UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[x]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30
th
,
2010
OR
[_]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from __________________ to __________________
Commission
File Number 0-17304
Cistera Networks,
Inc.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of incorporation or organization)
|
91-1944887
(I.R.S.
Employer Identification No.)
|
6509 Windcrest Drive, Suite
160, Plano,
Texas 75024
(Address
of principal executive
offices) (Zip
Code)
972-381-4699
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” “non-accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer
|
|
Accelerated
filer
|
|
Non-accelerated
filer
|
|
Smaller
reporting company
ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
As of
June 30, 2010, 18,022,605 shares of the registrant’s stock, $0.001 par value per
share, were outstanding.
CISTERA
NETWORKS, INC & SUBSIDIARY
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
|
|
Consolidated
Balance Sheets – June 30, 2010 (unaudited) and March 31, 2010
(audited)
|
3
|
|
Consolidated
Statements of Operations – For the three months ended June 30, 2010 and
2009 (unaudited)
|
4
|
|
Consolidated
Statements of Stockholders’ Deficit – June 30, 2010 (unaudited) and March
31, 2010 (audited)
|
5
|
|
Consolidated
Statement of Cash Flows – For the three months ended June 30, 2010 and
2009 (unaudited)
|
6
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
21
|
|
|
|
PART
II: OTHER INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
22
|
|
|
|
Item
1A.
|
Risk
Factors
|
22
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
23
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
23
|
|
|
|
Item
5.
|
Other
Information
|
23
|
|
|
|
Item
6.
|
Exhibits
|
23
|
|
|
|
Part
I. FINANCIAL INFORMATION
Item
1. Financial Statements
CISTERA
NETWORKS, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
June
30, 2010 (Unaudited)
|
|
|
March
31st, 2010 (Audited)
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,322
|
|
|
$
|
12,954
|
|
Accounts
receivable, net of allowance for doubtful accounts of $-0-
|
|
|
185,704
|
|
|
|
188,983
|
|
Inventory
|
|
|
29,400
|
|
|
|
45,000
|
|
Prepaid
expenses
|
|
|
90,983
|
|
|
|
113,565
|
|
Total
current assets
|
|
|
312,409
|
|
|
|
360,502
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
203,118
|
|
|
|
206,960
|
|
Intangible
assets, net
|
|
|
1,443,003
|
|
|
|
1,479,667
|
|
Total
long-term assets
|
|
|
1,646,121
|
|
|
|
1,686,627
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,958,530
|
|
|
$
|
2,047,129
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
344,659
|
|
|
|
350,853
|
|
Accrued
liquidated damages – outside investors
|
|
|
177,402
|
|
|
|
177,402
|
|
Accrued
liabilities
|
|
|
1,618,537
|
|
|
|
1,636,700
|
|
Deferred
revenue
|
|
|
573,935
|
|
|
|
609,532
|
|
Convertible
promissory notes and other notes payable, net of discount
|
|
|
793,426
|
|
|
|
793,426
|
|
Related
party payables
|
|
|
78,676
|
|
|
|
78,676
|
|
Total
current liabilities
|
|
|
3,586,635
|
|
|
|
3,646,589
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
|
354,534
|
|
|
|
357,337
|
|
Other
long-term liabilities
|
|
|
45,723
|
|
|
|
45,722
|
|
Total
long-term liabilities
|
|
|
400,257
|
|
|
|
403,059
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,986,892
|
|
|
|
4,049,648
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 1,000,000 shares authorized;
|
|
|
-
|
|
|
|
-
|
|
-0-
shares issued and outstanding
|
Common
stock, $0.001 par value; 50,000,000 shares authorized;
|
|
|
18,023
|
|
|
|
18,023
|
|
18,022,605 shares
issued and outstanding,
|
Respectively
|
Additional
paid-in capital
|
|
|
19,541,214
|
|
|
|
19,541,214
|
|
Accumulated
deficit
|
|
|
(21,587,599
|
)
|
|
|
(21,561,756
|
)
|
Total
stockholders' deficit
|
|
|
(2,028,362
|
)
|
|
|
(2,002,519
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
1,958,530
|
|
|
$
|
2,047,129
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
|
2010
|
|
|
2009
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Convergence
solutions
|
|
$
|
329,907
|
|
|
$
|
189,143
|
|
Professional
services
|
|
|
24,172
|
|
|
|
35,504
|
|
Support
and maintenance
|
|
|
290,094
|
|
|
|
233,320
|
|
Total
revenues
|
|
|
644,173
|
|
|
|
457,967
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Convergence
solutions
|
|
|
128,912
|
|
|
|
103,013
|
|
Professional
services
|
|
|
42,500
|
|
|
|
47,718
|
|
Support
and maintenance
|
|
|
30,215
|
|
|
|
18,000
|
|
Total
cost of revenues
|
|
|
201,627
|
|
|
|
168,731
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
442,546
|
|
|
|
289,236
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
65,056
|
|
|
|
57,497
|
|
Software
development
|
|
|
74,755
|
|
|
|
29,149
|
|
Engineering
and support
|
|
|
43,151
|
|
|
|
64,057
|
|
General
and administrative
|
|
|
236,790
|
|
|
|
151,750
|
|
Depreciation
and amortization
|
|
|
5,929
|
|
|
|
97,660
|
|
Total
operating expenses
|
|
|
425,681
|
|
|
|
400,113
|
|
|
|
|
|
|
|
|
|
|
Income
/ (Loss) from operations
|
|
|
16,865
|
|
|
|
(110,877
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
Other
income
|
|
|
304
|
|
|
|
56
|
|
Interest
expense
|
|
|
(43,012
|
)
|
|
|
(66,055
|
)
|
Abandonment
loss
|
|
|
|
|
|
|
(15,815
|
)
|
Charge
for inducements related to stock issued to convertible note
holders
|
|
|
-
|
|
|
|
-
|
|
Amortization
of discount on convertible notes – outside investors
|
|
|
-
|
|
|
|
-
|
|
Amortization
of discount on convertible notes – related parties
|
|
|
-
|
|
|
|
-
|
|
Credit
(charge) for estimated liquidated damages
|
|
|
-
|
|
|
|
-
|
|
Total
other income (expense)
|
|
|
(42,708
|
)
|
|
|
(81,814
|
)
|
|
|
|
|
|
|
|
|
|
Net
Income / (Loss)
|
|
$
|
(25,843
|
)
|
|
$
|
(192,691
|
)
|
|
|
|
|
|
|
|
|
|
Basic
& diluted net income / (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic and diluted
|
|
|
18,022,605
|
|
|
|
17,422,605
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders’ equity (deficit)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2010 (audited)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
18,022,605
|
|
|
$
|
18,023
|
|
|
$
|
19,541,214
|
|
|
$
|
(21,561,756
|
)
|
|
$
|
(2,002,519
|
)
|
Net
income / (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,843
|
)
|
|
|
(25,843
|
)
|
Balances
June 30, 2010 (unaudited)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
18,022,605
|
|
|
$
|
18,023
|
|
|
$
|
19,541,214
|
|
|
$
|
(21,587,599
|
)
|
|
$
|
(2,028,362
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
months ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income (loss)
|
|
$
|
(25,843
|
)
|
|
$
|
(192,691
|
)
|
Adjustments
used to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Charge
for inducement to convert debt to convertible promissory
notes
|
|
|
-
|
|
|
|
-
|
|
Amortization
of discount on convertible promissory notes – outside
investors
|
|
|
-
|
|
|
|
-
|
|
Amortization
of discount on convertible promissory notes – related
parties
|
|
|
-
|
|
|
|
-
|
|
Charge
(credit) for estimated liquidated damages – outside
investors
|
|
|
-
|
|
|
|
-
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
Abandonment
Loss
|
|
|
-
|
|
|
|
15,815
|
|
Gain
of disposition of assets
|
|
|
-
|
|
|
|
3,149
|
|
Depreciation
and amortization
|
|
|
74,706
|
|
|
|
97,660
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
3,279
|
|
|
|
56,307
|
|
Related
party receivables
|
|
|
-
|
|
|
|
-
|
|
Inventory
|
|
|
15,600
|
|
|
|
8,932
|
|
Prepaid
expenses
|
|
|
22,582
|
|
|
|
(21,031
|
)
|
Accounts
payable
|
|
|
(6,194
|
)
|
|
|
41,425
|
|
Related
party payables
|
|
|
-
|
|
|
|
-
|
|
Accrued
sales commissions
|
|
|
-
|
|
|
|
-
|
|
Other
accrued liabilities
|
|
|
(18,163
|
)
|
|
|
42,037
|
|
Deferred
revenue
|
|
|
(38,400
|
)
|
|
|
26,768
|
|
Other
long-tem liabilities
|
|
|
-
|
|
|
|
714
|
|
Net
cash used in operating activities
|
|
|
27,567
|
|
|
|
79,085
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of intangible assets
|
|
|
(32,112
|
)
|
|
|
|
|
Purchase
of property and equipment, net
|
|
|
(2,087
|
)
|
|
|
(882
|
)
|
Net
cash used in investing activities
|
|
|
(34,199
|
)
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on other notes payable and capital lease
|
|
|
-
|
|
|
|
(8,386
|
)
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
(8,386
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(6,632
|
)
|
|
|
69,817
|
|
Cash
and cash equivalents at beginning of year
|
|
|
12,954
|
|
|
|
1,493
|
|
Cash
and cash equivalents at end of year
|
|
$
|
6,322
|
|
|
$
|
71,310
|
|
CISTERA
NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(continued)
(Unaudited)
|
|
|
|
|
|
Three
months ended June
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
8,435
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible promissory notes and related accrued interest and accrued
liquidated damages to common stock
|
|
|
|
|
|
|
|
|
Conversion
of accounts payable and other accrued liabilities to convertible
promissory notes
|
|
|
|
|
|
|
|
|
Conversion
of accrued liabilities to common stock
|
|
|
|
|
|
|
|
|
Transfer
of inventory to equipment
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Cistera Networks,
Inc. (“Cistera” the “Company” or “we”) and its wholly-owned subsidiary have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). All significant intercompany transactions and balances have
been eliminated in consolidation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) have
been condensed or omitted pursuant to such rules and regulations. In the opinion
of management, the unaudited consolidated financial statements have been
prepared on the same basis as the annual audited consolidated financial
statements, and reflect all adjustments, consisting only of normal, recurring
adjustments necessary for a fair presentation in accordance with US GAAP. The
results of operations for interim period presented are not necessarily
indicative of the operating results for the full year. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (the “2009
10-K”).
Significant
Accounting Policies
The
Company prepares its financial statements in accordance with US GAAP. The
accounting policies most fundamental to understanding our financial statements
are those relating to recognition of revenue, our use of estimates and the
accounting for convertible debt and warrants. For a detailed discussion on the
application of these accounting policies, see Note 2 to our audited consolidated
financial statements contained in our 2010 10-K.
Recently
Issued Accounting Pronouncements
In April
2009, the FASB updated ASC 820 to provide additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have
decreased significantly. ASC 820 also provides guidance on identifying
circumstances that indicate a transaction is not orderly. The implementation of
ASC 820 did not have a material effect on the Company’s financial
statements.
In April
2009, the FASB updated ASC 825 regarding interim disclosures about fair value of
financial instruments. ASC 825 requires disclosures about fair value
of financial instruments in interim reporting periods of publicly traded
companies that were previously only required to be disclosed in annual financial
statements. The implementation of ASC 825 did not have a material effect on the
Company’s financial statements.
In April
2009, the FASB updated ASC 320 for proper recognition and presentation of
other-than-temporary impairments. ASC 320 provides additional
guidance designed to create greater clarity and consistency in accounting for
and presenting impairment losses on securities. The implementation of
ASC 320 did not have a material effect on the Company’s consolidated financial
statements.
In June
2009, the FASB created the Accounting Standards Codification, which is codified
as ASC 105. ASC 105 establishes the codification as the single
official non-governmental source of authoritative accounting principles (other
than guidance issued by the SEC) and supersedes and effectively replaces
previously issued GAAP hierarchy framework. All other literature that
is not part of the codification will be considered
non-authoritative. The codification is effective for interim and
annual periods ending on or after September 15, 2009. The Company has
applied the codification, as required, beginning with the 2009 Form
10-K. The adoption of the codification did not have a material impact
on the Company’s financial position, results of operations or cash
flows.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
In June
2009, the FASB updated ASC 855, which established principles and requirements
for subsequent events. This guidance details the period after the
balance sheet date which the Company should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements,
the circumstances under which the Company should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the required disclosures for such events. ASC 855 is effective
for interim and annual periods ending after June 15, 2009. The
implementation of ASC 855 did not have a material effect on the Company’s
financial statements.
