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Accountants
Approximate
date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration
statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box: □
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
Registration Statement for the same offering. □
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective Registration Statement for the same
offering. □
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective Registration Statement for the same
offering. □
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 definitions of a “large accelerated filer,”“accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check One):
Large
accelerated filer □ Accelerated
filer □
Non-accelerated
filer □ Smaller
reporting company x
(Do not
check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
Title
of each Class
of
Securities
to
be registered
Amount
to be
Registered
Proposed
Maximum
Offering
Price
per
share (1)
Proposed
Maximum
Aggregate
Offering
Price
Amount
of
Registration
Fee
Common
Stock
9,724,395
$0.95
$9,238,175.25
$363.06
(1)
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457.
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
PROSPECTUS
9,724,395
Shares of
common stock of Cistera Networks, Inc. (par value $0.001 per share)
This
prospectus relates to the resale by certain selling stockholders identified in
the section of this prospectus entitled “Selling Stockholders” on page 46 and
their permitted transferees, from time to time of up to 9,724,395 shares of our
common stock under this prospectus, issued as:
-
90,384
shares issued upon the conversion of notes issued by the Company in a
private placement
-
up
to 6,135,235 shares to be issued upon the conversion of notes issued by
the Company in a private placement,
and
-
up
to 3,498,776 shares to be issued upon the exercise of warrants issued by
the Company in a private placement
offering
We are
not offering or selling any of our common stock pursuant to this prospectus. We
will not receive any proceeds from any sales made by the selling stockholders in
this offering but we will pay the expense of this offering. We will, however,
receive the proceeds from the exercise of the warrants and options issued to the
selling stockholders if and when they are exercised.
The
selling stockholders may, but are not obligated to, offer all or part of their
shares for resale from time to time through public or private transactions, at
either prevailing market prices or at privately negotiated prices.
We do not
know when or in what amount a selling stockholder may offer shares for sale,
including whether a selling stockholder will sell any or all of the shares
offered by this Prospectus.
Investing
in our common stock involves risks. See “Risk Factors” beginning on
page 4 to read about factors you should consider before buying shares of our
common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
Our
shares of common stock are traded on the NASD’s Over-the-Counter Bulletin Board
under the symbol “CNWT.”
INFORMATION
CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
THIS PRELIMINARY PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT SEEK OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
i
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this document or any other
document to which we refer you. Neither we nor the selling
stockholders have authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. Neither we nor the selling
stockholders are making an offer to sell these securities in a jurisdiction
where the offer or sale is not permitted. The information contained
in this document is current only as of its date, regardless of the time of
delivery of this prospectus or of any sales of shares of common
stock. Our business, financial condition, results of operations and
prospects may have changed since that date.
This
summary highlights selected information about Cistera Networks and the offering
that is contained in detail throughout this prospectus. You should
read the entire prospectus before making an investment decision, especially the
information presented under the heading “Risk Factors” and the financial
statements and related notes included elsewhere in this prospectus, as well as
the other documents to which we refer you. Except as otherwise
indicated by the context, references in this prospectus to “we,”“us,”“our,” or
the “company” are to the business of Cistera Networks and do not include the
selling stockholders.
Our
Business
We
provide 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 IP telephony 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 CNH Holdings Company.
Our
general business plan is to drive adoption of the Cistera
technology--establishing the Cistera ConvergenceServer as the leading platform
for advanced IP-based applications, through the strategic technology
relationships with the IP Telephony equipment providers—Cisco, Nortel, Sylantro
and Avaya, as well as the leading channel resellers—AT&T, Verizon, Bell
Canada, Comstor, BT, etc. The Company plans to extend our product and
technological leadership in the IP communications industry, and to increase our
market penetration by continuing to expand our sales and distribution channels
and by capitalizing on new market opportunities like two-way radio
interoperability mobile/wireless devices.
Our
Corporate Information
CNH
Holdings Company, a Nevada corporation (the Company) 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.
On May 5,2003, Corvero Networks, Inc., a Florida corporation, was formed by CNH Holdings
Company as a wholly owned subsidiary to acquire the use of certain technology
known as the XBridge Technology. This technology has as its principal
component the Corvero Convergence Platform. The acquisition was
accomplished by entering into a license agreement with XBridge Software, Inc., a
Delaware corporation.
1
The
Company was in the development stage from January 1, 1992 to May 5,2003. Since May 5, 2003, the Company has commenced planned principal
operations and is no longer in the development stage.
On August31, 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. As consideration
for the acquisition, we issued an aggregate of 4,150,000 shares of our common
stock, net of the cancellation of 2,150,000 shares of our common stock held by
XBridge at the time of the acquisition.
Our
corporate headquarters is located at 17304 Preston Road, Suite 975, Dallas,
Texas75252, and our telephone number is (972) 381-4699.
The
Offering
Common
stock offered by us
0
shares
Common
stock offered by the selling stockholders
9,724,395
shares
Common
stock to be outstanding after the offering
18,453,326
shares
2
Summary
Historical Consolidated Financial Information
The
following table provides our summary historical consolidated financial data for
the periods ended and as of the dates indicated. The summary
historical consolidated statement of operations data and summary historical
consolidated balance sheet data presented below for the fiscal years ended March31, 2006, and March 31, 2007, which have been derived from our audited
consolidated financial statements, and have been audited by Robison, Hill &
Co., independent certified public accountants and for the quarters ended
December 31, 2006, and December 31, 2007, which have been derived from our
unaudited consolidated financial statements. The historical results
are not necessarily indicative of the results to be expected in any future
period. You should read the summary consolidated historical financial
data set forth below in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Plan or Operation” and with our financial statements,
including introductory paragraphs, and the related notes appearing elsewhere in
this prospectus.
An
investment in our securities involves a high degree of risk. You
should carefully consider the following risks and the other information set
forth elsewhere in this Registration Statement, including our financial
statements and related notes, before you decide to purchase shares of our common
stock. If any of these risks occur, our business, financial condition
and results of operations could be adversely affected. As a result,
the trading price of our common stock could decline, perhaps significantly, and
you could lose part or all of your investment.
We
expect to incur losses in the future and may not achieve or maintain
profitability.
We have
incurred net losses since we began operations in May 2003. Our net
loss was approximately $4,572,094 for fiscal year 2006, ended March 31, 2006,
and approximately $1,284,443 for fiscal year 2007, ended March 31, 2007. We also
had net losses of approximately $192,061 for the quarter ended December 31, 2006
and $1,177,794 for the quarter ended December 31, 2007. We expect to
make significant investments in our sales and marketing programs and research
and development, resulting in a substantial increase in our operating
expenses. Consequently, we will need to generate significant
additional revenue to achieve and maintain profitability in the
future. We may not be able to generate sufficient revenue from sales
of our products and related professional services to become
profitable. Even if we do achieve profitability, we may not sustain
or increase profitability on a quarterly or annual basis. In addition
to funding operations through increased revenue, we anticipate that we will need
to raise additional capital before reaching profitability. We cannot
predict when we will operate profitably, if at all. If we fail to
achieve or maintain profitability, our stock price may decline.
Because
our products are relatively new, we have a limited operating history with which
you can evaluate our current business model and prospects.
We
launched the first commercial version of our Cistera ConvergenceServer and suite
of IP Phone applications in September 2003, and since then have expanded our
suite of advanced IP Phone applications. We expect our convergence product line
to account for substantially all of our total revenue for the foreseeable
future. We intend to continue to enhance our convergence products
with the release of future versions, upgrades and increased
functionality.
Ř Because
our convergence products are still at a relatively early stage of
commercialization, it is difficult for us to forecast the full level of market
acceptance that our solution will attain. Some of the risks we face
include: information technology departments of potential customers may choose to
create their own IP telephony solutions internally or through third-party,
custom developers;
Ř competitors
may develop products, technologies or capabilities that render our products
obsolete or noncompetitive or that shorten the life cycles of these products.
Although we have had initial success, the market may not continue to accept our
convergence products;
Ř we
may not be able to attract and retain a broad customer base; and
4
Ř we
may not be able to negotiate and maintain favorable strategic
relationships.
Failure
to successfully manage these risks could harm our business and cause our stock
price to fall. Furthermore, to remain competitive, products like ours
typically require frequent updates that add new features. We may not
succeed in creating and licensing updated or new versions of our Convergence
products. A decline in demand for, or in the average price of, our
Convergence products would have a direct negative effect on our business and
could cause our stock price to fall.
We
are currently operating with an interim Chief Financial Officer.
We are
currently operating with an interim Chief Financial Officer. Our
success depends on the ability to recruit and retain experienced management to
run the company. The Chief Financial Officer position will require market level
executive compensation, which is not currently part of our operating run-rate,
and will most likely require an equity position in the company as part of their
compensation package. This may require us to issue additional shares
of stock or options, which could cause current stockholders’ ownership positions
to be diluted.
Our
current business depends on the success of IP telephony product adoption for
major providers like cisco, nortel, sylantro, avaya, etc.
Although
our convergence products are currently designed to interoperate with a number of
equipment providers, we have optimized our technology for Cisco Systems’ IP
telephony products and go to market primarily with Cisco. If Cisco’s
IP telephony products do not continue to gain widespread market acceptance, or
if Cisco loses credibility in the IP telephony market or exits the IP telephony
market, demand for our current products would fall and our operating results and
financial condition may suffer. As we begin commercializing our
products for use with other IP telephony equipment providers like Nortel,
Sylantro and Avaya, we are also dependent upon the adoption of those platforms
to create the demand for our solutions.
If
we cannot meet our future capital requirements, our business will
suffer.
We will
need additional financing to continue operating our business. We need
to raise additional funds in the future through public or private debt or equity
financings in order to:
Ř fund
operating losses;
Ř scale
sales and marketing to address the rapidly growing market for Enterprise VoIP
applications;
Ř take
advantage of opportunities, including more rapid expansion or acquisitions of
complementary businesses or technologies;
Ř hire,
train and retain employees;
Ř develop
new products or professional services; or
Ř respond
to economic and competitive pressures.
5
If our
capital needs are met through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be
reduced. Our future success may be determined in large part by our
ability to obtain additional financing, and we can give no assurance that we
will be successful in obtaining adequate financing on favorable terms, if at
all. If adequate funds are not available or are not available on
acceptable terms, our operating results and financial condition may suffer, and
our stock price may decline.
Our
operating results may fluctuate, which may adversely affect our stock
price.
We are an
emerging company in an emerging market. As such, our quarterly
revenue and results of operations are difficult to predict. We have experienced
fluctuations in revenue and operating results from quarter-to-quarter and
anticipate that these fluctuations will continue until the company reaches
critical mass and the market becomes more stable. These fluctuations
are due to a variety of factors, some of which are outside of our control,
including:
Ř the
fact that we are a relatively young company in an emerging market;
Ř we
derive the bulk of our revenue from sales to large enterprises and are large
deal dependent;
Ř our
ability to attract new customers and retain existing customers;
Ř the
length and variability of our sales cycle, which makes it difficult to forecast
the quarter in which our sales will occur;
Ř the
amount and timing of operating expense relating to the expansion of our business
and operations;
Ř changes
in our pricing policies or our competitors' pricing policies, which can occur
rapidly due to technological innovation;
Ř the
development of new products or product enhancements by us or our competitors, as
well as the adoption of new networking standards;
Ř the
introduction and market acceptance of new technologies and products and our
success in new markets;
Ř actual
events, circumstances, outcomes, and amounts differing from judgments,
assumptions, and estimates used in determining the values of certain assets
(including the amounts of related valuation allowances), liabilities, and other
items reflected in our financial statements;
Ř how
well we execute on our strategy and operating plans; and
Ř changes
in accounting rules, such as recording expenses for employee stock option
grants.
6
As a
consequence, operating results for a particular future period are difficult to
predict, and, therefore, prior results are not necessarily indicative of results
to be expected in future periods. Any of the foregoing factors, or any other
factors discussed elsewhere herein, could have a material adverse affect on our
business, results of operations, and financial condition that could adversely
affect our stock price.
We also
typically realize a significant portion of our revenue in the last few weeks of
a quarter because of our customers' purchasing patterns. As a result,
we are subject to significant variations in license revenue and results of
operations if we incur a delay in a large customer's order. If we
fail to close one or more significant license agreements that we have targeted
to close in a given quarter, this failure could seriously harm our operating
results for that quarter. Failure to meet or exceed the expectation of
securities analysts or investors due to any of these or other factors may cause
our stock price to fall.
Our
revenues for a particular period are difficult to predict, and a shortfall in
revenues may harm our operating results.
As a
result of a variety of factors discussed in this Registration Statement, our
revenues for a particular quarter are difficult to predict. Our net
sales may grow at a slower rate than we anticipate, or may
decline. We plan our operating expense levels based primarily on
forecasted revenue levels. These expenses and the impact of long-term
commitments are relatively fixed in the short term. A shortfall in
revenue could lead to operating results being below expectations as we may not
be able to quickly reduce these fixed expenses in response to short term
business changes.
Disruption
of, or changes in, our distribution model or customer base could harm our sales
and margins.
If we
fail to manage the distribution of our products properly, or if the financial
condition or operations of our VARs weaken, our revenues and gross margins could
be adversely affected. Furthermore, a change in the mix of our
customers between service provider and enterprise, or a change in the mix of
direct and indirect sales, could adversely affect our revenues and gross
margins.
Several
factors could also result in disruption of or changes in our distribution model
or customer base, which could harm our sales and margins, including the
following:
Ř in
some instances, we compete with some of our VARs through our direct sales, which
may lead these channel partners to use other suppliers that do not directly sell
their own products;
Ř some
of our VARs may demand that we absorb a greater share of the risks that their
customers may ask them to bear;
Ř some
of our VARs may have insufficient financial resources and may not be able to
withstand changes in business conditions;
7
Ř as
we develop more solution-oriented products, enterprise customers may demand
rigorous acceptance testing or contracting similar to the requirements of our
service provider customers.
A
shortage of adequate component supply or manufacturing capacity could increase
our costs or cause a delay in our ability to fulfill orders.
Our
solution includes both hardware and software and our growth and ability to meet
customer demands depends in part on our ability to obtain timely deliveries of
parts from our suppliers and contract manufacturers. We may in the
future experience a shortage of certain component parts as a result of our own
manufacturing process issues, manufacturing process issues at our suppliers or
contract manufacturers, capacity problems experienced by our suppliers or
contract manufacturers, or strong demand in the industry for those parts,
especially if the economy grows.
Growth in
the economy is likely to create greater pressures on the Company and our
suppliers to accurately project overall component demand and component demands
within specific product categories and to establish optimal component
levels. If shortages or delays persist, the price of these components
may increase, or the components may not be available at all, and we may also
encounter shortages if we do not accurately anticipate our needs. We
may not be able to secure enough components at reasonable prices or of
acceptable quality to build new products in a timely manner in the quantities or
configurations needed. Accordingly, our revenues could suffer and our
costs could increase until other sources can be developed. There can
be no assurance that we will not encounter these problems in the
future.
The fact
that we do not own our manufacturing facilities could have an adverse impact on
the supply of our products and on operating results. Financial
problems of contract manufacturers on whom we rely, or reservation of
manufacturing capacity by other companies, inside or outside of our industry,
could either limit supply or increase costs.
The
markets in which we compete are intensely competitive, which could adversely
affect our revenue growth.
The
market for IP telephony solutions is rapidly changing and intensely
competitive. We expect competition to intensify as the number of
entrants increases and as other software companies expand into this
marketplace. Our current and potential competitors include other IP
telephony solution vendors, internal information technology departments,
enterprise application integration software vendors and other large software
vendors. Many of our existing and potential competitors have better
brand recognition, longer operating histories, larger customer bases and greater
financial, technical, marketing and other resources than we do. As a
result, they may be able to leverage these advantages to gain market share from
us. In addition, they may be able to respond more effectively than we
can to changing technologies, conditions or customer demands, especially during
economic downturns. Increased competition could significantly reduce
our future revenue and increase our operating losses due to price reductions,
lower gross margins or lost market share, which could harm our business and
cause our stock price to decline.
8
We
depend upon the development of new products and enhancements to existing
products, and if we fail to predict and respond to emerging technological trends
and customers’ changing needs, our operating results and market share may
suffer.
The
markets for our products are characterized by rapidly changing technology,
evolving industry standards and new product introductions. Our
operating results depend on our ability to develop and introduce new products
into existing and emerging markets and to reduce the production costs of
existing products. The process of developing new technology is
complex and uncertain, and if we fail to accurately predict customers’ changing
needs and emerging technological trends, our business could be
harmed. We must commit significant resources to developing new
products before knowing whether our investments will result in products the
market will accept. We may not execute successfully in our product
development endeavors because of errors in product planning or timing, technical
hurdles that we fail to overcome in a timely fashion, or a lack of appropriate
resources. This could result in competitors providing those solutions
before we do, leading to loss of market share, revenues, and
earnings.
The
success of new products is dependent on several factors, including proper new
product definition, component costs, timely completion and introduction of these
products, differentiation of new products from those of our competitors, and
market acceptance of these products. There can be no assurance that
we will successfully identify new product opportunities, develop and bring new
products to market in a timely manner, or achieve market acceptance of our
products or that products and technologies developed by others will not render
our products or technologies obsolete or noncompetitive.
Our
business depends upon the continued growth of IP based voice, video and data
systems.
Our
business and revenue depends on the growth of Internet based systems for
delivery of voice, video and data. To the extent that an economic slowdown and
reduction in capital spending would adversely affect spending on Internet
infrastructure and systems, we could experience material harm to our business,
operating results, and financial condition.
In
addition, because of the rapid introduction of new products and changing
customer requirements related to matters such as cost-effectiveness and
security, we believe that there could be certain performance problems with
Internet communications in the future, which could receive a high degree of
publicity and visibility. As we are a supplier of IP based
convergence products, our business, operating results, and financial condition
may be materially adversely affected, regardless of whether or not these
problems are due to the performance of our own products. Such an
event could also result in a material adverse effect on the market price of our
common stock independent of direct effects on our business.
Product
quality problems could lead to reduced revenues, gross margins, and net
income.
We
produce highly complex products that incorporate leading-edge technology,
including both hardware and software. Software typically contains
bugs that can unexpectedly interfere
9
with
expected operations. There can be no assurance that our testing
programs will be adequate to detect all defects, either ones in individual
products or ones that could affect numerous shipments, which might interfere
with customer satisfaction, reduce sales opportunities, or affect gross
margins. In the past, we have had to replace certain components and
respond to the discovery of defects or bugs in products that we had
shipped. While the cost of replacing products and curing defects has
not been material in the past, there can be no assurance that such replacement
and cure, depending on the product involved, would not have a material
impact. In addition, an inability to cure a product
defect could result in the failure of a product line, causing temporary or
permanent withdrawal of a product from the market which could result in damage
to our reputation, inventory costs, or product reengineering expenses, any of
which could have a material impact on revenues, margins, and net
income.
Our
proprietary rights may prove difficult to enforce.
We
generally rely on patents, copyrights, trademarks, and trade secret laws to
establish and maintain proprietary rights in our technology and
products. While we have process pending on several patents, there can
be no assurance that any of these patents or other proprietary rights will not
be challenged, invalidated, or circumvented or that our rights will in fact
provide competitive advantages to us. Furthermore, many key aspects
of networking technology are governed by industry-wide standards, which are
usable by all market entrants. In addition, there can be no assurance
that patents will be issued from pending applications or that claims allowed on
any patents will be sufficiently broad to protect our technology. In
addition, the laws of some foreign countries may not protect our proprietary
rights to the same extent, as do the laws of the United States. The
outcome of any actions taken in these foreign countries may be different than if
such actions were determined under the laws of the United States. If
we are unable to protect our proprietary rights (including aspects of products
protected other than by patent rights) in a market, we may find ourselves at a
competitive disadvantage to others who need not incur the substantial expense,
time, and effort required to create the innovative products that have enabled us
to be successful.
