##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30th, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-17304
 Cistera Networks, Inc.
  Nevada
    
    91-1944887(State or other jurisdiction of incorporation or 
organization)
    
    (I.R.S. Employer Identification No.)
 6509 Windcrest Drive, Suite 160, Plano, Texas 75024
 972-381-4699
 þ o
   Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



CISTERA NETWORKS, INC & SUBSIDIARY
 TABLE OF CONTENTS
 PART I: FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets  September 30, 2009 (unaudited) and June 30, 2009 (audited)
    
    
    3Consolidated Statements of Operations  For the three months ended September 30, 2009
and 2008 (unaudited)
    
    
    4Consolidated Statements of Stockholders Deficit  September 30, 2009 (unaudited) and
March 31, 2009 (audited)
    
    
    6Consolidated Statements of Cash Flows  For the six months ended September 30, 2009 and
2008 (unaudited)
    
    
    7Notes to Consolidated Financial Statements (unaudited)
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4T.
    
    Controls and Procedures
    
    
    23PART II: OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    26SIGNATURES
    
    
    27EX-31.1EX-32.1EX-99.1
  2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 September 30, 2009
    
    
    June 30, 2009(Unaudited)
    
    
    (Unaudited)Current assetsCash and cash equivalents
    
    $
    35,378
    
    
    $
    71,310Accounts receivable, net of allowance for doubtful accounts of $-0-
    
    
    70,094
    
    
    
    119,145Inventory
    
    
    91,658
    
    
    
    115,724Prepaid expenses
    
    
    46,307
    
    
    
    58,372Total current assets
    
    
    243,437
    
    
    
    364,551Property and equipment, net
    
    
    252,722
    
    
    
    276,418Intangible assets, net
    
    
    1,615,555
    
    
    
    1,683,499Total long-term assets
    
    
    1,868,277
    
    
    
    1,959,917TOTAL ASSETS
    
    $
    2,111,714
    
    
    $
    2,324,468Current liabilitiesAccounts payable
    
    
    518,058
    
    
    
    557,872Accrued liabilities
    
    
    613,446
    
    
    
    896,917Deferred revenue
    
    
    783,516
    
    
    
    1,066,592Note payable
    
    
    
    
    
    
    Total current liabilities
    
    
    1,915,020
    
    
    
    2,521,381Accrued liquidated damages  outside investors
    
    
    177,402
    
    
    
    177,402Litigation Reserve
    
    
    650,000
    
    
    
    650,000Convertible promissory notes and other notes payable, net of discount
    
    
    976,427
    
    
    
    976,427Other long-term liabilities
    
    
    392,007
    
    
    
    342,090Total long-term liabilities
    
    
    2,195,835
    
    
    
    2,145,919Total liabilities
    
    
    4,110,856
    
    
    
    4,667,300Commitments and contingencies (Note 4)Stockholders deficit:Preferred stock, $0.01 par value; 1,000,000 shares authorized; -0-
shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000,000 shares authorized; 17,423,410
shares issued and outstanding,
Respectively
    
    
    17,423
    
    
    
    17,423Additional paid-in capital
    
    
    19,291,219
    
    
    
    19,291,219Accumulated deficit
    
    
    (21,307,784
    )
    
    
    (21,651,474
    )Total stockholders deficit
    
    
    (1,999,142
    )
    
    
    (2,342,832
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    2,111,714
    
    
    $
    2,324,468
  3




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CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended September 30,2009
    
    
    2008RevenuesConvergence solutions
    
    $
    380,403
    
    
    $
    1,013,075Professional services
    
    
    98,018
    
    
    
    45,125Support and maintenance
    
    
    272,488
    
    
    
    230,303Total revenues
    
    
    750,909
    
    
    
    1,288,503Cost of revenuesConvergence solutions
    
    
    123,366
    
    
    
    276,710Professional services
    
    
    56,627
    
    
    
    42,500Support and maintenance
    
    
    22,246
    
    
    
    24,250Total cost of revenues
    
    
    202,239
    
    
    
    343,460Gross Profit
    
    
    548,670
    
    
    
    945,043Operating expensesSales and marketing
    
    
    (2,075
    )
    
    
    301,043Software development
    
    
    (16,843
    )
    
    
    226,875Engineering and support
    
    
    46,763
    
    
    
    201,969General and administrative
    
    
    164,984
    
    
    
    422,105Depreciation and amortization
    
    
    (44,247
    )
    
    
    100,674Total operating expenses
    
    
    148,582
    
    
    
    1,252,666Income / (Loss) from operations
    
    
    400,088
    
    
    
    (307,623
    )Other income (expense)Interest income
    
    
    
    
    
    
    Other income
    
    
    7
    
    
    
    86Interest expense
    
    
    (57,595
    )
    