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update 2009-13 (ASU 2009-13), which provided an update to
ASC 605. ASU 2009-13 addresses how to separate deliverables and how
to measure and allocate arrangement consideration to one or more units of
accounting in multiple-deliverable arrangements. The amendments in this update
will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. The
Company is currently evaluating the impact that this update will have on its
Financial Statements.
Balance
Sheet Accounts
Accounts
receivable are comprised of the following:
|
|
June
30, 2010
|
|
|
March
31, 2010
|
|
|
|
|
|
|
|
|
Non-factored
Accounts Receivable
|
|
|
185,704
|
|
|
|
188,983
|
|
Total
accounts receivable
|
|
$
|
185,704
|
|
|
$
|
188,983
|
|
Accrued
liabilities are comprised of the following:
|
|
June
30, 2010
|
|
|
March
31, 2010
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
131,375
|
|
|
$
|
148,484
|
|
Reserve
for litigation contingency
|
|
|
650,000
|
|
|
|
650,000
|
|
Accrued
compensation and payroll taxes
|
|
|
257,312
|
|
|
|
299,663
|
|
Accrued
Interest
|
|
|
435,600
|
|
|
|
395,075
|
|
Other
|
|
|
144,250
|
|
|
|
143,478
|
|
Total
Accrued liabilities
|
|
$
|
1,618,537
|
|
|
$
|
1,636,700
|
|
Other
long-term liabilities are comprised of the following:
|
|
June
30, 2010
|
|
|
March
31, 2010
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
$
|
45,722
|
|
|
$
|
45,722
|
|
|
|
$
|
45,722
|
|
|
$
|
45,722
|
|
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
Earnings
per Share
Basic
earnings (loss) per share is based on the weighted average number of common
shares outstanding.
Diluted
earnings (loss) per share is computed using the weighted average number of
common shares outstanding plus the number of common shares that would be issued
assuming exercise or conversion of all potentially dilutive common stock
equivalents. The Company had approximately 6.6 million and 6.5
million potentially dilutive common stock equivalents (in the form of stock
options and stock purchase warrants) outstanding as of June 30, 2010 and 2009,
respectively. These potentially dilutive common stock equivalents have been
excluded from the diluted share calculations for the three months ended June 30,
2010 and 2009, respectively, as they were anti-dilutive as a result of the net
losses incurred for those periods. Accordingly, basic shares equal diluted
shares for all periods presented.
Accounts
receivable and concentration of credit risk
The
Company has no significant off-balance sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
The
Company is subject to credit risk from accounts receivable with its customers.
The Company’s accounts receivable are due from both governmental and commercial
entities. Credit is extended based on evaluation of the customers’ financial
condition and, generally, collateral is not required. Accounts receivable are
generally due within 30 to 60 days and are stated at amounts due from customers
net of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due.
The
Company assesses potential reserves against its accounts receivable by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customers’
current ability to pay their obligations to the Company and economic and
industry conditions. Based on these factors, the Company has
concluded that an allowance for doubtful accounts as of June 30, 2010 and March
31, 2010 is not required.
As of
June 30, 2010, the Company receives approximately 28.6% of its gross revenues
from its top three re-sellers. This represents an increase in
concentration of business from the 18% reported for the year ended March 31,
2010.
Reclassifications
Certain
reclassifications have been made in the fiscal year 2009 financial statements to
conform to the fiscal year 2010 presentation.
NOTE
2 - FINANCIAL CONDITION
The
accompanying consolidated financial statements have been prepared in conformity
with US GAAP (except with regard to omission of certain disclosures within
interim financial statements, as permitted by the SEC), which contemplate our
continuation as a going concern and do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary if we were unable to
continue as a going concern. However, the report of our independent registered
public accounting firm on our consolidated financial statements, as of and for
the year ended March 31, 2010, contains an explanatory paragraph expressing
substantial doubt as to our ability to continue as a going concern. The “going
concern” explanatory paragraph resulted from, among other things, the
substantial losses from operations we have incurred since inception, our
liquidity position and the net loss of $0.339 million for the year ended March
31, 2010.
Accordingly,
as of June 30, 2010, the recoverability of a major portion of the recorded asset
amounts is dependent on our continuing operations, which in turn is dependent on
our ability to maintain our ability to be profitable in our future operations
through generating higher revenues or lowering operating costs, or a combination
of the two.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
The
Company maintained a factoring facility with Allied Capital Partners, L.P.
(“Allied”) for up to $1,500,000 of the Company’s customer accounts
receivable. The facility allows for an advance rate up to 85.88% and
initial factoring charges are 1.75% of the total accounts receivable
balance. An additional funding agreement became effective in November
of 2008 allowing for the factoring of support renewals at an advance rate of
50.88% and initial factoring charges of 1.75% of the total accounts receivable
balance. Advances made by Allied are collateralized by the Company’s
accounts receivable, chattel paper, general intangibles, supporting obligations,
inventory and proceeds thereof. The term of the current agreement is
for a period of two years with an automatic one-year renewal
thereafter.
On
December 10th 2009, the factoring facility was terminated by mutual agreement.
We believe that the cost of this facility outweighed the benefits to the
Company. In addition, by terminating this facility, we expect to save over
$135,000 annually.
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As
of that date, we began to accrue interest on the December PP2 Notes at a default
rate of 18% per annum, which is the maximum allowable rate as stipulated under
the PP2 Note purchase agreement. As of April 5, 2009, we were in
default on approximately $1,100,000 of principal and accrued interest on certain
PP2 Notes (the “April PP2 Notes”). As of that date, we began to
accrue interest on the April PP2 Notes at a default rate of 18% per annum, which
is the maximum allowable rate as stipulated under the PP2 Note purchase
agreement. We will need to renegotiate the payment or conversion of
the principal and interest due on all of the PP2 Notes, or raise additional
capital, or a combination of the two. If we need to raise additional capital it
could be in the form of equity or debt, or a combination of the two. The Company
is currently negotiation restructuring of this debt.
NOTE
3 – DEBT
As of
June 30, 2010, the Company had $793,426 of principal, accrued interest of
$435,600 and accrued liquidated damages of $177,402 outstanding on its PP1 Notes
and PP2 Notes. The PP1 Notes bear interest at an annual rate of 8%,
compounded quarterly. The December PP2 Notes and the April PP2 Notes
bear interest at an annual rate of 18%, compounded quarterly.