We
may be found to infringe on intellectual property rights of others.
Third
parties, including customers, may in the future assert claims or initiate
litigation related to exclusive patent, copyright, trademark, and other
intellectual property rights to technologies and related standards that are
relevant to us. These assertions may emerge over time as a result of
our growth and the general increase in the pace of patent claims assertions,
particularly in the United States. Because of the existence of a
large number of patents in the IP field, the secrecy of some pending patents,
and the rapid rate of issuance of new patents, it is not economically practical
or even possible to determine in advance whether a product or any of its
components infringes or will infringe the patent rights of
others. The asserted claims and/or initiated litigation can include
claims against us or our manufacturers, suppliers, or customers, alleging
infringement of their proprietary rights with respect to our existing or future
products or components of those products. Regardless of the merit of
these claims, they can be time-consuming, result in costly litigation and
diversion of technical and management personnel, or require us to develop a
non-infringing technology or enter into license agreements. Where
claims are made by customers, resistance even to unmeritorious claims could
damage customer relationships. There can be no assurance that
licenses will be available on acceptable terms and
10
conditions,
if at all, or that our indemnification by our suppliers will be adequate to
cover our costs if a claim were brought directly against us or our
customers. Furthermore, because of the potential for high court
awards that are not necessarily predictable, it is not unusual to find even
arguably unmeritorious claims settled for significant amounts. If any
infringement or other intellectual property claim made against us by any third
party is successful, or if we fail to develop non-infringing technology or
license the proprietary rights on commercially reasonable terms and conditions,
our business, operating results, and financial condition could be materially and
adversely affected.
We
rely on the availability of third-party licenses.
Although
the Company attempts to limit any use of third-party products requiring
licensing, some of our products are designed to include software or other
intellectual property licensed from third parties. It may be
necessary in the future to seek or renew licenses relating to various aspects of
these products. There can be no assurance that the necessary licenses
would be available on acceptable terms, if at all. The inability to
obtain certain licenses or other rights or to obtain such licenses or rights on
favorable terms, or the need to engage in litigation regarding these matters,
could have a material adverse effect on our business, operating results, and
financial condition. Moreover, the inclusion in our products of
software or other intellectual property licensed from third parties on a
nonexclusive basis could limit our ability to protect our proprietary rights in
our products.
Our
operating results and future prospects could be materially harmed by
uncertainties of regulation of the Internet, Voice-over-IP and IP
telephony
Currently,
few laws or regulations apply directly to VoIP and IP telephony or access over
the Internet. We could be materially adversely affected by regulation
of IP telephony and the Internet in any country where we
operate. Such regulations could include matters such as voice over
the Internet or using IP, encryption technology, and access charges for Internet
service providers. The adoption of regulation of IP telephony and the
Internet could decrease demand for our products and, at the same time, increase
the cost of selling our products, which could have a material adverse effect on
our business, operating results, and financial condition.
Changes
in telecommunications regulation and tariffs could harm our prospects and future
sales.
Changes
in telecommunications requirements in the U.S. or in other countries could
affect the sales of our products. In particular, there may be future
changes in U.S. telecommunications regulations that could slow the expansion of
IP telephony infrastructures and materially adversely affect our business,
operating results, and financial condition. Future changes in tariffs
by regulatory agencies or application of tariff requirements to currently
untariffed services could affect the sales of our products. Changes
in tariffs could have a material adverse effect on our business, operating
results, and financial condition.
11
Failure
to retain and recruit key personnel would harm our ability to meet key
objectives.
Our
success has always depended in large part on our ability to attract and retain
highly skilled technical, executive, managerial, sales, and marketing personnel.
Competition for these personnel is intense in the market
today. Volatility or lack of positive performance in our stock price
may also adversely affect our ability to retain key employees, virtually all of
whom have been granted stock options. The loss of services of any of
our key personnel, the inability to retain and attract qualified personnel in
the future, or delays in hiring required personnel, particularly executive
management, engineering and sales personnel, could make it difficult to meet key
objectives, such as timely and effective product introductions. As mentioned
previously, we are currently operating with an interim Chief Financial
Officer.
If
we do not successfully manage our strategic alliances, we may experience
increased competition or delays in product development.
We have
several strategic alliances with large enterprise organizations and other
companies with whom we work to offer complementary products and
services. If successful, these relationships may be mutually
beneficial and result in industry growth. However, these alliances
carry an element of risk because, in most cases, we must compete in some
business areas with a company with which we have a strategic alliance and, at
the same time, cooperate with that company in other business
areas. Also, if these companies fail to perform or if these
relationships fail to materialize as expected, we could suffer delays in product
development or other operational difficulties.
Our
stock price may continue to be volatile.
Our
common stock has experienced substantial price volatility, particularly as a
result of speculation in the investment community about our strategic position,
financial condition, results of operations, or business. In addition,
the stock market has experienced extreme price and volume fluctuations that have
affected the market price of many technology companies, in particular, and that
have often been unrelated to the operating performance of these
companies. These factors, as well as general economic and political
conditions, may materially adversely affect the market price of our common stock
in the future. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability to retain key
employees, all of whom are compensated in part based on the performance of our
stock price.
Failure
to manage our planned growth could harm our business.
Our
ability to successfully license products, sell professional services and
implement our business plan in a rapidly evolving market requires an effective
plan for managing our future growth. We plan to increase the scope of
our operations at a rapid rate. Future expansion efforts will be
expensive and may strain our managerial and other resources. To
manage future growth effectively, we must maintain and enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations. If we do not manage growth properly, it could harm our
operating results and financial condition and cause our stock price to
fall.
12
A few of
our existing shareholders own a large percentage of our voting stock and will
have a significant influence over matters requiring stockholder approval and
could delay or prevent a change in control.
Upon
completion of the offering, and assuming the conversion of all of outstanding
convertible promissory notes, and the exercise of warrants and options that we
assumed in our acquisition of XBridge, our officers, directors and their
affiliates will beneficially own or control approximately 10.9% of our
outstanding common stock. As a result, our management could have the
ability to exert substantial influence over all matters requiring approval by
our stockholders, including the election and removal of directors and any
proposed merger, consolidation or sale of all or substantially all of our assets
and other corporate transactions. This concentration of control could
be disadvantageous to other stockholders with interests different from those of
our officers, directors and principal stockholders. For example, our
officers, directors and principal stockholders could delay or prevent an
acquisition or merger even if the transaction would benefit other stockholders.
In addition, this significant concentration of share ownership may adversely
affect the trading price for our common stock because investors often perceive
disadvantages in owning stock in companies with controlling
stockholders. Please see “Principal Stockholders” for a more detailed
description of our share ownership.
Illiquidity
of our common stock.
Although
there is a public market for our common stock, trading volume has been
historically low which substantially increases your risk of loss. We
can give no assurance that an active and liquid public market for the shares of
the common stock will develop in the future. Low trading volume in
our common stock could affect your ability to sell the shares of common
stock. The development of a public trading market depends upon not
only the existence of willing buyers and sellers, but also on market
makers. The market bid and asked prices for the shares may be
significantly influenced by decisions of the market makers to buy or sell the
shares for their own account, which may be critical for the establishment and
maintenance of a liquid public market in the shares. Market makers
are not required to maintain a continuous two-sided market and are free to
withdraw firm quotations at any time. Additionally, in order to
maintain our eligibility for quotation on the OTC Bulletin Board, we need to
have at least one registered and active market maker. No assurance
can be given that any market making activities of any additional market makers
will commence or that the activities of current market makers will be
continued.
Sales
of our common stock in the public market may lower our stock price and impair
our ability to raise funds in future offerings.
If our
stockholders sell substantial amounts of our common stock in the public market,
the market price of our common stock could fall. The price of our
common stock could also drop as a result of the exercise of options for common
stock or the perception that such sales or exercise of options could
occur. These factors also could make it more difficult for us to
raise funds through future offerings of our common stock.
13
As of
February 15, 2008, there were 8,508,868 shares of common stock issued and
outstanding, excluding 310,447 shares for which the Company has placed stop
transfer orders. In addition, we have issued convertible notes, which if held to
maturity will convert into 6,135,235 shares of common stock, and options and
warrants representing 5,086,715 shares of common stock are currently
outstanding.
Our
Articles and Bylaws may delay or prevent a potential takeover of
us.
Our
Articles of Incorporation, as amended, and Bylaws, as amended, contain
provisions that may have the effect of delaying, deterring or preventing a
potential takeover of us, even if the takeover is in the best interest of our
stockholders. The Bylaws limit when stockholders may call a special
meeting of stockholders. The Articles also allow the Board of
Directors to fill vacancies, including newly created directorships.
No
Dividends payments.
We have
not paid any dividends on our common stock to date, and have no plans to pay any
dividends on our common stock for the foreseeable future. We can give
no assurance that we will ever pay any dividends in respect of our common
stock.
This
prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can
identify forward-looking statements by terminology such as “may,”“will,”“could,”“expect,”“plan,”“intend,”“anticipate,”“believe,”“estimate,”“predict,”“potential,” or “continue,” or the negative of such terms or other
comparable terminology. These statements are only
predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the “Risk Factors”
section above. These factors may cause our actual results to differ
materially from any forward-looking statement. Readers are urged to
carefully review and consider the various disclosures we make in this prospectus
and in our other reports filed with the Securities and Exchange
Commission.
We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. Our management believes
its assumptions are based upon reasonable data derived from and known about our
business and operations. No assurances are made that our actual
results of operations or the results of our future activities will not differ
materially from these assumptions.
The
Company will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders. The company will, however,
receive proceeds from the exercise of the options and warrants described in this
prospectus, if and when these options and warrants are exercised. We could raise
an additional $1,084,720 if all of the Class A warrants issued in conjunction
with the December 2004 private placement funding were exercised. The
warrants are redeemable by us if the closing bid of our common stock is $3.50
for ten of fifteen consecutive days. The exercise price is $1.30 per
share. Because at that price it would be profitable for the warrant holders to
exercise their warrants rather than to allow the redemption to proceed, we
assume they would choose to exercise. However, there is no assurance that our
stock price will rise to the $3.50 per share redemption trigger price, or that
all of the warrants will be exercised. We could raise an additional
$289,858 if all of the other outstanding warrants for common shares were
exercised. We could raise an additional $168,931 if all of the outstanding
options were exercised. We can give no assurance that any or all of
these warrants or options will ever be exercised.
MARKET
PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 National Association of Securities Dealers,
Inc. (NASD), under the symbol CNWT. The following table sets forth
the range of high and low bid quotations for our common stock during each
calendar quarter during our last two fiscal years, and the quarters ending June30, 2007, September 30, 2007, and December 31, 2007. The figures have
been rounded to the nearest whole cent.
The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions. As
of February 15, 2008, there were 8,508,656 shares of our common stock issued and
outstanding held by approximately
15
576
stockholders of record, excluding 310,447 on which the Company has placed stop
transfer orders.
We have
not paid any cash dividends to date and do not anticipate paying cash dividends
in the foreseeable future. It is the present intention of our
management to utilize all available funds for the development of our
business.
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 has not yet been approved by our
shareholders. We currently have outstanding options to purchase
190,000 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 February 15, 2008:
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
N/A
N/A
N/A
Equity
Compensation Plans not approved by security holders
597,917
$0.67
1,402,083
Total
597,917
$0.67
1,402,083
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. 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 2012. The fair value of these
options was determined to be approximately $1.30 as derived using the intrinsic
valuation methodology.
Under the
provisions of the Plan, on October 1, 2004, the Company granted non-statutory
options for 915,000 shares of common stock, to various employees, including
options to purchase 275,000 share to each of Mr. Derek Downs, our President,
Interim Chief Operating
16
Officer
and a Director, Mr. Greg Royal, our Executive Vice President, Chief Technology
Officer and Director, and Ms. Cynthia Garr, our Interim Chief Financial Officer
Executive Vice President and Director, 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. These options vest in a range from the date of the grant
through four years, and may be exercised at any time after vesting through
October 2012. The fair value of these options was determined to be
approximately $1.10 as derived using the intrinsic valuation
methodology. On April 1, 2007, the options granted to each of Messrs.
Downs and Royal and Ms. Garr were mutually cancelled by the
parties.
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, our President, interim Chief Executive Officer and a
director. 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 $.95.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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 document. In addition to
historical consolidated 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 include those discussed below and elsewhere in this memorandum,
particularly in “Risk Factors.”
Overview
We
provide 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- 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 IP telephony environments across large single-site and
multi-site private voice/data networks. Because our solutions improve
productivity and efficiencies for customers using IP telephony systems, we
believe that our convergence solutions complement the efforts of IP telephony
solution providers to increase the overall return on investment and value
contribution associated with IP telephony systems. This has allowed
us to establish cooperative relationships with IP telephony solution providers,
as well as large VARs and systems integrators focused on delivering IP telephony
systems and services.
Currently,
we offer new customers a robust IP-based applications platform pre-loaded with a
variety of packaged applications (we refer to them as application
engines). We market our software and hardware solutions through a VAR
channel, and in some cases directly to
17
Fortune
500 customers. 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
installations.
Our
objective is to be the leading provider of IP communications application
platforms and advanced IP-based applications for businesses
worldwide. To address our market opportunity, our management team is
focused on a number of short and long-term challenges including: strengthening
and extending our solution offerings; adding new customers and expanding our
sales efforts into new territories; deepening our relationships with our
existing customers, VARs, and SIs; and encouraging the development of
third-party applications on our platform.
In order
to increase our revenues and take advantage of our market opportunity, we will
need to add substantial numbers of customer installations. We plan to reinvest
our earnings for the foreseeable future in the following ways: hiring additional
personnel, particularly in sales and engineering; expanding our domestic and
international selling and marketing activities; increasing our research and
development activities to upgrade and extend our solution offerings and to
develop new solutions and technologies; growing our VAR and systems
implementation channel; adding to our infrastructure to support our growth; and
expanding our operational and financial systems to manage a growing
business.
Fiscal
Year
Our
fiscal year ends on March 31. References to fiscal 2007, for example,
refer to the fiscal year ended March 31, 2007.
Sources
of Revenues
We derive
our revenues from three sources: (1) product revenues, 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. Product revenues accounted for
approximately 75.6 percent of total revenues during fiscal year 2006 and 72.0
percent of total revenues during fiscal year 2007, and 74.0 percent of total
revenues during our third fiscal quarter of 2008. Professional
services revenues accounted for approximately 12.5 percent of total revenues
during fiscal 2006 and 11.8 percent of total revenues during fiscal year 2007,
and 1.2 percent of total revenues during our third fiscal quarter of
2008. Revenues for our support and maintenance services made up
approximately 11.9 percent of total revenues during fiscal 2006 and 16.2 percent
of total revenues in fiscal 2007, and 24.8 percent of total revenues during our
third fiscal quarter of 2008.
The
Company changed its revenue recognition policy in the third fiscal quarter
ending December 31, 2006, to reflect a more conservative accounting
practice.
Product
revenues are recognized once the software and hardware solution has been shipped
according to the customer order, and are 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
18
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 24 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 and support revenues primarily consists of expenses
related to depreciation expense associated with computer equipment, allocated
overhead and amortization expense associated with capitalized software, and
employee-related costs associated with professional services and support and
maintenance. To date, the expense associated with capitalized
software has not been material to our cost of revenues. We allocate
overhead such as rent and occupancy charges, employee benefit costs and
depreciation expense to all departments based on headcount. As such,
general overhead expenses are reflected in each cost of revenue and operating
expense category. Cost of professional services and other revenues
consists primarily of employee-related costs associated with these services and
allocated overhead. The cost associated with providing professional
services is significantly higher as a percentage of revenue than for our
convergence solutions due to the labor costs associated with providing
professional services.
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. For example, we plan to increase the number of employees who
are fully dedicated to supporting and enabling the reseller and implementation
partner channel.
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
19
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 IP telephony 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 33.7 percent of total revenues for fiscal 2006 and only 17.4
percent of total revenues in fiscal 2007. For the quarters ended
December 31, 2006 and December 31, 2007, marketing and sales expenses accounted
for approximately 18.9 percent and 55.4 percent of total revenues, respectively.
In fiscal 2007 the Company reduced spending by leveraging some of the marketing
programs funded by large technology and VAR partners. It is expected
that the Company will increase spending in this area, as the market is beginning
to show signs of momentum. 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. Since the
beginning of fiscal 2005, our sales and marketing costs as a percentage of total
expenses have increased as a result of increased market coverage in the U.S.,
Canada and the U.K.
As our
revenues increase, we plan to continue to invest heavily in marketing and sales
by increasing the number of national account sales and channel management
personnel in order to add new customers and increase penetration within our
existing customer base, expanding our domestic and international selling and
marketing activities, building brand awareness and sponsoring additional
marketing events. We expect that in the future, marketing and sales expenses
will increase in absolute dollars and continue to be our largest
cost.
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. We expect
that in the future, general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional professional fees and
insurance costs related to the growth of our business and our
operations.
We expect
that general and administrative expenses associated with executive compensation
will increase in the future. Although the current executive
team has foregone full salary payment during the initial stages of the business,
during 2007 the team began to receive full compensation. In addition,
we believe over the next fiscal year that the compensation packages required to
attract the senior executives the Company requires to execute against its
business plan will increase our total general and administrative
expenses.
In May
2003, we entered into an exclusive licensing agreement with XBridge
Software. This agreement provided us with the exclusive worldwide
rights to market, sell and deliver the convergence solutions based upon the
XBridge technology. We also retained XBridge to provide additional
development and engineering resources necessary to build, maintain and service
the convergence solutions.
As a
continuation of a restructuring plan we implemented in August 2004, we entered
into discussions to acquire XBridge and obtain ownership of the intellectual
property upon which our products are based. The XBridge Software acquisition was
consummated on May 27, 2005.
Critical
Accounting Policies
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. 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.
Revenue
Recognition
In an
effort to establish an accounting policy that provides shareholders with the
most accurate representation of the company's performance, the company has
instated a new policy that only declares revenue from software, hardware and
services once fully installed and implemented. This method of revenue reporting
will not reflect all orders received and shipped during the reporting period,
but only those orders completely installed within the reporting
period. Prior to the adoption of this policy, the Company recognized
revenues when orders for our products and solutions were received and
shipped.
In future
earnings reporting, the Company will continue to provide the "booked" revenue
figures -- the amount based upon purchase orders (POs) received from customers
and delivered to resellers -- during the reporting period in addition to the new
recognized revenue reporting policy.
The
Company recognizes revenue according to 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).
21
Our total
deferred revenue for products and services was $1,047,001 as of December 31,2007. 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 Deferred
Commissions
Prior to July 1, 2007, the Company’s
policy was to defer commission payments to our direct and channel sales force
for the professional services and support and maintenance portions of our
contracts. Commissions would be deferred and amortized to sales
expense over the life of the related contracts, which typically last 12 to 36
months, since the payments, which are paid the month after the service is
delivered to the customer, are a direct and incremental cost of the revenue
arrangements, and are recoverable through the future revenue streams under the
customer support and maintenance contracts. Effective July 1, 2007,
the Company’s policy is to charge these commission payments to expense in the
period in which they are earned by the direct and channel sales force. Prior to
July 1, 2007, the Company did not incur or pay commissions to the direct and
channel sales force; therefore, this change in policy will have no effect on the
results reported in previous periods.
