as required, beginning with the 2009 Form
10-K. The adoption of the codification did not have a material impact
on the Company’s financial position, results of operations or cash
flows.
In June
2009, the FASB updated ASC 855, which established principles and requirements
for subsequent events. This guidance details the period after the
balance sheet date which the Company should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements,
the circumstances under which the Company should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the required disclosures for such events. ASC 855 is effective
for interim and annual periods ending after June 15, 2009. The
implementation of ASC 855 did not have a material effect on the Company’s
financial statements.
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update 2009-13 (ASU 2009-13), which provided an update to
ASC 605. ASU 2009-13 addresses how to separate deliverables and how
to measure and allocate arrangement consideration to one or more units of
accounting in multiple-deliverable arrangements. The amendments in this update
will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. The
Company is currently evaluating the impact that this update will have on its
Financial Statements.
NOTE 3 — FINANCIAL
CONDITION
The
accompanying consolidated financial statements have been prepared in conformity
with US GAAP , 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 years ended March 31, 2010 and
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 and 1.5 million related to amortization of
discounts associated with our sale and issuance of Senior Unsecured Convertible
Promissory Notes in the fiscal years 2009 and 2008 (the “PP2 Notes”) and
negative working capital (current liabilities in excess of current assets) of $2
million and $2 million as of March 31, 2010 and 2009.
Accordingly,
as of March 31, 2010, 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
maintain our ability to be profitable in our future operations through
generating higher revenues or lowering operating costs, or a combination of the
two.
The
Company maintained a factoring facility with Allied Affiliated Funding (formerly
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 agreements are for a period of two
years with an automatic one year renewal thereafter.
On
December 10, 2009, the factoring facility was terminated by mutual agreement. We
believe that the cost of this facility outweighed the benefits to the
Company.
F -
15
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.
NOTE
4 - DEBT
As of
March 31, 2010, the Company had $793,426 of principal, accrued interest of
$395,075 and accrued liquidated damages of $177,402 outstanding on its PP1 Notes
and PP2 Notes. The PP1 Notes bear interest at an annual rate of 8%,
compounded quarterly. The December PP2 Notes and the April PP2 Notes
bear interest at an annual rate of 18%, compounded quarterly.
PP1
Notes and Warrants
On
December 13, 2004, the Company issued and sold an aggregate of $1,146,000 in
principal amount of PP1 Notes, and PP1 Warrants to purchase 1,146,000 shares of
our common stock. Of the $1,146,000 in principal, the Company
received cash of $1,004,000, and $142,000 in principal amount of the PP1 Notes
was issued in connection with the cancellation of an equal amount of the
Company’s outstanding obligations.
The PP1
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 anniversary that they are
outstanding (each, an interest compounding date). The outstanding
principal and all accrued interest become due and payable on the earlier of (a)
December 13, 2006, or (b) the date on which a change in control of the Company
occurred.
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 occurring
after the effective date of a registration statement covering the resale of
shares of common stock to be issued upon conversion of the PP1
Notes.
In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP1 Notes may be converted, in whole or in part at the
option of the note holders, into the convertible securities, upon the same terms
and conditions governing the issuance of the convertible securities in the
private transaction. The right of the PP1 Note holders to convert
their notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.
The
Company may prepay the PP1 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 PP1 Note holders
may convert the amount of the proposed prepayment into shares of our common
stock at any time.
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.
F -
16
During
the quarter ended September 30, 2007, the Company elected to compensate PP1 Note
holders who had opted to convert debt into shares of common stock, which
remained unregistered with the SEC as of the date the PP1 Notes became due and
payable on December 13, 2006. The amount offered to, and accepted by,
the shareholders was $135,825, payable in the form of additional shares of
common stock. In August 2007, the company recorded a charge and
liability for the impending issuance of this stock. On January 11,
2008, the Company issued 134,462 shares of common stock at the agreed upon
conversion rate of $1.01, and paid $19 in cash for fractional shares in
settlement of this liability. At March 31, 2010, there was $51,850 of
principal and $40,119 of interest due on the PP1 Notes.