PP1
Notes and Warrants
On
December 13, 2004, the Company issued and sold an aggregate of $1,146,000 in
principal amount of PP1 Notes, and PP1 Warrants to purchase 1,146,000 shares of
our common stock. Of the $1,146,000 in principal, the Company
received cash of $1,004,000, and $142,000 in principal amount of the PP1 Notes
was issued in connection with the cancellation of an equal amount of the
Company’s outstanding obligations.
The PP1
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 anniversary that they are
outstanding (each, an interest compounding date). The outstanding
principal and all accrued interest become due and payable on the earlier of (a)
December 13, 2006, or (b) the date on which a change in control of the Company
occurred.
The
outstanding principal and accrued interest are convertible into shares of common
stock at a conversion rate equal to the lesser of (a) $1.30 per share, or (b) a
25% discount to the average closing bid price of the Company’s common stock for
the five days including and immediately preceding the interest compounding date,
provided that in no event shall the conversion price per share be less than
$1.00 per share. The PP1 Notes may be converted, in whole or in part,
at the option of the PP1 Note holder on any interest compounding date occurring
after the effective date of a registration statement covering the resale of
shares of common stock to be issued upon conversion of the PP1
Notes.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP1 Notes may be converted, in whole or in part at the
option of the note holders, into the convertible securities, upon the same terms
and conditions governing the issuance of the convertible securities in the
private transaction. The right of the PP1 Note holders to convert
their notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.
The
Company may prepay the PP1 Notes in whole or in part, upon thirty days prior
written notice to note holders; provided that partial prepayments may be made
only in increments of $10,000 and, provided further, that the PP1 Note holders
may convert the amount of the proposed prepayment into shares of our common
stock at any time.
The PP1
Warrants have a term of five years and are exercisable at an exercise price of
$1.30 per share. Subject to an effective registration statement
covering the resale of the shares of common stock issuable upon exercise of the
PP1 Warrants, the Company may, upon thirty days prior written notice, redeem the
PP1 Warrants for $0.10 per share, in whole or in part, if our common stock
closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15)
consecutive trading days.
During
the quarter ended September 30, 2007, the Company elected to compensate PP1 Note
holders who had opted to convert debt into shares of common stock, which
remained unregistered with the SEC as of the date the PP1 Notes became due and
payable on December 13, 2006. The amount offered to, and accepted by,
the shareholders was $135,825, payable in the form of additional shares of
common stock. In August 2007, the company recorded a charge and
liability for the impending issuance of this stock. On January 11,
2008, the Company issued 134,462 shares of common stock at the agreed upon
conversion rate of $1.01, and paid $19 in cash for fractional shares in
settlement of this liability. At March 31, 2010, there was $51,850 of
principal and $40,119 of interest due on the PP1 Notes.
PP2
Notes and Warrants
On
December 29, 2006 we issued and sold an aggregate of $433,362 in principal
amount of PP2 Notes, and issued PP2 Warrants to purchase 433,571 shares of our
common stock. Of the $433,362 in principal, we received cash of
$397,500 and $35,862 in principal and interest of PP1 Notes was
converted. During January through March 2007, the Company received
additional funding from investors in the amount of approximately $1,466,000,
which were formally issued and sold as PP2 Notes on April 5, 2007, when the
Company also issued an additional $1,593,000 in PP2
Notes. Additionally, the Company issued PP2 Warrants to purchase
3,065,205 shares of our common stock, par value $0.001 per share. Of
the $3,065,205 in principal, we received cash of $2,416,429, and $648,776 in
principal amount of the PP2 Notes was issued in connection with the cancellation
of an equal amount of the Company’s outstanding obligations. Included
in the outstanding obligations that were cancelled were $100,779 of obligations
to principal officers and directors in the following amounts: Greg Royal $70,779
and Derek Downs $30,000.
The PP2
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 anniversary that they are
outstanding (each, an interest compounding date). The outstanding
principal and all accrued interest become due and payable two years from the
date of the PP2 Notes. The outstanding principal and accrued interest
are convertible into shares of common stock at a fixed rate of $0.75 per
share. The PP2 Notes may be converted, in whole or in part, at the
option of the PP2 Note holder on any interest compounding date occurring after
the effective date of a registration statement covering the resale of shares of
common stock to be issued upon conversion of the PP1 Notes.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP2 Notes may be converted, in whole or in part at the
option of the note holders, into the convertible securities, upon the same terms
and conditions governing the issuance of the convertible securities in the
private transaction. The right of the PP2 Note holders to convert
their notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.
The
Company may prepay the PP2 Notes in whole or in part, upon thirty days prior
written notice to note holders; provided that partial prepayments may be made
only in increments of $10,000 and, provided further, that the PP1 Note holders
may convert the amount of the proposed prepayment into shares of our common
stock at any time.
The PP2
Warrants have a term of five years and are exercisable at an exercise price of
$1.00 per share. Subject to an effective registration statement
covering the resale of the shares of common stock issuable upon exercise of the
PP2 Warrants, the Company may, upon thirty days prior written notice, redeem the
PP2 Warrants for $0.10 per share, in whole or in part, if our common stock
closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15)
consecutive trading days.
For the
twelve months ended March 31, 2009 and 2008, the Company recorded $1,434,353 and
$1,532,511 respectively, of amortization of debt discounts associated with the
PP2 Notes. For the twelve months ended March 31, 2009 the total
amortization charge included $747,357 for the write-off of unamortized debt
discounts related to the conversion of $2,470,156 in principal of PP2 Notes
under the Company’s Short Term Investment Incentive Plan (the
“STIIP”).
At March
31, 2010, there was $741,576 of principal, accrued interest of $354,955 and
accrued liquidated damages of $177,402 outstanding on its PP2
Notes.
STIIP
Under the
STIIP, which commenced on June 9, 2008, the Company temporarily modified the
terms of its outstanding PP1 Notes, PP2 Notes, PP1 Warrants and PP2 Warrants.
During the period beginning June 9, 2008 through June 24, 2008 (the “Conversion
Period”), the conversion prices of the PP1 Notes and PP2 Notes, which were $1.00
and $0.75 per share, respectively, were reduced to $0.53 per
share. In addition, the exercise prices for the PP1 Warrants and the
PP2 Warrants, which were $1.30 and $1.00 per share, respectively, were reduced
to $0.40 per share. Under the STIIP, certain PP2 Note holders
converted $3,240,290, comprised of $2,470,156 in principal and $770,134 in
accrued interest and liquidated damages into approximately 6.2 million shares of
the Company’s common stock at the reduced conversion price.
