UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549




AMENDED FORM
10-Q/A


Amendment No.
4




(Mark
      One)




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.


(Exact
name of registrant as specified in its charter)




Nevada
            
            91-1944887(State
      or other jurisdiction ofincorporation
      or organization)
            
            (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 þ No o




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 o
            Accelerated
      filer o
            Non-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company þ




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




As of
November 19th, 2009, 17,423,410 shares of the registrant’s stock, $0.001 par
value per share, were outstanding.






1






CISTERA NETWORKS, INC &
SUBSIDIARY




TABLE OF CONTENTS




PART I: FINANCIAL
    INFORMATIONItem 1.
            Financial Statements:Consolidated Balance Sheets — September 30, 2009
      (unaudited) (Unreviewed) and March 31, 2009
      (audited) (restated)
            5Consolidated Statements of Operations — For the
      three months ended September 30, 2009 and 2008 (unaudited) (Unreviewed) (restated)
            6Consolidated Statements of Operations — For the
      six months ended September 30, 2009 and 2008 (unaudited)(Unreviewed)
            7Consolidated Statements of Stockholders’ Deficit —
      September 30, 2009 (unaudited) (Unreviewed)
      and March 31, 2009 (audited) (restated)
            8Consolidated Statements of Cash Flows — For the
      six months ended September 30, 2009 and 2008 (unaudited)(Unreviewed)
            9Notes to Consolidated Financial Statements
      (unaudited)(Unreviewed)
            11Item 2.
            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            20Item 3.
            Quantitative and Qualitative Disclosures About
      Market Risk
            29Item 4T.
            Controls and Procedures
            29PART II: OTHER INFORMATIONItem 1.
            Legal Proceedings
            30Item 1A.
            Risk Factors
            30Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            30Item 3.
            Defaults Upon Senior
    Securities
            30Item 4.
            Submission of Matters to a Vote of Security
      Holders
            31Item 5.
            Other Information
            31Item 6.
            Exhibits
            32SIGNATURES
            33







2




EXPLANATORY NOTES




Amendment
No. 4 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal
quarter ended September 30, 2009 is filed for the purpose of amending the
report as “not-reviewed”. On April 7th the
SEC provided a letter of comment stating that the existing Independent Certified
Accountant used to review the report is not a member of the PCOAB. Subsequently
the Company appointed Robison, Hill & Company as the company’s independent
accountants to review the report.




Amendment
No. 3 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal quarter
ended September 30, 2009 is filed for the purpose of amending the Section 302
Certifications, filed as Exhibits 31.1 and 31.2 to the original Report.
Additional the SFAS 140 discussion for the factoring agreement with Allied
Capital has been included.




Amendment
No. 2 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal quarter
ended September 30, 2009 is filed for the purpose of amending the Section 302
Certifications, filed as Exhibits 31.1 and 31.2 to the original
Report.




There was
a mistake in the payroll accrual account that resulted in a positive $341,509
dating back to April 2009. The accrual error was caused and dated by duplicate
entries to that accrual dating from and solely to April 2009 through June 30,
2009. This has reduced the net income for quarter ended 30th September 2009 from
$342,500 to $106,215. This entry has been reversed for the quarter ending
September 30, 2009 and re-entered in the quarter ending June 30, 2009. Both
these dated statements are being amended and re-issued.




Although
the PP2 Note maturity has resulted in these Notes converting to default status
and therefore able to be called, the company has negotiated a stasis with over
90% of the Noteholders including all of the largest individual holdings.
Although the company believes that it is unlikely that these notes will be
called in the Fiscal Year 2010, the 10 Q filing for 30 September 2009 has been
amended to correct this change in assumption.




The
credit balances shown in Sales and Marketing and Software Development are
directly a result of the below accrual adjustment to payroll expenses dating
from April 1, 2009 to June 30, 2009. This adjusting entry made in the quarter
ending September 30, 2009 was made in error and has been corrected to show the
net effect for the correct quarter ending June 30, 2009 and is in the corrected
amendments. The credit balance shown in Depreciation expense is due to an
adjustment and correcting of the fixed asset depreciation schedule dating back
to April 1, 2009. The aggregate impact of this adjustment is $68,425 or $34,213
per quarter and is not deemed material on a quarterly basis.