PP2
Notes and Warrants
On
December 29, 2006 we issued and sold an aggregate of $433,362 in principal
amount of PP2 Notes, and issued PP2 Warrants to purchase 433,571 shares of our
common stock. Of the $433,362 in principal, we received cash of
$397,500 and $35,862 in principal and interest of PP1 Notes was
converted. During January through March 2007, the Company received
additional funding from investors in the amount of approximately $1,466,000,
which were formally issued and sold as PP2 Notes on April 5, 2007, when the
Company also issued an additional $1,593,000 in PP2
Notes. Additionally, the Company issued PP2 Warrants to purchase
3,065,205 shares of our common stock, par value $0.001 per share. Of
the $3,065,205 in principal, we received cash of $2,416,429, and $648,776 in
principal amount of the PP2 Notes was issued in connection with the cancellation
of an equal amount of the Company’s outstanding obligations. Included
in the outstanding obligations that were cancelled were $100,779 of obligations
to principal officers and directors in the following amounts: Greg Royal $70,779
and Derek Downs $30,000.
The PP2
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 anniversary that they are
outstanding (each, an interest compounding date). The outstanding
principal and all accrued interest become due and payable two years from the
date of the PP2 Notes. 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 occurring after
the effective date of a registration statement covering the resale of shares of
common stock to be issued upon conversion of the PP1 Notes.
In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP2 Notes may be converted, in whole or in part at the
option of the note holders, into the convertible securities, upon the same terms
and conditions governing the issuance of the convertible securities in the
private transaction. The right of the PP2 Note holders to convert
their notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.
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 PP1 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.
F -
17
For the
twelve months ended March 31, 2009 and 2008, the Company recorded $1,434,353 and
$1,532,511 respectively, of amortization of debt discounts associated with the
PP2 Notes. For the twelve months ended March 31, 2009 the total
amortization charge included $747,357 for the write-off of unamortized debt
discounts related to the conversion of $2,470,156 in principal of PP2 Notes
under the Company’s Short Term Investment Incentive Plan (the
“STIIP”).
At March
31, 2010, there was $741,576 of principal, accrued interest of $354,955 and
accrued liquidated damages of $177,402 outstanding on its PP2
Notes.
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 ASC 470 (formerly 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 ASC 718
and 505 (formerly 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.
F -
18
Registration
payment arrangements
Effective
April 1, 2007, the Company adopted ASC 815 (formerly 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.
Line
of credit
On May
18, 2007, the Company secured a line of credit with JPMorgan Chase Bank in the
amount of $50,000. The line of credit carried an interest rate of
prime plus one-half point. The line of credit was secured with a
deposit guaranty of $50,000. On September 8, 2008, the Company repaid
the outstanding obligation from the balance of its deposit guaranty and
cancelled this line of credit facility.
The
Company’s total debt as of March 31, 2010, all of which is current, is as
follows:
PP1
and PP2 Notes:
|
||||
Principal
|
$ | 793,426 | ||
Accrued
interest
|
395,074 | |||
Accrued
estimated liquidated damages
|
177,402 | |||
1,365,902 | ||||
Less:
unamortized discount
|
0 | |||
1,365,902 | ||||
Other
notes payable
|
78,676 | |||
Total
|
$ | 1,444,577 |
F -
19
NOTE
5 – COMMITMENTS AND CONTINGENCIES
Lease
commitments
The
Company currently leases 9,767 square feet of office space at 6509 Windcrest
Drive, Suite 160, Plano, Texas, 75024 from GKII Plano, L.P.. The
lease payments are $14,479 per month and the lease expires July 13,
2013. This office space is used as the Corporate
Headquarters.
The
minimum future lease payments under this lease for the next five years
are:
April
1, 2010 - March 31, 2011
|
181,888 | |||
April
1, 2011 – March 31, 2012
|
186,764 | |||
April
1, 2012 - March 31, 2013
|
191,644 | |||
April
1, 2013 - March 31, 2014
|
196,536 | |||
April
1, 2014 - March 31, 2015
|
- | |||
Total
minimum future lease payments
|
$ | 756,832 |
Litigation
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 ASC 450 (formerly 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 March
31st, 2010, the Company believes that this amount represents the best estimate
of a potential settlement.
NOTE
6 - INCOME TAXES
As of
March 31, 2010, the Company had net operating loss carryforwards available to
offset future federal income tax of approximately $16.8 million. Such
carry-forwards expire between fiscal year 2009 and fiscal year
2029. Under the Tax reform Act of 1986, the amount of and the benefit
from net operating losses that can be carried forward may be limited in certain
circumstances. Events that may cause changes in the Company’s tax
carryovers include, but are not limited to, a cumulative ownership change of
more than 50% over a three-year period. Therefore, the amount
available to offset future taxable income may be limited. The Company
carries a deferred tax valuation allowance equal to 100% of total deferred
assets. In recording this allowance, management has considered a number of
factors, but chiefly, the Company’s recent history of sustained operating
losses. Management has concluded that a valuation allowance is required for 100%
of the total deferred tax assets as it is more likely than not that the deferred
tax assets will not be realized.