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 2006, Ended March 31, 2006, and Fiscal 2007, Ended March31, 2007.
Our
revenues have grown from $1,587,900 in fiscal 2006 to $1,932,838 in fiscal 2007,
a growth year-over-year of 21.7 percent on a recognized revenue
basis. The Company instituted a new revenue recognition policy in the
third quarter of fiscal 2007, causing the last half of the fiscal year to be
reported differently than the first half of the year. Had the Company
continued to report on a non-GAAP “booked” revenue basis for the entire fiscal
year 2007, the revenue would have been reported as $2,169,903, or 36.7 percent
on a non-GAAP “booked” revenue basis.
Our gross
profit during the fiscal year 2006 was $1,251,351 or approximately 78.8 percent
of revenues, and the operating loss for the same period was
$2,324,552. Gross profit for fiscal year 2007 was $1,619,566 or
approximately 83.8 percent of revenues, and our operating loss for the same
period was $1,200,405.
During
the fiscal year 2007, we continued to incur substantial costs and operating
expenses related to the expansion of our business. We added support
services personnel to focus on adding new customers and increasing penetration
within our existing customer base,
22
professional
services personnel to support our implementation and support services, and
developers to broaden and enhance our convergence solutions.
Overview of Results of
Operations for the Quarter Ended December 31, 2006, and the Quarter
Ended December 31, 2007.
Our
revenues have grown from $601,871 in the quarter ended December 31, 2006 to
$618,761 in the quarter ended December 31, 2007, a growth year-over-year of 2.8
percent on a recognized revenue basis. The Company instituted a new
revenue recognition policy in the third quarter of fiscal 2007, causing the last
half of the fiscal year to be reported differently than the first half of the
year.
Our gross
profit during the quarter ended December 31, 2006 was $509,312 or approximately
84.6 percent of revenues, and the operating loss for the same period was
$179,638. Gross profit for the quarter ended December 31, 2007 was
$520,260 or approximately 84.1 percent of revenues, and our operating loss for
the same period was $945,710.
During
the quarter ended December 31, 2007, we continued to incur substantial costs and
operating expenses related to the expansion of our business. We added
support services personnel to focus on adding new customers and increasing
penetration within our existing customer base, professional services personnel
to support our implementation and support services, and developers to broaden
and enhance our convergence solutions.
Liquidity
and Capital Resources
At March31, 2007, we had cash, cash equivalents and short-term marketable securities of
$534,871, as compared to $60,990 at March 31, 2006. Accounts
receivable at March 31, 2007 were $314,178, as compared to $198,319 at March 31,2006. Deferred revenue was $550,147 as of March 31, 2007, as compared
to $229,159 at March 31, 2006.
From our
start of operations in May 2003 through December 31, 2007, 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 fourth
quarter of fiscal 2007.
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. We currently have a bank line of
credit with JPMorgan Chase Bank in the amount of $50,000. In
addition, we have a factoring agreement with Allied Capital Partners, L.P. tied
to accounts receivable with a credit line of up to $1,500,000.
The
Company recently completed a private placement to support current and future
growth requirements. Through this offering the Company raised an
aggregate amount of
23
$3,498,776
through the issuance of Senior Unsecured Convertible Promissory Notes, and
warrants to purchase 3,498,776 shares of our common stock. Of the
$3,498,776 in Notes, $2,815,000 n principal amount of Notes were issued for
cash, and $683,776 in principal amount of Notes were issued in connection with
the cancellation of an equal amount of the Company's outstanding
obligation.
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. To the extent that existing cash and securities and cash
from operations are insufficient to fund our future activities, we will need to
raise additional funds through public or private equity or debt financing.
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. If the Company cannot obtain needed
funds, it may be forced to curtail or cease its activities.
Description
Of Property
Our
corporate offices are located at 17304 Preston Road, Suite 975, Dallas,
Texas. We lease this office space, which contains approximately 4,264
square feet, from CMD Realty Investment Fund, L.P. Our rent under
this lease is approximately $7,626 per month and the lease expires November 30,2009.
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 principle elements of a potential settlement. We are
currently in the process of negotiating definitive settlement
agreements.
We
provide 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 objective is to be the leading provider of IP
communications platforms and advanced application engines for businesses
worldwide. 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 IP telephony environments across large single-site and
multi-site private voice/data networks. Because our solutions
improve customer responsiveness, employee productivity and efficiencies for
customers using IP telephony systems, we believe that our convergence solutions
complement the efforts of IP telephony solution providers such as Cisco, Nortel,
Sylantro and Avaya to increase the overall return on investment and value
contribution associated with IP telephony systems. This has allowed
us to establish cooperative relationships with IP telephony solution providers,
as well as large value added resellers (VARs) and systems integrators (SIs)
focused on delivering IP telephony systems and services.
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 referenceable 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 paying
customers. From January 2005 to the present time, we increased
expansion efforts into Canada and Europe. Our revenues grew from
$1,322,675 in fiscal 2005 to $1,932,838 in fiscal 2007 and were $618,761 for the
third fiscal quarter of 2008 and were $2,192,330 for the nine months ended
December 31, 2007.
We cannot
be certain that our revenues will continue to grow or that we will achieve
profitability in the future. We cannot accurately predict our future
growth rate, if any, or the ultimate size of our market. Our ability to increase
revenues and achieve profitability depends on a number of factors outside of our
control, including the extent to which:
Ţ
our
solutions are able to gain market acceptance, particularly as IP telephony
increases penetration in the mainstream
market;
Ţ
we
are able to acquire and retain customers on a cost-effective
basis;
Ţ
we
are able to establish strategic relationships with IP telephony platform
and services providers;
Ţ
we
are able to successfully identify, develop and market enhanced
applications for the mainstream
market;
Ţ
IP
telephony platform and service providers develop or bundle competing
applications; and
25
Ţ
we
become subject to increased regulatory
burdens.
Currently,
we offer new customers a variety of packaged applications, and platform tools
for customized solutions. We market our software and hardware
solutions through a VAR channel, and directly in some cases to Fortune 500
customers. 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
installations.
We plan
to reinvest our earnings for the foreseeable future in the following ways:
hiring additional personnel, particularly in sales and engineering; expanding
our domestic and international selling and marketing activities; increasing our
research and development activities to upgrade and extend our solution offerings
and to develop new solutions and technologies; growing our VAR and systems
integration channel; adding to our infrastructure to support our growth; and
expanding our operational and financial systems to manage a growing
business.
Key
Terms and Definitions
Ţ
Enterprise Voice is
defined as the combination of Enterprise Telephony and Enterprise VoIP
Gateways.
Ţ
Enterprise Telephony is
defined as the combination of Enterprise IP Telephony and traditional
telephony (PBX/KTS).
Ţ
Enterprise IP Telephony
is defined as the combination of LAN Telephony, Converged Telephony, and
IP Phones.
Ţ
Enterprise VoIP Gateway
is defined as a Layer 3 network device which provides the interconnection
of customer premise equipment (CPE)-based voice and data traffic across a
WAN network or the PSTN, also refereed to as trunks. This device is
typically a modular or standalone router specially equipped with voice DSP
resources.
Ţ
LAN Telephony (IP-Only)
is defined as those ports and systems which provide Enterprise Voice
services over a LAN whereby both call control and voice traffic traverse a
packet network, in most cases IP running over Ethernet. The use of a
traditional PBX or KTS is not required. In most cases the three
fundamental elements to this network architecture include a server running
call control software, Ethernet switches, and IP
Phones.
Ţ
Converged Telephony
(TDM/IP) is defined as those lines and systems which provide voice
services whereby voice traffic traverses Time Division Multiplex (TDM)
lines but call control is packet based. In most cases this
enables a traditional Enterprise Voice network to migrate its
infrastructure to IP incrementally with the prime advantage of maintaining
prior capital investment in PBXs and traditional phones. In most cases
call control resides on a server, connected to a LAN, running call control
software which provides call control to a PBX. In this case,
the end-points remain TDM but the call control is IP. Also, other form
factors of this segment
26
may not
include traditional phone systems, but an integrated standalone device which
integrates the functions of TDM and IP at a systems level. These standalone
solutions are targeted to smaller deployments as found at branch offices or
small offices.
Ţ
IP Phone is defined as a
packet based telephone that has a Layer 3 IP address and a Layer 2 network
connection (in most cases Ethernet or Voice over Ethernet). The functions
of an IP Phone mirror that of a traditional phone. Technically, an IP
Phone transmits voice traffic by first taking the Voice Payload and adding
an RTP header, then a UDP header, then an IP header and finally an
Ethernet header per frame. An IP Phone is an IP appliance, which has been
optimized for voice applications. Given that it is more than a traditional
telephone, other network services may be available to the IP Phone such as
Internet browsing or other network services. An IP Phone can be a hard
phone, soft phone, or wireless
device.
Industry
Background
The term
"IP telephony" 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. IP telephony connects across combinations of PCs, Web-based
telephones, and phones connected via public telephone lines to remote voice
gateways. Because information traveling through an IP-based network travels in
discrete packets, it does not need to rely on a continuously available switched
circuit as does information traveling in the analogue format used in traditional
telephony. Consequently, IP-based services are very bandwidth and
cost-efficient.
Users of
IP telephony typically can save money because IP telephony operates more
efficiently than ordinary plain old telephone service (POTS) and because it
currently avoids most of the tariffs and tolls applicable when using POTS,
especially with respect to international telephone service. IP-based
voice conversations require less than 10% of the bandwidth of
POTS. This efficiency of bandwidth results from two factors: First,
compression techniques, such as G.723.1, a standard IP compression technique,
compresses a standard POTS transmission resulting in an overall bandwidth
reduction generally in the range of 6-to-1. Second, POTS requires
full duplex—a simultaneous transmission in both directions—to support a
telephone conversation. Tying up bandwidth in this fashion is
wasteful because in conversations, typically only one person is speaking at a
time. Voice-over-IP (VoIP) products have the ability to sense the
silence and cease transmitting when one party is quiet. This
technique almost halves the required bandwidth of a typical telephone
conversation. As a result, IP telephony commonly consumes as little
as one-twelfth the bandwidth of POTS to transmit conversations. In
addition, IP telephony provides carriers with the ability to lower costs by
consolidating both voice and data in one network instead of necessitating the
two separate networks required for traditional POTS and data.
VoIP
technologies convert digitized voice into data packets that are encapsulated in
Internet protocol, thus allowing IP Phone calls, faxes and voice traffic to be
relayed over corporate intranets or across the Internet. As a result,
VoIP presents an opportunity for exciting new uses for IP-based phone systems,
such as: IP multicast conferencing and telephony distance learning applications,
phone directories and customer service monitoring and playback of calls via IP,
and “voice web browsing” where the caller can interact with a web page by
speaking
27
commands. The
ability to access enterprise data and applications through a device such as a
web-browser enabled IP Phone has presented an opportunity to position the IP
Phone as a peer to the personal computer in many work environments - especially
where PC's are not appropriate user interfaces for employees. Apart
from the economies provided by moving a firm’s communications onto one network,
it is IP convergence, the uniting of voice, video and data that has provided
many companies with a compelling reason to replace legacy phone systems with IP
telephony.
Market
Highlights:
·
Total
IP phone annual shipments are expected to grow from 10 million units in
2006 to 164 million units in 2010 (Still less than 5% of all communication
devices sold) (According to research firm,
In-Sat)
·
Enterprise
converged mobile device (SmartPhone) shipments were 7.3 million in 2005,
and are projected to reach 63 million units worldwide by 2010 (According
to research firm, IDC)
·
Computer-Telephony
Integration (CTI) was $5 Billion in 2005, and projected to be $12 Billion
by 2010 (Telecommunication Industry Association - North
America)
·
$7.5
Billion in revenue is expected to be reached by 2010 for the Land Mobile
Radio market (LMR) (Venture Development Corporation – North
America)
Limitations
of Existing IP Telephony Solutions
Existing
IP telephony solutions have been criticized for lacking the broad set of
features, or applications, such as voicemail, call transfer, and three-way
calling, that traditional PBX phone systems have developed over the past
century. As an application development company for the IP telephony
market, we bridge the feature/function gap currently present in many major IP
telephony platforms like those provided by Cisco, Avaya, Nortel, Siemens and
others. We believe that, just as happened with POTS, application
providers will flourish alongside the equipment providers as the IP telephony
market develops and matures.
The
Opportunity for Convergence of Voice, Video and Data
IP
telephony refers to the technology used in transmitting voice over a network
using open, standards-based IP. Our Convergence IP telephony
solutions leverage a single network infrastructure for the transmission of data,
voice, and video traffic to deliver high-quality voice and fully integrated
communications and enable enterprises to realize the business benefits of a
converged network. These benefits include increased productivity,
business flexibility, and reduced operational costs.
With the
mainstream adoption of enterprise IP communications, businesses are now
embracing the operational benefits of convergence at an accelerated
pace. While the infrastructure benefits of IP telephony are well
documented, the user-level benefits are only now starting to
emerge. Today, businesses deploying IP telephony are looking for
benefits that
28
extend
beyond VoIP into ways to integrate existing business data into the telephony
environment.
Collaboration
tools like video conferencing and multicasting can be delivered to every
desktop, enabling up-to-the minute information sharing between employees,
partners, suppliers and customers - improving the company's ability to respond
and collaborate at a fraction of the cost of other point solutions.
Unified
views of customer data also become a reality with the true integration of voice,
video and data. Combined with the use of intelligent communication
devices like IP-based phones, critical information and important messages can
travel to the employees to enable them to work smarter and faster.
Finally,
a converged network is more capable of supporting a mobile
workforce. By offering remote access to a corporate network and its
information, geographically dispersed locations or traveling employees can
access the tools they need to perform and interact with customers, thereby
increasing per capita efficiency.
The
movement towards incorporating voice, video and data into a single network is
referred to as "convergence". IP telephony now allows the telephone
to serve up data in a manner similar to a PC or any other web-enabled
device.
Before
the introduction of our Cistera ConvergenceServer, most IP data-based
applications offered via IP Phones were limited by the phone's own ability to
navigate and/or manipulate data in a meaningful way. The Cistera
ConvergenceServer, coupled with XML, other standard protocols and an IP
telephony environment, allows an enterprise to achieve unique client-application
integration through its IP Phones. This integration is accomplished
in the network as a peer with other user interface devices such as PCs, PDAs,
wireless phones and point-of-sale devices, among others. By coupling
an XML browser with voice services, we are able to combine voice, video and
powerful data query applications and deliver them through IP communications
devices.
Our
Strategy
Our
objective is to be the leading provider of IP communications Application
Platforms and advanced application engines for businesses worldwide. To achieve
this objective, we are pursuing the following strategies:
Extend Our Product and Technological
Leadership. We believe our solution supports more communications and data
format standards across the broadest range of communications systems than most
other competing solutions, allowing us to provide improved interoperability
within a customer’s existing network infrastructure. We intend to
build upon our IP communications technology and improve our solution's
functionality and ease of use for rapidly designing, deploying and maintaining
our communications solutions in a customer’s environment. We may also
seek to enhance our products through licensing or acquiring complementary
technologies or businesses. We believe that we are also unique in
delivering a full suite of application engines to an IP communications end point
and plan to extend our application engine portfolio.
29
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 domestic distribution by
adding channel sales personnel. We also plan to continue to expand
our indirect distribution through alliances with additional system integrators,
VARs and OEMs. We intend to launch our international distribution by
developing additional relationships with international distributors and creating
strategic alliances with international system integrators. We
anticipate that our primary means of addressing the market will be through our
indirect sales force.
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. While we
encourage our indirect channel partners to build out professional services
practices to support the Cistera solutions, we will continue to extend our
professional services expertise in applying emerging standards, especially XML
standards, to create additional solutions that capitalize on our
technologies. By offering a full range of professional services, we
believe we can strengthen our existing customer and VAR relationships and foster
new relationships, creating opportunities to sell additional
products. Our current expectation is for our VAR channel to handle
the standard installation and configuration requirements, thereby enabling us to
focus on the more advanced customer services requirements and to scale rapidly
to meet the anticipated demand for our convergence 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 IP telephony application environments.
Ţ
Cistera ConvergenceServer™
(CCS™) the foundation of a Cistera IPT solution is available in six
form factors—the CCS 1030, the CCS 1530, the CCS 2510, the CCS 2520, the
CCS 5500 and the CCS 7500 are designed to support “small”,
“medium”, “large” and “service provider” performance requirements for
specific customer locations. The servers are rack-mountable,
open standards-based hardware
systems.
Ţ
Cistera ZoneController™ (CZC™)
enables IP phone 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 1.8 Software
Platform. The Cistera 1.8 software platform is a
component-based architecture that enables enhanced scalability and management of
advanced IP Phone applications. This platform has built in media
management engines that enable third-party application developers to leverage
our pre-built components—a voice recording engine, a
30
broadcast
engine, a content streaming engine, a directory engine, a two-way radio
interoperability engine, a pin code and authentication engine, a ruleset engine
and a grouping engine—without having to create each component from the ground
up. Our authorized developers can use our published APIs to invoke
many of these services and therefore focus their development efforts on the
workflow components critical for specific industries. This platform
also provides configurable administration and management tools.
Cistera Advanced IP Phone
Applications. We believe that we have developed the broadest
suite of advanced IP Phone applications available in the market
today. These applications include:
Ţ
QuickRecord™ - an IP
telephony on-demand voice recorder and media management service designed
to allow phone users to record important or malicious calls when needed
and play them back from the phone. The entire call is recorded
regardless of when the user presses the record button during the
call.
Ţ
CallCenterRecord™ - an IP
telephony continuous voice recorder and media management service with
remote monitoring and quality reporting features. It supports
standard storage and archival
systems.
Ţ
RapidBroadcast™ - an IP
telephony messaging and broadcast system. Instantly transmit text or voice
messages or schedule pre-recorded broadcasts to a defined group or to an
entire organization through IP Phones or external
speakers.
Ţ
VirtualDirectory™ - a centralized
directory system that allows telephone users, both internal and external
to traverse corporate information quickly without time consuming
tree-based systems. Callers can use their touchtone or voice to request
information or to be directed to the appropriate extension. It
supports LDAP integration into popular contact management
systems.
Ţ
ContentStreamer™ - an IP
telephony streaming solution that delivers audio, graphics, music, and
data streaming capabilities to the IP Phone network. It enables
targeted music/messaging for on-hold callers as well. Cistera’s solution
uses Real Simple Syndication (RSS) to deliver targeted messaging that is
delivered as it is updated.
Ţ
LandMobileRadioConnect™ - 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 IP Telephony.
Recognizing the need to integrate, Cistera Networks has created the
LandMobileRadio (LMR) Connect Application Engine—bringing two-way radios
into the IPT network.
Ţ
QuickConnect™ - Cistera’s
QuickConnect is the premier engine for the delivery of event alerting and
notification for cellular and analog phones. As part of the
Event
31
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.
Ţ
MasterBellScheduler™ - 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), education IT administrators can control all elements of
school bell ringing, from short days, K-12 and High School to emergencies,
the IT administrator can tailor a schedule unique to their
environment.
Ţ
RuleSetManager™ - enables
control of behavior of IP Phone applications, IP Phones and other IP
devices from a central administration point. It allows quick
configuration to apply rule-based call management for an IPT
system.
Ţ
GroupManager™ - enables the
organization and management of designated groups of IP Phone users from a
central administration point. It allows the system
administrator to assign rights and services based upon group
association.
