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EX-32 - Cistera Networks, Inc.form10ka033110ex32.htm
EX-31 - Cistera Networks, Inc.form10ka033110ex31.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-K/A
 
Amendment No. 1

 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended: March 31, 2010

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number: 0-17304

Cistera Networks, Inc.
(Name of small business issuer in its charter)

Nevada
91-1944887
State or other jurisdiction of
(I.R.S. Employer
incorporation or organization
Identification No.)

6509 Windcrest Drive, suite 160, Plano, Texas  75024
(Address of principal executive offices)  (zip code)

Issuer's telephone number                                           (972) 381-4699

Securities registered under Section 12(b) of the Act:  NONE
Securities registered under Section 12(g) of the Act:

Common Stock Par Value $0.001
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  [  ] Yes  [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  [  ] Yes  [X] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.[X] Yes [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X] Yes [  ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company ý


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes  [X] No

At July 14, 2010, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the quoted market price $.05 at which the common equity was sold as of was approximately  $ 901,130.

As of July 14, 2010, 18,022,605 shares of the Issuer's $.001 par value common stock were issued and outstanding.

 
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CISTERA NETWORKS, INC.
FORM 10-K
TABLE OF CONTENTS
Item Number and Caption
Page
 
PART I
 
     
Item 1.
Business
1
     
Item 1A.
Risk Factors
7
     
Item 1B.
Unresolved Staff Comments
7
     
Item 2.
Properties
8
     
Item 3.
Legal Proceedings
8
     
     
     
 
PART II
 
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
8
 
Purchases of Equity Securities
 
     
Item 6.
Selected Financial Data
9
     
Item 7.
Management's Discussion and Analysis of Financial Condition and
9
 
Results of Operations
 
     
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
17
     
Item 8.
Financial Statements and Supplementary Data
17
     
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
17
 
     
Item 9A.
Controls and Procedures
17
     
Item 9B.
Other Information
19
     
 
PART III
 
     
Item 10.
Directors, Executive Officers, and Corporate Governance
19
     
Item 11.
Executive Compensation
22
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
24
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
26
     
Item 14.
Principal Accountant Fees & Services
26
     
 
PART IV
 
     
Item 15.
Exhibits, Financial Statement Schedules
28

 
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EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K (the “Report”) for the fiscal year ended March 31, 2010 is filed for the purpose of amending the following:

·  
Amend references to legacy GAAP have been updated to reflect FASB accounting standards.
·  
Additional discussions have been included in the results of operations for costs of revenues, operating expenses, or other income (expense).
·  
Additional discussion on the evaluation of Disclosure Controlers and Procedures
·  
Additional discussion on Internal Control over Financial Reporting
·  
A correction to the use of the term “small business issuer” to “registrant” in Exhibit 31.1
·  
Correct an error with certification incorrectly referring to December 31, 2009 in Exhibit 32.1
·  
Additional discussion disclosing the use of non-GAAP EBITDA under 10(e) of Regulation S-K in Exhibit 99.1

ASC FASB 250-10-50-7 Disclosure  
 
There are no corrections to any financial statement line items required to be disclosed.

ASC FASB 250-10-50-8 Disclosure  

There are no FASB 250-10-50-8 disclosures required.



 
iii

 

PART I

ITEM 1:  DESCRIPTION OF BUSINESS

BACKGROUND
 
Cistera Networks, Inc. (“we” or “the Company” or “Cistera”) was incorporated in Delaware on April 15, 1987, under the name of I.S.B.C. Corp.  The Company subsequently changed its name first to Coral Companies, Inc., and then to CNH Holdings Company.  Domicile was changed to Nevada in 1997.  The Company conducted an initial public and secondary offerings during the 1980's.  On June 15, 1998, the Company acquired Southport Environmental and Development, Inc.  This acquisition, however, was subsequently rescinded by agreement between the parties and made a formal order of the court effective April 19, 2000.  This order put the Company in the position that it occupied at June 14, 1998, as if none of the actions that had occurred from that time to the date of rescission had transpired.
 
The Company was in the development stage from January 1, 1992 to May 5, 2003.  On May 5, 2003, the Company formed Corvero Networks, Inc., a Florida corporation as a wholly owned subsidiary to acquire the use of certain technology known as the XBridge Technology.  This technology was used as its principal component of the Corvero Convergence Platform.  The acquisition was accomplished by entering into a license agreement with XBridge Software, Inc., a Delaware corporation.
 
On August 31, 2004, as part of a corporate restructuring aimed at simplifying the Company’s operating structure, Corvero Networks merged into CNH Holdings and began doing business as Cistera Networks.  As a continuation of this restructuring, effective May 27, 2005, the Company acquired XBridge in a merger of XBridge with a newly formed Company subsidiary.
 
On September 27, 2005, we changed our name to Cistera Networks, Inc.
 
On January 1st, 2010, Cistera Networks restructured the company around three core operating markets and channels. Cistera Federal Systems, Inc. provides sales and marketing for the US Federal Government market. Telmarine Communications, Inc. develops and markets public safety wireless communications solutions and Cistera Networks Inc, develops and markets solutions for the Cisco technology channels and partners.
 
BUSINESS OVERVIEW  
 
We provide an Enterprise Application Server for Unified Communications that provides an advanced platform for the delivery of application services for predominately the public safety, healthcare and federal markets. We offer our solution sets predominately using a perpetual license and maintenance fee model although we have deployed solutions on a subscription model for large carriers.
 
In 2009 in response to a considerable deterioration of the global economy and the unified communications markets in particular, Cistera began to restructure the company and realign its business strategy towards “high value” markets and solutions and away from highly competitive low margin unified communications markets. With this in mind, the company has restructured into three divisions; Federal Systems, Commercial (including Healthcare) and Public Safety.
 
In 2007, we began efforts to offer our solution sets to the United States Federal Government. This market has unique compliance and procurement requirements particular in the area of security and scalability. For example, in order for the company to be eligible for Department of Defense contracts, our software products must meet strict security configurations and profiles. The company has invested considerable time and effort bringing the solution set into compliance and as a consequence has been successfully deployed by various agencies of the US Government including the Department of Defense. In December 2009, Cistera formed a wholly owned subsidiary, Cistera Federal Systems Inc, to meet the procurement requirements of the Government Services Agency and encapsulate the federal activities of Cistera.  It is the intention of the company to considerably increase the activity and investment in the Federal Marketplace through a combination of direct marketing and channel partner activity. We expect that over time this will significantly contribute to the overall success of the company.  As of March 31, 2010, there are no significant transactions for Cistera Federal.
 
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In 2009 we began to offer our solution sets to the Healthcare markets, specifically in enabling business workflow and communications in hospitals and other medical facilities. Operational efficiency is a critical objective of healthcare providers. Cistera provides solutions that marshal resources in real-time with processes to allow timely resolution of key tasks. We have over the past year seen solid success in implementing our solution in large hospital systems in California, Texas and Florida and now have over 25 healthcare systems and providers using Cistera capability. It is the intention of the company to considerably increase the activity and investment in the Healthcare market through a combination of direct marketing and partnerships to enhance our value in this market. We expect that over time this will significantly contribute to the overall success of the company.
 
Cistera Networks has also believes that there are significant opportunities in the public safety market dominated by Federal, State and Local government customers, particularly Land Mobile Radio P.25 markets. In December 2009 Cistera Networks Inc incorporated a wholly owned subsidiary Telmarine Communications Inc to specifically focus on the development the market for Unified Communications for Land Mobile Radio. Cistera has sold the LMRConnect product line to Telmarine Communications. Telmarine is currently pursuing technology licensing agreements and relationships with third parties to grow the product offering for the public safety markets.
 
We began operations in May 2003, and first introduced our convergence solutions in September 2003.  We initially offered our solutions at discounted prices, to seed the market and to establish a reference-able customer base.  From May 2003 through June 2005, we staffed our operations, grew our reseller channel, built our infrastructure, created, marketed and delivered our solutions and obtained an initial base of commercial customers.  In April 2009 in response to the global recession and collapse of the unified communications market, Cistera restructured the company to reduce staff and overhead and focused the company on three key markets; Commercial, Federal and Public Safety.
 
Our revenues decreased from $3,714,272 in fiscal 2009 to $2,294,210 in fiscal 2010, an decrease of 38% primarily due the global recession, however the Company, as a result of restructuring, dramatically reduced losses from $4,628,117 in fiscal 2009 to $339,257 in fiscal 2010, a decrease of 93%. This has resulted in the Company achieving positive (non-GAAP) EBITDA from operations for the fiscal year end March 31, 2010.
 
Company Business
 
Currently, we offer new and existing customers a variety of packaged applications and platform solutions for industry-specific requirements.  We market and sell our software and hardware solutions through a Value Added Reseller (VAR) channel.  To ensure growth scalability, our VAR channel is being trained to deliver professional services for standard installations, which we believe will allow us to focus on advanced professional services for complex high value implementations.
 
We rely heavily on recurring maintenance and support revenue as a core component of our business. Currently we enjoy annualized maintenance revenue of approximately $1,066,000 in recurring maintenance and support revenue and we expect this number to grow over time. We have over 600 customers using our products throughout North America and Europe and are aggressively pursuing opportunities to grow value within our existing customer base.
 
We also intend to increase our direct presence in the three key markets, Healthcare, Finance and Public Safety. These markets purchase technology solutions based on specific business needs and requirements. Cistera is building up its core business competency in these markets through Account and Product Management. We intend to invest heavily over the next few years in building out our market presence in these areas and develop core internal competencies both on the sales and research and development groups.
 

 
2

 

CURRENT ECONOMIC ENVIRONMENT
 
The global economy has without doubt been through one of the most difficult periods in memory. This significantly impacted the market for unified communications solutions and business investment overall. The Company was forced to respond to this market reality and has over the last year responded accordingly. However Cistera has taken this opportunity to reassess the business and the markets it participates in. Cistera Networks is approximately half-way through a restructuring plan designed to make the Company sustain-ably profitable and dominate in the strongest key markets we operate in. We believe that our products are ideally suited to Federal, Healthcare and Public Safety and continue to make strong headway in these markets. We enjoy higher revenue per customer and gross margins from these markets because we offer a higher value solution. We believe that this focus will continue the trending of our product mix toward the higher value in key markets as well as a strong emphasis on maintenance revenue will allow us to maintain strong profitability into the future.

We currently have 15 full time and no part time employees located predominately in North America.
 
REVERSE/FORWARD SPLIT
 
Effective May 13, 2009, the Company completed a reverse stock split of our common stock followed immediately by a forward stock split of our common stock (the "Reverse/Forward Stock Split").  As a result, we now have fewer than 300 stockholders of record, and are eligible to cease filing periodic reports with the Commission, and we intend to cease public registration and terminate the listing of our Common Stock on the OTC Bulletin Board. Once we cease public registration and terminate the listing of our Common Stock, we will not be required to provide our Stockholders with periodic or other reports regarding the Company, although we intend to continue to provide similar information through the Pink Sheets News Service.
 
We believe that any material benefit derived from continued registration under the Exchange Act is outweighed by the cost.  We have been unable to provide increased value to our stockholders as a public company, and particularly as a result of the increased cost and tangible and intangible burdens associated with being a public company following the passage of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), we do not believe that continuing our public company status is in the best interest of the Company or our stockholders.
 