Also
under the STIIP, certain PP1 and PP2 Warrant holders exercised approximately 2.3
million PP1 and PP2 Warrants at an exercise price of $0.40 per
share. All PP1 and PP2 Warrant holders who exercised their warrants
also received three additional warrants (the “Bonus Warrants”) for every ten
warrants exercised. The Bonus Warrants were exercisable during the
Conversion Period at an exercise price of $0.30 per share, and if not exercised
on or before such date, the exercise price for such Bonus Warrants was increased
to $0.60 per share. A total of 507,675 Bonus Warrants were exercised at
$0.30 per share. The bonus warrants were valued using the Black-Scholes
option pricing model (“Black-Scholes model”) and a charge and a corresponding
credit to additional paid-in capital were recorded for the June 30, 2008 and
September 30, 2008 quarters in the amounts of $36,125 and $131,631,
respectively. The bonus warrants expire on April 6,
2012. The total cash proceeds received from the exercises of the PP1,
PP2 and Bonus Warrants was approximately $844,000.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
The
Company accounted for the reduction in the conversion prices of the PP2 Notes
under the STIIP in accordance with ASC 470 (formerly FASB Statement No. 84,
“Induced Conversions of Convertible Debt an amendment of APB Opinion No. 26”
(“SFAS 84”)). Accordingly, the Company calculated and recorded an
inducement charge and a corresponding credit to additional paid-in capital in
the June 30, 2008 quarter in the amount of $931,893 for the fair value of common
stock issued based on the reduced price in excess of the fair value of the
common stock issuable pursuant to the original conversion price.
The
Company accounted for the reduction in the exercise price of the PP1 and PP2
Warrants exercised under the STIIP in accordance with the guidance in ASC 718
and 505 (formerly SFAS 123(R), “Share-based payment” (“SFAS 123R”) and FASB
Staff Position No. FSP FAS 123(R)-6, “Technical Corrections of FASB Statement
No. 123(R)”) for a modification due to a short-term
inducement. Accordingly, the Company recorded a charge and a
corresponding credit to additional paid-in capital in the June 30, 2008 quarter
in the amount of $202,743 for the difference between the fair value of the PP1
and PP2 Warrants immediately before and after the modification multiplied by the
number of PP1 and PP2 Warrants that were exercised during the Conversion Period
of the STIIP. The fair value of the PP1 and PP2 Warrants were
calculated using the Black-Scholes model. The total non-cash charge recorded for
the inducement on the PP2 Notes and the reduction in exercise price on the PP1
and PP2 Warrants was $1,134,216.
Registration
payment arrangements
Effective
April 1, 2007, the Company adopted ASC 815 (formerly FASB Staff Position No.
EITF 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”)), which was applicable to the accounting for the liquidated damages on
the PP2 Notes. Upon adoption, the Company recorded a cumulative
effect of an accounting change entry (i.e., a charge to the beginning balance of
the accumulated deficit) as of April 1, 2007 for the combination
of: 1) the reclassification of the Warrants from derivative
liabilities to equity securities (based on the criteria as outlined under EITF
00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”)), and 2) a
contingent liability for probable future payment of liquidated damages (based on
the Company’s best estimate as of the date of adoption, which was through March
31, 2008). The amount of the contingent liability recorded was
approximately $289,000. The difference between the Warrants as
measured on the date of adoption of FSP EITF 00-19 and their original recorded
value was approximately $466,000, and, as stated above, was included in the
charge to the beginning balance of the accumulated deficit. The total
cumulative effect of this accounting change was $755,000.
On April
5, 2007, the Company closed the balance of its PP2 offering and, in accordance
with FSP EITF 00-19-2, recorded a contingent liability and related charge to the
consolidated Statement of Operations for estimated liquidated damages related to
this funding through March 31, 2008. The amount recorded was
$251,176.
As of
March 31, 2008, the Company estimated and accrued $671,342 related to liquidated
damages related to the PP2 Notes and concluded that this amount was the maximum
pay-out required. Under the STIIP, certain PP2 Note holders,
comprising approximately 70% of the original principal of PP2 Notes, converted
their outstanding PP2 Notes at a reduced price of $0.53. On June 30,
2008, the Company executed an agreement with the institutional investor in the
PP2 offering that had the contractual right to liquidated damages. In
exchange for the waiver from the investor, the Company issued to the investor
58,777 shares of its common stock. The agreement terminated any assessment of
liquidated damages beyond June 24, 2008. For the three months ended June 30,
2008, the Company recorded a charge and credit to additional paid-in capital for
the fair value of these shares issued in the amount of $22,041.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
The
Company’s total debt as of March 31, 2010, all of which is current, is as
follows:
PP1
and PP2 Notes:
|
|
|
|
Principal
|
|
$
|
793,426
|
|
Accrued
interest
|
|
|
435,600
|
|
Accrued
estimated liquidated damages
|
|
|
177,402
|
|
|
|
|
1,406,428
|
|
Less:
unamortized discount
|
|
|
-
|
|
|
|
|
1,406,428
|
|
Other
notes payable
|
|
|
78,676
|
|
Total
|
|
$
|
1,485,104
|
|
NOTE
4 – COMMITMENTS AND CONTINGENCIES
The
Company and certain of its current and former officers and directors are
defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS.
GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH
HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No.
DV05-0600-G; G-134th District Court, Dallas County, Texas. The
plaintiff has alleged a number of complaints against the defendants, including
breach of fiduciary duty, misappropriation of corporate opportunities, fraud,
fraudulent inducement, breach of contract, tortuous interference with contract,
fraudulent transfer, and shareholder oppression arising in connection with the
license agreement between the Company and XBridge in May 2003 and the
acquisition of XBridge by the Company in May 2005. The parties held a
mediation conference in April 2006 and have come to an understanding with
respect to the principal elements of a potential settlement. The Company is
currently in the process of negotiating definitive settlement agreements. In
accordance with ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies”
(“SFAS 5”)), we recorded a contingent liability in the amount of $650,000 as of
March 31, 2008 related to the outstanding litigation. As of June
30th, 2010, the Company believes that this amount represents the best estimate
of a potential settlement.
NOTE
5 - RELATED PARTY TRANSACTIONS
On
December 4, 2008, an employee advanced the Company $25,000 for the period
through December 31, 2008. In consideration for this advance, the
Company issued to the employee 25,000 common stock purchase warrants that were
immediately exercisable at $0.40 per share and have a five-year
life. The Company calculated the fair value of the warrants using the
Black-Scholes model and recorded a charge in the amount $4,100 for the December
2008 quarter. As of December 31, 2008, the entire obligation remained
outstanding and began to accrue interest at 8% per annum. The
obligation is due upon demand. During the year ended March 31, 2010,
this obligation was paid in full.
