UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)




[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended September 30th, 2010





OR





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





For the transition period from __________________ to __________________





Commission File Number    0-17304





Cistera Networks, Inc.


(Exact name of registrant as specified in its charter)





Nevada

(State or other jurisdiction of incorporation or organization)
91-1944887

(I.R.S. Employer Identification No.)





6509 Windcrest Drive, Suite 160, Plano, Texas       75024


(Address of principal executive offices)               (Zip Code)





972-381-4699


(Registrant's telephone number, including area code)










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




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).




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




Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company ý







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




As of October 26th, 2010, 18,665,462 shares of the registrant’s stock, $0.001 par value per share, were outstanding.




1


CISTERA NETWORKS, INC & SUBSIDIARIES




TABLE OF CONTENTS














PART I: FINANCIAL INFORMATION




Item 1.
Financial Statements:Consolidated Balance Sheets – September 30, 2010 (unaudited) and March 31, 2010 (audited)
4Consolidated Statements of Operations – For the three months ended September 30, 2010 and

2009 (unaudited)
5Consolidated Statements of Operations – For the six months ended September 30, 2010 and

2009 (unaudited)
6Consolidated Statements of Stockholders’ Deficit – September 30, 2010 (unaudited) and

March 31, 2010 (audited)
7Consolidated Statements of Cash Flows – For the six months ended September 30, 2010 and

2009 (unaudited)
8Notes to Consolidated Financial Statements (unaudited)
10Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25Item 4T.
Controls and Procedures
25


PART II: OTHER INFORMATION




Item 1.
Legal Proceedings
26Item 1A.
Risk Factors
26Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26Item 3.
Defaults Upon Senior Securities
27Item 4.
Submission of Matters to a Vote of Security Holders
27Item 5.
Other Information
27Item 6.
Exhibits
28SIGNATURES
29







2


Reporting Disclosure





On August 16 2010, the company filed its notice of termination of registration under Section 12(g) of the Securities Exchange Act of 1934. The company subsequently will continue to follow the International Reporting Standard or Alternative Reporting Standard to meet the requirements for Pink Sheets Current Information.





The company is using the 10Q and 10K reporting structure to meet the requirements of the Alternative Reporting Standard. It is provided in this format to maintain consistency across reporting periods.





As a consequence of this, specific SEC reporting requirements that may be detailed in this document may not apply to a company that has terminated it’s registration under Section 12(g) of the Securities Exchange Act of 1934.





Furthermore, this 10Q Filing has not been audited or reviewed as required under SEC regulations.





3


Part I. FINANCIAL INFORMATION





Item 1. Financial Statements





CISTERA NETWORKS, INC. & SUBSIDIARIESCONSOLIDATED BALANCE SHEET30-Sep-10

(Unaudited)


31-Mar-10

(Audited)Current assets:Cash and cash equivalents

$
8,139


$
12,954Accounts receivable, net of allowance for doubtful accounts $-0-


161,568



188,983Inventory


52,513



45,000Prepaid expenses


51,841



113,565Total current assets


274,061



360,502Property and equipment, net


204,609



206,960Intangible assets, net


1,447,484



1,479,667Total long-term assets


1,652,094



1,686,627TOTAL ASSETS

$
1,926,155


$
2,047,129Current liabilities:Accounts payable

$
366,068


$
350,853Accrued liquidated damages – outside investors


-



177,402Accrued liabilities


1,048,905



986,700Deferred revenue


765,898



609,532Convertible promissory notes – outside investors, net of discount


754,576



793,426Total current liabilities


2,935,447



2,917,913Reserve Contingency for Litigation


650,000



650,000Related Party Payables


78,676



78,676Deferred revenue


101,962



357,335Other long-term liabilities


-



45,722Total long-term liabilities


830,638



1,131,733TOTAL LIABILITIES


3,766,085



4,049,646Stockholders’ deficit:Preferred stock, $0.001 par value; 1,000,000 shares authorized;


-



--0- shares issued and outstandingCommon stock, $0.001 par value; 50,000,000 shares authorized;18,665,462 and 18,022,605 shares issued and outstanding


18,665



18,023Additional paid-in capital


19,585,572



19,541,214Accumulated deficit


(21,444,168
)


(21,561,754
)Total stockholders’ deficit


(1,839,930
)


(2,002,517
)TOTAL LIABILITIES AND STOCKHOLDERS’DEFICIT

$
1,926,155


$
2,047,129The accompanying notes are an integral part of these consolidated financial statements.