Our
convergence solutions utilize several key technologies to provide integration
into IP communications environments, including XML, JTAPI, J2EE, SIP, H.323, and
others.
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, while supporting the proprietary codecs for the
specific areas of interoperability. An example of this would be in
the way our products currently support Cisco’s proprietary SCCP
protocol.
We have
designed our solution to provide support for many of the emerging industry XML
standards with minimal impact to existing business applications. We
believe this non-intrusive architecture is a key in enabling integration of IP
based voice, video and data; and will enable content to be delivered to a wide
array of devices, like IP Phones, wireless phones, PDAs, etc.
Product
Development
We
released our first convergence products in September 2003 at Cisco’s Innovation
Through Convergence Expo in California. Using the technology
developed for our Cistera ConvergenceServer, we recently introduced additional
convergence products, extending the breadth and depth of our solution
footprint. We continue to enhance our convergence products with
particular emphasis on providing improved interoperability, increased
functionality, enhanced security and scalability and simplified ease of
use. Our product development efforts currently focus on enhancing our
existing products and technologies and on developing
32
additional
products to extend our position in the growing voice, video and data convergence
market.
On May 5,2003, we retained the services of XBridge Software to perform a substantial
portion of our product development. XBridge continued to perform
these services for us until May 27, 2005, when we acquired XBridge.
Competition
We
compete with a broad number of companies that extract revenues from the
telecommunications capital budgets of small and medium business (SMB) and large
companies (Enterprises). Currently, 100% of our revenues are derived
from equipment purchased as part of an enterprise's telecommunications
infrastructure and aligned CTI applications. In 2005, this was a
$5.7B market with about 20% specifically associated with IP
communications.
We face
competitors in three primary categories: Traditional TDM application vendors
transitioning to IP; PBX vendors extending functionality to core systems; and,
alternative application platforms focused on “custom” application development
capabilities.
Our
principle competitors are companies that have for a number of years manufactured
telephony application products for traditional TDM based phone systems and are
currently transitioning their products to support VoIP phone systems otherwise
known as IP Telephony. Examples of companies that we compete with
include Verint, Interactive Intelligence and Nice Systems in the Quality
Assurance and Compliance category; Raytheon, Alcatel-Lucent and Motorola in the
Event Alerting and Notification category.
While we
believe that the Company’s business plan provides competitive advantage over
competitors, many of our existing and potential competitors have stronger brand
recognition, longer operating histories, larger customer bases and greater
financial resources. As a result, they may be able to respond more
effectively to changing technologies, conditions or customer demands, especially
during market downturns.
The
following table sets forth the name, age, and position of each executive officer
and director of the Company:
Name
Age
Position With Company
Derek
P. Downs
39
President,
Interim Chief Executive Officer and Director
Gregory
T. Royal
42
Executive
Vice-President/Chief Technology Officer and Director
Cynthia
A. Garr
47
Interim
Chief Financial Officer, Executive Vice-President of Corporate Development
and Director
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 appointed by our Board of Directors at the board meeting
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 a term of employment for our executive officers, all of
whom currently serve on an at will basis.
Derek P. Downs served as
President since May 31, 2004 and became our Interim CEO for the Company in June
2005. Mr. Downs has been a member of the Board of Directors since October 1,2004. Prior to becoming President and Interim CEO, Mr. Downs served
as the Company’s Vice President of Sales Marketing and Business
Development. From January 2003 to May 2003, Mr. Downs held the
same position with XBridge Software, Inc. From December 2000 to
September 2002, Mr. Downs held senior executive roles in marketing, alliances,
product marketing, and business development at i2 Technologies (NASDAQ:ITWO), a
$1 billion supply chain software company. Before joining i2
Technologies, he served from December 1999 to December 2000 as VP of Business
Development and Strategic Alliances for BSI Consulting, a midsized technology
strategy firm. From May 1995 to December 1999, Mr. Downs held the
position of Director of Strategic Alliances at Baan Company, a $1+ billion
enterprise software company. Mr. Downs graduated from the University
of Eastern New Mexico in 1990 with a BBA degree in Marketing and a BBA degree in
Business Administration.
Gregory T. Royal has served as
Executive Vice President and Chief Technology Officer, and as a member of the
Board of Directors since May 2003. Mr. Royal is the original founder
of XBridge Software, and the inventor of the ConvergenceServer
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 graduated from Victoria University in 1986 and
holds an MBA from Rushmore University.
34
Cynthia A.
Garr has served
as Interim CFO and Executive Vice President of Corporate Development since June
of 2004. She has been a member of the Board of Directors since May
2003. She is one of the founders of XBridge Software, and has served
as its President and as a Director from its inception in 1999 to the
present. She was also Director of Sales for Identify Software, a
leader in application problem resolution software, from January 2003 to June
2004. From January 2000 to August 2001, Ms Garr served as a Regional
Sales Manager for Mercury Interactive, the leading provider of enterprise
testing and performance management solutions. Ms. Garr was
President of U.S. Operations and Executive Director of Qronus Interactive, a
provider of automated testing solutions software, which was ultimately acquired
by Mercury Interactive from November 1997 to January 2000.
Board
Composition and Committees
Our Board
of Directors currently consists of three members, Gregory T. Royal, Cynthia A.
Garr, and Derek P. Downs. 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. 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 Officers
None of
our directors or officers or their respective associates or affiliates is
indebted to us.
35
Family
Relationships
There are
no family relationships among our directors or executive officers.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Exchange Act, requires the Company's officers, directors and
persons who beneficially own more than ten percent of the Common Stock to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent beneficial owners also are required by rules promulgated by the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
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 officers who received in excess of
$100,000 in compensation during these periods.
SUMMARY
COMPENSATION TABLE
Nonqualified
Year
Non-Equity
Deferred
All
Other
Ended
Stock
Option
Incentive
Plan
Compensation
Compen-
Name
and
March
Salary
Bonus
Awards
Awards
Compensation
Earnings
sation
Total
Principal
Position
31
($)
($)
($)
($)
($)
($)
($)
($)
Derek
P. Downs
2007
$127,500
-
-
-
-
-
-
$127,000
President/Interim
CEO/Director
2006
$125,000
-
$369,396(1)
-
-
-
-
$494,396
Cynthia
A. Garr
2007
$10,417
-
-
-
-
-
-
$10,417
Interim
CFO/ Executive Vice President/Director
2006
$125,000
-
-
-
-
-
-
$125,000
Greg
T. Royal
2007
$130,500
-
-
-
-
-
$130,500
Executive
V.P./Director
2006
$130,000
-
-
-
-
-
-
$130,000
(1)
Represents
the grant of 123,132 restricted shares of our common stock on January 3,2005. This grant is still subject to the approval by our
shareholders of our long term incentive
plan.
Except as
described below under “Employment Contracts,” 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 2006 and 2007.
On
January 1, 2005, we entered into an employment agreement with Mr. Downs pursuant
to which we agreed to employ him as President at an annual salary of
$125,000. Although the initial term of the agreement has expired, if
we terminate our employment relationship with Mr. Downs agreement (a) without
cause, or (b) for any reason within twelve months of a change in control; or Mr.
Downs terminates the agreement with just cause, then Mr. Downs shall be entitled
to receive two times his then current salary, payable in equal installments over
the course of the immediately following eighteen months.
On
October 1, 2004, Cistera Networks Canada, one of our subsidiaries, entered into
an employment agreement with Mr. Royal pursuant to which Cistera Networks Canada
has agreed to employ him as its President at an annual salary of
$130,000. Although the initial term of the agreement has expired, if
Cistera Networks Canada terminates its employment relationship with
37
Mr. Royal
(a) without cause, or (b) for any reason within twelve months of a change in
control; or Mr. Royal terminates the agreement with just cause, then Mr. Royal
shall be entitled to receive two times his then current salary, payable in equal
installments over the course of the immediately following eighteen
months.
The
employment agreements for both Mr. Downs and Mr. Royal were terminated by the
parties, effective March 31, 2007. An employment agreement for Ms.
Garr, with terms similar to that of Mr. Downs, was terminated by the parties,
effective April 1, 2006.
Outstanding
Equity Awards at Fiscal Year End
Outstanding
Equity Awards at Fiscal Year-End
Option
Awards
Name
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
Number
of Securities Underlying Unexercised Unearned Options
(#)
Option
Exercise Price
($)
Option
Expiration Date
Derek
Downs
0
0
275,000(3)
1.30
2/6/2009
Cynthia
Garr
41,831(1)
0
275,000(3)0
0.46
4/1/2009
Gregory
Royal
271,174(2)
0
275,000(3)0
0.46
5/3/2009
(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 2.71174 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 were subject to shareholder approval of the plan and were
terminated by the parties, effective April 1, 2007. On April 1,2007, the options granted to each of Messrs. Downs and Royal and Ms. Garr
were mutually cancelled by the
parties.
None of
our executive officers exercised options to purchase our common stock during
fiscal 2006 or 2007.
Director
Compensation
We do not
pay our directors a fee for attending scheduled and special meetings of our
board of directors. We intend to reimburse each director for
reasonable travel expenses related to such director’s attendance at board of
directors and committee meetings. In the future we might have to
offer some compensation to attract the caliber of independent board members the
Company is seeking.
Effective
April 5, 2007, the Company sold an aggregate of $3,498,776 in principal amount
of Senior Unsecured Convertible Promissory Notes, and issued warrants to
purchase 3,498,776 shares of the Company’s common stock. Of the $3,498,776 in
Notes, $2,815,000 in principal amount of Notes were issued for cash, and
$683,776 in principal amount of Notes were 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 table
below sets forth, as of February 15, 2008, certain information with respect to
the beneficial ownership of our common stock by (i) each of our directors and
executive officers, (ii) each person known to us to be the beneficial owner of
five percent or more of the outstanding shares of our common stock, and (iii)
all of our officers and directors as a group. Unless otherwise
indicated, the person or entity listed in the table is the beneficial owner of,
and has sole voting and investment power with respect to, the shares
indicated.
(1) The
business address for each Ms. Garr and Messrs. Downs and Royal is 17304 Preston
Road, Suite 975, Dallas, Texas75252.
(2) 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.
(3) 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.
(4) Includes
189,822 shares subject to warrants that are presently exercisable.
(5) Consists
of warrants to purchases shares of common stock exercisable within 60
days.
The
following description is a summary of the material terms of our capital
stock. This summary is subject to and qualified in its entirety by
our Articles of Incorporation, as amended, and Bylaws as amended, and by the
applicable provisions of Nevada law.
Our
authorized capital stock consists of 50,000,000 shares of common stock, having a
par value of $0.001 per share and 1,000,000 shares of preferred stock, having a
par value of $0.01 per share.
Common
Stock
Each
outstanding share of common stock entitles the holder thereof to one vote per
share on all matters. Our Articles of Incorporation do not permit
cumulative voting for the election of directors, which means that the holders of
more than 50 percent of such outstanding shares voting for the election of
directors can elect all of the directors to be elected, if they so choose; in
such event, the holders of the remaining shares will not be able to elect any of
our directors. Stockholders do not have preemptive rights to purchase
shares in any future issuance of our common stock.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and
does not anticipate declaring a dividend in the foreseeable
future. In the event of liquidation, dissolution or winding up of the
affairs of the company, holders are entitled to receive, ratably, the net assets
available to stockholders after payment of all creditors and of any liquidation
preference to the holders of the company’s preferred shares.
All of
the issued and outstanding shares of our common stock are duly authorized,
validly issued, fully paid, and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
Preferred
Stock
The board
of directors may, without further action of our common stockholders, issue
shares of preferred stock in one or more series and fix or alter the rights and
preferences thereof, including the voting rights, redemption provisions
(including sinking fund provisions), dividend rights, dividend rates,
liquidation preferences, conversion rights and any other rights, preferences,
privileges and restrictions of any wholly un-issued series of preferred
stock. The
40
board of
directors may, without further action by our common stockholders, issue shares
of preferred stock that it has designated.
The
rights of holders of common stock will be subject to, and may be adversely
affected by, the rights of holders of preferred stock. While the
issuance of preferred stock provides flexibility in connection with additional
financing, possible acquisitions and other corporate purposes, future issuances
may have the effect of delaying, deferring or preventing the change of control
in us without further action by the stockholders and may discourage bids for the
common stock at a premium over the market price. The board of
directors may, without stockholder approval, provide for the issuance of
preferred stock that could have voting, conversion or other rights superior to
the rights of holders of common stock.
The
following table sets forth the names of the selling stockholders and for each
selling stockholder, the number of shares of common stock beneficially owned as
of February 15, 2008, the number of shares being registered, and the amount and
percentage (if one percent or more) of shares of common stock to be owned by
each selling stockholder after the offering is complete. All
information with respect to share ownership has been furnished by the selling
stockholders. The shares being offered are being registered to permit
public secondary trading of the shares and each selling stockholder may offer
all or part of the shares owned for resale from time to time. A
selling stockholder is under no obligation, however, to sell any shares
immediately pursuant to this prospectus, nor is a selling stockholder obligated
to sell all or any portion of the shares at any time. Therefore, no
estimate can be given as to the number of shares of common stock that will be
sold pursuant to this prospectus or the number of shares that will be owned by
the selling stockholders upon termination of the offering made hereby.
Selling
Stockholder
Shares
of Common Stock Issued
Shares
of Common Stock to be issued upon the conversion of Notes
Shares
of Common Stock to be issued upon the exercise of warrants and/or
options
Total
Shares of Common Stock to be registered
Shares
of Common Stock held after the offering is complete
Percentage
ownership (if one percent or more) after the offering is
complete
Alex
Groswird, Sr.
30,000*
60,738
50,995(1)
96,733
45,000
Andrew
Sazama
98,233(2)
877
84,125(3)
149,386
33,849
Derek
P. Downs(4)
125,199(5)
53,197
30,000
83,197
2,067
Gregory
T. Royal(4)
1,124,985*
125,507
341,953(6)
196,286
1,396,159
7.6%
Jacob
Angrest
37,662*
53,953
60,000(7)
83,953
67,662
Jim
Miller
164,939*
16,845
9,500
26,345
164,939
Katherine
B. Lane or Richard Lane
82,771*
64,772
90,650(8)
100,772
137,421
Linda
Slate
12,554*
17,732
20,000(9)
27,732
22,554
Michael
K. Winslow
18,830*
17,929
25,000(10)
27,929
33,830
41
Ralph
C. Wintrode Trustee of Ralph C. Wintrode Trust UDT
Christopher
& Suzie Cole Trustees for Cole Living Trust
0
44,537
25,000
69,537
0
Craig
F. & Elizabeth J. Gross
0
35,614
20,000
55,614
0
Craig
Millet
0
44,340
25,000
69,340
0
Daniel
Andresen
0
17,956
10,000
27,956
0
Daryl
W. & Amal M. Alsop
0
27,630
15,000
42,630
0
David
Hadley
0
13,452
7,500
20,952
0
David
Lively
0
53,515
30,000
83,515
0
David
R. Morgan
0
177,754
100,000
277,754
0
David
R. Moyer Trustee of David R. Moyer DDS PC PSP
0
44,487
25,000
69,487
0
Dawn
Correll
0
37,446
20,000
57,446
0
Dennis
Johnson
0
26,728
15,000
41,728
0
Dieter-Heinz
Kjora
0
26,947
15,000
41,947
0
Donald
R.Craighead
0
17,791
10,000
27,791
0
Edward
T. Cox, Trustee, The Cox Family Trust
0
127,953
70,000
197,953
0
Eric
Anderson
0
17,713
10,000
27,713
0
Extenprise,
Inc., Arvind Pandy
0
126,586
70,619
197,205
0
F.
Patricia Cullen
0
26,982
15,000
41,982
0
Ferdynand
J. Zdyb
0
26,686
15,000
41,686
0
Gary
& Sally Sportsman
0
88,719
50,000
138,719
0
Gary
Moyer Trustee of Subtrust #1 2003 Moyer Family Trust
0
8,897
5,000
13,897
0
Gregory
Peay
0
47,106
25,000
72,106
0
Gregory
W.Oliver
0
67,399
42,842
110,241
0
Gunnar
& Stephanie Gooding Trustees for Gooding Living Trust
0
44,911
25,000
69,911
0
Harold
Zagunis
0
17,713
10,000
27,713
0
Heinz,
Ilse & Sonja Gietz Trustees
0
26,947
15,000
41,947
0
James
& Gretchen Flickinger Trustees for Flickinger Trust
0
27,006
15,000
42,006
0
James
Mattson
0
72,016
40,000
112,016
0
42
James
Rury IRA, TD Ameritrade Custodian
0
27,364
15,000
42,364
0
Jayna
C. Whiddon
55,000*
119,840
12,583
187,423
0
Jeffrey
& Cezanne Kone
0
58,658
33,000
91,658
0
Jeffrey
Reeves
0
44,438
25,000
69,438
0
Joel
& Elizabeth Warkentin Trustees for Warkentin Family
Trust
0
46,685
25,000
71,685
0
John
V. Reitz
0
26,692
15,000
41,692
0
Joseph
& Melissa Moisant
0
26,858
15,000
41,858
0
Joseph
Quilici
0
27,006
15,000
42,006
0
Kid
Gro-Co LLC, Darrel Whithead
0
27,802
15,000
42,802
0
Kim
R. Salzwedel
0
17,755
10,000
27,755
0
Lars
Olsen
0
26,905
15,000
41,905
0
Mark
Rock
0
26,911
15,000
41,911
0
Martin
Bentley
0
26,976
15,000
41,976
0
Marty
& Michele Adler Trustees for Adler Family Trust
0
27,106
15,000
42,106
0
Michael
Duffy
0
28,017
15,000
43,017
0
Michael
Moore
0
26,864
15,000
41,864
0
Minh
Chi Vu
0
17,929
10,000
27,929
0
Ngoc-Loan
Khoa Nguyen
0
17,929
10,000
27,929
0
Nicholas
Chacos II
0
26,970
15,000
41,970
0
Nick
Denneen
0
89,626
50,000
139,626
0
Paul
Chacon
0
8,875
5,000
13,875
0
Paul
Colombe
0
35,527
20,000
55,527
0
Paul
Gustafson
0
35,819
20,000
55,819
0
Paul
H. Schaaf Trustee for Schaaf Family Trust
0
25,599
15,000
40,599
0
Paulson
Investment Company, Glen S. Davis
0
44,547
25,000
69,547
0
Quang
Huy & Jacqueline T. Vu
0
26,722
15,000
41,722
0
Regan
J. Patrick
0
17,881
10,000
27,881
0
Richard
D. Walker
0
35,582
20,000
55,582
0
Roaring
Fork Capital SBIC LP, Michael Machens
0
1,773,237
1,000,000
2,773,237
0
Robert
& Victoria M. Logan
0
54,608
30,000
84,608
0
Robert
L. Swenson
0
26,947
15,000
41,947
0
Robert
Metzger II
0
13,364
7,500
20,864
0
Robert
W. Loewen Trustee for Loewen Family Trust
0
90,356
50,000
140,356
0
Samuel
H. Moyer Trustee for Armstrong Marketing, Inc. PSP
0
44,487
25,000
69,487
0
Seegler
Ittyvirah
0
134,647
75,933
210,580
0
Sidney
Levine
0
44,547
25,000
69,547
0
Stanley
Worthley IRA
0
28,370
15,000
43,370
0
Stanton
Camp
0
27,190
15,000
42,190
0
Stephen
& Barbara Kleeman Trustees for Kleeman Family Trust
0
177,912
100,000
277,912
0
Thomas
E. Szulist
0
26,645
15,000
41,645
0
Todd
Van de Putte
0
29,799
16,000
45,799
0
43
Wall
Street Capital Partners LP, Jeffrey Kone
0
266,159
150,000
416,159
0
Wayne
M. Hamersly
0
26,610
15,000
41,610
0
William
O. Hagerty
0
27,894
15,000
42,894
0
Total
2,149,672
6,223,384
4,116,600
9,724,395
2,599,716
* Represents
shares not being registered under this Registration Statement
(1)
Consists
of warrants exercisable for 35,995 shares being registered under this
Registration Statement and warrants exercisable for an additional
15,000.