We believe that the significant tangible and intangible costs of our being a public company are not justified because we have not been able to realize many of the benefits that publicly traded companies sometimes realize.  We do not believe that we are in a position to use our status as a public company to raise capital through sales of securities in a public offering, or otherwise to access the public markets to raise equity capital.  In addition, our common stock's extremely limited trading volume, stock price and public float have all but eliminated our ability to use our common stock as acquisition currency or to attract and retain employees.
 
Our status as a public company has not only failed to benefit our stockholders materially, but also, in the Company’s view, places an unnecessary financial burden on us.  That burden has only risen in recent years, since the enactment of the Sarbanes-Oxley Act.  As a public company, we incur direct costs associated with compliance with the Commission's filing and reporting requirements imposed on public companies.  To comply with the public company requirements, we incur an estimated $224,000 annually before taxes in related expenses.  Of these expenses, we anticipate that the deregistration of our shares will result in a reduction of approximately $198,000 in annual expenses as follows:
 
ESTIMATED FUTURE ANNUAL SAVINGS TO BE REALIZED IF THE COMPANY GOES PRIVATE

Accounting and Audit Fees
  $ 38,000  
Internal Control Compliance
  $ 140,000  
Stockholder Expenses
  $ 5,000  
Legal Fees
  $ 15,000  
   Total
  $ 198,000  


 
3

 

The estimates set forth above are only estimates.  The actual savings that we may realize may be higher or lower than the estimates set forth above.  In light of our current size, opportunities and resources, the Board does not believe that such costs are justified.  Therefore, we believe that it is in our best interests and the best interests of our stockholders to eliminate the administrative, financial and additional accounting burdens associated with being a public company rather than continue to subject the Company to these burdens.
 
Default On Convertible Promissory Notes

Effective April 10, 2010, the Company was in default on approximately $1,365,901 of convertible promissory notes, including accrued interest related thereon. These notes were originally issued in the Company’s private placement that was consummated in April 2007. Interest on the notes, which was eight percent (8%) per annum, compounded quarterly, began to accrue at eighteen percent (18%) per annum until the notes are paid in full.
 
Effective December 27, 2008 the Company was currently in default on approximately $148,000 of convertible promissory notes and accrued interest related thereto issued in the Company’s private placement that occurred on December 29, 2006. The notes were due and payable on December 29, 2008. As a result of this default, interest on the notes, which was eight percent (8%) per annum, compounded quarterly, began to accrue at eighteen percent (18%) per annum until the notes are paid in full.
 
Resignation Of CEO

Effective April 30, 2009, Mr. Derek P. Downs resigned as President, Chief Executive Officer, acting Chief Financial Officer and director of the Company, andMr. Gregory T. Royal, became acting Chief Executive Officer and acting Chief Financial Officer of the Company.
 
INDUSTRY BACKGROUND
 
The term "unified communications" covers a range of technologies, including voice-over-IP (VoIP) and fax-over-IP services, which are carried over both the Internet and private IP-based networks.
 
Unified communications (UC) is the integration of real-time communication services such as instant messaging (chat), presence information, Telephony (including Unified communications), video conferencing, call control and speech recognition with non real-time communication services. UC is not a single product, but a set of products that provides a consistent unified user interface and user experience across multiple devices and media types. UC also refers to a trend to offer Business process integration, i.e. to simplify and integrate all forms of communications in view to optimize business processes and reduce the response time, manage flows and eliminate device and media dependencies.
 
Unified communications is very useful for knowledge workers, information workers, and service workers alike, many of whom may cross the lines between the three sectors on a daily or hourly basis, depending on the task and the client. With an increasingly mobile workforce, businesses are rarely centralized in one location. Unified communications facilitates this on-the-go, always-available style of communication.

A subsection of Unified communications is Communication Enabled Business Process (CEBP). The goal of CEBP is to optimize business process by reducing the human latency that exists within a process flow. For example, a mortgage approval process may be experiencing human latency because the person assigned to providing an approval is on vacation or busy working on something else. To reduce this latency, CEBP leverages Unified communications capabilities (i.e. UC services) by embedding them into the business process flow. The result is a more efficient, more automated closed-loop process; translating into significant ROI.


 
4

 

THE OPPORTUNITY FOR COMMUNICATION ENABLED BUSINESS PROCESSES
 
Traditionally communications infrastructure has remained separated from existing data networking infrastructure. In order to integrate the two systems together was expensive and time consuming limiting this integration effort to very high value business areas such as contact centers and trading floors. However within the last 3 years with the adoption of voice-over-ip systems that reside on the data network, there has been a significant growth in the integration of these two platforms. At the heart of this is the integration of communications into business processes significantly increasing operational capability.

Cistera offers powerful CEBP solutions through a rich, open software platform, applications and professional services capability. We have a suite of Unified communications and CEBP applications available as off the shelf, packaged solution sets for as well as a strong application configuration capability to provide custom solutions that meet unique business requirements in the healthcare, federal and public safety markets.

OUR STRATEGY
 
Our objective is to be the leading provider of communication enabled business process for the Federal Government, Healthcare and Public Safety markets. To achieve this objective, we are pursuing the following strategies:
 
Extend Our Product and Technological Leadership. We believe our solution provides some of the highest value unified communications solutions for business in the industry. This has been proven consistently throughout our markets and we successfully compete with lower-cost competitors and substitute products. We have increased our focus towards driving value into our three core markets and we continue to invest in enhancing value.
 
Expand Sales and Distribution Channels.  We intend to pursue a multi-channel distribution strategy by expanding our key relationships with system integrators, VARs, OEMs and distributors.  We intend to increase our presence directly in our key markets in order to engage customers at a higher level and are retaining sales people specifically to address these markets.
 
Capitalize on Our Professional Services Capabilities.  We have established what we believe to be highly successful relationships with customers and VARs by assisting them in designing, developing and deploying our convergence solutions.  Our professional services range from strategic and architectural planning to complete integration and deployment of our products.  We encourage our indirect channel partners to build out professional services practices to support the Cistera solutions by offering certification-training classes. We also work directly with mid-market and enterprise customers whose solution is large and complex. We are continuing to aggressively market to enterprise customers and the Federal Government directly and develop large-scale complex solutions.
 
Build a comprehensive annuity business. Because the telecommunications industry is predominately an annuity business, we intend to build out a platform and services offering that creates a sustainable annuity structure, consisting of the delivery of application services that are instrumental to customer’s communications processes.  Because of this value we have a strong maintenance and support business that has been growing at a significant rate for the past 3 years. We continue to develop in building a professional services business that leverages the over 600 customers who use Cistera solutions.
 
PRODUCTS
 
Our convergence products consist of application appliances—hardware and software combined to deliver a broad suite of feature-sets on a scalable architecture:
 
Hardware platforms. The Cistera platforms combine advanced software engines with hardware devices that have been optimized and in some cases, specifically designed to deliver the performance and scalability required for Unified communications application environments.
 

 
5

 

Þ  
Cistera ConvergenceServer™ (CCS™) the foundation of a Cistera IPT solution is available in five form factors— the CCS 1500, the CCS 2500, the CCS 5500 and the CCS 7500 series are designed to support  “medium”, “large” and “service provider” performance requirements for specific customer locations.  The servers are rack-mountable, open standards-based hardware systems.

Þ  
Cistera ZoneController™ (CZC™) and ZoneSpeak™ enables unified communications systems to work with existing or newly installed overhead speakers to create a unified paging system.  Cistera’s solution is the only one that supports simultaneous broadcasting to IP phones and speakers.

Cistera 1.9 Software Platform.  The Cistera 1.9 software platform is a component-based architecture that enables enhanced scalability and management of advanced unified communications applications.  This platform has built in business process management; rules engine and media control elements that combine together and configured to meet the needs of particular markets.
 
Quality Assurance and Management are systems that allow organizations to better respond to the needs of their customers and their partners. This solution enables organizations to build feedback loops by automating audit and compliance needs through recording and monitoring systems. Quality Assurance and Management Systems include recording, monitoring, screen capture, supervisory intervention and reporting tools that increase the organization’s ability to view and response to customer experiences.
 
The application engines include:
 
Þ  
QuickRecord™ - is a robust unified communications compliance recorder and media management service designed to support those environments requiring reliable call recording functionality on an adhoc basis, using major unified communications platforms like Cisco’s Call Manager™.

Þ  
QAMRecord™ Enterprise- is Cistera’s premier solution for large-scale contact centers. It provides a comprehensive solution for unified contact centers and builds on the functionality of Enhanced including tighter integration with Cisco Unified Contact Center (TM) and Cistera QuickConnect outbound dialer, remote desktop control as well as comprehensive dashboarding functionality

Þ  
LMRRecord - is Cistera’s solution specifically designed to support Cisco’s IP Interoperable Communications Solutions.  Cistera is the first and only recording solution designed and certified for Cisco’s IPICS offering.  With this solution, customers can record all two-way radio, cell phone, and traditional analog systems in a single “talk group”.

Event Alerting and Notification - Event Alerting and Notification Solutions allow customers to use their unified communications Platform as the core to their alerting and notification strategy.  Emergency alert and notification solutions help organizations of all sizes communicate quickly and effectively during all types of incidents and challenges

Þ  
RapidBroadcast™ Enterprise - Advanced, full-featured messaging service that links data and voice with your business’ communication devices. Instantly transmit text or voice messages or schedule pre-recorded broadcasts to your entire organization through IP phones or external overhead speakers. Easy to configure and administer, RapidBroadcast™, and the entire suite of Cistera Networks applications, is managed via a web-based interface. Features include Whisper, Intercom, paging, text messaging and numerous other features.

Þ  
LMRConnect™ - Two-way radios are a communications cornerstone for public agencies, emergency operations and businesses around the world. However, until today, proprietary technology confined push-to-talk radios to their own networks—keeping them well-separated from convergence with unified communications. Recognizing the need to integrate, Cistera Networks has created the LandMobileRadio (LMR) Connect Application Engine—bringing two-way radios into the IPT network.


 
6

 

Þ  
EANScheduler - Cistera provides a comprehensive solution for scheduled alerting and notification such as school bell ringing schedule. Using the popular RapidBroadcast Application Engine and the Cistera Convergence Server (CCS).

Þ  
QuickConnect - is the premier engine for the delivery of event alerting and notification for cellular and analog phones.  As part of the Event Alerting and Notification Solution, QuickConnect extends the popular RapidBroadcast to launch notifications beyond IP Phones, overhead paging systems and two-way radios now to every communications device. QuickConnect as an outbound dialing engine, can manage communications for Contact Centers, Education facilities, Local Government and Healthcare.

Our convergence solutions have been designed to interoperate seamlessly within network environments, by aligning with key industry standards.  There are occasions where integration with certain legacy platforms requires that our solutions interact with some proprietary protocols.  In these situations, our convergence solution works to maintain open protocols for the broad network functions, specifically Session Initiated Protocol (SIP) and for more traditional networks, using bridging technology into the IP network.
 
COMPETITION
 
Cistera competes with a number of companies that derive revenues from telecommunications budgets of Mid Market and Enterprise Businesses throughout the world and specifically those that compete for the capital budgets for customer premise equipment (CPE). Cistera earns 95% of its revenues currently from equipment purchased as part of a unified communications Infrastructure and more recently through VOIP based hosted service providers.  At the top end of our market we compete with more mature traditional solutions derived from digital phone systems and ported to unified communications. They have a more complete solution but we have been successful in positioning Cistera and indeed IP communications as technology shift that has the ability to more deeply integrate into existing business need.