4





CISTERA NETWORKS, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)Three months ended September2010


2009RevenuesConvergence Solutions

$
240,223


$
380,403Professional Services


30,620



98,018Support and Maintenance


306,379



272,488Total revenues


577,223



750,909Cost of revenuesConvergence Solutions


107,193



123,366Professional Services


42,439



56,627Support and Maintenance


18,000



22,246Total cost of revenues


167,632



202,239Gross Profit


409,590



548,670Expenses:Sales and marketing


68,901



53,723Software development


54,983



106,803Engineering and support


88,391



73,112General and administrative


190,244



195,076Depreciation and amortization


6,381



(44,247
)Total expenses


408,900



384,467Profit (Loss) from operations


690



164,203Other income (expense)Interest income


1



7Interest expense


(34,003
)


(57,595
)Charge for estimated liquidated damages – outside investors


177,402



-Other income (expense)


(1,794
)


-Total other income (expense)


141,606



(57,588
)Net Gain (loss)

$
142,296


$
106,615Basic & diluted net gain (loss) per share

$
0.01


$
0.01Weighted average shares outstanding – basic and diluted


18,665,462



17,423,410The accompanying notes are an integral part of these consolidated financial statements.





5





CISTERA NETWORKS, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)Six Months Ended2010


2009RevenuesConvergence Solutions

$
569,154


$
568,481Professional Services


55,769



134,586Support and Maintenance


596,473



505,808Total revenues


1,221,396



1,208,875Cost of revenuesConvergence Solutions


233,149



226,379Professional Services


87,895



104,345Support and Maintenance


48,215



40,246Total cost of revenues


369,259



370,970Gross Profit


852,137



837,905Expenses:Sales and marketing


133,957



113,220Software development


129,738



136,235Engineering and support


131,543



140,905General and administrative


427,034



344,248Depreciation and amortization


12,310



53,413Total expenses


834,582



788,021Profit (Loss) from operations


17,555



49,884Other income (expense)Interest income


305



63Interest expense


(74,529
)


(124,629
)Abandonment Loss


-



(15,815
)Charge for inducements related to stock issued to convertible note holders


-



0Charge for estimated liquidated damages – outside investors


177,402



0Other income (expense)


(4,281
)


0Total other income (expense)


98,898



(140,381
)Net Gain (loss)

$
116,453


$
(90,497
)Basic & diluted net gain (loss) per share

$
0.01


$
(0.01
)Weighted average shares outstanding – basic and diluted


18,665,462



17,423,410The accompanying notes are an integral part of these consolidated financial statements.


6





CISTERA NETWORKS, INC. & SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


(Unaudited)





TotalPreferred Stock


Common Stock


Additional paid-


Accumulated


stockholders’Shares


Amount


Shares


Amount


in capital


deficit


equity (deficit)Balances at March 31, 2010


-



-



18,022,605


$
18,023


$
19,541,214


$
(21,561,754
)

$
(2,002,517
)PP#2 Note conversion to shares










642,857


$
642


$
(642
)Capital Investment

















$
45,000






$
45,000Net income / (loss)





















$
116,453


$
116,453Balance Adjustment from

June 30,2010





















$
1,135


$
1,135Balances at September 30, 2010


-


$
-



18,665,462


$
18,665


$
19,585,572


$
(21,444,167
)

$
(1,839,930
)




















The accompanying notes are an integral part of these consolidated financial statements.


7


CISTERA NETWORKS, INC. & SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six months ended September 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net Gain (loss)

$
116,453


$
(90,497
)Adjustments used to reconcile net loss to net cash used in operating activities:Liquidated Damages

Gain on disposition of assets


177,402



15,815 3,149Depreciation and amortization


12,310



53,414Changes in operating assets and liabilities:Accounts receivable


27,415



81,228Inventory


(7,513
)


32,998Prepaid expenses


(85,469
)


8,966Accounts payable


16,374



1,006Accrued liabilities


(102,428
)


(231,973
)Deferred revenue


(110,331
)


(256,309
)Other long-term liabilities


(45,722
)


333,976Net cash provided by (used) in operating activities


(49,815
)


42,270CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment, net


-



-Net cash used in investing activities


-



-CASH FLOWS FROM FINANCING ACTIVITIES:Decrease in restricted cash






-Payments on convertible promissory notes and other loans


45,000



-Payments on other notes payable and capital lease


-



(8,386
)Net cash provided by (used) financing activities


45,000



(8,386
)Net increase in cash and cash equivalents


(4,814
)


33,884Cash and cash equivalents at beginning of period


12,954



1,493Cash and cash equivalents at end of period

$
8,140


$
35,377








The accompanying notes are an integral part of these consolidated financial statements.


8








CISTERA NETWORKS, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)Six months ended September 302010


2009SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest

$
74,529


$
8,435Income 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

$
45,000


$
-Termination of accrued liquidated damages reserve


177,402





The accompanying notes are an integral part of these consolidated financial statements.


9
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)





NOTE 1 – BASIS OF PRESENTATION





The accompanying unaudited consolidated financial statements of Cistera Networks, Inc. (“Cistera” the “Company” or “we”) and its wholly-owned subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements, and reflect all adjustments, consisting only of normal, recurring adjustments necessary for a fair presentation in accordance with US GAAP. The results of operations for interim period presented are not necessarily indicative of the operating results for the full year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (the “2010 10-K”).