(2)
All
but 7,849 of these shares are being registered under this Registration
Statement.
(3)
Consists
of warrants exercisable for 58,125 shares being registered under this
Registration Statement and warrants exercisable for an additional
26,000.
(4)
Messrs.
Downs and Royal are officers and directors of the Company. Mr.
Downs serves as President and Interim Chief Executive Officer and
Director, Mr. Royal serves as Executive Vice-President/Chief Technology
Officer.
(5)
All
but 2,067 of these shares are being registered under this Registration
Statement.
(6)
Consists
of warrants exercisable for 70,779 shares being registered under this
Registration Statement and warrants exercisable for an additional
271,174.
(7)
Consists
of warrants exercisable for 30,000 shares being registered under this
Registration Statement and warrants exercisable for an additional
30,000.
(8)
Consists
of warrants exercisable for 36,000 shares being registered under this
Registration Statement and warrants exercisable for an additional
54,650.
(9)
Consists
of warrants exercisable for 10,000 shares being registered under this
Registration Statement and warrants exercisable for an additional
10,000.
(10)
Consists
of warrants exercisable for 10,000 shares being registered under this
Registration Statement and warrants exercisable for an additional
15,000.
(11)
Consists
of warrants exercisable for 37,500 shares being registered under this
Registration Statement and warrants exercisable for an additional
50,000.
(12)
All
but 6,000 of these shares are being registered under this Registration
Statement.
(13)
All
but 88,149 of these shares are being registered under this Registration
Statement.
(14)
Consists
of warrants exercisable for 56,325 shares being registered under this
Registration Statement and warrants exercisable for an additional
81,000.
(15)
Consists
of warrants exercisable for 37,500 shares being registered under this
Registration Statement and warrants exercisable for an additional
50,000.
(16)
Consists
of warrants exercisable for 75,000 shares being registered under this
Registration Statement and warrants exercisable for an additional
50,000.
The
9,724,395 shares being registered, were acquired or may be acquired by the
selling shareholders (a) from the Company through a private placement of an
aggregate of $6,225,619 in principal amount of Senior Unsecured Convertible
Promissory Notes (the "Notes"), and issued warrants to purchase 3,498,776 shares
of our common stock, par value $0.001 per share (the "Warrants"). All
of the principal amount of Notes were issued for cash..
When
issued the Notes accrued interest at the rate of eight percent per annum,
compounded quarterly on each March 31, June 30, September 30 and December 31
that the Notes are outstanding (each, an Interest Compounding
Date). The outstanding principal on the Notes 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 occurs.
44
The
outstanding principal and accrued interest on the Notes are convertible into
shares of our common stock at a conversion rate equal to $0.75 per
share. The Notes may be converted, in whole or in part, at the option
of the 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 Notes.
The
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
Warrants, the Company may, upon thirty days prior written notice, redeem the
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.
Upon
completion of the offering, and assuming the conversion of all of outstanding
convertible promissory notes included in the table under “Selling
Stockholders”), and the exercise of warrants and options that we assumed in our
acquisition of XBridge, we will have 18,142,879 shares of common stock
outstanding. A current stockholder who is an “affiliate” of the
company, defined in Rule 144 as a person who directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the company, will be required to comply with the resale
limitations of Rule 144.
Purchasers
of the shares offered by the selling stockholders, other than affiliates, may
resell their shares immediately. Sales by affiliates will be subject
to the volume and other limitations of Rule 144, including certain restrictions
regarding the manner of sale, notice requirements, and the availability of
current public information about the company. The volume limitations
generally permit an affiliate to sell, within any three month period, a number
of shares that does not exceed the greater of one percent of the outstanding
shares of common stock or the average weekly trading volume during the four
calendar weeks preceding his sale. A person who ceases to be an
affiliate at least three months before the sale of restricted securities
beneficially owned for at least two years may sell the restricted securities
under Rule 144 without regard to any of the Rule 144 limitations.
The
9,724,395 shares being offered by the selling stockholders may be sold or
distributed from time to time by the selling stockholders (the term “selling
stockholder” includes, for purposes of this section, donees, pledgees,
transferees or other successors-in-interest selling shares received after the
date of this prospectus from a named selling stockholder as a gift, pledge,
partnership distribution or other non-sale related transfer) directly to one or
more purchasers or through brokers, dealers, or underwriters who may act solely
as agents or may acquire shares as principals. Such sales or
distributions may be made at prevailing market prices, at prices related to such
prevailing market prices, or at variable prices negotiated between the sellers
and purchasers that may vary. The distribution of the shares may be
effected in one or more of the following methods:
45
·
ordinary
brokerage transactions, including long or short
sales,
·
transactions
involving cross or block trades, or otherwise on the OTC Bulletin
Board,
·
purchases
by brokers, dealers, agents or underwriters as principals and subsequent
resales by the purchasers for their own accounts pursuant to this
prospectus,
·
sales
“at the market” to, or through, market makers or into an existing market
for the shares,
·
sales
not involving market makers or established trading markets, including
direct sales to purchasers or sales effected through
agents,
·
transactions
involving puts, calls and other options, swaps, or other derivatives,
whether exchange-listed or otherwise,
or
·
transactions
involving any combination of the foregoing or any other legally available
means.
In
addition, a selling stockholder may enter into hedging transactions with one or
more broker-dealers who may engage in short sales of shares in the course of
hedging the positions they assume with the selling stockholder. A
selling stockholder may also enter into options or other transactions with one
or more broker-dealers requiring the delivery of the shares by such
broker-dealers with the possibility that such shares may be resold thereafter
pursuant to this prospectus.
A broker,
dealer, underwriter, or agent participating in the distribution of the shares
may receive compensation in the form of discounts, concessions, or commissions
from the selling stockholders and/or purchasers of the shares for whom such
person may act as an agent, to whom such person may sell as principal, or both;
and such compensation as to a particular person may be in excess of customary
commissions. The selling stockholders and any broker-dealers acting
in connection with the sale of the shares being registered may be deemed to be
underwriters within the meaning of Section 2(11) of the Securities Act of 1933,
as amended, or the Securities Act, and any profit realized by them on the resale
of shares as principals may be deemed underwriting compensation under the
Securities Act. We have agreed to indemnify each selling stockholder against
certain liabilities, including liabilities arising under the Securities Act. We
know of no existing arrangements between any of the selling stockholders and any
other stockholder, broker, dealer, underwriter, or agent relating to the sale or
distribution of the shares, nor can we presently estimate the amount, if any, of
such compensation.
Because
selling stockholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, the selling stockholders will be subject to
the prospectus delivery requirements of the Securities Act.
Although
we will receive no proceeds from the sale of shares pursuant to this prospectus,
we have agreed to bear the costs and expenses of the registration of the shares,
including legal and accounting fees, and such costs and expenses are estimated
to be approximately $91,000.
We have
informed the selling stockholders that while they are engaged in a distribution
of the shares included in this prospectus they will be required to comply with
certain anti-manipulative rules contained in Regulation M under the Exchange
Act. With certain exceptions, Regulation M prohibits any selling
stockholder, any affiliated purchaser, and any broker-dealer
46
or other
person who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security that is the
subject of the distribution until the entire distribution is
complete. Regulation M also prohibits any bids or purchases made in
order to stabilize the price of a security in connection with the distribution
of that security.
Upon our
being notified by a selling stockholder that any material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange, distribution or secondary distribution or a purchase
by a broker or dealer, a supplement to this prospectus will be filed, if
required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the
name of each such selling stockholder and of the participating broker-dealer(s),
(ii) the number of shares involved, (iii) the price at which such shares were
sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus and (vi) other facts material to the
transaction. In addition, upon our being notified by a selling
stockholder that a donee, pledgee, transferee or other successor-in-interest
intends to sell more than 500 shares, a supplement to this prospectus will be
filed.
There
have been no changes in and/or disagreements with Robison, Hill & Co.,
independent certified public accountants, on accounting and financial disclosure
matters.
Certain
legal matters in this offering, including the legality of the common stock
offered pursuant to this prospectus, will be passed upon for the Company and the
selling shareholders by Colbert Johnston LLP.
The
consolidated financial statements of the Company included in this prospectus
have been audited for fiscal years ending March 31, 2006 and March 31, 2007 by
Robison, Hill & Co., independent certified public accountants, as stated in
the opinion, which has been rendered upon the authority of said firm as experts
in accounting and auditing.
On
September 26, 2007, we dismissed Robison, Hill & Co. as our independent
auditors. The reports of Robison, Hill & Co. on our financial statements for
the years ended March 31, 2006 and 2007 did not contain an adverse opinion or a
disclaimer of opinion, and were not modified as to uncertainty, audit scope or
accounting principles, other than the “going concern” disclaimer contained in
therein. The decision to change our independent registered public
accountant was authorized and approved by our board of directors. On
September 26, 2007, we engaged Farmer, Fuqua & Huff, P.C., as our new
independent registered public accountant.
The
Company’s Bylaws provide that the Company has the power to indemnify its
directors and officers to the fullest extent provided by Nevada
law. Pursuant to Nevada law, a corporation may indemnify its officers
and directors, provided that such person actions:
(a) did
not constitute a breach of his fiduciary duties as a director or officer; and
did not involve intentional misconduct, fraud or a knowing violation of law;
and
(b) were
conducted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful
The
effect of these provisions is potentially to indemnify our directors and
officers from all costs and expenses of liability incurred by them in connection
with any action, suit or proceeding in which they are involved by reason of
their affiliation with the Company.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our officers, directors, or persons controlling the Company under
the foregoing provisions, the Company has been informed that in the opinion of
the Securities Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
No
“Expert” or “Counsel” as defined by Item 509 of Regulation S-K promulgated
pursuant to the Securities Act, whose services were used in the preparation of
this Form S-1, was hired on a contingent basis or will receive a direct or
indirect interest in the company.
We have filed a
registration statement on Form S-1 with the Securities and Exchange Commission
under the Securities Act of 1933 with respect to the shares of common stock
offered in this offering prospectus. This prospectus, which is
a part of the registration statement, does not contain all of the information
set forth in the registration statement, or the exhibits that are part of the
registration statement. You should refer to the registration
statement and its exhibits for additional information that is not contained in
this prospectus. Whenever we make reference in this prospectus to any
of our contracts, agreements or other documents, you should refer to the
exhibits attached to the registration statement for copies of the actual
contract, agreement or other document.
We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and we are required to file reports, any proxy statements and
other information with the Securities and Exchange Commission. You
can read our Securities and Exchange Commission files, including this
registration statement, at the Securities and Exchange Commission’s web site at
http://www.sec.gov. You may also read and copy any documents we file
with the Securities and Exchange Commission at its public reference facility at
450 Fifth
48
Street,
N.W., Washington, D.C. 20549. You may also obtain copies
of the documents at prescribed rates by writing to the Public Reference Section
of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference facilities.
We have audited the accompanying
consolidated balance sheets of Cistera Networks, Inc. & Subsidiary as of
March 31, 2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years ended March 31, 2007 and
2006. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these consolidated 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. as of March 31, 2007 and 2006,
and the results of its operations and its cash flows for the years
ended March 31, 2007 and 2006 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
raise 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.
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
On May 27, 2005, the Company issued
4,150,000 shares of common stock to the shareholders of XBridge Software, Inc.
and cancelled 2,150,000 shares then held by XBridge, in connection with the
Company’s merger with XBridge Software, Inc. In the merger, the
Company acquired all of the assets and liabilities of XBridge Software, valued
at a net of $782,245, and intellectual property valued at
$2,717,755. Goodwill of $2,134,821 was also acquired and subsequently
expensed.
On December 31, 2005, the Company
issued 946,392 shares of stock due to the conversion of note principal and
interest from private placement fund holders. The amount of principal
represented by these shares was $859,000. The amount of accrued
interest represented by these shares was $87,392.
On March 31, 2006, the Company issued
67,785 shares of stock due to the conversion of note principal and interest from
private placement fund holders. The amount of principal represented
by these shares was $57,000. The amount of accrued interest
represented by these shares was $10,785.
On July 1, 2006, the Company issued
70,893 shares of stock in connection with the exercise of warrants issued in the
merger of the Company with Xbridge Software, Inc. at $.46 per
share. The warrants were exercised for notes payable totaling
$32,594.
On August 31, 2006, the Company issued
4,034 shares of stock due to the conversion of note principal and interest from
private placement fund holders. The amount of principal represented
by these shares was $1,000. The amount of accrued interest
represented by these shares was $3,034 due to the conversion of a portion of the
note at an earlier date. These notes converted at $1.00 per
share.
On December 13, 2006, the Company
issued 17,931 shares of stock upon conversion of certain outstanding notes
issued in the 2004 private placement. The amount of principal
represented by these shares was $15,000. The amount of accrued
interest represented by these shares was $2,931. These notes were
converted at $1.00 per share.
The
accompanying notes are an integral part of these financial
statements.
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States, 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 its liabilities, the reported
revenues and expenses, and the balance sheet classifications used.
Organization and Basis of
Presentation
CNH Holdings Company, Inc., a Nevada
corporation (the Company), 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 which it occupied at June 14, 1998, as if none of
the actions which had occurred from that time to the date of rescission had
transpired.
On May 5, 2003, Corvero Networks, Inc.,
a Florida corporation, was formed by CNH Holdings Company as a wholly-owned
subsidiary to acquire the use of certain technology known as the XBridge
Technology. This technology has as its principal component the
Corvero Convergence Platform. The acquisition was accomplished by
entering into a license agreement with XBridge Software, Inc., a Delaware
corporation. See Note 9, for detailed description of
acquisition.
F - 8
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 1 - NATURE OF
OPERATIONS AND GOING CONCERN (continued)
On August 31, 2004, CNH Holdings
Company absorbed its wholly-owned subsidiary Corvero Networks, and began doing
business as Cistera Networks. All Corvero products
adopted the Cistera name.
The Company was in the development
stage from January 1, 1992 to May 5, 2003. Since May 5, 2003, the
Company has commenced planned principal operations and is no longer in the
development stage.
On May 27, 2005, the Company acquired
XBridge Software, Inc. through a merger between XBridge and a Company
subsidiary. XBridge will continue to be a wholly-owned subsidiary of
the Company.
Cistera Networks, Inc. provides
IP-based advanced application platforms and engines for the enterprise VoIP
communications market. The Cistera Convergence Server (TM) (CCS) uses
the Cistera Enterprise Platform for IPT to provide Unified Application
Administration as well as Fault and Performance Management for enterprise IPT
Application deployments. The Company provides next-generation
solutions for numerous vertical markets including education, finance, healthcare
and government. The Company maximizes IP phone capabilities - taking
the communications platform.
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES
This summary of accounting policies for
Cistera Networks, Inc. is presented to assist in understanding the Company's
consolidated financial statements. The accounting policies conform to
generally accepted accounting principles and have been consistently applied in
the preparation of the consolidated financial statements.
Principles of
Consolidation
The consolidated financial statements
for the years ended March 31, 2007 and 2006 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.
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.
F - 9
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Use of
Estimates
The financial statements are prepared
in conformity with accounting principles generally accepted in the United States
of America. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and statement of operations for the year then
ended. Actual results may differ from these
estimates. Estimates are used when accounting for allowance for bad
debts, collectibility of accounts receivable, amounts due to service providers,
depreciation and litigation contingencies, among others.
Cash and Cash
Equivalents
For purposes of the statement of cash
flows, 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.
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.
Revenue
Recognition
The Company’s revenue is comprised of
three main sources: (1) product sales, (2) professional services and (3) support
and maintenance contracts. The Company recognizes revenue according
to 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). Product sales revenues are recognized
when a valid purchase order has been received from a client and the product has
been shipped and installed at the client site. Product revenue is
fixed and determinable at the time of shipment as clients are engaged with the
Company in a two-tier distribution model with no refund/return
rights. Professional services revenue and costs are recognized when
an installation project has been completed and client sign-off
received. Professional services revenue is fixed and determinable
only at the time of client approval as typical client install projects involve
several vendors working against shifting deadlines to install multiple
solutions. Support and maintenance contracts are executed on an
annual basis and the revenue from these contracts is recognized on a monthly
basis as the support fees are earned.
F - 10
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Inventory
Inventory
consists of equipment that has been shipped but not yet installed and equipment
that has been returned to the Company because the customer has quit the project
or there were problems with the hardware. The machines are
refurbished and used in future sales. The inventory assets are
recorded at cost.
Depreciation and
Amortization
Fixed assets 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. Fixed assets consisted of the following at March 31, 2007 and
2006:
Maintenance and repairs are charged to
operations; betterments are capitalized. The cost of property sold or
otherwise disposed of and the accumulated depreciation thereon are eliminated
from the property and related accumulated depreciation accounts, and any
resulting gain or loss is credited or charged to income.
Total depreciation expense for the
years ended March 31, 2007 and 2006 was $36,181 and $46,106,
respectively.
Intangible
Assets
The Company has adopted the Financial
Accounting Standards Board SFAS No., 142, “Goodwill and Other
Intangible Assets.” SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill for impairment
at least annually. In addition, SFAS 142 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 SFAS
142.
F - 11
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Intangible Assets consisted of the
following at March 31, 2007 and 2006:
March
31,
Intangible
Asset
2007
2006
Amortization
Period
Intellectual
Property
$
2,717,755
$
2,717,755
10
Years
Software
Development
366,040
366,040
4
Years
Less
accumulated amortization
(788,802
)
(477,091
)
Total
$
2,294,993
$
2,606,704
Software development costs include all
development costs incurred after the Company’s software became “technologically
feasible”. Prior to the software reaching that stage, all development
costs were expensed as incurred. Once the software was developed to
the point of being ready for sale, the Company began amortizing the costs over
the term of the license agreement it entered into which was four
years. The software development costs were acquired in the
acquisition of XBridge Software, Inc.
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
years ended March 31, 2007 and 2006 was $311,710 and $265,492,
respectively.
The estimated amortization for the next
five years is as follows:
2008
$
271,776
2009
271,776
2010
271,776
2011
271,776
2012
271,776
Total
$
1,358,880
F - 12
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Earnings (Loss) per
Share
Basic earnings (loss) per share has
been computed by dividing the earnings for the period applicable to the common
stockholders by the weighted average number of common shares outstanding during
the years.
Diluted loss per common share for the
years ended March 31, 2007 and 2006 is not presented as it would be
anti-dilutive. At March 31, 2007, the total number of potentially
dilutive common stock equivalents was 6,428,197. At March 31, 2006,
the total number of potentially dilutive common stock equivalents was
2,907,019.
Reclassification
Certain reclassifications have been
made in the 2006 financial statements to conform with the 2007
presentation.
Deferred
Income
Deferred income represents contracts
for certain revenue to be received in the future and come 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 on a monthly basis as the support fees are
earned.
Research and
Development
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.
Stock
Options
Effective April 1, 2006, the company
adopted the provisions of SFAS No. 123(R). SFAS No. 123(R) requires
employee equity awards to be accounted for under the fair value method.