We have a broad offering of functionality and services that we combine together on a platform to create compelling application services for our end users. Therefore we predominately compete with other companies that either (a) provide point solutions that compete with one aspect of our offering such as Nice Systems, Verint and others or  (b) compete with broader platforms solutions with similar offerings such as Interactive Intelligence, Aspect and Genesys. We also compete with vertical solutions such as Philips Emigen and others who have focused vertical solutions.  We expect this trend to continue as we focus on more high value vertical customers.


We also compete with potential substitute products that offer more basic and narrow functionality. These predominately Windows based solutions offer low value and cheap alternatives for price-sensitive markets such as education and contact centers. There are a number of these in the Cisco Partner channel. The Company has been successful in moving away from these price-sensitive markets and subsequently directed towards vertical high value solutions. The Department of Defense is a good example of this. Cistera is continuing to drive revenue towards high value markets.


ITEM 1A:  RISK FACTORS
 
As a smaller reporting company, we are not required to provide this information.
 


ITEM 1B:  UNRESOLVED STAFF COMMENTS
 
None.
 

 
7

 

ITEM 2:  PROPERIES

Our corporate offices are located at 6509 Windcrest Drive, Plano, TX  75024.  We lease this office space, which contains approximately 9,767 rentable square feet, from GK II Plano, L.P.  Our rent under this lease is approximately $14,479 per month and the lease expires July 31, 2013.
 
Cistera Networks by mutual agreement with the owners has terminated the lease at 17304 Preston Road, Suite 975 Dallas, TX  75252 (Dominion Plaza) and settled all outstanding obligations.
 
ITEM 3:  LEGAL PROCEEDINGS

The Company and certain of its current and former officers and directors are defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS. GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No. DV05-0600-G; G-134th District Court, Dallas County, Texas.  The plaintiff has alleged a number of complaints against the defendants, including breach of fiduciary duty, misappropriation of corporate opportunities, fraud, fraudulent inducement, breach of contract, tortuous interference with contract, fraudulent transfer, and shareholder oppression arising in connection with the license agreement between the Company and XBridge in May 2003 and the acquisition of XBridge by the Company in May 2005.  The parties held a mediation conference in April 2006 and have come to an understanding with respect to the principal elements of a potential settlement. The Company is currently in the process of negotiating definitive settlement agreements. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we recorded a contingent liability in the amount of $650,000 as of March 31, 2008 related to the outstanding litigation.  As of March 31st, 2010, the Company believes that this amount represents the best estimate of a potential settlement.
 


PART II

ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is presently traded in the over-the-counter market and is listed on the Pink Sheets maintained by the National Quotation Bureau, Inc., and on the Bulletin Board maintained by the maintained by the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers, Inc.), under the symbol CNWT. The following table sets forth the range of high and low bid quotations for the common stock during each calendar quarter beginning April 1, 2008, and ending March 31, 2010.  The figures have been rounded to the nearest whole cent.
   
High
   
Low
 
June 30, 2008
  $ 0.85     $ 0.63  
September 30, 2008
  $ 0.60     $ 0.16  
December 31, 2008
  $ 0.39     $ 0.22  
March 31, 2009
  $ 0.30     $ 0.06  
                 
June 30, 2009
  $ 0.51     $ 0.51  
September 30, 2009
  $ 0.15     $ 0.06  
December 31, 2009
  $ 0.07     $ 0.04  
March 31, 2010
  $ 0.06     $ 0.06  

The above quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
 

 
8

 

RECORD HOLDERS
 
The number of shareholders of record of the Company's issued and outstanding common stock as of March 31, 2010 was approximately 207 post-split.  Registered holders include brokerage firms and clearinghouses holding our shares for their clientele, with each brokerage firm and clearinghouse considered as one holder.
 
DIVIDENDS
 
The Company has not paid any cash dividends to date and does not anticipate paying cash dividends in the foreseeable future.  It is the present intention of management to utilize all available funds for the development of the Company's business.

RECENT SALES OF UNREGISTERED SECURITIES
 
Set forth below is information regarding the issuance and sales of the Company’s securities without registration during the period covered by this Report.  No such sales involved the use of an underwriter, no advertising or public solicitation were involved, the securities bear a restrictive legend and no commissions were paid in connection with the sale of any securities.
  
In January of 2010, the Company issued 600,000 shares of common stock upon conversion of accrued interest and principal on a previously issued convertible notes with an aggregate principal of $183,000.  The amount of accrued interest converted was $52,800.  The principal and interest was converted at $0.393 per share.

The issuance of the shares of our common stock described above were made in private transactions or private placements intending to meet the requirements of one or more exemptions from registration.  In addition to any noted exemption below, we relied upon Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the “Act”).  The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities; the shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions.  We never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.  Other than the securities mentioned above, we have not issued or sold any securities during the period covered by this Report.

 
ITEM 6:  SELECTED FINANCIAL DATA
 
As a smaller reporting company, we are not required to provide this information.
 
ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this filing.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences have been included throughout the public filings from the Company.


 
9

 

OVERVIEW OF BUSINESS
 
According to industry analysts at Gartner, Inc., unified communications are the “direct result of convergence in communication networks and applications.” The term “unified communications” has also been defined in other ways, primarily the integration of productivity tools from the desktop into the network communications infrastructure. The convergence of voice and data communications, typically on IP networks leveraging open standards software platforms and integrated application suites, is a new standard for people, groups and organizations to communicate. However Cistera has been a leading developer of business process enablement through communications tools with over 600 customers from banks to airlines to the Department of Defense and NASA.

Business Process Automation and Communications-Based Process Automation

We believe business process automation will improve a company’s competitive position in the global marketplace and strengthen its foundation for growth. Our solutions have long taken an intelligence-based approach to automation, beginning with the ability to unify and integrate key public safety and customer contact process, and build on processes structured according to an organization’s business rules.

More recently and more specifically, Communications enabled business processes (“CEBP”) has combined these established communications automation practices with the automation of formal business processes, such as public safety and security, directory integration or quality assurance compliance reporting and auditing.  For the last four years Cistera has been leading the market for this communications-based approach to automating business and interaction processes with a full-featured process integration convergence solution.

Broader Integration to Business/Data Systems and End-User Devices

With the increasing emphasis on business processes, automation is essential to broadening the integration capability between a communications platform and business applications, information systems, databases, knowledge bases and where the employee works such as phone sets, headsets, hand-held devices, iPhones, iPads and notebook computers. Compared to traditional closed communications hardware systems and CTI, open standards solutions, such as SIP and XML, designed for IP networks and consisting of IP-based applications and industry-standard servers increase such integration capability to a wider range of business systems and low-cost IP devices for users across an organization. Cistera has been steadily increasing the reach and capability of it’s mobile solutions and continues to address the ability to reach process to the mobile end point. For example, Cistera recently integrated a large Floridian healthcare providers workflow into mobile devices to improve their responsiveness. Employess in real-time are notified of the status of security and property processes when and how they are needed.

Business Process Automation

Over the past five years the Company’s core convergence platform was designed as a platform to automate key processes and procedures for it’s customers. The core business rules engine forms the based of integrating communications end points and capability to create new and unique capability. While the Company initially focused on transitioning existing capability to VOIP, it became apparent over time that our communications-based approach to business process, such supporting engineering teams, or the integration of city field staff, lends itself to leveraging into virtually any industry looking to automate key business and interaction processes.

Of particular interest is that the Cistera Convergence Server can codify each step in the business process to reduce latency, improve efficiency, reliability and efficacy. In large part, business did not automate between communications infrastructure and data systems because of the cost and complexity. The Cistera CCS goes a long way to removing these barriers.

FISCAL YEAR
 
Our fiscal year ends on March 31.  References to fiscal 2010, for example, refer to the fiscal year ended March 31, 2010.
 

 
10

 

SOURCES OF REVENUES
 
We derive our revenues from three sources: (1) convergence solutions, which are comprised of software and hardware solutions; (2) professional services revenues, consisting primarily of installation, configuration, integration, training and VAR support services; and (3) support and maintenance, which is comprised of tiered technical support levels.  Convergence solutions revenues accounted for approximately 67% percent of total revenues during fiscal year 2009 and 43% percent of total revenues during fiscal year 2010.  Professional services revenues accounted for approximately 6% percent of total revenues during fiscal 2009 and 10% percent of total revenues during fiscal year 2010.
 
Revenues for our support and maintenance services made up approximately 27% percent of total revenues during fiscal 2009 and 47% percent of total revenues in fiscal 2010.
 
Product revenues are recognized once the software and hardware solution has been shipped according to the customer order, and is fully installed and operational. Prior to the adoption of this policy, the Company recognized revenues once orders were received and shipped. Professional services revenues are recognized once the services have been completed and the customer has approved the service.  Support and maintenance revenues are recognized on a monthly basis over the life of the support contract.  The typical support and maintenance term is 12 months, although terms range from 12 to 48 months.  Our support and maintenance contracts are non-cancelable, though customers typically have the right to terminate their contracts for cause if we fail to perform. We generally invoice our customers in annual or quarterly installments and typical payment terms provide that our customers pay us within 30 to 45 days of invoice.  Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, or in revenue depending on whether the revenue recognition criteria have been met.  In general, we collect our billings in advance of the support and maintenance service period.
 
 Professional services and other revenues consist of fees associated with consulting and implementation services and training.  Our consulting and implementation engagements are typically billed in advance of delivery with standard rates applied. We also offer a number of classes on implementing, using and administering our convergence solutions that are billed on a per class basis.  Our typical professional services payment terms provide that our customers pay us within 30-45 days of invoice.
 
COST OF REVENUES AND OPERATING EXPENSES
 
Cost of Revenues
 
Cost of convergence solutions revenue consists primarily of the purchase cost of computer equipment that hosts our platform and applications solutions.  Cost of professional services revenue consists primarily of employee related expenses from our field engineers and other employees and contractors that configure, install, and integrate our convergence solutions for our customers.  The cost of support and maintenance revenues primarily consists of employee-related costs associated with providing technical support at various service levels and the costs associated with any required maintenance provided to our customers’ convergence solutions equipment.  The Company estimates that approximately 80% of salary cost of employees whose primary role is to provide professional services and support and maintenance is attributable to the cost of securing those revenues.
 
To the extent that our customer base grows, we intend to continue to invest additional resources in building the channel infrastructure to enable our VARs and SIs to provide the professional services associated with the standard convergence solutions installation, configuration and training.  The timing of these additional expenses could affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues, in a particular quarterly period.  

Cost of Revenues

The total cost of revenues was $628,513 or 27% of revenues for fiscal year ending 31 March 2010. The total cost of revenues for fiscal year ending 31 March 2010 was $957,913 or 26% of revenue. The reduction of 35% was due to the decrease in total revenues as a result of the global economic environment.
 

 
11

 

Research and Development
 
Research and development expenses consist primarily of salaries and related expenses, and allocated overhead.  We have historically focused our research and development efforts on increasing the functionality and enhancing the ease-of-use of our convergence platform and applications. Because of our open, scalable and secure component-based architecture, we are able to provide our customers with a solution based on a single version of our software application platform. As a result, we do not have to maintain multiple versions, which enables us to have relatively low research and development expenses as compared to traditional enterprise software business models. We expect that in the future, research and development expenses will increase in absolute dollars as we support additional unified communications platforms, extend our solution offerings and develop new technologies.
 