    
    (50,117
    )Abandonment loss
    
    
    
    
    
    
    Charge for inducements related to stock issued to convertible note holders
    
    
    
    
    
    
    (131,631
    )Amortization of discount on convertible notes  outside investors
    
    
    
    
    
    
    (108,918
    )Amortization of discount on convertible notes  related parties
    
    
    
    
    
    
    Credit (charge) for estimated liquidated damages
    
    
    
    
    
    
    Total other income (expense)
    
    
    (57,588
    )
    
    
    (290,580
    )Net Income / (Loss)
    
    $
    342,500
    
    
    $
    (598,203
    )Basic & diluted net income / (loss) per share
    
    $
    0.02
    
    
    $
    (0.03
    )Weighted average shares outstanding  basic and diluted
    
    
    17,423,410
    
    
    
    17,274,687
 4




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CISTERA NETWORKS, INC. & SUBSIDIARY
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Six months ended September 30,2009
    
    
    2008RevenuesConvergence solutions
    
    $
    568,481
    
    
    $
    1,535,468Professional services
    
    
    134,586
    
    
    
    105,833Support and maintenance
    
    
    505,808
    
    
    
    447,762Total revenues
    
    
    1,208,875
    
    
    
    2,089,063Cost of revenuesConvergence solutions
    
    
    226,379
    
    
    
    409,742Professional services
    
    
    104,345
    
    
    
    93,000Support and maintenance
    
    
    40,246
    
    
    
    47,434Total cost of revenues
    
    
    370,970
    
    
    
    550,176Gross Profit
    
    
    837,905
    
    
    
    1,538,887Operating expensesSales and marketing
    
    
    113,220
    
    
    
    580,472Software development
    
    
    136,235
    
    
    
    423,333Engineering and support
    
    
    140,905
    
    
    
    406,400General and administrative
    
    
    344,248
    
    
    
    760,617Depreciation and amortization
    
    
    53,413
    
    
    
    198,830Total operating expenses
    
    
    788,021
    
    
    
    2,369,652Income / (loss) from operations
    
    
    49,884
    
    
    
    (830,765
    )Other income (expense)Interest income
    
    
    
    
    
    
    168Other income
    
    
    63Interest expense
    
    
    (124,629
    )
    
    
    (147,809
    )Abandonment loss
    
    
    (15,815
    )
    
    
    Charge for inducements related to stock issued to convertible note holders
    
    
    
    
    
    
    (1,324,444
    )Amortization of discount on convertible notes  outside investors
    
    
    
    
    
    
    (1,188,855
    )Amortization of discount on convertible notes  related parties
    
    
    
    
    
    
    (41,060
    )Credit (charge) for estimated liquidated damages
    
    
    
    
    
    
    11,299Total other income (expense)
    
    
    (140,381
    )
    
    
    (2,690,701
    )Net loss
    
    $
    (90,497
    )
    
    
    (3,521,466
    )Basic & diluted net loss per share
    
    $
    (0.00
    )
    
    $
    (0.26
    )Weighted average shares outstanding  basic and diluted
    
    
    17,423,410
    
    
    
    13,369,365
  5




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CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
 TotalPreferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    paid-in   capital
    
    
    deficit
    
    
    equity (deficit)Balances at June 30, 2009
    
    
    
    
    
    
    
    
    
    
    17,423,410
    
    
    $
    17,423
    
    
    $
    19,291,219
    
    
    $
    (21,651,474
    )
    
    $
    (2,342,832
    )Net income / (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342,500
    
    
    
    342,500Balance Adjustment from
June 30,2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,190
    
    
    
    1,190Balances at September
30, 2009
    
    
    
    
    
    $
    
    
    
    
    17,423,410
    
    
    $
    17,423
    
    
    $
    19,291,219
    
    
    $
    (21,307,784
    )
    
    $
    (1,999.142
    )
  6




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##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six months ended September 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (90,497
    )
    
    $
    (3,521,466
    )Adjustments used to reconcile net loss to net cash used in operating
activities:Charge for inducement to convert debt to convertible promissory notes
    
    
    
    
    
    
    1,324,444Charge (credit) for liquidated damages
    
    
    
    
    
    
    (11,299
    )Charge for stock issued for waiver of registration rights payments
    
    
    
    
    
    
    1,188,855Amortization of discount on convertible promissory notes
    
    
    
    
    
    
    41,060Abandonment loss
    
    
    15,815
    
    
    
    Gain on disposition of assets
    
    
    3,149
    
    
    
    Depreciation and amortization
    
    
    53,414
    
    
    
    198,830Changes in operating assets and liabilities:Accounts receivable
    
    
    81,228
    
    
    
    118,172Inventory
    
    
    32,998
    
    
    
    (12,488
    )Prepaid expenses
    
    
    8,966
    
    
    