Significant Accounting Policies





The Company prepares its financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, our use of estimates and the accounting for convertible debt and warrants. For a detailed discussion on the application of these accounting policies, see Note 2 to our audited consolidated financial statements contained in our 2010 10-K.





Recently Issued Accounting Pronouncements




In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115"(“SFAS 159”).  SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items will be reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We  do not believe it will have a material impact.






In December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements” (“SFAS 160”), which requires all entities to report non-controlling (minority interests) in subsidiaries with equity in the consolidated financial statements, but separate from the parent stockholders' equity. We do not believe it will have a material impact.






In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. We do not believe it will have a material impact.




10
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)


Research and development expenditures are generally expensed as incurred. 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.





Balance Sheet Accounts





Accounts receivable are comprised of the following:





September 30, 2010


March 31, 2010Non-factored Accounts Receivable


161,568



188,983Total accounts receivable

$
161,568


$
188,983







Accrued liabilities are comprised of the following:




September 30, 2010


March 31, 2010Accrued expenses

$
10,326


$
148,484Accrued compensation and payroll taxes

Accrued Interest

Customer Deposits

Other


386,759

469,618

167,202

15,000



299,663

395,075

143,478

-Total Accrued liabilities

$
1,048,905


$
986,700





Other long-term liabilities are comprised of the following:




September 30, 2010


March 31, 2010Deferred rent

$
0


$
45,722$
0


$
45,722





Earnings per Share





Basic earnings (loss) per share is based on the weighted average number of common shares outstanding.





Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common stock equivalents. The Company had approximately 4 million potentially dilutive common stock equivalents (in the form of stock options and stock purchase warrants) outstanding as of September 30, 2010. These potentially dilutive common stock equivalents have been excluded from the diluted share calculations for the three months ended September 30, 2010, respectively, as they were anti-dilutive as a result of the net losses incurred for those periods. Accordingly, basic shares equal diluted shares for all periods presented.




11
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)


Accounts receivable and concentration of credit risk





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





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





The Company assesses potential reserves against its accounts receivable by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay their obligations to the Company and economic and industry conditions.  The Company has historically very low rates of default. Based on these factors, the Company has concluded that an allowance for doubtful accounts as of September 30, 2010 and March 31, 2010 is not required.





As of September 30, 2010, the Company receives approximately 40% of its gross revenues from its top three re-sellers.  This represents an increase in concentration of business from the 18% reported for the year ended March 31, 2010.





Reclassifications





Certain reclassifications have been made in the fiscal year 2010 financial statements to conform to the fiscal year 2011 presentation.





NOTE 2 - FINANCIAL CONDITION





The accompanying consolidated financial statements have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2010, contains an explanatory paragraph expressing doubt as to our ability to continue as a going concern.





The “going concern” explanatory paragraph resulted from, among other things, the losses from operations we have incurred since inception, our liquidity position and the net loss of $339,257 for the year ended March 31, 2010, and negative working capital (current liabilities in excess of current assets) of $1.8 million as of June 30, 2009.  Also, as of September 30, 2010, we have negative working capital (current liabilities in excess of current assets) of 1.9 million.





As of September 2010, we were in default on approximately $1,224,193 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”).  As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement.  The company is currently in negotiations to restructure the remaining outstanding notes.




12
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)


NOTE 3 – DEBT





As of September 30, 2009, the Company had $754,576 of gross principal, accrued interest of $469,618. This represents 15.6% of the total principal amount raised in PP#1, PP#2 and PP#2A.





The table below represents the total principal raised and the total principal amount remaining.





PP1 and PP2 Notes:

Original Principal
Current Outstanding
Percentage RemainingPP1 Principal

$        1,146,000
13,000
1%PP2 Principal

3,700,000
741,576
20%Total

$        4,846,000
754,576
15.6%





PP1 Notes and Warrants





The outstanding principal and accrued interest are convertible into shares of common stock at a conversion rate equal to the lesser of (a) $1.30 per share, or (b) a 25% discount to the average closing bid price of the Company’s common stock for the five days including and immediately preceding the interest compounding date, provided that in no event shall the conversion price per share be less than $1.00 per share.  The PP1 Notes may be converted, in whole or in part, at the option of the PP1 Note holder on any interest compounding date.  The PP1 Notes converted in December 2005 were converted at $1.00 per share.





The PP1 Warrants have a term of five years and are exercisable at an exercise price of $1.30 per share.  Subject to an effective registration statement covering the resale of the shares of common stock issuable upon exercise of the PP1 Warrants, the Company may, upon thirty days prior written notice, redeem the PP1 Warrants for $0.10 per share, in whole or in part, if our common stock closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15) consecutive trading days.