Accordingly, share-based compensation is measured at grant date, based on the
fair value of the award. Prior to April 1, 2006, the company accounted for
awards granted to employees under its equity incentive plans under the intrinsic
value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related
interpretations, and provided the required pro forma disclosures prescribed by
SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS
No. 123), as amended. No stock options were granted to employees
during the years ended March 31, 2007 or 2006 and accordingly, no compensation
expense was recognized under APB No. 25 for the years ended March 31, 2007 or
2006. In addition, no compensation expense is required to be recognized under
provisions of SFAS No. 123(R) with respect to employees.
F - 13
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Under the modified prospective method
of adoption for SFAS No. 123(R), the compensation cost recognized by the
company beginning on April 1, 2006 includes (a) compensation cost for all
equity incentive awards granted prior to, but not yet vested as of April 1,2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost for all
equity incentive awards granted subsequent to April 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). The company uses the straight-line attribution method to
recognize share-based compensation costs over the service period of the award.
Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon
vesting or forfeiture of restricted stock units, deferred tax assets for options
and restricted stock units with multiple vesting dates are eliminated for each
vesting period on a first-in, first-out basis as if each vesting period was a
separate award. To calculate the excess tax benefits available for use in
offsetting future tax shortfalls as of the date of implementation, the company
followed the alternative transition method discussed in FASB Staff Position
No. 123(R)-3.
Fair Value of Financial
Instruments
The carrying value of the Company's
financial instruments, including accounts payable and accrued liabilities at
March 31, 2007 and 2006 approximates their fair values due to the short-term
nature of these financial instruments.
NOTE 3 - CONCENTRATION OF
RISK
As of March 31, 2007, the Company
receives approximately 31% of its gross revenues from its top three
re-sellers. This represents a decrease in concentration of business
from the 48% reported for the year ended March 31, 2006. The loss of
these re-sellers would not adversely impact the business of the
Company.
NOTE 4 - INCOME
TAXES
As of March 31, 2007, the Company had a
net operating loss carry forward for income tax reporting purposes of
approximately $6,935,000 that may be offset against future taxable income
through 2027. Current tax laws limit the amount of loss available to
be offset against future taxable income when a substantial change in ownership
occurs. Therefore, the amount available to offset future taxable
income may be limited. Due to the uncertainty with respect to
ultimate realization, the Company has established a valuation allowance for all
deferred income tax assets.
The Company evaluates its valuation
allowance requirements based on projected future operations. When
circumstances change and causes a change in management's judgment about the
recoverability of deferred tax assets, the impact of the change on the valuation
is reflected in current income.
NOTE 5 - LEASE
COMMITMENT
The Company currently leases
approximately 4,264 square feet of office space at 17304 Preston Road, Suite
975, Dallas, Texas from Memshalah Realty. The lease payments are
approximately $7,626 per month and the lease expires November 30,2009. This office space is used as the Corporate
Headquarters.
The minimum future lease payments under
this lease for the next five years are:
On October 20, 2004, the Company
entered into an agreement with Dell Financial Services to lease five laptop
computers and a laser printer. The lease is for a period of
thirty-six months with a payment of approximately $369 per month. The
Company has an end of lease purchase option of $1. The Company has
capitalized a total of $10,205 under capital leases for the computers and
printer in the financial statements. The assets are depreciated over
their related lease terms. Depreciation of assets under capital
leases is included in depreciation expense for the years ended March 31, 2007
and 2006.
F - 15
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 6 - CAPITAL LEASE
(continued)
The minimum future lease payments under
this capital lease for the next five years are:
On April 29, 2005, the Company issued
173,511 shares of common stock for accrued liabilities of $482,364.
On May 27, 2005, the Company issued
4,150,000 shares of common stock to the shareholders of XBridge Software, Inc.
and cancelled 2,150,000 shares then held by XBridge, in connection with the
Company’s merger with XBridge Software, Inc. In the merger, the
Company acquired all of the assets and liabilities of XBridge Software, valued
at a net of $782,245, and intellectual property valued at
$2,717,755. Goodwill of $2,134,821 was also acquired and subsequently
expensed.
On June 24, 2005, the Company issued
100,000 shares of common stock from the exercise of outstanding stock options at
$2 per share.
Effective September 21, 2005, the
Company’s authorized shares were increased from 10 million shares to 50 million
shares.
On December 31, 2005, the Company
issued 311,600 shares of stock in connection with the exercise of warrants
issued in the 2004 private placement of notes and warrants at $1.30 per
share.
On December 31, 2005, the Company
issued 946,392 shares of stock upon conversion of certain outstanding notes
issued in the 2004 private placement. The amount of principal
represented by these shares was $859,000. The amount of accrued
interest represented by these shares was $87,392. These notes
converted at $1.00 per share.
On March 31, 2006, the Company issued
67,785 shares of stock upon conversion of certain outstanding notes issued in
the 2004 private placement. The amount of principal represented by
these shares was $57,000. The amount of accrued interest represented
by these shares was $10,785. These notes converted at $1.00 per
share.
F - 16
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 7 - COMMON STOCK
(continued)
One March 31, 2006the Company issued
2,000 shares of stock to a former contractor for providing project management
services valued at $2,000. As part of the initial agreement with this
contractor, these shares were to be issued upon the delivery of services defined
by the agreement.
On March 31, 2006, the Company issued
68,000 shares of stock as part of a legal settlement. 60,000 of the
shares had been previously issued as restricted and in settlement of the legal
issue, the shares were returned, cancelled and reissued as free
trading. 8,000 shares were newly issued.
On July 1, 2006, the Company issued
70,803 shares of stock in connection with the exercise of warrants issued in the
merger of CNH with XBridge at .46 per share. These warrants were
exercised to satisfy certain outstanding notes payable.
On August 31, 2006, the Company issued
4,034 shares of stock upon conversion of certain outstanding notes issued in the
2004 private placement. The amount of principal represented by these
shares was $1,000. The amount of accrued interest represented by
these shares was $3,034 due to the conversion of a portion of the note
earlier. These notes converted at $1.00 per share.
On October 25, 2006, the Company issued
122,028 shares of common stock in connection with the exercise of options issued
in the merger of the Company with Xbridge at $.01 per share.
On December 13, 2006, the Company
issued 17,931 shares of stock upon conversion of certain outstanding notes
issued in the 2004 private placement. The amount of principal
represented by these shares was $15,000. The amount of accrued
interest represented by these shares was $2,931. These notes were
converted at $1.00 per share.
NOTE 8 - NOTES
PAYABLE
In June 2005, the Company received
loans totaling $50,000. The notes are due May 30, 2006 and carry an
interest rate of 8% per annum. Due to the loan being unpaid at
maturity, the interest rate increased to 12%. At March 31, 2007, the
total amount of principal and interest due on this note was $0.
NOTE 9 - LINE OF
CREDIT
On September 21, 2006, the Company
entered into a factoring agreement with Allied Capital Partners, L.P., whereby
Allied Capital provides a revolving line of credit to the Company up to $750,000
that is secured by the Company’s accounts receivable. At March 31,2007, the total amount due on the line of credit was $62,094.
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 carries an interest rate of prime plus one half
point. The line of credit is secured with a deposit guarantee of
$50,000.
F - 17
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 10 - RELATED PARTY
TRANSACTIONS
On March 5, 2003, we (1)
obtained an exclusive license to certain XML
technology from XBridge in exchange for the issuance of
500,000 shares of our common stock, and
(2) entered into an
asset purchase agreement to acquire certain of
XBridge's assets. On June 20, 2003, we issued an additional 1,500,000 shares of
our common stock to XBridge in settlement of
certain CNH Holdings' obligations under the license agreement and
asset purchase agreement. Subsequent to the settlement
transaction, the officers and directors of XBridge became our
officers and directors.
Subsequent to March 2003, the Company had entered into
a master services agreement with XBridge pursuant to which
XBridge provided the Company with
certain development and maintenance services. In
connection with this
master services agreement, the Company
had previously issued to XBridge an
additional 150,000 shares of its common stock and
had incurred approximately $1,860,000 in past due service
fee debt.
Effective May 27, 2005, we acquired XBridge through a merger
transaction and obtained ownership of the
XBridge intellectual property upon which our products are
based. Prior to entering into the agreement governing the merger, (a)
Ms. Cynthia Garr, the Company's Executive Vice
President, interim Chief Financial Officer and a director, was also
the President and a director of XBridge, (b), Mr. Gregory Royal, the
Company's Chief Technology Officer and a
director, was also a Vice President and a
director of XBridge, (c) Mr. Derek Downs the
Company's acting Chief Executive Officer and a
director, was also a consultant to Xbridge.
On May 31, 2004, the Company received a
loan from an officer of $55,755. The note carries an interest rate of
8% and was due December 31, 2005. At March 31, 2007, the total amount
of principal and interest due on this note was $39,609.
On March 31, 2006, the Company received
a loan from an officer of $6,400. The note carries an interest rate
of 8% and is due March 31, 2007. At March 31, 2007, the total amount
of principal and interest due on this note was $0.
On June 30, 2006, the Company received
a loan from an officer of $16,434. Currently, this note is considered
short term and has no loan provisions. At March 31, 2007, the balance
of the loan was $0.
In July 2003, XBridge Software, Inc.
received loans totaling $33,000 from shareholders. The loans were due
on demand and carried an interest rate of 8% per annum. The Company
acquired these loans as part of the acquisition of XBridge Software in May
2005. At March 31, 2007, total principal and interest due on these
loans was $0.
Pursuant to an employment agreement
dated January 1, 2005, the Company agreed to pay $125,000 per year to Derek
Downs, an officer and director of the Company.
F - 18
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 10 - RELATED PARTY
TRANSACTIONS (continued)
Pursuant to an employment agreement
dated October 1, 2004, the Company agreed to pay $130,000 per year to Gregory
Royal, an officer and director of the Company.
NOTE 11 -
ACQUISITIONS
On May 5, 2003, a License Agreement was
entered into principally between Corvero Networks and XBridge Software, although
CNH Holdings Company was party to certain provisions. The License
Agreement resulted in XBridge licensing to Corvero all of XBridge's right, title
and interest in, and to a software program (and concomitant hardware platforms)
which had been developed by XBridge and which were, collectively known as the
"XBridge Technology." This technology principally allows for the
development, implementation and commercialization of XML integration solutions
in the EBI and IP Telephony markets. CNH Holdings Company
subsequently issued 2,000,000 "restricted" common shares of its stock to XBridge
as a licensing fee.
On August 31, 2004, CNH Holdings
Company absorbed its wholly-owned subsidiary Corvero Networks, Inc., and began
operating as Cistera Networks. As of that date, all Corvero products
adopted the Cistera name. All of Corvero's rights under the License
Agreement dated May 5, 2003 passed to Cistera Networks, Inc.
On May 27, 2005, the Company issued
2,000,000 new 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. Goodwill of $2,134,821 was also acquired and
subsequently expensed.
NOTE 12 - CONVERTIBLE
DEBT
Effective December 13, 2004, the
Company issued and sold an aggregate of $1,146,000 in principal
amount of Senior Unsecured Convertible Promissory Notes (the “notes”), and
issued warrants to purchase 1,146,000 shares of our common stock, par
value $0.001 per share (the “warrants”). Of the $1,146,000 in notes,
$1,004,000 in principal amount of notes were issued for cash, and $142,000 in
principal amount of notes were issued in connection with the cancellation of an
equal amount of the Company’s outstanding obligations. At December31, 2005, a number of note holders opted to convert their debt as provided in
their note agreements. The total number of shares issued due to this
conversion was 946,392. The amount of principal represented by these
shares was $859,000. The amount of accrued interest represented by
these shares was $87,392. At March 31, 2006, three note holders opted
to convert their debt as provided in their note agreements. The total
number of shares issued due to this conversion was 67,785. The amount
of principal represented by these shares was $57,000. The amount of
accrued interest represented by these shares was $10,785. These notes
converted at $1.00 per share. The total amount of principal and
interest due at December 13, 2006 was $196,088. At August 31, 2006,
one note holder who had previously converted most of his outstanding debt opted
to convert the outstanding balance. The total number of shares issued
due to this conversion was 4,034. The remaining amount of principal
represented by these shares was $1,000. The amount of interest earned
on his original note represented by these shares was $3,034. At
December 13, 2006, one note holder opted to convert their outstanding
balance. There were 17,931 shares issued at $1.00 per shares to
convert principal of $15,000 and accrued interest of $2,931. At
December 13, 2006, two note holders opted to convert their outstanding balance
to the second private placement. The total amount converted was
$56,071. At March 31, 2007, there was $144,000 of principal and
$22,138 of interest due on these notes.
F - 19
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 12 - CONVERTIBLE DEBT
(continued)
The notes bear interest at the rate of
8% per annum, compounded quarterly on each March 31, June 30, September 30 and
December 31 that the notes are outstanding (each, an interest compounding
date). The outstanding principal on the notes and all accrued
interest become due and payable on the earlier of (a) December 9, 2006, or (b)
the date on which a change in control of the Company occurs.
The outstanding principal and accrued
interest on the notes 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 notes may be converted, in whole or in part, at
the option of the 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 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 notes
may be converted, in whole or in part at the option of the noteholders, 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 note holders to convert the note 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 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 note holders may convert the amount of the proposed
prepayment into shares of our common stock, regardless of the period of time
that the notes have then been outstanding.
The 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 Warrants, the Company may, upon
thirty days prior written notice, redeem the 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. Because at that price it would be profitable for the warrant
holders to exercise their warrants rather than to allow the redemption to
proceed, we assume they would choose to exercise. However, there is no assurance
that our stock price will rise to the $3.50 per share redemption trigger price,
or that all of the warrants will be exercised.
The Company is currently seeking to
issue and sell a second offering of Senior Unsecured Convertible Promissory
Notes. This second offering will mirror the terms of the previous
Private Placement Funding as stated above, except for the conversion of stock
and interest is set at a fixed rate of $1.00 per share. The notes and
accrued interest are due and payable two years from the date of the
note. As of March 31, 2007, $1,900,606 had been received
by the Company from this offering.
In April 2007, the Company received an
additional $1,225,000 from this offering.
F - 20
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 13 - STOCK
OPTIONS
During the year ended March 31, 2005,
the Company issued 1,815,000 stock options to employees, contractors and other
service providers to the Company. At March 31, 2006, no compensation
expense had been recorded as the exercise price of the options was equal or
greater than the fair market value of the stock. As of December 31,2006, 1,015,000 of the total stock options are not exercisable, as they are not
yet approved or registered.
The following table sets forth the
options outstanding as of March 31, 2006:
Exercise prices for optioned shares
outstanding as of March 31, 2007 ranged from $0.23 to $2.00. A summary of these
options by range of exercise prices is shown as follows:
Weighted-
Weighted-
Weighted-
Shares/
Average
Average
Shares
/
Average
Warrants
Exercise
Price
Contractual
Exercise
Warrants
Exercise
Currently
Currently
Remaining
Price
Outstanding
Price
Exercisable
Exercisable
Life
$ 1.101.10
635,000
$ 1.101.10
613,750
$ 1.101.10
3
years
1.30
380,000
1.30
285,000
1.30
3
years
2.00
700,000
2.00
700,000
2.00
2
years
.23
81,352
.23
81,352
.23
3
years
.46
326,565
.46
326,565
.46
3
years
.46
189,822
.46
189,822
.46
3
years
1.30
990,200
1.30
990,200
1.30
5
years
1.00
1,842,690
1.00
1,842,690
1.00
5
years
In September 2005, although the stock
price had not achieved the levels necessary to allow the Company to redeem the
warrants, warrant holders were offered an incentive of one-half warrant for each
warrant exercised. This incentive expired on December 31,2005. The Company raised an additional $405,080 from the exercise of
311,600 warrants and issued 155,800 incentive warrants.
NOTE 14 -
CONTINGENCIES
In 2005, the Company was made a
third-party defendant to litigation that was originally filed on June 5, 2001 in
Longview, Texas, styled J. David Bolton, Joanna Bolton, Whitney Gaidry, Virginia
Ille and Kenneth Ille vs. Larry V. Tate, Gerald Pybas, E. Robert Barbee, H. Paul
Estey, and Robert A. Baker; Case No. 2001-1196-A; 188th District Court, Gregg
County, Texas. Plaintiffs sued Defendants and the Company for breach
of contract and sought approximately $975,000 in damages. The
Defendants had sued the Company for indemnification of Plaintiffs'
claims.
On February 7, 2006, the parties
reached an agreement to settle this case at mediation and signed a binding
agreement which settles the disputes between them. As part of that
settlement, the Company agreed to deliver 68,000 unrestricted stock certificates
of the Company's stock to Plaintiffs. The Plaintiffs held 60,000
shares of restricted stock prior to the settlement. Those 60,000
shares were cancelled and reissued as unrestricted shares. The
Plaintiffs received 8,000 newly issued shares. The settlement should
not be taken as an admission of liability and the Company expressly denies any
such liability.
F - 22
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 14 –
CONTINGENCIES (continued)
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 principle elements of a potential
settlement. We are currently in the process of negotiating definitive
settlement agreements.
The Company is a defendant in
litigation pending in Dallas, Texas, styled Collaborative Search Partners, Inc.
vs. Xbridge Software, Inc., and Cistera Networks, Inc., Cause No.
07-03189;J191st District Court, Dallas County, Texas. The plaintiff
has alleged a number of complaints against the defendants, including breach of
contract, promissory estoppel, and quantum meruitt arising in connection with
two separate employment search agreements. In May 2007, the parties
came to an understanding with respect to the principle elements of a potential
settlement, and a Rule 11 letter agreement has been filed with the Court,
however, a definitive settlement agreement is still being negotiated among the
parties. The Rule 11 letter agreement provides for payment by the
defendants of $44,000 to the plaintiff over a period of six months, and in the
event the defendants fail to make such payments, a default judgment may be
rendered against the defendants.
NOTE 15 - RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS
We have
restated our balance sheet at March 31, 2007, and statements of operations,
stockholders’ equity and cash flows for the year ended March 31,2007. The restatement impacts the year ended March 31, 2007, but has
no effect on the financial statements issued in prior fiscal
years. The restatement is required because of an
errors made in applyingCompany’snew the new deferred revenue
recognition policy adopted in the third quarter of fiscal year
2007. Under this policy revenues are recognized after installation
rather than upon shipment.
The
impact of the restatement on the balance sheet was to increase inventory $3,376
from $72,367 to $75,743, which in turn increased current assets from $955,486 to
$958,862. The restatements also increased the current portion of
deferred income $113,481 from $351,698 to $465,179, which in turn increased
current liabilities from $1,727,064 to $1,840,545. Retained deficit
also increased $110,105 from $9,088,375 to $9,198,480. The impact of
the restatement on the statements of operations was to decrease recognized
revenue $113,481 from $2,046,319 to $1,932,838, and decrease cost of goods sold
$3,376 from $316,648 to $313,272, which in turn decreased gross profit $110,105
from $1,729,671 to $1,619,566. The impact of the restatement on net
loss was an increase of $110,105 from $1,174,338 to $1,284,443. Loss
per share increased $.02 from $.14 to $.16 per share.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Debt
conversion expense
135,825
-
On April 29, 2005, the Company issued
173,511 shares of common stock for accrued liabilities of $482,364.
On May 27, 2005, the Company issued
4,150,000 shares of common stock to the shareholders of XBridge Software, Inc.
and cancelled 2,150,000 shares then held by XBridge, in connection with the
Company’s merger with XBridge Software, Inc. In the merger, the
Company acquired all of the assets and liabilities of XBridge Software, valued
at a net of $782,245, and intellectual property valued at
$2,717,755. Goodwill of $2,134,821 was also acquired and subsequently
expensed.