Marketing and Sales
 
Marketing and sales expenses are typically one of our largest costs, accounting for approximately 30% of total revenues for fiscal 2009 and 8% of total revenues in fiscal 2010. The decrease in marketing and sales costs for fiscal year 2010 is indicative of the global economic downturn.  Marketing and sales expenses consist primarily of salaries and related expenses for our sales and marketing staff, including commissions; payments to VARs; marketing programs, which include advertising, events, corporate communications, public relations, and other brand building and product marketing expenses, and allocated overhead. The Company has made significant in-roads into lowering the sales and marketing cost per revenue dollar over the last year, however the Company recognizes that additional investment will need to be made in this area as the economy improves.
 
General and Administrative
 
General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, and management information systems personnel, professional fees, other corporate expenses and allocated overhead. The Company has made a concerted effort to rely less on outside contractors and bring critical functions in house, particularly the accounting functions.
 
Operating Expenses
 
Operating Expenses for fiscal year ending March 31, 2010 were $1,737,554 or 76% of Revenue as compared to fiscal year ending March 31, 2009 of $4,413,040 or 119% of revenue. This represents a deduction of $2,675,486 or 60%. This is primarily due to the restructuring of the company that took place in calendar year 2009. The company has bought costs into line with expected revenue.
 
Other Income (Expense)
 
The company took a charge of $237,231 for interest costs primarily as a result of PP#2 notes. Although the company reduced the number of outstanding notes in fiscal year 2010, the interest rate had increased proportionally. The company took a charge of $30,103 for residual factoring fees, loss on abandoned assets, and penalties paid on property taxes.
 
CRITICAL ACCOUNTING POLICIES
 
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).  The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures.  On an ongoing basis, we evaluate our estimates and assumptions.  Our actual results may differ from these estimates under different assumptions or conditions.
 
 We believe that of our significant accounting policies, which are described in the notes to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
 

 
12

 

Revenue Recognition
 
We recognize revenue from software, hardware and services once fully installed and implemented. This method of revenue reporting does not reflect all orders received and shipped during the reporting period, but only those orders received, shipped and completely installed within the reporting period.
 
 We recognize revenue according to ASC 985, formerly the American Institute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 97-2 (Software Revenue Recognition) as defined by paragraphs 07-14 in SOP 97-2 and as amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions).  This SOP provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software (including computer hardware and support services).
 
 Deferred revenue represents contracts for certain revenue to be recognized in the future from support and maintenance contracts as well as product sales and professional services that have been shipped and billed but not installed.  Support and maintenance contracts are executed on an annual basis and the revenue from these contracts is recognized over the life of the contracts.  Of the total deferred revenue shown as a current liability in the amount of $966,869, the deferred revenue for products and services was $301,106 as of March 31, 2010.  The remainder of current deferred revenue and the long-term deferred revenue of $665,763 relates to technical support and maintenance services.
 
 Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years.  Advanced services revenue is recognized upon delivery or completion of performance.
 
 We make sales to distributors and retail partners and recognize revenue based on a sell-through method using information provided by them.
 
Accounting for Sales Commissions
 
During fiscal year 2010, the Company adopted a sales commission plan that paid commissions at various target rates of the contract amount.  Commissions payable are accrued in the period that the customer accepts the product or service from the Company.  In fiscal year 2010, the Company amended the sales commission plan in order to provide a more comprehensive compensation structure to the sales organization.  Sales commissions are generally paid on sales meeting the criteria for sales commission payment in the subsequent accounting period.
 

Convertible debt and warrants

During the fiscal years 2005 through 2008, the accounting for financial instruments - convertible debt and detachable warrants - (and the potential derivative accounting related to these financial instruments) was significant to our financial statements because the accounting for such instruments requires the use of management’s significant estimates and assumptions. This accounting policy is also significant because of the potential fluctuations in the estimated fair value from period to period, which are recorded as a benefit (charge) to net loss on the statement of operations. We estimated the fair value of the PP1 Warrants and PP2 Warrants using the Black-Scholes option pricing model. This model requires the use of significant estimates and assumptions related to the estimated term of the financial instruments, the volatility of the price of our common stock, and interest rates, among other items. Fluctuations in these assumptions may have a significant impact on the estimated fair value of financial instruments, which, in turn, may have a significant impact on our reported financial condition and results of operations.
 

 
13

 

Registration payment arrangements

Effective April 1, 2007, the Company adopted ASC 815 (formerly FASB Staff Position No. EITF 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”)), which was applicable to the accounting for the liquidated damages on the PP2 Notes.  Upon adoption, the Company recorded a cumulative effect of an accounting change entry (i.e., a charge to the beginning balance of the accumulated deficit) as of April 1, 2007 for the combination of:  1) the reclassification of the Warrants from derivative liabilities to equity securities (based on the criteria as outlined under EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”)), and 2) a contingent liability for probable future payment of liquidated damages (based on the Company’s best estimate as of the date of adoption, which was through March 31, 2008).  The amount of the contingent liability recorded was approximately $289,000.  The difference between the Warrants as measured on the date of adoption of FSP EITF 00-19 and their original recorded value was approximately $466,000, and, as stated above, was included in the charge to the beginning balance of the accumulated deficit.  The total cumulative effect of this accounting change was $755,000.

On April 5, 2007, the Company closed the balance of its PP2 offering and, in accordance with FSP EITF 00-19-2, recorded a contingent liability and related charge to the consolidated Statement of Operations for estimated liquidated damages related to this funding through March 31, 2008.  The amount recorded was $251,176.

As of March 31, 2008, the Company estimated and accrued $671,342 related to liquidated damages related to the PP2 Notes and concluded that this amount was the maximum pay-out required.  Under the STIIP, certain PP2 Note holders, comprising approximately 70% of the original principal of PP2 Notes, converted their outstanding PP2 Notes at a reduced price of $0.53.  On June 30, 2008, the Company executed an agreement with the institutional investor in the PP2 offering that had the contractual right to liquidated damages.  In exchange for the waiver from the investor, the Company issued to the investor 58,777 shares of its common stock. The agreement terminated any assessment of liquidated damages beyond June 24, 2008. For the three months ended June 30, 2008, the Company recorded a charge and credit to additional paid-in capital for the fair value of these shares issued in the amount of $22,041.
 
Research and Development Expenditures

Research and development expenditures are generally expensed as incurred. ASC 985 (formerly SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.



 

 
14

 

Results of Operations.
 
The following discussion should be read in conjunction with the consolidated statements of financial operations, in their entirety.
 
Overview of Results of Operations for: Fiscal 2010, Ended March 31, 2010, and Fiscal 2009, Ended March 31, 2009.
 
 
For the Year Ended March 31,
 
2010
% of rev
2009
% of rev
Revenues:
       
   Convergence Solutions
$       989,465
43%
$          2,498,763
67%
   Professional Services
238,510
10%
231,222
6%
   Support and Maintenance
1,066,235
46%
984,287
27%
      Total Revenues
2,294,210
100%
3,714,272
100%
Cost of Revenues:
       
   Convergence Solutions
502,295
22%
657,507
18%
   Professional Services
90,218
4%
209,680
6%
   Support and Maintenance
36,000
1%
90,726
2%
      Total Cost of revenues
628,513
27%
957,913
26%
     Gross Profit
1,665,697
73%
           2,756,359
74%
Expenses:
       
   Sales and marketing
174,942
8%
           1,112,375
30%
   Software development
333,321
15%
              823,040
22%
   Engineering and support
278,804
12%
              706,167
19%
   General and administrative
780,523
34%
           1,367,645
37%
   Depreciation and amortization
169,964
7%
403,813
11%
     Total expenses
1,737,554
76%
           4,413,040
119%
Profit (Loss) from operations
(71,857)
(3%)
         (1,656,681)
(45%)
Other income (expense)
       
   Interest income
74
-
                326 
-
   Interest expense
(237,371)
(10%)
            (233,886)
(6%)
   Charge for stock issued to convertible
      promissory note holders
-
-
(1.324,444)
(36%)
   Amortization of discount on convertible
      notes
-
-
(1,434,353)
(39%)
   Charge for estimated liquidated damages
-
-
10,921
-
   Other income (expense)
(30,103)
(1%)
            10,000
-
     Total other income (expense)
(267,400)
(12%)
 (2,971,436)
(81%)
     Net loss
$       (339,257)
(15%)
   $      (4,628,117)
(126%)
Basic & diluted net loss per share
 $               (.02)
 
 $               (0.30)
 
Weighted average shares outstanding – basic and diluted
17,570,550
 
15,390,029
 

 

 
15

 

Our revenues have decreased from $3,714,272 in fiscal 2009 to $2,294,210 in fiscal 2010, a reduction year-over-year of 38% on a recognized revenue basis. This was primarily due to the global recession beginning in 2008 that resulted in a significant number of new projects being cancelled or deferred. The Company relies on the business capital investment cycle that contracted significantly in 2010 resulting in a large reduction in new license revenue. However maintenance and renewal revenue increased year on year due to a strong value proposition within the existing customer base.
 
 Our gross profit during the fiscal year 2009 was $2,756,359 or approximately 74% of revenues.  Gross profit for fiscal year 2010 was $1,665,297 or approximately 73% of revenues. Cistera continues to provide strong Gross Margins.
 
Our operating loss for the fiscal year 2009 was $1,656,681 and for the fiscal year 2010 was $71,857, a reduction of 96% on the previous year. The reduction in expenses was as a result of a large restructuring effort in 2010 that reflected the significant economic downturn.
 
 In accordance with ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”)), as of March 31, 2008 we have recorded a contingent liability and related charge for outstanding litigation.  While the Company may prevail in this matter and disputes damages sought in the case, we have recorded a reserve of $650,000 in accordance with the guidance of ASC 540.
 
LIQUIDITY AND CAPITAL RESOURCES
 
From our start of operations in May 2003 through the end of fiscal 2009, we funded our operations primarily through financing obtained in two private placements—the first in the third quarter of fiscal 2005 and the second initiated in the third quarter of fiscal 2007.
 
At March 31, 2010, we had cash and cash equivalents of $12,954.  Accounts receivable at March 31, 2010 were $188,983.
 
On March 31, 2010, the Company had $350,853 in Accounts Payable and Accrued Liabilities of $1,636,700.
 
 Our future capital requirements will depend on many factors including: our rate of revenue growth; the expansion of our marketing and sales activities; the timing and extent of spending to support product development efforts and expansion into new territories; the timing of introductions of new services and enhancements to existing services; and the continuing market acceptance of our services.  
 
Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing.  Additional funds may not be available on terms favorable to us or at all.
 
 We do not have any special purpose entities, and other than operating leases for office space and computer equipment, which are described below, we do not engage in off-balance sheet financing arrangements. On December 10th 2009, the factoring facility was terminated by mutual agreement. We believe that the cost of this facility outweighed the benefits to the Company. In addition, by terminating this facility, we expect to save over $135,000 annually.
 

 
16

 

NON-GAAP DISCLOSURES
 
EBITDA, excluding special items, which represents earnings (excluding the impact of certain nonrecurring items on our results) before depreciation and amortization, interest and financing expenses, income taxes, and cumulative effect of a change in accounting principle, net, is a supplemental measure of performance that is not required by, or presented in accordance with, U.S. GAAP. We present EBITDA, excluding special items, because we consider it an important supplemental measure of our operations and financial performance. We believe EBITDA, excluding special items, is more reflective of our operations as it provides transparency to investors and enhances period-to-period comparability of our operations and financial performance. EBITDA, excluding special items, should not be considered as an alternative to net income determined in accordance with U.S. GAAP.
 