March
31,
|
||||||||
Net
deferred tax assets
|
2010
|
2009
|
||||||
Net
operating loss carry-forwards
|
$ | 5,712,000 | $ | 5,603,178 | ||||
Valuation
allowance
|
(5,712,000 | ) | (5,603,178 | ) | ||||
$ | - | $ | - |
F -
20
The
provision benefit for income taxes differs from the amount computed using the
U.S. federal statutory income tax rate as follows:
March
31,
|
||||||||
2010
|
2009
|
|||||||
Income
tax benefit at federal statutory rate
|
$ | 108,822 | $ | 1,573,560 | ||||
Less
Non-deductible items
|
||||||||
Charge
for stock issued to convertible note holders
|
- | (516,533 | ) | |||||
|
- | (516,533 | ) | |||||
Change
in valuation allowance
|
(108,822 | ) | (1,057,027 | ) | ||||
Income
tax benefit
|
$ | - | $ | - |
Effective
April 1, 2007, the Company adopted the provisions of ASC 740 (formerly FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”)). ASC 740
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. The adoption of the provisions of FIN 48 did not have a
material impact on the Company’s condensed consolidated financial position and
results of operations. At April 1, 2007, the Company had no liability
for unrecognized tax benefits and no accrual for the payment of related
interest.
Interest
costs related to unrecognized tax benefits are classified as “Interest Expense,
net” in the accompanying consolidated statements of
operations. Penalties, if any, would be recognized as a component of
“Selling, general and administrative expenses.” The Company
recognized $0 of interest expense related to unrecognized tax benefits for the
years ended March 31, 2010 and 2009. In many cases the Company’s
uncertain tax positions are related to tax years that remain subject to
examination by relevant tax authorities. With few exceptions, the
Company is generally no longer subject to U.S. federal, state, local or non-U.S.
income tax examinations by tax authorities for years before 2006. The
following describes the open tax years, by major tax jurisdiction, as of March
31, 2010:
United
States
(a) 2006
– Present
(a)
|
Includes
federal as well as state or similar local jurisdictions, as
applicable.
|
NOTE
7 – STOCKHOLDERS’ EQUITY (DEFICIT)
During
June of 2008, 6,175,857 shares of common stock were issued upon conversion of
certain PP2 notes. The amount of principal of these notes converted
was $2,470,156 and the amount of accrued interest converted was
$770,134. These notes were converted at $0.53 per share.
During
June of 2008, 2,368,584 shares of common stock were issued consisting of
1,860,909 warrants issued under PP1 and PP2 along with 507,675 bonus warrants
awarded under the STIIP. These warrants were exercised at $0.40 per
share while the bonus warrants were exercised at $0.30 per share.
During
June of 2008, 58,777 shares of common stock were issued to a institutional
investor in the PP2 offering that had the contractual right to liquidated
damages in exchange for a waiver from the investor. 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.
In
January of 2010, the Company issued 600,00 shares of common stock upon
conversion of accrued interest and principal on a previously issued convertible
notes with an aggregate principal of $183,000. The amount of accrued
interest converted was $52,800. The principal and interest was
converted at $0.393 per share. As part of this transaction, the
remaining accrued interest of $14,795 due on these notes was reclassified as
paid-in capital.
F -
21
On May
13, 2010, the Company completed a reverse/forward stock split that resulted in
the cancellation of 805 fractional shares (see Note 10). The stock
split reduced the number of shares outstanding from 18,023,410 to
18,022,605. All references to common stock in the financial
statements have been changed to reflect the stock split.
NOTE
8 - STOCK OPTIONS AND STOCK PURCHASE WARRANTS
On
January 9, 2004, our board of directors approved a long-term incentive plan (the
“Plan”), under which we may issue compensation, including stock grants and stock
options. The Plan allows for the issuance of up to 2,000,000 shares
of the Company’s common stock and has not yet been approved by our
stockholders.