On June 24, 2005, the Company issued
100,000 shares of common stock from the exercise of outstanding stock options at
$2 per share.
Effective September 21, 2005, the
Company’s authorized shares were increased from 10 million shares to 50 million
shares.
On December 31, 2005, the Company
issued 311,600 shares of stock in connection with the exercise of warrants
issued in the 2004 private placement of notes and warrants at $1.30 per
share.
On December 31, 2005, the Company
issued 946,392 shares of stock upon conversion of certain outstanding notes
issued in the 2004 private placement. The amount of principal
represented by these shares was $859,000. The amount of accrued
interest represented by these shares was $87,392. These notes
converted at $1.00 per share.
The
accompanying notes are an integral part of these financial
statements.
F -
29
On March 31, 2006, the Company issued
67,785 shares of stock due to the conversion of note principal and interest from
private placement fund holders. The amount of principal represented
by these shares was $57,000. The amount of accrued interest
represented by these shares was $10,785.
On March 31, 2006the Company issued
2,000 shares of stock to a former contractor for providing project management
services valued at $2,000. As part of the initial agreement with this
contractor, these shares were to be issued upon the delivery of services defined
by the agreement.
On March 31, 2006, the Company issued
8,000 shares of stock as part of a legal settlement. The shares had
been previously issued and were cancelled as part of a court order, but were
never returned to the Company. As per the settlement, the 8,000
outstanding were cancelled and subsequently reissued as unrestricted
shares.
On July 1, 2006, the Company issued
70,893 shares of stock in connection with the exercise of warrants issued in the
merger of the Company with XBridge Software, Inc. The exercise price
of the warrants was $.46 per share. The warrants were exercised for
notes payable totaling $32,594.
On August 1, 2006, the Company issued
4,034 shares of common stock upon conversion of the principal and accrued
interest on a previously issued convertible note. The principal
amount of the note converted was $1,000 and the amount of accrued interest
converted $3,034. The notes converted at $1.00 per
share.
On October 25, 2006, the Company issued
122,028 shares of common stock in connection with the exercise of options issued
in the merger of the Company with XBridge Software, Inc. The exercise
price for these options was $.01 per share.
The
accompanying notes are an integral part of these financial
statements.
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States, 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 its liabilities, the reported
revenues and expenses, and the balance sheet classifications used.
Interim
Reporting
The unaudited financial statements as
of December 31, 2007, and for the three and nine month periods then ended
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly state the financial position
and results of operations for the three and nine months. Operating
results for interim periods are not necessarily indicative of the results that
can be expected for full years.
Organization and Basis of
Presentation
CNH
Holdings Company, a Nevada corporation (the Company) 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
F -
31
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 1 - NATURE OF
OPERATIONS AND GOING CONCERN (continued)
at June14, 1998, as if none of the actions that had occurred from that time to the date
of rescission had transpired.
On May 5,2003, Corvero Networks, Inc., a Florida corporation, was formed by CNH Holdings
Company as a wholly owned subsidiary to acquire the use of certain technology
known as the XBridge Technology. This technology has as its principal
component the Corvero Convergence Platform. The acquisition was
accomplished by entering into a license agreement with XBridge Software, Inc., a
Delaware corporation.
The
Company was in the development stage from January 1, 1992 to May 5,2003. Since May 5, 2003, the Company has commenced planned principal
operations and is no longer in the development stage.
On August31, 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. As consideration
for the acquisition, we issued an aggregate of 4,150,000 shares of our common
stock, net of the cancellation of 2,150,000 shares of our common stock held by
XBridge at the time of the acquisition.
We
provide 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 IP telephony 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 CNH Holdings Company.
Our general business plan is to drive
adoption of the Cistera technology--establishing the Cistera ConvergenceServer
as the leading platform for advanced IP-based applications, through the
strategic technology relationships with the IP Telephony equipment
providers—Cisco, Nortel, Sylantro and Avaya, as well as the leading channel
resellers—AT&T, Verizon, Bell Canada, Comstor, BT,
etc. The
F -
32
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 1 - NATURE OF
OPERATIONS AND GOING CONCERN (continued)
Company
plans to extend our product and technological leadership in the IP
communications industry, and to increase our market penetration by continuing to
expand our sales and distribution channels and by capitalizing on new market
opportunities like two-way radio interoperability mobile/wireless
devices.
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES
This summary of accounting policies for
Cistera Networks, Inc. is presented to assist in understanding the Company's
consolidated financial statements. The accounting policies conform to
generally accepted accounting principles and have been consistently applied in
the preparation of the consolidated financial statements.
Principles of
Consolidation
The consolidated financial statements
for the quarter ended December 31, 2007 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.
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 inter-company balances
and transactions have been eliminated.
Use of
Estimates
Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States. 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
For purposes of the statement of cash
flows, 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.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Pursuant
to a factoring agreement with Allied Capital Partners L.P., effective December
2007, the Company is able to factor up to $1,500,000 of receivables at any one
time at an 80% advance rate, with recourse against the Company in the event of a
loss. The Company’s obligations to Allied are collateralized by all of the
Company’s accounts receivable, chattel paper, general intangibles, supporting
obligations, inventory and proceeds thereof. The term of the current agreement
is for a period of twelve months with automatic twelve month renewals
thereafter.
For the
nine months ended December 31, 2007 and the twelve months ended March 31, 2007,
the factoring charges amounted to 0.875% and 1.59%, respectively, of the
receivables purchased.
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.
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 cost.
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Revenue
Recognition
In an effort to establish an accounting
policy that provides shareholders with the most accurate representation of the
company's performance, the company has instituted a new policy that only
declares revenue from software, hardware and services once fully installed and
implemented. This method of revenue reporting will not reflect all orders
received and shipped during the reporting period, but only those orders
received, shipped and completely installed within the reporting
period. Prior to the adoption of this policy, the Company recognized
revenues when orders for our products and solutions were received and
shipped.
In future
earnings reporting, the Company will continue to provide the "booked" revenue
figures, i.e., the amount based upon purchase orders (POs) received from
customers and delivered to resellers, during the reporting period in addition to
the new recognized revenue reporting policy.
The
Company recognizes revenue according to 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).
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.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Depreciation and
Amortization
Fixed assets are recorded at cost and
depreciated using straight-line and accelerated methods over the estimated
useful lives of the assets that range from three to seven
years. Fixed assets consisted of the following at December 31, 2007
and March 31, 2007:
Maintenance and repairs are charged to
operations; betterments are capitalized. The cost of property sold or
otherwise disposed of and the accumulated depreciation thereon are eliminated
from the property and related accumulated depreciation accounts, and any
resulting gain or loss is credited or charged to income.
Total depreciation expense for the nine
months ended December 31, 2007 and 2006 was $49,485 and $27,901,
respectively.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
Intangible
Assets
The Company has adopted the Financial
Accounting Standards Board SFAS No., 142, “Goodwill and Other Intangible
Assets.” SFAS 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS 142 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 SFAS 142.
Software development costs include all
development costs incurred after the Company’s software became “technologically
feasible”. Prior to the software reaching that stage, all development
costs were expensed as incurred. Once the software was developed to
the point of being ready for sale, the Company began amortizing the costs over
the term of the license agreement it entered into which was four
years. The software development costs were acquired in the
acquisition of XBridge Software, Inc.
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
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 2 - SUMMARY OF
ACCOUNTING POLICIES (continued)
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 nine
months ended December 31, 2007 and 2006 was $203,832 and $243,767,
respectively.
The estimated amortization for the next
five years is as follows:
2008
$
271,776
2009
271,776
2010
271,776
2011
271,776
2012
271,776
Total
$
1,358,880
Earnings (Loss) per
Share
Basic earnings (loss) per share has
been computed by dividing the earnings for the period applicable to the common
stockholders by the weighted average number of common shares outstanding during
the years.
Diluted loss per common share for the
nine months ended December 31, 2007 and 2006 is not presented as it would be
anti-dilutive. At December 31, 2007, the total number of potentially
dilutive common stock equivalents was 10,399,356. At December 31,2006, the total number of potentially dilutive common stock equivalents was
3,557,058.
Reclassification
Certain reclassifications have been
made in the 2007 financial statements to conform with the 2008
presentation.
Deferred
Income
Deferred income represents contracts for
certain revenue to be received in the future and come from support and
maintenance contracts as well as product sales and professional services which
have been shipped
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
and billed but not
installed. Support and maintenance contracts are executed on an
annual basis and the revenue from these contracts is recognized on a monthly
basis as the support fees are earned.
Research and
Development
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.
Stock
Options
Effective April 1, 2006, the company
adopted the provisions of SFAS No. 123(R). SFAS No. 123(R) requires employee
equity awards to be accounted for under the fair value method. Accordingly,
share-based compensation is measured at grant date, based on the fair value of
the award. Prior to April 1, 2006, the company accounted for awards granted to
employees under its equity incentive plans under the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock Issued to Employees” (APB 25), and related interpretations, and provided
the required pro forma disclosures prescribed by SFAS No. 123, “Accounting for
Stock-Based Compensation” (SFAS No. 123), as amended. No stock
options were granted to employees during the nine months ended December 31, 2007
or 2006 and accordingly, no compensation expense was recognized under APB No. 25
for the nine months ended December 31, 2007 or 2006. In addition, no
compensation expense is required to be recognized under provisions of SFAS No.
123(R) with respect to employees.
Under the modified prospective method of
adoption for SFAS No. 123(R), the compensation cost recognized by the company
beginning on April 1, 2006 includes (a) compensation cost for all equity
incentive awards granted prior to, but not yet vested as of April 1, 2006, based
on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation cost for all equity incentive
awards granted subsequent to April 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123(R). The company uses
the straight-line attribution method to recognize share-based compensation costs
over the service period of the award. Upon exercise, cancellation, forfeiture,
or expiration of stock options, or upon vesting or forfeiture of restricted
stock units, deferred tax assets for options and restricted stock units with
multiple vesting dates are eliminated for each vesting period on a first-in,
first-out basis as if each vesting period was a separate award. To calculate the
excess tax benefits available for use in offsetting future tax shortfalls as of
the date of implementation, the company followed the alternative transition
method discussed in FASB Staff Position No. 123(R)-3.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 3 - CONCENTRATION OF
RISK
For the quarter ended December 31,2007, the Company receives approximately 36% of its gross revenues from its top
three re-sellers. This represents an increase in concentration of
business from the 20% reported for the quarter ended December 31,2006. The loss of these re-sellers would adversely impact the
business of the Company.
NOTE 4 - INCOME
TAXES
As of March 31, 2007, the Company had a
net operating loss carry forward for income tax reporting purposes of
approximately $6,965,000 that may be offset against future taxable income
through 2027. Due to the uncertainty with respect to ultimate
realization, the Company has established a valuation allowance for all deferred
income tax assets.
The Company evaluates its valuation
allowance requirements based on projected future operations. When
circumstances change and cause a change in management's judgment about the
recoverability of deferred tax assets, the impact of the change on the valuation
is reflected in current income.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 5 - LEASE
COMMITMENT
The Company currently leases
approximately 4,264 square feet of office space at 17304 Preston Road, Suite
975, Dallas, Texas from Memshalah Realty, a successor to CMD Realty
Fund. The lease payments are approximately $7,626 per month and the
lease expires November 30, 2009. This office space is used as the
Corporate Headquarters.
The minimum future lease payments under
this lease for the next five years are:
On October 20, 2004, the Company
entered into an agreement with Dell Financial Services to lease five laptop
computers and a laser printer. The lease is for a period of
thirty-six months with a payment of approximately $369 per month. The
Company has an end of lease purchase option of $1.00. The Company has
capitalized a total of $10,205 under capital leases for the computers and
printer in the financial statements. The assets are depreciated over
their related lease terms. Depreciation of assets under capital
leases is included in depreciation expense for the three months ended December31, 2007.
As of
December 31, 2007, there were no further payments due under this capital lease
agreement.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 7 - COMMON
STOCK
On April 29, 2005, the Company issued
173,511 shares of common stock for accrued liabilities of $482,364.
On May 27, 2005, the Company issued
4,150,000 shares of common stock to the shareholders of XBridge Software, Inc.
and cancelled 2,150,000 shares then held by XBridge, in connection with the
Company’s merger with XBridge Software, Inc. In the merger, the
Company acquired all of the assets and liabilities of XBridge Software, valued
at a net of $782,245, and intellectual property valued at
$2,717,755. Goodwill of $2,134,821 was also acquired and subsequently
expensed.
On June 24, 2005, the Company issued
100,000 shares of common stock from the exercise of outstanding stock options at
$2 per share.
Effective September 21, 2005, the
Company’s authorized shares were increased from 10 million shares to 50 million
shares.
On December 31, 2005, the Company
issued 311,600 shares of stock in connection with the exercise of warrants
issued in the 2004 private placement of notes and warrants at $1.30 per
share.
On December 31, 2005, the Company
issued 946,392 shares of stock upon conversion of certain outstanding notes
issued in the 2004 private placement. The amount of principal
represented by these shares was $859,000. The amount of accrued
interest represented by these shares was $87,392. These notes
converted at $1.00 per share.
On March 31, 2006, the Company issued
67,785 shares of stock upon conversion of certain outstanding notes issued in
the 2004 private placement. The amount of principal represented by
these shares was $57,000. The amount of accrued interest represented
by these shares was $10,785. These notes converted at $1.00 per
share.
On March 31, 2006the Company issued
2,000 shares of stock to a former contractor for providing project management
services valued at $2,000. As part of the initial agreement with this
contractor, these shares were to be issued upon the delivery of services defined
by the agreement.
On March 31, 2006, the Company reissued 8,000 shares of stock as part of a legal
settlement. The shares had been previously issued and were cancelled
as part of a court order, but were never returned to the Company. As
per the settlement, the 8,000 outstanding were cancelled and subsequently
reissued as unrestricted shares.
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 7 - COMMON STOCK
(continued)
On July1, 2006, the Company issued 70,803 shares of common stock in connection with the
exercise of warrants issued in the merger of the Company with XBridge Software,
Inc. The exercise price of the warrants was $.46 per
share. The warrants were exercised for notes payable totaling
$32,594.
On August1, 2006, the Company issued 4,034 shares of common stock upon conversion of the
principal and accrued interest on a previously issued convertible
note. The principal amount of the note converted was $1,000 and the
amount of accrued interest converted $3,034. The notes converted at
$1.00 per share.
On
October 25, 2006, the Company issued 122,028 shares of common stock in
connection with the exercise of options issued in the merger of the Company with
XBridge Software, Inc. The exercise price for these options was $.01
per share.
NOTE 8 – 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 carries an interest rate of prime plus one
half-point. The line of credit is secured with a deposit guarantee of
$50,000. At December 31, 2007, the total amount outstanding on this
line of credit was $17,534.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 9 - RELATED PARTY
TRANSACTIONS
On May 31, 2004, the Company received a
loan of $55,755 from one of its executive officers. The note carries
an interest rate of 8% with a due date of December 31, 2005. At
December 31, 2007, the total amount of principal and interest due on this note
was $7,691.
Effective
May 27, 2005, we acquired XBridge through a merger transaction in exchange for
4,150,000 shares of our common stock (which after the cancellation of the
2,150,000 originally issued to XBridge resulted in the issuance of only
2,000,000 new shares) and the elimination of approximately $1.86 million on
inter-company payables owed to XBridge. Prior to entering into the
agreement governing the merger, (a) Ms. Cynthia Garr, the Company's Executive
Vice President, acting Chief Financial Officer and a director, was also the
President and a director of XBridge, (b), Mr. Gregory Royal, the Company's Chief
Technology Officer and a director, was also a Vice President and a director of
XBridge, (c) Mr. Derek Downs the Company's acting Chief Executive Officer and a
director, was also a consultant to XBridge.
At the time of the merger, Ms. Garr
owned 451,000 shares of XBridge common stock and held options to purchase
another 15,426 shares, and Mr. Royal owned 375,000 shares of XBridge common
stock and held options to purchase another 100,000 shares. At an
exchange ratio of 2.71174 shares of our common stock for each share of XBridge
stock outstanding, post merger, (1) Ms. Garr owned 1,222,997 shares of our
common stock and held options to purchase another 41,831 shares; (2) Mr. Royal
owned 1,016,904 shares of our common stock and held options to purchase an
additional 271,174 shares. Ms. Garr's options expire April 1, 2009,
and Mr. Royal’s options expire May 3, 2009. With regard to these stock options
and all other outstanding options to purchase XBridge shares at the time, the
original provisions for the XBridge stock options were applied in a
carry-forward manner to the options to purchase shares of our
stock.
On March 31, 2006, the Company received
a loan of $6,400 from one of its executive officers. The note carries
an interest rate of 8% and was due March 31, 2007. At December 31,2007, the total amount of principal and interest due on this note was
$0.
Pursuant to an employment agreement
dated January 1, 2005, the Company agreed to pay $125,000 per year to Derek
Downs, an officer and director of the Company. This agreement was
mutually terminated by the parties, effective March 31, 2007.
Pursuant to an employment agreement
dated January 1, 2005, the Company agreed to pay $125,000 per year to Cynthia
Garr, an officer and director of the Company. This agreement was
mutually terminated by the parties, effective April 1, 2006.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 9 – RELATED PARTY
TRANSACTIONS (continued)
Pursuant to an employment agreement
dated October 1, 2004, the Company agreed to pay $130,000 per year to Gregory
Royal, an officer and director of the Company. This agreement was
mutually terminated by the parties, effective March 31, 2007.
On April 5, 2007, the Company issued a
Senior Unsecured Convertible Promissory Note in the principal amount of $30,000,
and issued warrants to purchase 30,000 shares of the Company’s common stock to
Derek Downs, an officer and director of the Company, in connection with the
cancellation of an equal amount of the Company’s outstanding obligations. As of
September 30, 2007, interest of $4,863 had been accrued on this
Note.
On April 5, 2007, the Company issued a
Senior Unsecured Convertible Promissory Note in the principal amount of $70,779,
and issued warrants to purchase 70,779 shares of the Company’s common stock to
Gregory Royal, an officer and director of the Company, in connection with the
cancellation of an equal amount of the Company’s outstanding obligations. As of
September 30, 2007, interest of $11,472 had been accrued on this
Note.
NOTE 10 -
ACQUISITIONS
On May 5, 2003, the Company, Corvero
Networks, Inc., a Florida corporation our wholly owned subsidiary (Corvero), and
XBridge Software, Inc., a Delaware corporation, entered into a license agreement
pursuant to which Corvero agreed to license from XBridge Software, Inc. all
rights, title, and interest of XBridge in and to certain technologies and
intellectual properties (the “XBridge Technology”). The exclusive
license was worldwide in scope and had a term of twenty years, and included, but
was not limited to, the right to make alternations and/or derivative works and
to license, sublicense, cross-license or otherwise transfer the XBridge
Technology for commercial purposes, and all rights to derivative works would be
the Company’s sole and exclusive property. This license did not,
however, give the Company the right to transfer or resell the XBridge Technology
without the consent of XBridge. CNH Holdings Company, through
multiple subsequent amendments to the licensing agreement, ultimately issued an
aggregate of 2,000,000 shares of its common stock to XBridge.
On August 31, 2004, CNH Holdings
Company absorbed its wholly-owned subsidiary Corvero Networks, Inc., and began
operating as Cistera Networks. As of that date, all of Corvero's
rights under the License Agreement dated May 5, 2003 passed to Cistera Networks,
Inc.