ITEM 7A:  QUANTITIAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, we are not required to provide this information.
 
ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements of the Company are included as a separate section of this report beginning on page F-1 immediately following the signature page to this report.
 
ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A:  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
As of March 31, 2010, we carried out an initial analysis, under the supervision and with the participation of our management, including our Chief Executive Officer (the “Certifying Officer”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Certifying Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report on Form 10-K (“Annual Report”).
 
The Certifying Officer also previously determined as of December 31, 2007 that our financial management team did not have sufficient experience in the preparation of the narrative disclosures in notes to the interim financial statements to ensure that the disclosure controls and procedures we maintain (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure.
 
In an effort to remediate the insufficiency, we engaged an independent financial consulting group to provide the personnel resources necessary for technical accounting and for the recording of complex financial transactions, preparation of financial statements, and management reporting and disclosure reporting.  This engagement resulted in a comprehensive review of our Company’s financials, which resulted in the Company amending its fiscal year 2007 Annual Report and its Form 10-QSB filings for the quarterly periods ended June 30, 2007 and September 30, 2007.
 

 
17

 

In April 2009, and for fiscal year ending March 31, 2010, the company embarked on a complete restructuring in response to the Global economic crisis. With this restructuring, the company also embarked on a complete overhaul of all operational processes and procedures with particular attention on management and financial accounting areas of the business. On April 1, 2010, the company moved to a new and more sophisticated accounting system and overhauled the financial processes to (a) verify the underlying historical information, and if necessary make adjustments and (b) improve the speed and efficacy on which final accounting and review processes are made. The company in fiscal year 2010 also retained a management accountant specifically tasked with validating and improving financial controls.
 
Although a number of significant changes have been made to the financial operations, the Certifying Officer determined that these changes were not significantly completed in order to verify the effectiveness of the design and operation of our disclosure controls and procedures for the reporting period. It is expected that these changes will be completed in the fiscal year ending March 31, 2011.
 
We will also monitor our disclosure controls and procedures on a continuing basis to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In the future as such controls change in relation to developments in the our business and financial reporting requirements, our evaluation and monitoring measures will also address any additional corrective actions that may be required.
 
Our management does not expect that our disclosure control procedures or our internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
 
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was not effective as of March 31, 2010. An independent financial firm will be engaged to complete remediation measures that may include further evaluation, remediation, implementation, documentation and testing of our key internal controls.
 
The SEC has extended the requirement date for non-accelerated filers of Section 404(b), the OUTSIDE AUDITOR'S attestation, from being required for years ending December 15, 2009 or later to June 15, 2010 or later. The Section 404(a) MANAGEMENT ASSESSMENT, however, is still in effect. This Annual Report does not include an audit or attestation report of our registered public accounting firm regarding our internal control over financial reporting. Our management’s report was not subject to audit or attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
 

 
18

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
There has been no change in the Registrant’s internal control over financial reporting during the year ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
 
ITEM 9B:  OTHER INFORMATION

None.
 
PART III

ITEM 10:   DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

EXECUTIVE OFFICERS AND DIRECTORS
 
The following table sets forth the name, age, and position of each executive officer and director of the Company as of the period ending March 31, 2010:
 

Director's   Name
Age
Position with Company
Greg T. Royal
44
Chairman, Chief Executive Officer, Chief Technology Officer and acting Chief Financial Officer.
James T Miller
50
President and Secretary.


Our directors hold office until the next annual meeting of shareholders and until their respective successors have been duly elected and qualified.  Our officers are elected by the Board of Directors at the board meeting held immediately following the shareholders' annual meeting and hold office until their death or until they either resign or are removed from office. There are no written or other contracts providing for the election of directors or term of employment for executive officers, all of whom serve on an at will basis.
 
Gregory T. Royal has served as Executive Vice President and Chief Technology Officer, and has been a member of the Board of Directors since May 2003. From April 2009, Mr Royal has served as Chief Executive Officer. Mr. Royal is the original founder of XBridge Software, and the inventor of the Convergence Server™ technology.  Mr. Royal has over 18 years of IT Sales, Marketing and Management experience in New Zealand, Australia and the United States.  He has held Senior Sales and Marketing positions at Sycom Office Equipment, Eagle Technology, Network General Corp. (NASDAQ:NETG) and Network Associates Inc (NASDAQ:NETA). Mr. Royal has system certification with Compaq, IBM, Novell and Hewlett Packard. He also has significant experience in designing and deploying large-scale IT systems including experience in Banking and Finance, Government, and Retail and Property Services.  Mr. Royal holds an MBA from Rushmore University. Mr Royal is also Chairman/CEO of Telmarine Communications Inc and Managing Director of Blue Kiwi Group Ltd.
 

 
19

 

James T Miller has served as President and Secretary of Cistera since December 2009. Prior to that Mr Miller served as Director Operations since 2005. Prior to Cistera Networks Jim served as President /CEO of T3, a technology systems integrator to large enterprise companies across varied industries such as aerospace, transportation and energy. Previous to T3, Jim served as CFO/COO for several application and network management solutions companies that provided outsourced data management solutions and technical consulting services for IBM and other F500 companies.  Jim has over 28 years of solid business experience and leadership with growing and developing growth stage companies. Mr Miller holds an MBA from University of Florida. Mr Miller is also Chairman/CEO of Cistera Federal Systems Inc.
 
BOARD COMPOSITION AND COMMITTEES
 
Our Board of Directors currently consists of one member, Gregory T. Royal.  We are planning to expand the number of members constituting our Board of Directors and will seek persons who are “independent” within the meaning of the rules and regulations of NASDAQ to fill vacancies created by any expansion.  Because of our current stage of development, we do not have any standing audit, nominating or compensation committees, or any committees performing similar functions.  The Board meets periodically throughout the year as necessity dictates.  No current director has any arrangement or understanding whereby they are or will be selected as a director or nominee. 
 
Audit Committee Financial Expert
 
The Company's Board of Directors does not have an "audit committee financial expert," within the meaning of such phrase under applicable regulations of the Securities and Exchange Commission, serving on its audit committee. As there is no separately designated Audit Committee, the entire Board of Directors serves as the Audit Committee. The Board of Directors believes that all members of its Audit Committee are financially literate and experienced in business matters, and that one or more members of the audit committee are capable of (i) understanding generally accepted accounting principles ("GAAP") and financial statements, (ii) assessing the general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (iii) analyzing and evaluating our financial statements, (iv) understanding our internal controls and procedures for financial reporting; and (v) understanding audit committee functions, all of which are attributes of an audit committee financial expert. However, the Board of Directors believes that there is not any audit committee member who has obtained these attributes through the experience specified in the SEC's definition of "audit committee financial expert." Further, like many small companies, it is difficult for the Company to attract and retain board members who qualify as "audit committee financial experts," and competition for these individuals is significant. The Board believes that its current audit committee is able to fulfill its role under SEC regulations despite not having a designated "audit committee financial expert."
 
Indebtedness of Directors and Executive Officer
 
None of our directors or our executive officers or their respective associates or affiliates are indebted to us.
 
Family Relationships
 
There are no family relationships among our directors or CEO.

Compensation Committee
 
The Company does not maintain a standing Compensation Committee.  Due to the Company’s small size at this point in time, the Board has not established a separate compensation committee. All members of the Board (with the exception of any member about whom a particular compensation decision is being made) participate in the compensation award process.
 
The Company understands that in order to attract executive management talent, it will need to offer competitive market salaries to senior management and board members. The Company intends at a later date to retain an independent compensation consultant to review executive compensation and advise the Company on the best course of action in order to attract the necessary capabilities.

 
20

 

Nominating Committee
 
The Company does not maintain a standing Nominating Committee and does not have a Nominating Committee charter.  Due to the Company’s small size at this point in time, the Board has not established a separate nominating committee and feels that all directors should have input into nomination decisions. As such, all members of the Board generally participate in the director nomination process. Under the rules promulgated by the SEC, the Board of Directors is, therefore, treated as a “nominating committee.”
 
 The Board will consider qualified nominees recommended by shareholders. Shareholders desiring to make such recommendations should submit such recommendations to the Corporate Secretary, c/o Cistera Networks, Inc., 6509 Windcrest Drive, Suite 160, Plano, Texas 75024.  The Board will evaluate candidates properly proposed by shareholders in the same manner as all other candidates.
 
 With respect to the nominations process, the Board does not operate under a written charter, but under resolutions adopted by the Board of Directors.  The Board is responsible for reviewing and interviewing qualified candidates to serve on the Board, for making recommendations for nominations to fill vacancies on the Board, and for selecting the nominees for selection by the Company’s shareholders at each annual meeting.  The Board has not established specific minimum age, education, experience or skill requirements for potential directors.  The Board takes into account all factors they consider appropriate in fulfilling their responsibilities to identify and recommend individuals as director nominees.  Those factors may include, without limitation, the following:
 
an individual’s business or professional experience, accomplishments, education, judgment, understanding of the business and the industry in which the Company operates, specific skills and talents, independence, time commitments, reputation, general business acumen and personal and professional integrity or character;
 
the size and composition of the Board of Directors and the interaction of its members, in each case with respect to the needs of the Company and its shareholders; and
 
regarding any individual who has served as a director of the Company, his or her past preparation for, attendance at, and participation in meetings and other activities of the Board of Directors or its committees and his or her overall contributions to the Board and the Company.
 
 
The Board may use multiple sources for identifying and evaluating nominees for directors, including referrals from the Company’s current directors and management as well as input from third parties, including executive search firms retained by the Board.  The Board will obtain background information about candidates, which may include information from directors’ and officers’ questionnaires and background and reference checks, and will then interview qualified candidates.  The Board will then determine, based on the background information and the information obtained in the interviews, whether to recommend that a candidate be nominated to the Board of Directors.  We strongly encourage and, from time to time actively survey, our shareholders to recommend potential director candidates.
 
Shareholder Communications with the Company’s Board of Directors
 
Any shareholder wishing to send written communications to the Company’s Board of Directors may do so by sending them in care of Greg Royal, CEO, at the Company’s principal executive offices.  All such communications will be forwarded to the intended recipient(s).
 

 
21

 

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC.  Such persons are required by SEC regulation  to furnish us with copies of all Section  16(a) forms they file.  Based solely on its review of the copies of such forms received by it and representations  from certain  reporting  persons regarding their  compliance with the relevant filing  requirements,  the Company believes that all filing requirements applicable to its officers, directors and 10%  shareholders  were complied with during the fiscal year ended March 31,2009.
 
CODE OF ETHICS
 
Due to the current stage of the Company’s development, it has not yet developed a written code of ethics for its directors or executive officers.
 
ITEM 11:  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION
 
SUMMARY COMPENSATION TABLE
 
The following table sets forth, for our last two fiscal years, certain information concerning the compensation paid by the Company to our Chief Executive Officer and our other most highly paid executive officer who received in excess of $100,000 in compensation during these periods.
 