On
December 1, 2009, the Company entered into a professional services agreement
with Blue Kiwi Group Ltd. This agreement provides for the services of Mr Royal
to act as Company Board Member and CEO of the Company. The consideration is
$150,000 per annum for a period of two years. The agreement is attached as
exhibit 10.4.
On
December 9, 2009, the Company issued an Unsecured Promissory Note for $13,942.38
to Gregory Royal being unpaid expense claims for years 2008, 2009 and 2010. The
note is for two (2) years at an interest rate of prime plus one and one half
percent (1.5%) per annum.
On
December 9, 2009, the Company issued an Unsecured Promissory Note for $64,733.76
to Gregory Royal being unpaid portion of salary for calendar year 2009. Mr.
Royal took voluntary partial salary deferral for that calendar period of approx
forty percent (40%) of his salary. The note is for two (2) years at an interest
rate of prime plus one and one half percent (1.5%) per annum.
CISTERA
NETWORKS, INC. & SUBSIDIARY
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
6 – REVERSE/FORWARD SPLIT
Effective
May 13, 2009, the Company completed a reverse stock split of our common stock
followed immediately by a forward stock split of our common stock (the
"Reverse/Forward Stock Split"). As a result of the Reverse/Forward
Stock Split, stockholders owning fewer than 3 shares of our common stock will be
cashed out at a price of $.14 per share, and the holdings of all other
stockholders will remain unchanged. The reverse/forward stock split
resulted in the cancellation of 805 fractional shares. The stock
split reduced the number of shares outstanding from 18,023,410 to
18,022,605. All references to common stock in the financial
statements have been changed to reflect the stock split.
NON-GAAP
DISCLOSURES
EBITDA,
excluding special items, which represents earnings (excluding the impact of
certain nonrecurring items on our results) before depreciation and amortization,
interest and financing expenses, income taxes, and cumulative effect of a change
in accounting principle, net, is a supplemental measure of performance that is
not required by, or presented in accordance with, U.S. GAAP. We present EBITDA,
excluding special items, because we consider it an important supplemental
measure of our operations and financial performance. We believe EBITDA,
excluding special items, is more reflective of our operations as it provides
transparency to investors and enhances period-to-period comparability of our
operations and financial performance. EBITDA, excluding special items, should
not be considered as an alternative to net income determined in accordance with
U.S. GAAP.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. In many but not all cases you can
identify forward-looking statements by words such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,”
“should,” “will” and “would” or the negative of these terms or other similar
expressions. These forward-looking statements include statements regarding
our expectations, beliefs, or intentions about the future, and are based on
information available to us at this time. We assume no obligation to update any
of these statements and specifically decline any obligation to update or correct
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. Actual events and results could differ materially from our expectations
as a result of many factors, including those identified in this report. We urge
you to review and consider those factors, and those identified from time to time
in our reports and filings with the SEC, for information about risks and
uncertainties that may affect our future results. All forward-looking statements
we make after the date of this filing are also qualified by this cautionary
statement and identified risks. Additional risk factors are discussed in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and our
other reports filed with the SEC, to which reference should be
made.
EXECUTIVE SUMMARY AND RECENT
BUSINESS DEVELOPMENTS
Revenues
increased from $644,173 for period ending June 30, 2010 from $457,967 for period
ending 30 June, 2009.
This
represents a 40% increase in revenues as compared to the same quarter in the
prior year, due to the improving macro economic environment. However the
business investment has not returned to previous levels prior to the global
economic crisis and we predict that this situation will continue into the
immediate future. Nonetheless the company continues to focus on revenue
generating activity around our three core markets; Federal, Public Safety and
Healthcare.
Operating
Income for period ending June 30, 2010 increased to $16,865 from a loss for
period ending June 30, 2009 of $110,877.
Earnings
before Interest, Depreciation and Amortization, and Taxes (EBITDA) were positive
$90,736 or 14% of revenue. This represents an increase of $299,273 over period
ending June 30, 2009.
Operating
expenses, excluding depreciation and amortization increased from $302,453 in the
period ending June 30 2009 quarter to $351,810 for the period ending June 30
2010. General Administration expenses increased from $151,750 for June 2009
quarter to $236,790 for the period ending June 30 2010 due to a payroll
adjustment made in the for the period ending June 30 2009.
The
company now has significant control over costs and believes that it is in a
strong position to grow profitability with the improvement in the market
conditions.
Change
in Presentation of Amortization of Intellectual Property
The
Amortization of Intellectual Property has moved to Cost of Revenues from
Operating Expenses from this period reflecting a decrease in Depreciation
Amortization and and a corresponding increase in Cost of Revenues. This in turn
has reduced the Gross Margin by approximately 10% when viewed against prior
periods.
RESULTS
OF OPERATIONS
Selected
Consolidated Statements of Operations Data
The
following tables present consolidated statements of operations data for the
three months ended June 30, 2010 and 2009 based on the percentage of revenue for
each line item, as well as the dollar and percentage change of each of the
items.