Effective May 27, 2005, we acquired
XBridge through a merger transaction in exchange for 4,150,000 shares of our
common stock (which after the cancellation of the 2,150,000 originally issued to
XBridge resulted in the issuance of only 2,000,000 new shares) and the
elimination of approximately $1.86 million on inter-company payables owed to
XBridge. Through this acquisition, the Company acquired net assets valued
at
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 10 –
ACQUISITIONS (continued)
$782,245
and intellectual property valued at $2,717,755. Of this amount,
$2,134,821 was allocated to goodwill and has subsequently been
expensed.
NOTE 11 - CONVERTIBLE
DEBT
Effective December 13, 2004, the
Company issued and sold an aggregate of $1,146,000 in principal amount of Senior
Unsecured Convertible Promissory Notes (the “notes”), and
issued warrants to purchase 1,146,000 shares of our common stock, par
value $0.001 per share (the “warrants”). Of the $1,146,000 in notes,
$1,004,000 in principal amount of notes were issued for cash, and $142,000 in
principal amount of notes were issued in connection with the cancellation of an
equal amount of the Company’s outstanding obligations.
The notes bear interest at the rate of
8% per annum, compounded quarterly on each March 31, June 30, September 30 and
December 31 that the notes are outstanding (each, an interest compounding
date). The outstanding principal on the notes 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 occurs.
The outstanding principal and accrued
interest on the notes 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 notes may be converted, in whole or in part, at
the option of the 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 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 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 note holders to convert the note 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 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,
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 11 - CONVERTIBLE DEBT
(continued)
that the
note holders may convert the amount of the proposed prepayment into shares of
our common stock, regardless of the period of time that the notes have then been
outstanding.
The 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 Warrants, the Company may, upon
thirty days prior written notice, redeem the 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. Because at that price it would be profitable for the warrant
holders to exercise their warrants rather than to allow the redemption to
proceed, we assume they would choose to exercise. However, there is no assurance
that our stock price will rise to the $3.50 per share redemption trigger price,
or that all of the warrants will be exercised.
At December 31, 2005, a number of note
holders opted to convert their debt as provided in their note
agreements. The total number of shares issued due to this conversion
was 946,392. The amount of principal represented by these shares was
$859,000. The amount of accrued interest represented by these shares
was $87,392. At March 31, 2006, three note holders opted to convert
their debt as provided in their note agreements. The total number of
shares issued due to this conversion was 67,785. The amount of
principal represented by these shares was $57,000. The amount of
accrued interest represented by these shares was $10,785. These notes converted at $1.00 per
share. At August 31, 2006, one note holder who had
previously converted most of his outstanding debt opted to convert the
outstanding balance. The total number of shares issued due to this
conversion was 4,034. The remaining amount of principal represented
by these shares was $1,000. The amount of interest earned on his
original note represented by these shares was $3,034. At December 13,2006, one note holder opted to convert their outstanding balance. As
of December 31, 2007, there were 17,931 shares to be issued at $1.00 per share
to convert principal of $15,000 and accrued interest of $2,931. At
December 13, 2006, two note holders opted to convert their outstanding balance
to the second private placement. The total amount converted was
$56,071. During the nine months ended December 31, 2007, the Company
paid $66,860 of principal and $9,770 of accrued interest towards these
notes. At December 31, 2007, there was $92,140 of principal and
$29,480 of interest due on these notes. During the quarter ended September 30,2007, the company elected to compensate note holders who had opted to convert
debt into shares of common stock which had not completed registration with the
SEC as of the date the 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
accrued a liability for the amount of this debt conversion expense, pending the
issuance of the additional shares. 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. The
total amount of principal and interest due at December 13, 2006 was
$214,019.
F -
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CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 11 - CONVERTIBLE DEBT
(continued)
During the nine months ended December31, 2007, the Company paid $66,860 of principal and accrued interest of $9,770
towards these notes. At December 31, 2007, there was $92,140 of
principal and $29,481 of interest due on these notes.
The Company issued and sold a second
offering of Senior Unsecured Convertible Promissory Notes. This
second offering mirrors the terms of the previous Private Placement Funding as
stated above, except for the conversion of stock and interest is set at a fixed
rate of $0.75 per share, and the warrants are exercisable at an exercise price
of $1.00 per share. The notes and accrued interest are due and
payable two years from the date of the note. Effective April 5, 2007,
the Company sold an aggregate of $3,498,776 in principal amount of Senior
Unsecured Convertible Promissory Notes, and issued warrants to purchase
3,498,776 shares of the Company’s common stock. Of the $3,498,776 in Notes,
$2,815,000 in principal amount of Notes were issued for cash, and $683,776 in
principal amount of Notes were 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 $110,279 of obligations to
principal officers and directors in the following amounts: Greg Royal $77,779;
Derek Downs $30,000; Jim Miller $9,500.
F -
48
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 12 - STOCK
OPTIONS
As of December 31, 2007, 190,000 of the
total stock options are not exercisable, as they are not yet formally
approved.
The following table sets forth the
options outstanding as of March 31, 2007.
Exercise prices for optioned shares
outstanding as of December 31, 2007 ranged from $1.10 to $2.00. A summary of
these options by range of exercise prices is shown as follows:
Weighted-
Weighted-
Option
/
Weighted-
Shares/
Average
Average
Warrants
Average
Warrants
Exercise
Price
Contractual
Exercise
Shares
Exercise
Currently
Currently
Remaining
Price
Outstanding
Price
Exercisable
Exercisable
Life
2.00
700,000
2.00
700,000
2.00
1
years
.23
81,353
.23
81,353
.23
5
years
.46
325,564
.46
325,564
.46
2
years
.46
189,822
.46
189,822
.46
2
years
1.30
990,200
1.30
990,200
1.30
2
years
1.00
1,842,690
1.00
1,842,690
1.00
5
years
1.00
1,656,088
1.00
1,656,088
1.00
5
years
In September 2005, although the stock
price had not achieved the levels necessary to allow the Company to redeem the
warrants, warrant holders were offered an incentive of one-half warrant for each
warrant exercised. This incentive expired on December 31,2005. The Company raised an additional $405,080 from the exercise of
311,600 warrants and issued 155,800 incentive warrants.
NOTE 13 -
CONTINGENCIES
The Company, and certain of its current
and former officers and directors are defendants in litigation pending in
Dallas, Texas, styled KINGDON R. HUGHES
VS. GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM,
CNH HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.;
Cause No. DV05-0600-G;
G-134th District Court, Dallas County, Texas. The plaintiff has alleged a
number of complaints against the defendants, including breach of fiduciary duty,
misappropriation of corporate opportunities, fraud, fraudulent inducement,
breach of contract, tortuous interference with contract, fraudulent transfer,
and shareholder oppression arising in connection with the license agreement
between the Company and XBridge in May 2003 and the acquisition of XBridge by
the Company in May 2005. The parties held a mediation conference in
April 2006 and have come to an understanding with respect to the principle
elements of a potential settlement. We are currently in the process
of negotiating definitive settlement agreements.
F -
50
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 14 – UNCERTAIN TAX
POSITIONS
Effective April 1, 2007, the company
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 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
quarter ended December 31, 2007. 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 2003. The following describes
the open tax years, by major tax jurisdiction, as of April 1, 2007:
United
States (a)
2003
– Present
(a) Includes federal as well as state
or similar local jurisdictions, as applicable.
NOTE 15 - RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Cistera Networks, Inc. has determined
the need to restate its historical financial statements for the quarter ended
September 30, 2007. The restatement is required because of an error made
in accounting for debt conversion
expenses related to a private placement, and an error made in accounting for
outstanding shares of common stock from the corporate restructuring in August
2004. The required restatement also includes a balance sheet reclassification of
accrued interest on convertible debt that is due in more than one year from
current liabilities to long-term liabilities.
The restatement will
not affect reported cash balances or liquidity. The effect on the second quarter
of fiscal year 2008 will be a $135,825 increase in the reported net loss, and an
increase of 284,516 in the number of ending and weighted average common shares
outstanding as of September 30, 2007. Basic and diluted loss per share for the
three and six month periods ended September 30, 2007 will increase by $0.01, to
$0.08 and $0.13 per share, respectively. The restatement of debt conversion
expenses will not affect gross profit and gross profit
margins.
F -
51
CISTERA NETWORKS, INC.&
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
NOTE 15 - RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)
Rigorous new financial
and accounting processes and procedures that have been implemented as a result
of the internal review by management in the second quarter of fiscal year 2008
are expected to ensure proper accounting for
debt conversion expenses and shareholders equity in the
future.
The Company intends to file an amended
quarterly report containing the restated financial results with the Securities
and Exchange Commission. The restated financial results for the second quarter
of fiscal year 2008 and the 10-QSB for the second quarter of fiscal year 2008
will be filed no later than January 25, 2008. The restatement of financial
results will also require the Company to file a new amendment to the effective
registration statement the Companypreviously filed with the
Commission.
F -
52
NO
DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT MADE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CISTERA NETWORKS, INC. OR THE SELLING SHAREHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CISTERA
NETWORKS, INC. SINCE SUCH DATE.
Expenses
incurred or (expected) relating to this Registration Statement and distribution
are as follows: The amounts set forth are estimates except for the
SEC registration fee:
Amount
Ř
SEC
registration fee
$
363
Ř
Accountants’
fees and expenses
$
50,000
Ř
Miscellaneous
$
40,000
Ř
Total
$
90,363
The
Registrant will bear all of the expenses shown above.
Indemnification
of Directors and Officers
The
Company’s Bylaws provide that the Company has the power to indemnify its
directors and officers to the fullest extent provided by Nevada
law. Pursuant to Nevada law, a corporation may indemnify its officers
and directors, provided that such person's actions:
(a) did
not constitute a breach of his fiduciary duties as a director or officer; and
did not involve intentional misconduct, fraud or a knowing violation of law;
and
(b) were
conducted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful
The
effect of these provisions is potentially to indemnify our directors and
officers from all costs and expenses of liability incurred by them in connection
with any action, suit or proceeding in which they are involved by reason of
their affiliation with the company.
Set forth
below is information regarding the issuance and sales of the company’s
securities without registration for the past three (3) years from the date of
this Registration Statement. 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.
On
January 3, 2005, the Company issued 359,580 shares of common stock for accrued
liabilities of $380,926. The shares were issued prices of between
$1.00 and $1.30 per share which was equal to the approximate closing price of
our common stock on the various dates that the Company and the debt parties
agreed to settle payment of these liabilities.
On April29, 2005, the Company issued 173,511 shares of common stock for accrued
liabilities of $482,364. The shares were issued at $ 2.78 per share
which was equal to the average closing price of our common stock over the ten
trading days prior to the date of issuance.
Effective
May 27, 2005, we issued 4,150,000 shares of our common stock in connection with
the merger of XBridge with XBR Acquisition, Inc., a newly formed Company
subsidiary. At the time of the merger, XBridge held 2,150,000 shares
of our common stock, which shares were cancelled. In connection with
this merger, options and warrants to purchase 310,643 shares of XBridge common
stock were converted into options to purchase an additional 842,383 shares of
the Company's common stock, at exercise prices ranging from $0.01 to $0.46 cents
per share. The Company also issued an additional 173,511 shares to
certain of the officers and consultants of XBridge in exchange for the
cancellation of $482,364.31 of XBridge debt held by these
individuals. The debt represented trade accounts payable and accrued
consulting fees, notes payable and accrued interest that were unpaid by
XBridge. Ms. Cynthia A. Garr, then the Company’s Executive Vice
President and acting Chief Financial Officer and also the President and a
director of XBridge, received 63,363 shares of our common stock in exchange for
the cancellation of $72,914.49 of unpaid expenses, $72,725.19 of notes payable
and accrued interest, and $30,510 of unpaid accrued consulting
fees. Mr. Gregory T. Royal, then the Company’s Chief Technology
Officer and a director and also a Vice President and director of XBridge,
received 108,081 shares of our common stock in exchange for the cancellation of
$8,563.94 of unpaid expenses and $291,902.18 of unpaid accrued consulting
fees. Mr. Derek P. Downs, then our acting Chief Executive Officer and
a director and also a consultant to XBridge, received 2,067 shares of our common
stock in exchange for the cancellation of $5,748.51 of unpaid expenses. The
shares of our common stock issued to these individuals was valued at $2.65 per
share, which was the average closing price of our common stock for the ten
trading days prior to the effective date of the merger. This share
value was also the value used to determine the exchange ratio for the shares of
our common stock to be received by all other XBridge shareholders.
The
Company believes that the structure of the merger agreement with XBridge and the
issuance of shares were comparable to what the Company would have received
through arms-length negotiations with an unaffiliated party. At the
time of the services agreement and the issuance of the shares, XBridge owned
approximately 51% of our outstanding shares of common stock, and a majority of
our officers and directors were also officers and directors of
XBridge.
53
This
transaction enabled us to obtain outright ownership of the XBridge intellectual
property upon which our products are based and eliminate future product
development and maintenance payments to XBridge. Costs associated
with maintenance and support related to the license agreement totaled $1.86
million during the first two years of the twenty-year life of the
agreement. In addition, we believed that the Company’s ownership of
the XBridge intellectual property would prove to be invaluable in both securing
agreements with tier-one channel reseller partners and in giving the Company
flexibility for future growth and product line expansion. Based upon
client driven product acceptance and sales order growth, the Company also
believed that funding maintenance efforts through its research and development
facility in India and eliminating potential royalty commitments were in the best
interest of the Company's shareholders.
Including
the new shares issued in the merger, the elimination of the $1.86 million in
inter-company payables and XBridge’s outstanding debt of approximately $200,000
at the time of the merger, the total purchase price for the XBridge acquisition
was approximately $5,500,000.
On June24, 2005, the Company issued 100,000 shares of common stock from the exercise of
outstanding stock options. The exercise price of the options was $2
per share.
In
September 2005, although the stock price had not achieved the levels necessary
to allow the Company to redeem warrants issued in the December 13, 2004 private
placement, warrant holders were offered an incentive of one-half warrant for
each warrant exercised. This incentive expired on December 31,2005. The Company raised an additional $405,080 from the exercise of
311,600 warrants and issued 155,800 incentive warrants. The exercise
price of the warrants was $1.30 per share.
On
December 31, 2005, the Company issued 311,600 shares of stock in connection with
the exercise of warrants issued in the 2004 private placement of notes and
warrants. The exercise price of the warrants was $1.30 per
share.
On
December 31, 2005, the Company issued 946,392 shares of stock upon conversion of
certain outstanding notes issued in the 2004 private placement. The
amount of principal converted was $859,000 and the amount of accrued interest
converted was $87,392. These notes converted at $1.00 per
share.
On March31, 2006, the Company issued 67,785 shares of stock upon conversion of certain
outstanding notes issued in the 2004 private placement. The amount of
principal converted was $57,000 and the amount of accrued interest converted was
$10,785. These notes converted at $1.00 per share.
On March31, 2006the Company issued 2,000 shares of stock to a former contractor for
providing project management services valued at $2,000. As part of
the initial agreement with this contractor, these shares were to be issued upon
the delivery of services defined by the agreement.
On March31, 2006, the Company reissued 8,000 shares of stock as part of a legal
settlement. The shares had been previously issued and were cancelled
as part of a court order,
54
but were
never returned to the Company. As per the settlement, the 8,000
outstanding were cancelled and subsequently reissued as unrestricted
shares.
On July1, 2006, the Company issued 70,803 shares of common stock in connection with the
exercise of warrants issued in the merger of the Company with XBridge Software,
Inc. The exercise price of the warrants was $.46 per
share. The warrants were exercised for notes payable totaling
$32,594.
On August1, 2006, the Company issued 4,034 shares of common stock upon conversion of the
principal and accrued interest on a previously issued convertible
note. The principal amount of the note converted was $1,000 and the
amount of accrued interest converted $3,034. The notes converted at
$1.00 per share.
On
October 25, 2006, the Company issued 122,028 shares of common stock in
connection with the exercise of options issued in the merger of the Company with
XBridge Software, Inc. The exercise price for these options was $.01
per share.
Included
in the outstanding obligations that were cancelled was $30,000 in past due
compensation to Mr. Derek Downs, our President and Chief Executive Officer and
director, and $70,779 to Mr. Greg Royal, our Executive Vice President and
director. As a result of the cancellation of this debt, Mr. Downs was
issued 30,000 shares in principle amounts in convertible notes and 30,000
warrants to purchase 70,000 shares, and Mr. Royal was
issued 70,779 shares in principle
amounts in convertible notes and 70,779 warrants to purchase 165,551 shares,
upon the same terms and conditions as provided to the other investors in this
private placement.
Effective
April 5, 2007, we issued and sold an aggregate of $3,498,776 in principal amount
of Senior Unsecured Convertible Promissory Notes, and issued warrants to
purchase 3,498,776 shares of our common stock, par value $0.001 per
share. Of the $3,498,776 in Notes, $2,815,000 in principal amount of
Notes were issued for cash, and $683,776 in principal amount of Notes were
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
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
warrants, the Company may, upon thirty days prior written notice, redeem
1,815,000 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. An additional 1,000,000 warrants may be
redeemed under the same terms if the above conditions are met plus the daily
volume for the 20 consecutive trading days preceding the notice of redemption on
the OTCBB or the principal exchange where the common stock is traded is in
excess of 100,000 shares. The structure of the note purchase
agreement and the issuance of the convertible notes and warrants were determined
through arm-length
55
negotiations
between us and the other parties involved and no material relationship existed
between us and the other parties at that time.
In
January of 2008, the Company issued 3,815 shares of common stock upon conversion
of accrued interest on a previously issued convertible note. The
amount of accrued interest converted was $3,815. The interest
converted at $1.00 per share.
In
January of 2008, the Company issued 130,647 shares of common stock upon
conversion of accrued interest on a previously issued convertible
note. The amount of accrued interest converted was
$130,647. The interest converted at $1.00 per share.
On
January 23, 2008, the Company issued 17,931 shares of common stock upon
conversion of certain outstanding notes. The amount of principal of
notes converted was $15,000 and the amount of accrued interest converted was
$2,391. These notes were converted at $1.00 per share.
The
foregoing issuance of the shares of our common stock, the convertible promissory
notes and the warrants 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 have 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.
Employment
Agreement by and between Derek Downs and Cistera Networks, Inc. dated as
of January 1, 2005 (Incorporated by reference from Exhibit 10.1 to the
Company’s Registration Statement No. 333-127800)
10.2
Employment
Agreement by and between Cynthia Garr and Cistera Networks, Inc. dated as
of January 1, 2005 (Incorporated by reference from Exhibit 10.2 to the
Company’s Registration Statement No. 333-127800)
10.3
Employment
Agreement between Gregory Royal and Cistera Networks Canada, Inc. dated as
of October 1, 2004 (Incorporated by reference from Exhibit 10.1 to the
Company’s Registration Statement No. 333-127800)
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
(a)
To
include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(b)
To
reflect in the prospectus any facts or events which, individually or in
the aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which is being
registered) and any deviation from the high or low end of the estimated
maximum range, may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement; and
(c)
To
include any additional or changed material information on the plan of
distribution.
2. For
determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
3. File
a post-effective amendment to remove from registration any of the securities
being registered, which remain unsold at the end of the offering.
4. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or controlling persons of the company pursuant
to the foregoing provisions or otherwise, the company has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in that Act and is, therefore,
unenforceable.
In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of us in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and we will be governed
by the final adjudication of such issue.
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, Texas on February15, 2008.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the date
stated.