 SUMMARY COMPENSATION TABLE
(a)
(b)
(c)
 
(d)
(e)
 
(f)
(g)
 
(h)
(i)
 
                         
 
 
Year
           
 
Non-Equity
 
Nonqualified
Deferred
All Other
 
 
Ended
     
Stock
 
Option
Incentive Plan
 
Compensation
Compen-
 
Name and
March
Salary
 
Bonus
Awards
 
Awards
Compensation
 
Earnings
sation
Total
Principal Position
31
($)
 
($)
($)
 
($)
($)
 
($)
($)
($)
James T Miller
2010
$136,603
 
-
-
 
-
-
 
-
 
$136,603
President
     
-
-
 
-
-
 
-
   
Greg T. Royal (1)
2010
$162,549
 
-
-
 
-
   
-
 
$162,549
CEO/Director
2009
$109,940
 
-
-
 
-
-
 
-
 
$109,940
 
(1) This amount includes deferred compensation not paid to Mr Royal of $64,733 for calendar year 2009.
 
There are no compensatory plans or arrangements with respect to any of our executive officers, which result or will result from the resignation, retirement or any other termination of such individual’s employment with us or from a change in control of the Company or a change in the individual’s responsibilities following a change in control.  No stock options, stock appreciation rights or other stock based incentives were awarded to any of our named executive officers during fiscal years 2009 and 2010.
 

 
22

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
 
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Name
Number of Securities Underlying Unexercised Options
(#)
Exercisable
Number of Securities Underlying Unexercised Options
(#)
Unexercisable
Number of Securities Underlying Unexercised Unearned Options
(#)
 
 
 
Option Exercise Price
($)
 
 
 
 
Option Expiration Date
           
Derek Downs
0
0
275,000(3)
1.30
2/6/2009
Cynthia Garr
41,831(1)
0
0
0.46
4/1/2009
     
275,000(3)
1.10
10/1/2009
Gregory Royal
271,174(2)
0
0
0.46
5/3/2009
     
275,000(3)
1.10
10/1/2009

 
(1)  Prior to the Company’s acquisition of XBridge, XBridge awarded Ms. Garr options to purchase shares of 15,426 shares of XBridge Software at an exercise price of $1.25 per share.  As part of the acquisition of XBridge by the Company, these options were converted into options to purchase shares of our common stock, on a basis of 2.71174 shares of our common stock for each share of XBridge.  This conversion ratio was the same ratio received by all other XBridge stockholders.
 
(2)  Prior to the Company’s acquisition of XBridge, XBridge awarded Mr. Royal options to purchase shares of 100,000 shares of XBridge Software at an exercise price of $1.25 per share.  As part of the acquisition of XBridge by the Company, these options were converted into options to purchase shares of our common stock, on a basis of 2.71124 shares of our common stock for each share of XBridge.  This conversion ratio was the same ratio received by all other XBridge stockholders.
 
(3)  Granted pursuant to the Company’s 2004 Long Term Incentive Plan.  These options are subject to shareholder approval of the plan.  The options for 275,000 shares for each Messrs. Downs and Royal and Ms. Garr were terminated effective April 1, 2007.
 
None of our executive officers exercised options to purchase our common stock during fiscal 2007, 2008, 2009 or 201
 

 
DIRECTOR COMPENSATION
 
We do not currently pay our directors a fee for attending scheduled and special meetings of our board of directors.  We reimburse each director for reasonable travel expenses related to such director’s attendance at board of directors and committee meetings.  In the future we expect that we will offer compensation to attract the caliber of board members the Company is seeking, and intend at a later date to retain an independent compensation consultant to advise the best course of action.
 

 
23

 

ITEM 12:  SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
PRINCIPAL SHAREHOLDERS
 
The following table sets forth information, as of July 14, 2010, concerning beneficial ownership of Common Stock, our only class of equity securities currently outstanding, by (i) the only persons known to the Company to be beneficial owners of more than 5% of the outstanding Common Stock, (ii) all directors, (iii) all named executive officers and (iv) all directors and named executive officers as a group.
                     
Title of
 
Name and Address
 
Nature and Amount
   
Class
 
Of Beneficial Owners
 
of Beneficial Ownership
 
Percent
Common
 
Gregory T. Royal(1)
   
1,396,159
(2)
   
7.75
%
                     
Common
 
Cynthia A. Garr
5935 Buffridge Trail
Dallas TX 75252
   
1,330,191
(3)
   
7.38
%
                     
Common
 
Kingdon Hughes
16475 Dallas Pkwy, Suite 440
Addison, TX 75001
   
1,465,593
(4)
   
8.13
%
                     
Common
 
Roaring Fork Capital Management
5350 South Roslyn St., Suite 380
Greenwood Village, CO 80111
   
3,533,379
(5)
   
19.60
%
                     
All Officers and Directors as a Group
   
1,396,159
     
7.75
%

 
     
*
 
Less than 1%
     
(1)
 
Mr. Royal is the Company’s only Director and its Chief Executive Officer, President and acting Chief Financial Officer. The business address for Mr. Royal is 6509 Windcrest Drive, Suite 160, Plano, Texas 75024.
     
(2)
 
Includes options to purchase 271,174 shares resulting from the post merger conversion of options to purchase shares of XBridge common stock that are presently exercisable.
     
(3)
 
Includes options to purchase 41,831 shares resulting from the post merger conversion of options to purchase shares of XBridge common stock that are presently exercisable.
     
(4)
 
Includes 189,822 shares subject to warrants that are presently exercisable.
     
(5)
 
Roaring Fork has a $200,000 note, currently convertible into 367,742 shares of common stock.  These shares are included in the above number.

 

 
24

 

EQUITY COMPENSATION PLAN INFORMATION
 
On January 9, 2004, our Board of Directors approved a long-term incentive plan (the “Plan”), under which we may issue compensation, including stock grants and stock options up to a maximum of 2,000,000 shares.  The Plan has not yet been approved by our shareholders.  As of August 5, 2008, we have outstanding options to purchase 140,000 shares of common stock issued under the Plan, subject to stockholder approval of the Plan.  In addition, in connection with our acquisition of XBridge Software, options to purchase 150,246 shares of XBridge Software stock were converted into options to purchase 407,917 shares of our common stock.
 
The following table summarizes our equity compensation plan information as of July 14, 2010.

 Equity Compensation Plan Information

Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted-average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
             
Equity Compensation Plans approved by security holders
 
-
 
-
 
2,000,000
Equity Compensation Plans not approved by security holders
 
558,163
 
$0.63
 
1,452,083
Total
 
558,163
 
$0.63
 
1,452,083


EQUITY COMPENSATION PLAN GRANTS NOT APPROVED BY SECURITY HOLDERS.

Under the provisions of the Plan, on February 6, 2004, the Company granted non-statutory options for 100,000 shares of common stock, to various employees in consideration for employment with and services provided to the Company, and non-statutory options for 275,000 shares of common stock to Mr. Derek Downs, our past Chief Executive Officer, interim Chief Financial Officer and a past Director.  These options were issued with an exercise price of $1.30, which was the closing trading price per share on the date of the grant. These options vest over 4 years from the date of the grant, and may be exercised at any time after vesting through January 2009.
 
 Under the provisions of the Plan, on October 1, 2004, the Company granted non-statutory options for 550,000 shares of common stock, including options to purchase 275,000 shares to each of Mr. Greg Royal, our acting Chief Executive Office, acting Chief Financial Officer, Executive Vice President, Chief Technology Officer and Director and Ms. Cynthia Garr in consideration for employment with and services provided to the Company.  These options were issued with an exercise price of $1.10, which was the closing trading price per share on the date of the grant.  Fifty percent of these options vested immediately and the other 50% vested one year from the grant date and could be exercised at any time after vesting through October 2009.  
 
On April 1, 2007, the options granted to each of Messrs. Downs and Royal and Ms. Garr were mutually cancelled by the parties.  
 

 
25

 

On October 1, 2004, the Company issued 90,000 non-statutory options for 90,000 shares of common stock to various outside service providers and employees.  These options vested over a range of immediately to four years and have five year contractual lives. Additionally, under the provisions of the Plan, on January 3, 2005, the Company granted 304,550 restricted shares of common stock to various employees and consultants as consideration for employment with and services provided to the Company.  Of these shares, 123,132 restricted shares were granted to Mr. Downs.  The market price of our common stock on January 3, 2005, the date of these grants, was $3.00.  On April 1, 2006, the Company granted an additional 2,000 restricted shares of our common stock under the provisions of the Plan to another employee as consideration for employment with the Company.  The market price of our common stock on April 1, 2006 was $0.95.
 
EQUITY COMPENSATION PLAN GRANTS APPROVED BY SECURITY HOLDERS.

On January 28th, 2010, our Board of Directors approved a long-term incentive plan (the “Plan”), under which we may issue compensation, including stock grants and stock options up to a maximum of 2,000,000 shares. On June 8, 2010 the Company received majority shareholder approval for the long-term incentive plan. The Company has not issued any stock options under this plan as at June 30, 2010.
 
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE

On December 1, 2009, the Company entered into a professional services agreement with Blue Kiwi Group Ltd. This agreement provides for the services of Mr. Royal to act as Company Board Member and CEO of the Company. The consideration is $150,000 per annum for a period of two years. The agreement is attached as exhibit 10.4.
 
On December 9, 2009, the Company issued an Unsecured Promissory Note for $13,942.38 to Gregory Royal for unpaid expense claims for years 2008, 2009 and 2010. The note is for two (2) years at an interest rate of prime plus one and one half percent (1.5%) per annum.

On December 9, 2009, the Company issued an Unsecured Promissory Note for $64,733.76 to Gregory Royal for unpaid salary for calendar year 2009. Mr. Royal took voluntary partial salary deferral for that calendar period of approx forty percent (40%) of his salary. The note is for two (2) years at an interest rate of prime plus one and one half percent (1.5%) per annum.
 
None of our directors are independent, as defined by Rule 4200(a) (15) of the Nasdaq’s listing standards.
 
ITEM 14: PRINCIPAL ACCOUNTANT FEES & SERVICES

The following is a summary of the fees billed to us by Farmer, Fuqua & Huff PC for professional services rendered for the years ended March 31, 2010 and 2009:

Service
 
2010
   
2009
 
Audit Fees
        $ 55,000  
Audit-Related Fees
    2,000       -  
Tax Fees
            -  
All Other Fees
    -       -  
Total
  $ 2,000     $ 55,000  

Audit Fees. Consists of fees billed for professional services rendered for the audits of our consolidated financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Securities & Exchange Commission and related comfort letters and other services that are normally provided by Farmer, Fuqua & Huff PC in connection with statutory and regulatory filings or engagements.
 

 
26

 

Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
 
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
As there is no separately designated Audit Committee, the entire Board of Directors serves as the Audit Committee.  A function of the Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation.  Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount.  The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
 

 
27

 

PART IV

ITEM 15: EXHIBITS

      The following exhibits are included as part of this report:

Ex. Number
Title of Document
3(i)
Restated Articles of Incorporation (Incorporated by reference from Exhibit 3(i) to the Company’s Quarterly Report of Form 10-Q for the fiscal quarter ended December 31, 2008)
3(ii)
Bylaws (Incorporated by reference from Exhibit 3(ii) to the Company’s Quarterly Report of Form 10-Q for the fiscal quarter ended December 31, 2008)
4.1
Form of Convertible Note Purchase Agreement dated as of December 13, 2004 (Incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2004)
4.2
Form of Senior Unsecured Convertible Note (Incorporated by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2004)
4.3
Form of Warrant (Incorporated by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2004)
4.4
Registration Rights Agreement dated as of December 13, 2004 (Incorporated by reference from Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2004)
4.5
Form of Convertible Note Purchase Agreement dated as of April 5, 2007 (Incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2007)
4.6
Form of Senior Unsecured Convertible Note (Incorporated by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2007)
4.7
Form of Warrant (Incorporated by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2007)
4.8
Registration Rights Agreement dated as of April 7, 2005 (Incorporated by reference from Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the Commission on April 12, 2007)
6.1
License Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31, 2004)
10.1
Employment Agreement between Richard McDowell and Cistera Networks, Inc. dated as of March 12, 2008 (Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 17, 2008)
10.2
Waiver Agreement dated as of June 30, 2008, by and between Cistera Networks, Inc., and Roaring Fork Capital SBIC, LP. (Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 3, 2008)
10.3
Factoring Agreement dated as of November 19, 2008, by and between Allied Capital Partners, LP and Cistera Networks, Inc. (Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 15, 2008)
10.4
Professional Services Agreement between Blue Kiwi Group Ltd and Cistera Networks, Inc. (Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 10-Q filed with the Commission on February 16 2010.
10.5
 Asset Sale and Purchase Agreement between Telmarine Communications Inc and Cistera Networks, Inc dated March 10 2010.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
28

 

SIGNATURES



Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CISTERA NETWORKS, INC.