PP2 Notes and Warrants





The outstanding principal and accrued interest are convertible into shares of common stock at a fixed rate of $0.75 per share.  The PP2 Notes may be converted, in whole or in part, at the option of the PP2 Note holder on any interest compounding date.  The Company may prepay the PP2 Notes in whole or in part, upon thirty days prior written notice to note holders; provided that partial prepayments may be made only in increments of $10,000 and, provided further, that the PP2 Note holders may convert the amount of the proposed prepayment into shares of our common stock at any time.





The PP2 Warrants have a term of five years and are exercisable at an exercise price of $1.00 per share.  Subject to an effective registration statement covering the resale of the shares of common stock issuable upon exercise of the PP2 Warrants, the Company may, upon thirty days prior written notice, redeem the PP2 Warrants for $0.10 per share, in whole or in part, if our common stock closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15) consecutive trading days.





For the three months ended June 30, 2008, the Company recorded $1,120,997 of amortization of debt discounts associated with the PP2 Notes.





13
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)


STIIP





Under the STIIP, which commenced on June 9, 2008, the Company temporarily modified the terms of its outstanding PP1 Notes, PP2 Notes, PP1 Warrants and PP2 Warrants. During the period beginning June 9, 2008 through June 24, 2008 (the “Conversion Period”), the conversion prices of the PP1 Notes and PP2 Notes, which were $1.00 and $0.75 per share, respectively, were reduced to $0.53 per share.  In addition, the exercise prices for the PP1 Warrants and the PP2 Warrants, which were $1.30 and $1.00 per share, respectively, were reduced to $0.40 per share.  Under the STIIP, certain PP2 Note holders converted $3,240,290, comprised of $2,470,156 in principal and $770,134 in accrued interest and liquidated damages into approximately 6.2 million shares of the Company’s common stock at the reduced conversion price.




Also under the STIIP, certain PP1 and PP2 Warrant holders exercised approximately 2.3 million PP1 and PP2 Warrants at an exercise price of $0.40 per share.  All PP1 and PP2 Warrant holders who exercised their warrants also received three additional warrants (the “Bonus Warrants”) for every ten warrants exercised.  The Bonus Warrants were exercisable during the Conversion Period at an exercise price of $0.30 per share, and if not exercised on or before such date, the exercise price for such Bonus Warrants was increased to $0.60 per share.  A total of 507,675 Bonus Warrants were exercised at $0.30 per share.  The bonus warrants were valued using the Black-Scholes option pricing model (“Black-Scholes model”) and a charge and a corresponding credit to additional paid-in capital were recorded for the June 30, 2008 and September 30, 2008 quarters in the amounts of $36,125 and $131,631, respectively.  The bonus warrants expire on April 6, 2012.  The total cash proceeds received from the exercises of the PP1, PP2 and Bonus Warrants was approximately $844,000.




The Company accounted for the reduction in the conversion prices of the PP2 Notes under the STIIP in accordance with FASB Statement No. 84, “Induced Conversions of Convertible Debt an amendment of APB Opinion No. 26” (“SFAS 84”).  Accordingly, the Company calculated and recorded an inducement charge and a corresponding credit to additional paid-in capital in the June 30, 2008 quarter in the amount of $931,893 for the fair value of common stock issued based on the reduced price in excess of the fair value of the common stock issuable pursuant to the original conversion price.





The Company accounted for the reduction in the exercise price of the PP1 and PP2 Warrants exercised under the STIIP in accordance with the guidance in SFAS 123(R), “Share-based payment” (“SFAS 123R”) and FASB Staff Position No. FSP FAS 123(R)-6, “Technical Corrections of FASB Statement No. 123(R)” for a modification due to a short-term inducement.  Accordingly, the Company recorded a charge and a corresponding credit to additional paid-in capital in the June 30, 2008 quarter in the amount of $202,743 for the difference between the fair value of the PP1 and PP2 Warrants immediately before and after the modification multiplied by the number of PP1 and PP2 Warrants that were exercised during the Conversion Period of the STIIP.  The fair value of the PP1 and PP2 Warrants were calculated using the Black-Scholes model. The total non-cash charge recorded for the inducement on the PP2 Notes and the reduction in exercise price on the PP1 and PP2 Warrants was $1,134,216.





The Company’s total senior convertible note debt as of September 30, 2010, all of which is current, is as follows:





PP1 and PP2 Notes:Principal

$
754,576Accrued interest


469,618Accrued estimated liquidated damages


-Total

$
1,224,194








14
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)


Registration Payment Arrangements





Effective April 1, 2007, the Company adopted 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.





On September 30,2010, the company closed out the Liquidated Damages Reserve after it determined that no more claims are assessable under this reserve.





The table below summarizes the cumulative effect entry recorded as of April 1, 2007 for the adoption of FSP EITF 00-19-2:





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
)





15
 CISTERA NETWORKS, INC. & SUBSIDIARIES
 Notes to Consolidated Financial Statements
 (Unaudited)


NOTE 4 – COMMITMENTS AND CONTINGENCIES





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




NOTE 5 - RELATED PARTY TRANSACTIONS





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.