On
April 1, 2006, the Company adopted ASC 718 and 505 (formerly SFAS 123R)
under the “modified prospective application.” ASC 718 and 505 requires all
equity-based payments to employees to be recognized in the Consolidated
Statements of Operations and Comprehensive Income at the fair value of the award
on the grant date. Under the modified prospective application, the Company was
required to record equity-based compensation cost for all awards granted after
the date of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. The Company used the BSM model for
determining the fair values of all stock options granted prior to the adoption
of ASC 718 and 505 and continues to use this pricing model for all share-based
awards issued or modified on or after adoption of ASC 718 and
505. The Company did not issue any stock options during the years
ended March 31, 2010, 2009 and 2008, respectively.
On
January 28, 2010, our board of directors approved a long-term incentive plan
(the “Plan”), under which we may issue compensation, including stock grants and
stock options. The Plan allows for the issuance of up to 2,000,000
shares of the Company’s common stock. This has been approved by a majority of
the shareholders.
For
the years ended March 31, 2010 and 2009, the share-based compensation was
$-0-.
The
following table sets forth the Company’s stock options outstanding as of March
31, 2010 and 2009 and activity for the years then ended:
Weighted
|
||||||||||||||||
Weighted
|
Average
|
|||||||||||||||
Average
|
Remaining
|
Aggregate
|
||||||||||||||
Shares
|
Exercise
Price
|
Contractual
Term
(Years)
|
Intrinsic
Value
|
|||||||||||||
Outstanding,
March 31, 2008
|
1,257,917 | 1.39 | ||||||||||||||
Granted
|
- | - | ||||||||||||||
Exercised
|
- | - | - | |||||||||||||
Forfeited/expired
|
80,000 | 1.25 | ||||||||||||||
Vested
and exercisable at March 31, 2009
|
1,177,917 | 1.40 | 0.00 | $ | 0 | |||||||||||
Forfeited/expired
|
700,000
313,005
70,000
|
2.00
0.46
1.10
|
||||||||||||||
Vested
and exercisable at March 31, 2010
|
94,912 | 0.26 | 0.00 | $ | 0 |
The total
fair value of shares vested during the years ended March 31, 2010 and 2009 was
$0 and $0. respectively.
F -
22
The
following table sets forth the Company’s investor stock purchase warrants
outstanding as of March 31, 2009 and 2008 and activity for the years then
ended:
Shares
|
||||
Outstanding,
March 31, 2008
|
4,678,800 | |||
Granted
|
175,596 | |||
Exercised
|
(507,675 | ) | ||
Forfeited/expired
|
- | |||
Outstanding,
March 31, 2009
|
4,346,721 | |||
Granted
|
- | |||
Exercised
|
- | |||
Forfeited/expired
|
- | |||
Outstanding,
March 31, 2010
|
4,346,721 |
NOTE
9 - 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 December 31, 2008, the entire obligation remained
outstanding and began to accrue interest at 8% per annum. The
obligation is due upon demand. During the year ended March 31, 2010,
this obligation was paid in full.
On
December 1, 2009, the Company entered into a professional services agreement
with Blue Kiwi Group Ltd. This agreement provides for the services of Mr Royal
to act as Company Board Member and CEO of the Company. The consideration is
$150,000 per annum for a period of two years. The agreement is attached as
exhibit 10.4.
On
December 9, 2009, the Company issued an Unsecured Promissory Note for $13,942.38
to Gregory Royal being unpaid expense claims for years 2008, 2009 and 2010. The
note is for two (2) years at an interest rate of prime plus one and one half
percent (1.5%) per annum.
On
December 9, 2009, the Company issued an Unsecured Promissory Note for $64,733.76
to Gregory Royal being unpaid portion of salary for calendar year 2009. Mr.
Royal took voluntary partial salary deferral for that calendar period of approx
forty percent (40%) of his salary. The note is for two (2) years at an interest
rate of prime plus one and one half percent (1.5%) per annum.
F -
23
NOTE
10 – REVERSE/FORWARD SPLIT
Effective
May 13, 2009, the Company completed a reverse stock split of our common stock
followed immediately by a forward stock split of our common stock (the
"Reverse/Forward Stock Split"). 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.
NOTE
11 – SUBSEQUENT EVENTS
The
Company adopted ASC 855, and has evaluated all events occurring after March 31,
2010, the date of the most recent balance sheet, for possible adjustment to the
financial statements or disclosures through July 14, 2010, which is the date on
which the financial statements were issued. The Company has concluded
that there are no significant or material transactions to be reported for the
period from April 1, 2010 to July 14, 2010, other than what was reported
above.
F -
24