Dated: 9 August 2010                                                 By  /S/     Gregory T Royal
Gregory T Royal
Chief Executive Officer
(Principal Executive Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 9 day of August 2010.

Signatures                      Title


 
/S/   Gregory T. Royal
CEO/President/Chief Technology
 
Gregory T. Royal
Officer and Director

 
29

 

Index to Financial Statements
Page
   
Report of Independent Registered Public Accountants
F – 2
   
Report of Independent Registered Public Accountants
F – 3
   
Consolidated Balance Sheet
 
   March 31, 2010 and 2009
F - 4
   
Consolidated Statements of Operations for the
 
   Years Ended March 31, 2010 and 2009
F - 5
   
Consolidated Statements of Stockholders' Equity for the
 
   Years Ended March 31, 2010 and 2009
F - 6
   
Consolidated Statements of Cash Flows for the
 
   Years Ended March 31, 2010 and 2009
F - 7
   
Notes to Consolidated Financial Statements
F - 9

 
F - 1

 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
Cistera Networks, Inc. & Subsidiaries

We have audited the accompanying consolidated balance sheet of Cistera Networks, Inc. and Subsidiaries as of March 31, 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cistera Networks, Inc. and Subsidiaries as of March 31, 2010 and the results of its operations and its cash flows for the year ended March 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Robison, Hill & Co.__


Salt Lake City, Utah
July 14, 2010


 
F - 2

 




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
Cistera Networks, Inc. & Subsidiary

We have audited the accompanying consolidated balance sheet of Cistera Networks, Inc. & Subsidiary as of March 31, 2009 and the related consolidated statement of operations, stockholders’ equity and cash flows for the year ended March 31, 2009.  Cistera Networks, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cistera Networks, Inc. and Subsidiary as of March 31, 2009, and the consolidated results of their operations and their cash flows for the years ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Farmer, Fuqua & Huff, P.C.
Plano, Texas
July 14, 2009


 
F - 3

 

CISTERA NETWORKS, INC. & SUBSIDIARY
 
CONSOLIDATED BALANCE SHEET
 
             
   
March 31,
 
   
2010
   
2009
 
 Current assets:
           
   Cash and cash equivalents
  $ 12,954     $ 1,493  
   Accounts receivable, net of allowance for doubtful accounts $-0-
    188,983       151,322  
   Inventory
    45,000       124,656  
   Prepaid expenses
    113,565       37,341  
 Total current assets
    360,502       314,812  
                 
Property and equipment, net
    206,960       324,217  
Intangible assets, net
    1,479,667       1,751,442  
Total long-term assets
    1,686,627       2,075,659  
                 
TOTAL ASSETS
  $ 2,047,129     $ 2,390,471  
                 
Current liabilities:
               
   Accounts payable
  $ 350,853     $ 517,052  
   Accrued liquidated damages – outside investors
    177,402       177,402  
   Accrued liabilities
    1,636,700       1,527,811  
   Deferred revenue
    609,532       865,271  
   Related party payables
    78,676       -  
   Note payable
    -       7,781  
   Convertible promissory notes – outside investors, net of discount
    793,426       976,426  
Total current liabilities
    3,646,589       4,071,743  
                 
Convertible promissory notes – outside investors, net of discount
    -       -  
Convertible promissory notes – related parties, net of discount
    -       -  
Deferred revenue
    357,337       174,554  
   Other long-term liabilities
    45,722       58,031  
     Total long-term liabilities
    403,059       232,585  
                 
TOTAL LIABILITIES
    4,049,648       4,304,328  
                 
Stockholders’ deficit:
               
   Preferred stock, $0.001 par value; 1,000,000 shares authorized;
    -       -  
     -0- shares issued and outstanding
               
   Common stock, $0.001 par value; 50,000,000 shares authorized;
               
     18,022,605 and 17,422,605 shares issued and outstanding
    18,023       17,423  
   Additional paid-in capital
    19,541,214       19,291,219  
   Accumulated deficit
    (21,561,756 )     (21,222,499 )
Total stockholders’ deficit
    (2,002,519 )     (1,913,857 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’DEFICIT
  $ 2,047,129     $ 2,390,471  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 

 
F - 4

 

CISTERA NETWORKS, INC. & SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
   
Years ended March 31,
 
   
2010
   
2009
 
Revenues
           
   Convergence Solutions
  $ 989,465     $ 2,498,763  
   Professional Services
    238,510       231,222  
   Support and Maintenance
    1,066,235       984,287  
   Total revenues
    2,294,210       3,714,272  
                 
Cost of revenues
               
   Convergence Solutions
    502,295       657,507  
   Professional Services
    90,218       209,680  
   Support and Maintenance
    36,000       90,726  
      Total cost of revenues
    628,513       957,913  
                 
     Gross Profit
    1,665,697       2,756,359  
                 
Expenses:
               
   Sales and marketing
    174,942       1,112,375  
   Software development
    333,321       823,040  
   Engineering and support
    278,804       706,167  
   General and administrative
    780,523       1,367,645  
   Depreciation and amortization
    169,964       403,813  
Total expenses
    1,737,554       4,413,040  
                 
Profit (Loss) from operations
    (71,857 )     (1,656,681 )
                 
Other income (expense)
               
   Interest income
    74       326  
   Interest expense
    (237,371 )     (233,886 )
   Amortization of discount on convertible notes – outside investors
    -       (1,393,293 )
   Amortization of discount on convertible notes – related parties
    -       (41,060 )
   Charge for inducements related to stock issued to convertible note holders
    -       (1,324,444 )
   Charge for estimated liquidated damages – outside investors
    -       10,921  
   Other income (expense)
    (30,103 )     10,000  
Total other income (expense)
    (267,400 )     (2,971,436 )
                 
Net loss
  $ (339,257 )   $ (4,628,117 )
                 
Basic & diluted net loss per share
  $ (0.02 )   $ (0.30 )
                 
Weighted average shares outstanding – basic and diluted
    17,570,550       15,390,029  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 5

 
CISTERA NETWORKS, INC. & SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
                                           
   
Preferred Stock
   
Common Stock
   
Additional paid-in
   
Accumulated
   
Total stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
deficit
   
equity (deficit)
 
                                           
Balances at March 31, 2008
    -     $ -       8,820,192     $ 8,820     $ 13,764,517     $ (16,594,382 )   $ (2,821,045 )
                                                         
Reduction of shares due to cancellation of
                                                       
   fractional shares from reverse/forward
                                                       
   stock split
    -       -       (805 )     -       -       -       -  
                                                         
Stock issued from the conversion of
                                                       
  convertible notes
    -       -       6,175,857       6,176       3,280,940       -       3,287,116  
Stock issued from the exercise of
                                                       
   Warrants
                    2,368,584       2,368       894,547       -       896,915  
Stock issued for waiver of registration
    -       -                                          
  rights payments
                    58,777       59       21,983       -       22,042  
Inducement charges related to conversion of
                                                       
  convertible notes and exercise of warrants
    -       -       -       -       1,302,403       -       1,302,403  
Charge for issuance of warrants
    -       -       -       -       26,829       -       26,829  
                                                         
Net loss
                                            (4,628,117 )     (4,628,117 )
Balances at March 31, 2009
    -     $ -       17,422,605       17,423     $ 19,291,219     $ (21,222,499 )   $ (1,913,857 )
                                                         
Stock issued from the conversion of
                                                       
  convertible notes
    -       -       600,000       600       235,200       -       235,800  
Accrued interest reclassified as to paid-in
                                                       
   capital related to converted notes
    -       -       -       -       14,795       -       14,795  
                                                         
Net loss
    -       -       -       -       -       (339,257 )     (339,257 )
Balances at March 31, 2010
    -     $ -       18,022,605     $ 18,023     $ 19,541,214     $ (21,561,756 )   $ (2,002,519 )
                                                         
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 6

 
CISTERA NETWORKS, INC. & SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Years ended March 31
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (339,257 )   $ (4,628,117 )
Adjustments used to reconcile net loss to net cash used in operating activities:
               
   Charge for inducement to convert debt to convertible promissory notes
    -       1,324,443  
   Amortization of discount on convertible promissory notes – outside investors
    -       1,393,293  
   Amortization of discount on convertible promissory notes – related parties
    -       41,060  
   Charge (credit) for estimated liquidated damages – outside investors
    -       (10,921
   Share-based compensation
    -       26,829  
   Abandonment Loss
    18,052       -  
   Depreciation and amortization
    373,796       403,813  
   Changes in operating assets and liabilities:
               
     Accounts receivable
    (37,661 )     72,734  
     Related party receivables
    -       15,837  
     Inventory
    79,656       17,940  
     Prepaid expenses
    (76,224 )     8,689  
     Accounts payable
    (166,199 )     95,844  
     Related party payables
    78,676       (129,702 )
     Accrued sales commissions
    -       (54,177 )
     Accrued interest
    237,371       (136,956 )
     Other accrued liabilities
    (60,856 )     742,036  
     Deferred revenue
    (72,956 )     (157,566 )
     Other long-tem liabilities
    (12,309 )     41,832  
       Net cash used in operating activities
    22,089       (933,088 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment, net
    (2,847 )     (55,479 )
       Net cash used in investing activities
    (2,847 )     (55,479 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
                 
(Increase)Decrease in restricted cash
    -       50,000  
Net proceeds from short-term advances
    -       25,630  
Net borrowings (payments) on line of credit
    -       (17,503 )
Net proceeds from exercise of warrants
    -       843,604  
Payments on convertible promissory notes and other loans
    -       (36,678 )
Payments on other notes payable and capital lease
    (7,781 )     -  
     Net cash provided by financing activities
    (7,781 )     865,053  
                 
Net increase (decrease) in cash and cash equivalents
    11,461       (123,514 )
Cash and cash equivalents at beginning of year
    1,493       125,007  
Cash and cash equivalents at end of year
    12,954     $ 1,493  
                 
 
F - 7

 
CISTERA NETWORKS, INC. & SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(continued)
 
             
   
Years ended March 31
 
   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
             
             
Cash paid during the year for:
           
  Interest
  $ 19,598     $ 62,696  
  Income taxes
    -       -  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
         
                 
Conversion of convertible promissory notes and related accrued interest to
               
   common stock
  $ 235,800     $ 3,287,116  
Conversion of accounts payable and other accrued liabilities to convertible
               
   promissory notes
    -       53,312  
Conversion of other notes payable to common stock
    -       -  
Allocation of discount on convertible promissory notes to warrants
    -       -  
Conversion of accrued liabilities to common stock
    -       45,364  
Discount related to beneficial conversion feature on convertible promissory
               
   Notes
    -       -  
                 
OTHER NON-CASH TRANSACTIONS:
               
                 
The accompanying notes are an integral part of these consolidated financial statements.
         