On December 9, 2009, the Company issued an Unsecured Promissory Note for $13,942.38 to Gregory Royal being unpaid expense claims for years 2008, 2009 and 2010. The note is for two (2) years at an interest rate of prime plus one and one half percent (1.5%) per annum.





On December 9, 2009, the Company issued an Unsecured Promissory Note for $64,733.76 to Gregory Royal being unpaid portion of salary for calendar year 2009. Mr. Royal took voluntary partial salary deferral for that calendar period of approx forty percent (40%) of his salary. The note is for two (2) years at an interest rate of prime plus one and one half percent (1.5%) per annum.





NOTE 6 – SUBSEQUENT EVENTS





Reverse/Forward Split





Effective May 13, 2009, the Company completed a reverse stock split of our common stock followed immediately by a forward stock split of our common stock (the "Reverse/Forward Stock Split").  As a result of the Reverse/Forward Stock Split, stockholders owning fewer than 3 shares of our common stock will be cashed out at a price of $.14 per share, and the holdings of all other stockholders will remain unchanged.  The reverse/forward stock split resulted in the cancellation of 805 fractional shares.  The stock split reduced the number of shares outstanding from 18,023,410 to 18,022,605.  All references to common stock in the financial statements have been changed to reflect the stock split.





NON-GAAP DISCLOSURES





EBITDA, excluding special items, which represents earnings (excluding the impact of certain nonrecurring items on our results) before depreciation and amortization, interest and financing expenses, income taxes, and cumulative effect of a change in accounting principle, net, is a supplemental measure of performance that is not required by, or presented in accordance with, U.S. GAAP. We present EBITDA, excluding special items, because we consider it an important supplemental measure of our operations and financial performance. We believe EBITDA, excluding special items, is more reflective of our operations as it provides transparency to investors and enhances period-to-period comparability of our operations and financial performance. EBITDA, excluding special items, should not be considered as an alternative to net income determined in accordance with U.S. GAAP.


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





CERTIFICATION AND NOTICE OF TERMINATION OF REGISTRATION UNDER SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR SUSPENSION OF DUTY TO FILE REPORTS UNDER SECTIONS 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.





On August 16 2010, the company filed its notice of termination of registration under Section 12(g) of the Securities Exchange Act of 1934. The company subsequently will continue to follow the International Reporting Standard or Alternative Reporting Standard to meet the requirements for Pink Sheets Current Information. The company continues to make its reports available on both the EDGAR system and the OTC Disclosure Service.


17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations





FORWARD-LOOKING STATEMENTS





This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In many but not all cases you can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negative of these terms or other similar expressions.  These forward-looking statements include statements regarding our expectations, beliefs, or intentions about the future, and are based on information available to us at this time. We assume no obligation to update any of these statements and specifically decline any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Actual events and results could differ materially from our expectations as a result of many factors, including those identified in this report. We urge you to review and consider those factors, and those identified from time to time in our reports and filings with the SEC, for information about risks and uncertainties that may affect our future results. All forward-looking statements we make after the date of this filing are also qualified by this cautionary statement and identified risks. Additional risk factors are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 and our other reports filed with the SEC, to which reference should be made.





EXECUTIVE SUMMARY AND RECENT BUSINESS DEVELOPMENTS





For the third quarter ending 30th September 2010, we saw a 1% increase in revenues as compared to the same six months in the prior year.  We experienced a modest revenue increase as a result of the difficult economic environment in the United States and the lengthening of our sales cycle.  Our pipeline has grown considerably this year, however because of the move to higher-margin higher-revenue business, lead times have increased resulting in pressure on short-term business revenue. The company has also been successful in up-skilling partner engineering staff to complete their own installations. This has resulted in reduced professional services fees, but increased the engineering capacity in house.





The Company has embarked on a restructuring program that includes comprehensive changes in the business model of the company. This includes changing the channel mix from predominately indirect (2 tier channel) to predominately direct. The company is refocusing its efforts towards three primary industries, Healthcare, Public Safety and Federal Government. This transition has and will have the effect of impacting shorter-term business over long-term high-value business.





We are experiencing an increase in our pipeline both in terms of total revenue and revenue per customer. This is because of an increased emphasis on higher value solutions, away from lower transactional-based business. Direct business this quarter increased to approximately 25% of the company’s revenue.





Gross Margins





The Gross Margins continue to be strong at 71% of revenues. The company continues to maintain a strong gross margin recognizing the value that our customers place on our solutions.





Profitability





The Company continues to keep a tight rein on cost within the organization however the net profit this quarter was primarily due to the closing out of the Liquidated Damages Reserve of $177,402.