    (17,587
    )Accounts payable
    
    
    1,006
    
    
    
    (100,828
    )Accrued liabilities
    
    
    (231,973
    )
    
    
    25,997Deferred revenue
    
    
    (256,309
    )
    
    
    (46,249
    )Other long-term liabilities
    
    
    333,976
    
    
    
    45,378Net cash provided by (used) in operating activities
    
    
    42,270
    
    
    
    (767,181
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment, net
    
    
    
    
    
    
    (64,261)
    )Net cash used in investing activities
    
    
    
    
    
    
    (64,261
    )CASH FLOWS FROM FINANCING ACTIVITIES:Decrease in restricted cash
    
    
    
    
    
    
    50,000Net borrowings (payments) on line of credit
    
    
    
    
    
    
    (17,503
    )Net proceeds from short-term advances
    
    
    Net proceeds from exercise of warrants
    
    
    
    
    
    
    843,604Payments on convertible promissory notes and other loans
    
    
    
    
    
    
    (14,938
    )Payments on other notes payable and capital lease
    
    
    (8,386
    )
    
    
    Net cash provided by (used) financing activities
    
    
    (8,386
    )
    
    
    861,163Net increase in cash and cash equivalents
    
    
    33,884
    
    
    
    29,721Cash and cash equivalents at beginning of period
    
    
    1,493
    
    
    
    125,007Cash and cash equivalents at end of period
    
    $
    35,377
    
    
    $
    154,728
  7




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CISTERA NETWORKS, INC. & SUBSIDIARY  CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)  (Unaudited)
 Six months ended September 302009
    
    
    2008SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest
    
    $
    8,435
    
    
    $
    38,982Income taxes
    
    
    
    
    
    
    SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion of convertible promissory notes and related accrued interest and
accrued liquidated damages to common stock
    
    $
    
    
    
    $
    3,287,116Conversion of accounts payable and other accrued liabilities to convertible
promissory notesConversion of accrued liabilities to common stock
    
    
    
    
    
    
    53,312Transfer of inventory to equipment
    
    
    
    
    
    
    20,399
  8




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CISTERA NETWORKS, INC. & SUBSIDIARY
 
 Notes to Consolidated Financial Statements
(Unaudited)
 NOTE 1  BASIS OF PRESENTATION
  Significant Accounting Policies
  Recently Issued Accounting Pronouncements
     9




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
  Balance Sheet Accounts
  September 30, 2009
    
    
    June 30, 2009Receivables assigned to factor
    
    $
    215,079
    
    
    $
    137,071Advances to (from) factor
    
    
    (186,299
    )
    
    
    (112,205
    )Fees, expenses and charges to reserve
    
    
    (12,810
    )
    
    
    (12
    )Amounts due from reserve account
    
    
    4,293
    
    
    
    7,239Amounts due from factor
    
    
    20,263
    
    
    
    32,093Non-factored Accounts Receivable
    
    
    49,831
    
    
    
    87,052Total accounts receivable
    
    $
    70,094
    
    
    $
    119,145
  September 30, 2009
    
    
    June 30, 2009Accrued expenses
    
    $
    80,350
    
    
    $
    80,350Accrued compensation and payroll taxes
    
    
    272,767
    
    
    
    668,854Customer Deposits
    
    
    131,286
    
    
    
    Other
    
    
    129,043
    
    
    
    147,724Total Accrued liabilities
    
    $
    613,446
    
    
    $
    896,928
  September 30, 2009
    
    
    June 30, 2009Deferred rent
    
    $
    58,982
    
    
    $
    58,745$
    58,982
    
    
    $
    58,745
 Earnings per Share
   10




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
 Accounts receivable and concentration of credit risk
     Reclassifications
  NOTE 2  FINANCIAL CONDITION
    11




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
   NOTE 3  DEBT
  PP1 Notes and Warrants
   PP2 Notes and Warrants
   12




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
   STIIP
      PP1 and PP2 Notes:Principal
    
    $
    976,426Accrued interest
    
    
    333,010Accrued estimated liquidated damages
    
    
    177,402Total
    
    $
    1,486,838
 13




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
 Registration Payment Arrangements
     Accumulated deficit, April 1, 2007
    
    $
    (10,586,847
    )Adjustments for the cumulative effect of the change in accounting
principle:Contingent liability recorded for estimated liquidated damages
    
    
    (289,518
    )Reclassification of Warrants from derivative liabilities to
equity securities
    
    
    (465,597
    )Total adjustments
    
    
    (755,115
    )Accumulated deficit, April 1, 2007, as adjusted
    
    $
    (11,341,962
    )
 14




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
 NOTE 4  COMMITMENTS AND CONTINGENCIES
  NOTE 5  RELATED PARTY TRANSACTIONS
    NOTE 6  SUBSEQUENT EVENTS
 Reverse/Forward Split
 th
  15