Results
of Operations for the Three Months Ended June 30, 2010
Compared
to the Three Months Ended June 30, 2009
|
Three
months ended June 30,
|
|
2010
|
%
|
2009
|
%
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Convergence
solutions
|
$329,907
|
51%
|
$189,143
|
41%
|
Professional
services
|
24,172
|
4%
|
35,504
|
8%
|
Support
and maintenance
|
290,094
|
45%
|
233,320
|
51%
|
Total
revenues
|
644,173
|
100%
|
457,967
|
100%
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
Convergence
solutions
|
128,912
|
20%
|
103,013
|
22%
|
Professional
services
|
42,500
|
7%
|
47,718
|
10%
|
Support
and maintenance
|
30,215
|
5%
|
18,000
|
4%
|
Total
cost of revenues
|
201,627
|
31%
|
168,731
|
37%
|
|
|
|
|
|
Gross
Profit
|
442,546
|
69%
|
289,236
|
63%
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
Sales
and marketing
|
65,056
|
10%
|
57,497
|
12%
|
Software
development
|
74,755
|
12%
|
29,149
|
6%
|
Engineering
and support
|
43,151
|
7%
|
64,057
|
13%
|
General
and administrative
|
236,790
|
37%
|
151,750
|
33%
|
Depreciation
and amortization
|
5,929
|
1%
|
97,660
|
21%
|
Total
operating expenses
|
425,681
|
66%
|
400,113
|
87%
|
|
|
|
|
|
Income
/ (Loss) from operations
|
16,865
|
3%
|
(110,877)
|
-24%
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
Interest
income
|
-
|
0%
|
-
|
0%
|
Other
income
|
304
|
0%
|
56
|
0%
|
Interest
expense
|
(43,012)
|
-7%
|
(66,055)
|
-14%
|
Abandonment
loss
|
-
|
0%
|
(15,815)
|
-3%
|
Charge
for inducements related to stock issued to convertible note
holders
|
-
|
0%
|
-
|
0%
|
Amortization
of discount on convertible notes – outside investors
|
-
|
0%
|
-
|
0%
|
Amortization
of discount on convertible notes – related parties
|
-
|
0%
|
-
|
0%
|
Credit
(charge) for estimated liquidated damages
|
-
|
0%
|
-
|
0%
|
Total
other income (expense)
|
(42,708)
|
-7%
|
(81,814)
|
-18%
|
|
|
|
|
|
Net
Income / (Loss)
|
$(25,843)
|
-4%
|
$(192,691)
|
-42%
|
|
|
|
|
|
Basic
& diluted net income / (loss) per share
|
$0.00
|
|
$(0.01)
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic and diluted
|
18,022,605
|
|
17,422,605
|
|
Revenue
Revenue
for the quarter ended June 30, 2010 increased $186,206 or approximately 40% from
the comparable prior year quarter primarily due to deferred projects being
bought forward as well as stronger maintenance renewals.
Gross
Profit and Gross Margin
Gross
profit for the quarter ended June 30, 2010 increased $153,310 or approximately
52% from the comparable prior year quarter primarily due to increased
revenue. Gross margin increased in the June 2010 quarter as compared
to the June 2009 quarter to 69% from 63%. This increase was primarily
due to increases in the higher margin revenue categories of convergence
solutions and support and maintenance, offset by lower margins on professional
services as a result of the timing of completion of certain project service
engagements.
Additionally
Amortization of Intellectual Property is now treated as Cost of Goods Sold for
the amount of $67,942. This has the effect of reducing the Gross Margin by
approx 10% when viewed against prior periods.
Operating
Expenses
Operating
expenses increased from $400,113 in the June 2009 quarter to $425,687 in the
June 2010 quarter, a increase of $25,574 or approximately 6%. The
increase was due to a payroll adjustment made in the June 2009
quarter.
Interest
Expense
Interest
expense for the June 2010 quarter decreased $23,043 from the June 2009 quarter
primarily due to the decrease in the PP2 Notes as a result of the conversions
completed in the fiscal 2010 year. This also reflects the elimination of the
factoring facility.
Liquidity
and Capital Resources
The
unaudited consolidated financial statements contained in this report have been
prepared in conformity with US GAAP (except with regard to omission of certain
disclosures within interim financial statements, as permitted by the SEC), which
contemplate our continuation as a going concern and do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary if
we were unable to continue as a going concern. However, the report of our
independent registered public accounting firm on our consolidated financial
statements, as of and for the year ended March 31, 2010, contains an explanatory
paragraph expressing substantial doubt as to our ability to continue as a going
concern. The “going concern” explanatory paragraph resulted from, among other
things, the substantial losses from operations we have incurred since inception,
our liquidity position and net loss of $0.339 million for the year ended March
31, 2010.
Accordingly,
as of June 30, 2010, the recoverability of a major portion of the recorded asset
amounts is dependent on our continuing operations, which in turn is dependent on
our ability to maintain our current financing arrangements and our ability to
become profitable in our future operations through generating higher revenues or
lowering operating costs, or a combination of the two. These factors raise
substantial doubt about our ability to continue as a going concern. These
consolidated financial statements do not reflect adjustments that would be
necessary if we were unable to continue as a going concern.
Our
primary source of working capital liquidity was a factoring facility we have
with Allied Capital Partners, L.P. (“Allied”), which allows for cash advances of
up to $1,500,000 on our customer accounts receivable, subject to the approval of
Allied of the customer and the type of product or service that is
invoiced. The facility allows for an advance rate up to 85.88% and
initial factoring charges are 1.75% of the total accounts receivable
balance. An additional funding agreement became effective in November
of 2008 allowing for the factoring of support renewals at an advance rate of
50.88% and initial factoring charges of 1.75% of the total accounts receivable
balance. Advances made by Allied are collateralized by our accounts
receivable, chattel paper, general intangibles, supporting obligations,
inventory and proceeds thereof.
On
December 10th 2009, both parties mutually agreed to terminate the factoring
facility. The company believes that the cost of this facility outweighed the
benefits to the company. The company expects to save over $135,000 annually from
the termination of this facility.
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As
of that date, we began to accrue interest on the December PP2 Notes at a default
rate of 18% per annum, which is the maximum allowable rate as stipulated under
the PP2 Note purchase agreement. We will need to renegotiate the
payment or conversion of the principal and interest due on all of the PP2 Notes,
of which approximately $1.1 million is due in April 2009, or raise additional
capital, or a combination of the two. If we need to raise additional capital it
could be in the form of equity or debt, or a combination of the two. The capital
markets are extremely challenging at this time and there can be no assurance
that we will be successful in raising additional funds and, if so, on favorable
terms or that the cost savings or required new capital will be
sufficient. We are also actively exploring other strategic
alternatives.
As of
April 5, 2009, we were in default on approximately $1,100,000 of principal and
accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of
that date, we began to accrue interest on the April PP2 Notes at a default rate
of 18% per annum, which is the maximum allowable rate as stipulated under the
PP2 Note purchase agreement. We will need to renegotiate the payment
or conversion of the principal and interest due on all of the PP2 Notes or raise
additional capital, or a combination of the two. If we need to raise additional
capital it could be in the form of equity or debt, or a combination of the two.
The capital markets are extremely challenging at this time and there can be no
assurance that we will be successful in raising additional funds and, if so, on
favorable terms or that the cost savings or required new capital will be
sufficient.
Cash
and Cash Flows
Our cash
and cash equivalents at June 30, 2010 were $6,322. For the three months ended
June 30, 2010, net cash provided by operations was $27,567. The
primary use of cash was to pay down Accrued Liabilities in the amount
of $52,702.
Contractual
Obligations
Our
current material contractual obligations are our current and former corporate
office leases and the principal, accrued interest and accrued liquidated damages
under our PP1 and PP2 Notes.