The sales and marketing organizations make extensive use of web-conferencing and audio-conferencing capability to minimize sales costs, previously a significant cost to the company. We continue to maintain a profitable support and maintenance organization with low warranty costs and minimal maintenance issues relative to the industry.





The company continues to enjoy a considerable reputation for quality in the installed base. As increased support and maintenance revenue shows, customers are increasingly relying on Cistera solutions for core operating functions.





18


Federal Government





The Federal Government pipeline is steadily increasing, however we are under no illusion that this business will take a significant time and effort in order for it to be a major revenue contributor. We have made significant headway in gaining the necessary certifications for Government business. This quarter the company won a significant overseas contract with a major defense contractor.





We will continue to invest in this business and expand our government offerings. This quarter we expanded our partnerships in the Federal business and added Desktop Alerts Inc and Trusted Computing Solutions to integrate their solutions into ours.





Healthcare





The Company this quarter won another significant healthcare system deal to integrate our Event Alerting and Notification solution into hospital process management. We are continuing to grow our partnerships and offerings in this market including increased support for mobile solutions as part of hospital critical response infrastructure.





Cistera now has over 20 major healthcare organizations and continues to tune it’s healthcare business towards larger sustainable business. Because these businesses are 24/7 operations, they contribute significantly to the support and maintenance revenue. We have added increased support coverage this year to meet their needs.





Debt Restructuring





The Company continues to make significant process in restructuring the balance sheet with a number of successful transactions that have been favorable to the company. The Company has made significant progress in restructuring outstanding notes. Of the original PP1 and PP2 principal, the company has restructured over 85% of the total notes and 40% of the default notes, at terms favorable to the company.





The following  table shows the original and current principal amounts of the PP1 and PP2 offerings.





PP1 and PP2 Notes:

Original Principal


Current Outstanding


Percentage RemainingPP1 Principal

$
1,146,000



13,000



1
%PP2 Principal


3,700,000



741,576



20
%Total

$
4,846,000



754,576



15.6
%





Interest Expense fell from $124,629 to $74,529 for the six months ending 2010 and 2009 respectively. This is primarily due to the debt-restructuring program completed so far this year. The company expects interest payments to continue to fall this year as it further completes it’s restructuring program.























19


RESULTS OF OPERATIONS





Selected Consolidated Statements of Operations Data





The following tables present consolidated statements of operations data for the three and six months ended September 30, 2010 and 2009 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.





CISTERA NETWORKS, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)Three months ended September2010

2009RevenuesConvergence Solutions
$          240,223
42%
$          380,403
51%Professional Services
30,620
5%
98,018
13%Support and Maintenance
306,379
53%
272,488
36%Total revenues
577,223
100%
750,909
100%Cost of revenuesConvergence Solutions
107,193
19%
123,366
16%Professional Services
42,439
7%
56,627
8%Support and Maintenance
18,000
3%
22,246
3%Total cost of revenues
167,632
29%
202,239
27%Gross Profit
409,590
71%
548,670
73%Expenses:Sales and marketing
68,901
12%
53,723
7%Software development
54,983
10%
106,803
14%Engineering and support
88,391
15%
73,112
10%General and administrative
190,244
33%
195,076
26%Depreciation and amortization
6,381
1%
(44,247)
-6%Total expenses
408,900
71%
384,467
51%Profit (Loss) from operations
690
0%
164,203
22%Other income (expense)Interest income
1
0%
7
0%Interest expense
(34,003)
-6%
(57,595)
0%Charge for estimated liquidated damages – outside investors
177,402
31%
-
0%Other income (expense)
(1,794)
0%
-
-8%Total other income (expense)
141,606
25%
(57,588)
-8%Net Gain (loss)
$          142,296
25%
$         106,615
14%Basic & diluted net Gain (loss) per share
$0.01

$0.01Weighted average shares outstanding – basic and diluted
18,665,462

17,423,410The accompanying notes are an integral part of these consolidated financial statements.





20








Revenue





Revenue for the quarter ended September 30, 2010 decreased $173,686 or approximately 23% from the comparable prior year quarterly period primarily due to the weak United States economy and the transition from indirect to direct sales.





Revenue from professional services decreased 37% from the prior year quarter primarily due an increase in partner led implementations and improvements in implementation times for remote installations. The company has increased it’s pipeline of higher value solutions over lower value transactions.





Revenue from maintenance contracts continues to increase due to price increases and an introduction of 24/7 support contracts for high value customers such as in the healthcare and public safety markets.





Gross Profit and Gross Margin





Gross profit for the quarter ended September 30, 2010 decreased $139,080 or approximately 25% from the comparable prior year quarter primarily due to revenue.  Gross margin also maintained a constant level as a percentage of sales at 71%.





Operating Expenses





Operating expenses, excluding depreciation and amortization decreased from $428,714 in the September 2009 quarter to $402,519 in the September 2010 quarter, a decrease of $26,195 or approximately 6%.





Sales and Marketing costs increased from $53,723 to $68,901 due to increased commissions for software maintenance and support renewal sales.