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CISTERA NETWORKS, INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
    16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
  EXECUTIVE SUMMARY AND RECENT BUSINESS DEVELOPMENTS
 th
     th
 17




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th Zone Speak
 th
 th
   18




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##### Table of Contents



RESULTS OF OPERATIONS
 Selected Consolidated Statements of Operations Data
  Results of Operations for the Six Months Ended September 30, 2009
Compared to the Six Months Ended September 30, 2008
 For the six months ended September 30,% of
    
    
    
    
    
    
    % of2009
    
    
    revenue
    
    
    2008
    
    
    revenueRevenues:Convergence solutions
    
    $
    568,541
    
    
    
    47
    %
    
    $
    1,535,468
    
    
    
    73
    %Professional services
    
    
    134,586
    
    
    
    11
    %
    
    
    105,833
    
    
    
    6
    %Support and maintenance
    
    
    505,808
    
    
    
    42
    %
    
    
    447,762
    
    
    
    21
    %Total revenues
    
    
    1,208,875
    
    
    
    100
    %
    
    
    2,089,063
    
    
    
    100
    %Cost of revenues:Convergence solutions
    
    
    226,379
    
    
    
    19
    %
    
    
    409,742
    
    
    
    20
    %Professional services
    
    
    104,345
    
    
    
    9
    %
    
    
    93,000
    
    
    
    4
    %Support and maintenance
    
    
    40,246
    
    
    
    3
    %
    
    
    47,434
    
    
    
    2
    %Total cost of revenues
    
    
    370,970
    
    
    
    31
    %
    
    
    550,176
    
    
    
    26
    %Gross Profit
    
    
    837,905
    
    
    
    69
    %
    
    
    1,538,887
    
    
    
    74
    %Operating expenses:Sales and marketing
    
    
    113,220
    
    
    
    9
    %
    
    
    580,472
    
    
    
    28
    %Software development
    
    
    136,235
    
    
    
    11
    %
    
    
    423,333
    
    
    
    20
    %Engineering and support
    
    
    140,905
    
    
    
    12
    %
    
    
    406,400
    
    
    
    19
    %General and administrative
    
    
    344,248
    
    
    
    28
    %
    
    
    760,617
    
    
    
    36
    %Depreciation and amortization
    
    
    53,413
    
    
    
    5
    %
    
    
    198,830
    
    
    
    10
    %Total operating expenses
    
    
    788,021
    
    
    
    65
    %
    
    
    2,369,652
    
    
    
    113
    %Gain (Loss) from operations
    
    
    49,884
    
    
    
    4
    %
    
    
    (830,765
    )
    
    
    (40
    %)Other income (expense)Interest income
    
    
    
    
    
    
    
    %
    
    
    168
    
    
    
    
    %Other income
    
    
    63
    
    
    
    
    %Charge for
inducements related to stockIssued to convertible note holders
    
    
    
    
    
    
    
    %
    
    
    (1,324,444
    )
    
    
    (64
    %)Amortization of discount on convertibleNotes
    
    
    
    
    
    
    
    %
    
    
    (1,188,855
    )
    
    
    (57
    %)Abandonment loss
    
    
    (15,815
    )
    
    
    (1
    )%Interest expense
    
    
    (124,629
    )
    
    
    (10
    )%
    
    
    (147,809
    )
    
    
    (7
    %)Credit (charge) for estimated liquidated Damages
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Total other income (expense)
    
    
    (140,381
    )
    
    
    (11
    )%
    
    
    (2,690,701
    )
    
    
    (128
    %)Net Gain (Loss)
    
    $
    (90,497
    )
    
    
    (7
    )%
    
    
    (3,521,466
    )
    
    
    (168
    %)
 19




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##### Table of Contents



Revenue
  Gross Profit and Gross Margin
  Operating Expenses
  Interest Expense
  Amortization of Debt Discount
  Charge for Inducements Related to Stock Issued to Convertible Note Holders
  Liquidated Damages
  20




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Liquidity and Capital Resources
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Cash and Cash Flows
  Contractual Obligations
  Critical Accounting Policies
  Research and Development  Software Development
 th
 Recently Issued Accounting Pronouncements
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4(T). Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
           Inherent Limitations of Internal Controls
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 We may need to raise additional capital to fund our operations.
   We will need to renegotiate or extend the currently outstanding PP2 Notes and related interest.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 None
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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
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Item 6. Exhibits
 31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Press Release dated November 20,
2009
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SIGNATURE
  CISTERA NETWORKS, INC.Date: November 19th, 2009
    /s/    Gregory T. RoyalGregory T. RoyalChief Executive Officer and interim
Chief Financial Officer
(Principal Executive, Financial and
Accounting Officer) 27