 
F - 8

 
 
CISTERA NETWORKS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”), which contemplate the Company as a going concern.  However, the Company has sustained substantial operating losses in recent years and has used substantial amounts of working capital in its operations.  Realization of a major portion of the assets reflected on the accompanying balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company's ability to meet its financing requirements and succeed in its future operations.  Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide them with the opportunity for the Company to continue as a going concern.
 
 
These consolidated financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern”.  While management believes that the actions already taken or planned, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful.
 
 
If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of liabilities, the reported revenues and expenses, and the balance sheet classifications used.
 
 
 Organization and Basis of Presentation
 
 
 On August 31, 2004, CNH Holdings Company absorbed its wholly-owned subsidiary Corvero Networks, and began doing business as Cistera Networks, Inc. (“Cistera Networks,” the “Company” or “we”).  All Corvero products adopted the Cistera name.
 
 
 On May 27, 2005, the Company acquired XBridge Software, Inc. through a merger between XBridge and a Company subsidiary.  XBridge is a wholly-owned subsidiary of the Company.
 
 
 On September 27, 2005, the Company changed its name from CNH Holdings Company to Cistera Networks, Inc.
 
 
In December 2009 the Company incorporated two wholly owned subsidiaries, Cistera Federal Systems, Inc. and Telmarine Communications, Inc. On March 10 2010, Cistera transferred the assets and intellectual property for the LMR Connect line of products into Telmarine Communications Inc.
 
 
 Nature of Operations
 
 
 Cistera Networks provides IP network-based application appliances and services that add features and enhanced functionality to the telecommunications services used by large enterprises, small and mid-sized organizations, both in the commercial and public sector.   Our software-based and hardware-based solutions are delivered on our open-architecture, component-based platform known as the Cistera ConvergenceServer™, which allows administrators to centrally manage advanced applications for Unified communications environments across large single-site and multi-site private voice/data networks.  Although the origins of the solution started back in 2000, we began operations in May 2003 as a public entity under the name of CNH Holdings Company.
 

 
F - 9

 

 
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
 
Principles of Consolidation
 
The consolidated financial statements as of March 31, 2010 and 2009 and for the years ended March 31, 2010 and 2009 include the accounts of Cistera Networks, Inc. and its wholly-owned subsidiary XBridge Software, Inc.  XBridge Software, Inc. was acquired by the Company on May 27, 2005.
 
In December 2009 the Company incorporated two wholly owned subsidiaries, Cistera Federal Systems, Inc. and Telmarine Communications, Inc. On March 10 2010, Cistera transferred the assets and intellectual property for the LMR Connect line of products into Telmarine Communications Inc.
 
The results of subsidiaries acquired or sold during the year are consolidated from their effective dates of acquisition through their effective dates of disposition.
 
All significant intercompany balances and transactions have been eliminated.
 
Use of Estimates
 
Our consolidated financial statements are prepared in accordance with US GAAP.  The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures.  On an ongoing basis, we evaluate our estimates and assumptions.  Our actual results may differ from these estimates under different assumptions or conditions.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. 
 
Accounts Receivable

Accounts receivable is comprised of the following at March 31, 2010 and 2009:
                 
Receivables Assigned to Factor
 
$
-
   
$
125,402
 
Advances to (from) Factor
   
-
     
(70,570
)
Fees, Expenses and Charges to Reserve
   
-
     
(792
)
               
                 
Amounts Due from Factor
   
-
     
54,040
 
Unfactored Accounts Receivable
   
188,983
     
97,282
 
               
Total Receivables
 
$
188,983
   
$
151,322
 

Accounts receivable and concentration of credit risk

The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

The Company is subject to credit risk from accounts receivable with its customers. The Company’s accounts receivable are due from both governmental and commercial entities. Credit is extended based on evaluation of the customers’ financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due.


 
F - 10

 

The Company assesses potential reserves against its accounts receivable by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay their obligations to the Company and economic and industry conditions. Based on these factors, the Company has concluded that an allowance for doubtful accounts as of March 31, 2010 is not required.

As of March 31, 2010, the Company receives approximately 18% of its gross revenues from its top three re-sellers. This represents a decrease in concentration of business from the 37% reported for the year ended March 31, 2009.

The Company maintained a factoring facility with Allied Affiliated Funding (formerly Allied Capital Partners, L.P.) (“Allied”) for up to $1,500,000 of the Company’s customer accounts receivable. The facility allows for an advance rate up to 85.88% and initial factoring charges are 1.75% of the total accounts receivable balance. An additional funding agreement became effective in November of 2008 allowing for the factoring of support renewals at an advance rate of 50.88% and initial factoring charges of 1.75% of the total accounts receivable balance. Advances made by Allied are collateralized by the Company’s accounts receivable, chattel paper, general intangibles, supporting obligations, inventory and proceeds thereof. The term of the current agreements are for a period of two years with an automatic one year renewal thereafter.

On December 10, 2009, the factoring facility was terminated by mutual agreement. We believe that the cost of this facility outweighed the benefits to the Company.

Inventory

Inventory consists of equipment that has been purchased but not yet shipped, shipped but not yet installed, and equipment that has been returned to the Company because the customer has cancelled the project or there were problems with the hardware.  The inventory assets are recorded at the lower of cost or market. Cost is determined by the first-in, first-out method.

Liabilities

Accrued liabilities are comprised of the following at March 31, 2010 and 2009:

     
 2010
     
 2009
 
Accrued expenses
 
$
148,484
   
$
82,924
 
Reserve for litigation contingency
   
650,000
     
650,000
 
Accrued compensation and payroll taxes
   
299,663
     
545,626
 
Accrued interest
   
395,075
     
225,330
 
Other
   
143,478
     
23,931
 
     
Total Accrued Liabilities
 
$
1,636,700
   
$
1,527,811
 

Other long-term liabilities are comprised of the following at March 31, 2010 and 2009:

                 
Accrued interest
 
$
   
$
 
Deferred rent
   
45,722
     
58,031
 
     
Total Other Long-Term Liabilities
 
$
45,722
   
$
58,031
 

Revenue recognition

We recognize revenue when:
·  
persuasive evidence of an arrangement exists,
·  
delivery has occurred or services have been rendered,
·  
the sales price is fixed or determinable, and
·  
collect-ability of the resulting accounts receivable is reasonably assured.


 
F - 11

 

The Company recognizes revenue from software, hardware and services once fully installed and implemented. This method of revenue reporting does not reflect all orders received and shipped during the reporting period, but only those orders received, shipped and completely installed within the reporting period.

The Company recognizes revenue according to ASC 985, formerly the American Institute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 97-2 (Software Revenue Recognition) as defined by paragraphs 07-14 in SOP 97-2 and as amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions). This SOP provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software (including computer hardware and support services).

Deferred revenue represents contracts for certain revenue to be recognized in the future from support and maintenance contracts as well as product sales and professional services which have been shipped and billed but not installed. Support and maintenance contracts are executed on an annual basis and the revenue from these contracts is recognized over the life of the contracts. Of the total deferred revenue shown as a current liability in the amount of $966,869, the deferred revenue for products and services was $301,106 as of March 31, 2010. The remainder of current deferred revenue and the long term deferred revenue of $665,762 related to technical support and maintenance services.

Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed according to the term of the contract, which is typically from one to three years. Advanced services revenue is recognized upon delivery or completion of performance.

We make sales to distributors and retail partners and recognize revenue based on a sell-through method using information provided by them.

Accounting for Sales Commissions

During fiscal year 2008, the Company adopted a sales commission plan that paid commissions at a target rate of 3.75% of the contract amount. Commissions payable are accrued in the period that the customer accepts the product or service from the Company. In fiscal year 2009, the Company amended the sales commission plan in order to provide a more comprehensive compensation structure to the sales organization. Sales commissions are generally paid on sales meeting the criteria for sales commission payment in the subsequent accounting period. In fiscal 2010 the company made no changes to the sales commission structure.
 
Depreciation and Amortization

Property and equipment are recorded at cost and depreciated using straight-line and accelerated methods over the estimated useful lives of the assets which range from three to seven years. Property and equipment consisted of the following at March 31, 2010 and 2009:

                 
   
2010
   
2009
 
Computer Equipment
 
$
241,899
   
$
234,277
 
Trade Show Booth & Fixtures
   
15,637
     
15,637
 
               
Office Equipment
   
322,200
     
399,537
 
Leasehold Improvements
   
22,164
     
22,164
 
               
Property held under capital leases
   
-
     
10,205
 
               
Less accumulated depreciation
   
(394,941
)
   
(357,603
)
             
                 
Total
 
$
206,960
   
$
324,217
 

Maintenance and repairs are charged to operations; betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation thereon is eliminated from the property and related accumulated depreciation accounts, and any resulting gain or loss is credited or charged to income or expense.

 
F - 12

 

Total depreciation expense for the years ended March 31, 2010 and 2009 was $102,020 and $132,037, respectively.

Long Term Investments

On March 10, 2010, Cistera Networks sold the intellectual property and assets for the Land Mobile Radio product range to wholly owned subsidiary Telmarine Communications, Inc. for the sum of $300,000, in exchange for 300,000 shares  of common stock, which was 100% of the outstanding stock in Telmarine.   The purchase contract is attached to this Report as Exhibit 10.5.  All significant intercompany balances and transactions have been eliminated.

Intangible Assets

The Company has adopted ASC 350 (formerly the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”).  ASC 350 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, ASC 350 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in ASC 350. Intangible Assets consisted of the following at March 31, 2010 and 2009:

                   
Intangible Asset
 
2010
   
2009
 
Amortization Period
Intellectual Property
 
$
2,717,755
   
$
2,717,755
 
10 Years
Software Development
   
366,040
     
366,040
 
4 Years
Less accumulated amortization
   
(1,604,128
)
   
(1,332,353
)
 
               
Total
 
$
1,479,667
   
$
1,751,442
   

The software development costs were acquired in the acquisition of XBridge Software, Inc. Capitalized software development costs are amortized on a product-by-product basis over their expected useful life, which is over the term of the customer license agreement, which is generally four years. The annual amortization related to software to be sold is the greater of the amount computed using (a) the ratio that current gross revenue for a product compares to the total of current and anticipated future gross revenue for that product or (b) the straight-line method over the remaining estimated economic life of the product.

Research and development expenses consist primarily of salaries and related expenses, and allocated overhead related to increasing the functionality and enhancing the ease of use of the convergence platform and applications.
On May 27, 2005, the Company issued 2,000,000 shares of common stock to acquire the assets and liabilities of XBridge Software, Inc. The shares were valued at the market price on the effective date of the acquisition, which was $2.65 per share. The Company acquired net assets valued at $782,245 and intellectual property valued at $2,717,755. The Company has determined that the intellectual property has a useful life of 10 years, and is using straight-line amortization.

Total amortization expense for the fiscal years ended March 31, 2009 were $271,776 and 2010 were $271,776.

The estimated amortization for the next five years is as follows:
         
2011
 
 $
271,776
 
2012
   
271,776
 
2013
   
271,776
 
2014
   
271,776
 
2015