Software development costs reduced from $106,803 to $54,983 due primarily to a change in accounting treatment.





Engineering and Support costs increased from $73,112 to $88,391 due to timing in headcount changes and replacements and travel related expenses and accounting related entries in 2009.





General and Administrative costs decreased from $195,076 to $190,244 from a combination of increased audit and legal fees for the second quarter and a change in accounting treatment for deferred rent.  These costs and treatments are not expected to continue through the remainder of the fiscal year.





The Depreciation and Amortization is a increased from $(44,247) to $6,381 as compared to same quarter 2009because of an adjustment made in September 2009.





Interest Expense





Interest expense for the September 2010 quarter decreased $23,591 from the September 2009 quarter due to successful restructuring efforts.


21





CISTERA NETWORKS, INC. & SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)Six Months Ended September2010

2009RevenuesConvergence Solutions
$569,154
47%
$568,481
47%Professional Services
55,769
5%
134,586
11%Support and Maintenance
596,473
49%
505,808
42%Total revenues
1,221,396
100%
1,208,875
100%Cost of revenuesConvergence Solutions
233,149
19%
226,379
19%Professional Services
87,895
7%
104,345
9%Support and Maintenance
48,215
4%
40,246
3%Total cost of revenues
369,259
30%
370,970
31%Gross Profit
852,137
70%
837,905
69%Expenses:Sales and marketing
133,957
11%
113,220
9%Software development
129,738
11%
136,235
11%Engineering and support
131,543
11%
140,905
12%General and administrative
427,034
35%
344,248
28%Depreciation and amortization
12,310
1%
53,413
4%Total expenses
834,582
68%
788,021
65%Profit (Loss) from operations
17,555
1%
49,884
4%Other income (expense)Interest income
305
0%
63
0%Interest expense
(74,529)
-6%
(124,629)
0%Abandonment Loss
-
0%
(15,815)
-1%Charge for estimated liquidated damages – outside investors
177,402
15%
-
0%Other income (expense)
(4,281)
0%
0
0%Total other income (expense)
98,898
8%
(140,381)
-12%Net Gain (loss)
$116,453
10%
($90,497)
-7%Basic & diluted net Gain (loss) per share
$0.01

$(0.01)Weighted average shares outstanding – basic and diluted
18,665,462

17,423,410The accompanying notes are an integral part of these consolidated financial statements.





22


Revenue





Revenue for the six months ended September 30, 2010 increased $12,251 or approximately 1% from the comparable prior year six months primarily due to the increase in Support and Maintenance renewals for the six months ended.





Revenue from professional services decreased by $78.817 from the prior year six-month period primarily due to a combination of increased remote installations and an increase in installations by the purchasing channel partner.





Revenue from support and maintenance contracts has continued to increase over the previous year six months by $90,665 or approximately 18%. This is due to an increase in support pricing and the addition of 24/7 support for high value customers.





Gross Profit and Gross Margin





Gross profit for the six months ended September 30, 2010 increased $14,232 or approximately 1% from the comparable prior year six-month period.  Gross margin increased in the six months ending September 2010 as compared to the September 2009 six months to 71% from 69%.  This increase was primarily due to product mix on convergence solutions offset by higher margins on support and maintenance as a result of the higher installed base.





Operating Expenses





Operating expenses, excluding depreciation and amortization, decreased from $2,369,652 in the September 2008 six months to $788,021 in the six-month ending September 2009, a decrease of $1,581,631 or approximately 67%.





Sales and Marketing costs increased from $113,220 to $133,957 primarily through increases in commission.





Software development costs decreased from $136,235 to  $129,738 due to a change in the accounting treatment of development cost.





Engineering and Support costs reduced from $140,995 to $131,543 through reductions in the use of contract labor.





General and Administrative costs increased from $344,248 to $427,757 primarily because of an increase in the use of professional accounting and legal services. This is not expected to continue.





Interest Expense





Interest expense for the six months ending September 2010 quarter decreased $50,100 from the six months ended September 2009 quarter primarily due to the reduction in outstanding notes and the debt-restructuring program the company is engaged in.





Liquidated Damages





On September 29 2010, the Company determined that no further claims for liquidated damages are assessable and has closed out the liquidated damages reserve and written back the amount of $177,402.




Liquidity and Capital Resources




The accompanying consolidated financial statements have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2010, contains an explanatory paragraph expressing doubt as to our ability to continue as a going concern.





23


The “going concern” explanatory paragraph resulted from, among other things, the substantial losses from operations we have incurred since inception, our liquidity position and the net loss of $339,257 for the year ended March 31, 2010, and negative working capital (current liabilities in excess of current assets) of $1.8 million as of June 30, 2009.  Also, as of September 30, 2010, we have negative working capital (current liabilities in excess of current assets) of $1.9 million.