ASC FASB 250-10-50-7
Disclosure




The
effect of the correction on each financial statement line item for each prior
period is as follows:




•
            
            The
      total current liabilities have increased from $1,915,020 to $2,891,447 and
      the corresponding long term liabilities have decreased from $2,195,835 to
      $1,219,409.•
            
            Sales
      and marketing has increased from ($2,075) to $53,723.•
            
            Software
      development has increased from ($16,843) to $106,803.•
            
            Engineering
      and Support has increased from $46,763 to $73,122.•
            
            General
      and Administrative has increased from 164,984 to
  193.803.•
            
            Total
      operating expenses has increased from $148,582 to
  $384,867.•
            
            Total
      Income from operations has decreased from $400,088 to
      $163,803.•
            
            Net
      Income has been reduced from $342,500 to $106,215 and from 2c per share to
      1c per share.




This has
not resulted in any change in retained earnings or other appropriate components
of equity including net assets.






3






ASC FASB 250-10-50-8
Disclosure




There was
a mistake in the payroll accrual account that resulted in a positive $341,509
dating back to April 2009. The accrual error was caused and dated by duplicate
entries to that accrual dating from and solely to April 2009 through June 30,
2009. This has reduced the net income for quarter ended 30th September 2009 from
$342,500 to $106,215. For quarter ending 30th June 2009 the loss has been
reduced from $428,975 to $192,691.




4






Part I. FINANCIAL
INFORMATION




Item 1. Financial
Statements




CISTERA
NETWORKS, INC. & SUBSIDIARY


CONSOLIDATED BALANCE
SHEETS




RestatedSeptember
      30, 2009
            
            
            March
      31st,  2009(Unaudited)
      (Unreviewed)
            
            
            (Audited)Current
      assetsCash
      and cash equivalents
            
            $
            35,378
            
            
            $
            1,493Accounts
      receivable, net of allowance for doubtful accounts of $-0-
            
            
            70,094
            
            
            
            151,322Inventory
            
            
            91,658
            
            
            
            124,656Prepaid
      expenses
            
            
            46,307
            
            
            
            37,341Total
      current assets
            
            
            243,437
            
            
            
            314,812Property
      and equipment, net
            
            
            252,722
            
            
            
            324,217Intangible
      assets, net
            
            
            1,615,555
            
            
            
            1,751,442Total
      long-term assets
            
            
            1,868,277
            
            
            
            2,075,659TOTAL
      ASSETS
            
            $
            2,111,714
            
            
            $
            2,390,471Current
      liabilitiesAccounts
      payable
            
            
            518,058
            
            
            
            517,052Accrued
      liquidated damages — outside investors
            
            
            —
            
            
            
            177,402Accrued
      liabilities
            
            
            613,446
            
            
            
            1,527,811Deferred
      revenue
            
            
            783,516
            
            
            
            865,271Convertible
      promissory notes and other notes payable, net of discount
            
            
            976,427
            
            
            
            976,427Note
      payable
            
            
            —
            
            
            
            7,781Total
      current liabilities
            
            
            2,891,447
            
            
            
            4,071,743Accrued
      liquidated damages — outside investors
            
            
            177,402
            
            
            
            —Litigation
      Reserve
            
            
            650,000
            
            
            
            —Deferred
      Revenue
            
            
            —
            
            
            
            174,554Other
      long-term liabilities
            
            
            392,007
            
            
            
            58,031Total
      long-term liabilities
            
            
            1,219,409
            
            
            
            409,987Total
      liabilities
            
            
            4,110,856
            
            
            
            4,304,328Commitments
      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
            )
            
            
            (21,222,499
            )Total
      stockholders’ deficit
            
            
            (1,999,142
            )
            
            
            (1,913,857
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            2,111,714
            
            
            $
            2,390,471




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




5




CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(Unreviewed)




Three
      months ended September 30,Restated2009
            
            
            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
            
            
            53,723
            
            
            
            301,043Software
      development
            
            
            106,803
            
            
            