Critical
Accounting Policies
We
prepare our financial statements in accordance with US GAAP. The accounting
policies most fundamental to understanding our financial statements are those
relating to recognition of revenue, our use of estimates and the accounting for
convertible debt and warrants. For a detailed discussion on the application of
these accounting policies, see Note 2 to our audited consolidated financial
statements contained in our 2010 10-K.
Research
and Development – Software Development
Research
and development expenditures are generally expensed as incurred. ASC 985
(formerly SFAS No. 86, “Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed”), requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. Based on the Company’s product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant. Thereafter, all
software production costs shall be capitalized and subsequently reported at the
lower of unamortized cost or net realizable value. Capitalized costs are
amortized based on current and future revenue for each product with an annual
minimum equal to the straight-line amortization over the remaining estimated
economic life of the product. Our capitalization of software
development for quarter ending June 30, 2010 was $32,112.
Recently
Issued Accounting Pronouncements
We
discuss the potential impact of recent accounting pronouncements in Note 1 to
the unaudited consolidated financial statements contained in this
report.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
As a
smaller reporting company, we are not required to provide this
information.
Item
4(T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) are designed to ensure that information required to be
disclosed in reports filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in SEC
rules and forms and that such information is accumulated and communicated to
management, including our Chief Executive Officer, who is also currently our
interim Chief Financial Officer (the “Certifying Officer”), to allow timely
decisions regarding required disclosures.
In April
2009, and for fiscal year ending March 31, 2010, the company embarked on a
complete restructuring in response to the Global economic crisis. With this
restructuring, the company also embarked on a complete overhaul of all
operational processes and procedures with particular attention on management and
financial accounting areas of the business. On April 1, 2010, the company moved
to a new and more sophisticated accounting system and overhauled the financial
processes to (a) verify the underlying historical information, and if necessary
make adjustments and (b) improve the speed and efficacy on which final
accounting and review processes are made. The company in fiscal year 2010 also
retained a management accountant specifically tasked with validating and
improving financial controls.
Although
a number of significant changes have been made to the financial operations, the
Certifying Officer determined that these changes were not significantly
completed in order to verify the effectiveness of the design and operation of
our disclosure controls and procedures for the reporting period. It is expected
that these changes will be completed in the fiscal year ending March 31,
2011.
As of
June 30, 2010, we carried out an analysis, under the supervision and with the
participation of our management, including our Certifying Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. As a result of this analysis, our Certifying Officer concluded that
our disclosure controls and procedures and internal controls over financial
reporting continued to be not effective and identified remediation measures to
be implemented.
We
estimate that the Certifying Officer, along with the Company’s other management
personnel, will need to complete remediation measures that may include engaging
an independent consulting firm to further evaluate, remediate, implement,
document and test the internal controls in these key areas:
1.
|
Financial
Reporting, including technical accounting surrounding complex accounting
transactions
|
2.
|
Order
Entry Accounting & Reporting
|
3.
|
Debt/Equity
Accounting & Compliance
|
4.
|
Cash
& Other Working Capital
Management
|
5.
|
Compensation
Accounting & Administration
|
6.
|
Other
Assets & Liability Account
Management
|
We will
also monitor our disclosure controls and procedures on a continuing basis to
ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management,
including its principal executive and principal financial officers, as
appropriate, to allow timely decisions regarding required disclosure. In the
future as such controls change in relation to developments in the our business
and financial reporting requirements, our evaluation and monitoring measures
will also address any additional corrective actions that may be
required.
Inherent
Limitations of Internal Controls
Our
management does not expect that our disclosure control procedures or our
internal controls over financial reporting will prevent all errors and fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
The
Company and certain of its current and former officers and directors are
defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS.
GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH
HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No.
DV05-0600-G; G-134th District Court, Dallas County, Texas. The
plaintiff has alleged a number of complaints against the defendants, including
breach of fiduciary duty, misappropriation of corporate opportunities, fraud,
fraudulent inducement, breach of contract, tortuous interference with contract,
fraudulent transfer, and shareholder oppression arising in connection with the
license agreement between the Company and XBridge in May 2003 and the
acquisition of XBridge by the Company in May 2005. The parties held a
mediation conference in April 2006 and have come to an understanding with
respect to the principal elements of a potential settlement. The Company is
currently in the process of negotiating definitive settlement agreements. In
accordance with ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies”
(“SFAS 5”)), we recorded a contingent liability in the amount of $650,000 as of
March 31, 2008 related to the outstanding litigation. As of June
30th, 2010, the Company believes that this amount represents the best estimate
of a potential settlement.
Item
1A. Risk Factors
We may
need to raise additional capital to fund our operation
s.
Our
ability to continue as a going concern is potentially doubt and we may not be
successful in generating revenue and gross profit at levels sufficient to cover
our operating costs and cash investment requirements.
We
will need to renegotiate or extend the currently outstanding PP2 Notes and
related interest.
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes. In addition, as of April 5,
2009, we were in default of approximately $1,100,000 of principal and accrued
interest on certain PP2 Notes. Currently, we are accruing interest on
these PP2 Notes at a default rate of 18% per annum, which is the maximum
allowable rate as stipulated under the PP2 Note purchase
agreement. If we need to raise additional capital it could be in the
form of equity or debt, or a combination of the two. There can be no assurance
that we will be successful in raising additional funds and, if so, on favorable
terms or that the cost savings or required new capital will be
sufficient.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item
3. Defaults Upon Senior Securities
As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As
of this date, we began to accrue interest on the December PP2 Notes at a default
rate of 18% per annum, which is the maximum allowable rate as stipulated under
the PP2 Note purchase agreement. In addition, as of April 5, 2009, we
were in default on approximately $1,100,000 of principal and accrued interest on
certain PP2 Notes. As of this date, we began to accrue interest on
the April PP2 Notes at a default rate of 18% per annum. We will
likely need to renegotiate the payment or conversion of the principal and
interest due on all of the PP2 Notes, or raise additional capital, or a
combination of the two. If we need to raise additional capital it could be in
the form of equity or debt, or a combination of the two. There can be no
assurance that we will be successful in raising additional funds and, if so, on
favorable terms or that the cost savings or required new capital will be
sufficient.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
31.1 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Press
release dated August 13, 2010.
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
CISTERA
NETWORKS, INC.
|
|
|
|
|
Date:
August 13, 2010
|
/s/ Gregory T.
Royal
|
|
Gregory
T. Royal
|
|
Chief
Executive Officer and interim
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Executive, Financial and
|
|
Accounting
Officer)
|
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