As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”).  As of that date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement.  As of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”).  As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement.  The company is currently in negotiate to restructure these notes.




As of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”).  As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement.




As of September 30, 2009, the company is in default of approximately 60% of the original $1,248,000 of principal and accrued interest on certain PP1 and PP2 Notes (the “Notes”).  The company has successfully resolved 40% of these notes at discounted favorable terms to the company. The company is currently in negotiations to restructure the remaining amount of these notes.





Cash and Cash Flows





Our cash and cash equivalents at September 30, 2010 were $8,139. For the six months ended September 30, 2010, net cash used in operations was ($49,815).





Contractual Obligations





Our current material contractual obligations are our current and former corporate office leases and the principal, and accrued interest.




Critical Accounting Policies





We prepare our financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, our use of estimates and the accounting for convertible debt and warrants. For a detailed discussion on the application of these accounting policies, see Note 2 to our audited consolidated financial statements contained in our 2010 10-K.





Research and Development – Software Development





Research and development expenditures are generally expensed as incurred. 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. The Company’s software development costs capitalized for the six months ending September 30, 2010 are $107,041.





Recently Issued Accounting Pronouncements


We discuss the potential impact of recent accounting pronouncements in Note 1 to the unaudited consolidated financial statements contained in this report.


24





Item 3. Quantitative and Qualitative Disclosures About Market Risk





As a smaller reporting company, we are not required to provide this information.





Item 4(T). Controls and Procedures





Evaluation of Disclosure Controls and Procedures




Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer, who is also currently our interim Chief Financial Officer (the “Certifying Officer”), to allow timely decisions regarding required disclosures.





As of September 30, 2010, we carried out an analysis, under the supervision and with the participation of our management, including our Certifying Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. As a result of this analysis, our Certifying Officer concluded that our disclosure controls and procedures and internal controls over financial reporting continued to be not effective and identified remediation measures to be implemented.





We estimate that the Certifying Officer, along with the Company’s other management personnel, will need to complete remediation measures that may include engaging an independent consulting firm to further evaluate, remediate, implement, document and test the internal controls in these key areas:





1.
Financial Reporting, including technical accounting surrounding complex accounting transactions


2.
Order Entry Accounting & Reporting


3.
Debt/Equity Accounting & Compliance


4.
Cash & Other Working Capital Management


5.
Compensation Accounting & Administration


6.
Other Assets & Liability Account Management





We will also monitor our disclosure controls and procedures on a continuing basis to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In the future as such controls change in relation to developments in the our business and financial reporting requirements, our evaluation and monitoring measures will also address any additional corrective actions that may be required.





Inherent Limitations of Internal Controls




Our management does not expect that our disclosure control procedures or our internal controls over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.








25


PART II - OTHER INFORMATION





Item 1.  Legal Proceedings





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




Item 1A.  Risk Factors





We may need to raise additional capital to fund our operations.Our ability to continue as a going concern is potentially in doubt and we may not be successful in continuing to generate revenue and gross profit at levels sufficient to cover our operating costs and cash investment requirements.





We will need to renegotiate or extend the currently outstanding PP2 Notes and related interest.




As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes.  In addition, as of April 5, 2009, we were in default of approximately $1,100,000 of principal and accrued interest on certain PP2 Notes.  Currently, we are accruing interest on these PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement.





The table below represents the total principal raised and the total principal amount remaining.





PP1 and PP2 Notes:

Original Principal


Current Outstanding


Percentage RemainingPP1 Principal

$
1,146,000



13,000



1
%PP2 Principal


3,700,000



741,576



20
%Total

$
4,846,000



754,576



15.6
%





The company is currently in negotiations to restructure the remaining outstanding notes.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





In September, 2010, the Company issued 642,857 shares of common stock upon conversion of accrued interest and principal on a previously issued convertible notes with an aggregate principal of $81,000.  The amount of accrued interest converted was $40,499.  The principal and interest were converted at $0.189 per share. The company also reissued 137,325 of the attached warrants with a 5-year extension at a conversion price of $0.07.





26


Item 3.  Defaults Upon Senior Securities





As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”).  As of this date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement.  In addition, as of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes.  As of this date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum.





The table below represents the total principal raised and the total principal amount remaining.





PP1 and PP2 Notes:

Original Principal


Current Outstanding


Percentage RemainingPP1 Principal

$
1,146,000



13,000



1
%PP2 Principal


3,700,000



741,576



20
%Total

$
4,846,000



754,576



15.6
%





Item 4.  Submission of Matters to a Vote of Security Holders





None.





Item 5.  Other Information





None.





27


Item 6.  Exhibits








31.1           Certification





99.1           Press release dated November 5th 2010


28


SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








CISTERA NETWORKS, INC.Date: November 5th, 2010
/s/    Gregory T. RoyalGregory T. RoyalChief Executive Officer and interimChief Financial Officer(Principal Executive, Financial andAccounting Officer)