            226,875Engineering
      and support
            
            
            73,112
            
            
            
            201,969General
      and administrative
            
            
            193,803
            
            
            
            422,105Depreciation
      and amortization
            
            
            (44,247
            )
            
            
            100,674Total
      operating expenses
            
            
            384,867
            
            
            
            1,252,666Income
      / (Loss) from operations
            
            
            163,803
            
            
            
            (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)
            
            $
            106,215
            
            
            $
            (598,203
            )Basic
      & diluted net income / (loss) per share
            
            $
            0.01
            
            
            $
            (0.03
            )Weighted
      average shares outstanding — basic and diluted
            
            
            17,423,410
            
            
            
            17,274,687






6




CISTERA
NETWORKS, INC. & SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(Unreviewed)




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




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




7





CISTERA
NETWORKS, INC. & SUBSIDIARY


CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIT) — RESTATED (Unreviewed)




Additional
            
            
            
            
            
            
            TotalPreferred
      Stock
            
            
            Common
      Stock
            
            
            paid-in
            
            
            Accumulated
            
            
            stockholders’Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            capital
            
            
            deficit
            
            
            equity
      (deficit)Balances
      at June 30, 2009
            
            
            —
            
            
            
            —
            
            
            
            17,423,410
            
            
            $
            17,423
            
            
            $
            19,291,219
            
            
            $
            (21,415,190
            )
            
            $
            (2,106,548
            )Net
      income / (loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            106,215
            
            
            
            106,215Balance
      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
            )




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




8





CISTERA
NETWORKS, INC. & SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Unreviewed)




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




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






9





CISTERA
NETWORKS, INC. & SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS(continued) (Unaudited) (Unreviewed)




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




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




10






CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)






NOTE 1 — BASIS OF
PRESENTATION




The
accompanying unaudited consolidated financial statements of Cistera Networks,
Inc. (“Cistera” the “Company” or “we”) and its wholly-owned subsidiary have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). All significant intercompany transactions and balances have
been eliminated in consolidation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) have
been condensed or omitted pursuant to such rules and regulations. In the opinion
of management, the unaudited consolidated financial statements have been
prepared on the same basis as the annual audited consolidated financial
statements, and reflect all adjustments, consisting only of normal, recurring
adjustments necessary for a fair presentation in accordance with US GAAP. The
results of operations for interim period presented are not necessarily
indicative of the operating results for the full year. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (the “2009
10-K”).




Significant Accounting
Policies




The
Company prepares its financial statements in accordance with US GAAP. The
accounting policies most fundamental to understanding our financial statements
are those relating to recognition of revenue, our use of estimates and the
accounting for convertible debt and warrants. For a detailed discussion on the
application of these accounting policies, see Note 2 to our audited consolidated
financial statements contained in our 2009 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.




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




11




CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




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, 2009
            
            
            March
      31, 2009Receivables
      assigned to factor
            
            $
            215,079
            
            
            $
            125,402Advances
      to (from) factor
            
            
            (186,299
            )
            
            
            (70,570
            )Fees,
      expenses and charges to reserve
            
            
            (12,810
            )
            
            
            (792
            )Amounts
      due from reserve account
            
            
            4,293
            
            
            
            —Amounts
      due from factor
            
            
            20,263
            
            
            
            54,040Non-factored
      Accounts Receivable
            
            
            49,831
            
            
            
            97,282Total
      accounts receivable
            
            $
            70,094
            
            
            $
            151,322




Accrued
liabilities are comprised of the following:


September
      30, 2009
            
            
            March
      31, 2009Accrued
      expenses
            
            $
            80,350
            
            
            $
            82,924Reserve
      for litigation contingency
            
            
            —
            
            
            
            650,000Accrued
      compensation and payroll taxes
            
            
            272,767
            
            
            
            545,626Accrued
      Interest
            
            
            —
            
            
            
            225,330Customer
      Deposits
            
            
            131,286
            
            
            
            —Other
            
            
            129,043
            
            
            
            23,931Total
      Accrued liabilities
            
            $
            613,446
            
            
            $
            1,527,811




Other
long-term liabilities are comprised of the following:


September
      30, 2009
            
            
            March
      31, 2009Deferred
      rent
            
            $
            58,982
            
            
            $
            58.031$
            58,982
            
            
            $
            58,031




Earnings per
Share




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




Diluted
earnings (loss) per share is computed using the weighted average number of
common shares outstanding plus the number of common shares that would be issued
assuming exercise or conversion of all potentially dilutive common stock
equivalents. The Company had approximately 6.6 million and 6.5 million
potentially dilutive common stock equivalents (in the form of stock options and
stock purchase warrants) outstanding as of September 30, 2009 and 2008,
respectively. These potentially dilutive common stock equivalents have been
excluded from the diluted share calculations for the three months ended
September 30, 2009 and 2008, respectively, as they were anti-




12






CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




dilutive
as a result of the net losses incurred for those periods. Accordingly, basic
shares equal diluted shares for all periods presented.




Accounts receivable and concentration
of credit risk




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




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




The
Company assesses potential reserves against its accounts receivable by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customers’
current ability to pay their obligations to the Company and economic and
industry conditions. Based on these factors, the Company has concluded that an
allowance for doubtful accounts as of September 30, 2009 and March 31, 2009 is
not required.




As of
September 30, 2009, the Company receives approximately 44% of its gross revenues
from its top three re-sellers. This represents an increase in concentration of
business from the 34% reported for the year ended June 30, 2009.




Reclassifications




Certain
reclassifications have been made in the fiscal year 2009 financial statements to
conform to the fiscal year 2010 presentation.




NOTE 2 — FINANCIAL
CONDITION




The
accompanying consolidated financial statements have been prepared in conformity
with US GAAP (except with regard to omission of certain disclosures within
interim financial statements, as permitted by the SEC), which contemplate our
continuation as a going concern and do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary if we were unable to
continue as a going concern. However, the report of our independent registered
public accounting firm on our consolidated financial statements, as of and for
the year ended March 31, 2009, contains an explanatory paragraph expressing
substantial doubt as to our ability to continue as a going concern. The “going
concern” explanatory paragraph resulted from, among other things, the
substantial losses from operations we have incurred since inception, our
liquidity position and the net loss of $4.6 million for the year ended March 31,
2009, which included non-cash charges of $1.4 million related to amortization of
discounts associated with our sale and issuance of Senior Unsecured Convertible
Promissory Notes in the fiscal years 2007 and 2008 (the “PP2 Notes”) and
negative working capital (current liabilities in excess of current assets) of
$2.2 million as of June 30, 2009. In addition, we had a net loss of $90,497 for
the six months ended September 30, 2009. Also, as of September 30, 2009, we have
negative working capital (current liabilities in excess of current assets) of
$2.65 million.




Accordingly,
as of September 30, 2009, the recoverability of a major portion of the recorded
asset amounts is dependent on our continuing operations, which in turn is
dependent on our ability to maintain our current financing arrangements and our
ability to become profitable in our future operations through generating higher
revenues or lowering operating costs, or a combination of the two. These factors
raise substantial doubt about our ability to continue as a going concern. These
consolidated financial statements do not reflect adjustments that would be
necessary if we were unable to continue as a going concern.




13




CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




SFAS No. 140 — Disclosure of
Accounting for Factoring




The
Company maintains a factoring facility with Allied Capital Partners, L.P.
(“Allied”) for up to $1,500,000 of the Company’s customer accounts receivable.
The facility allows for an advance rate up to 85.88% and initial factoring
charges are 1.75% of the total accounts receivable balance. An additional
funding agreement became effective in November of 2008 allowing for the
factoring of support renewals at an advance rate of 50.88% and initial factoring
charges of 1.75% of the total accounts receivable balance. Advances made by
Allied are collateralized by the Company’s accounts receivable, chattel paper,
general intangibles, supporting obligations, inventory and proceeds thereof. The
term of the current agreement is for a period of two years with an automatic
one-year renewal thereafter. Advances under the factoring facility at September
30, 2009 were $186,299 and are netted against total accounts receivable on the
Consolidated Balance Sheet.




SFAS
No.140, paragraph 9 states:




The transferor has surrendered
control over transferred assets if and only if all of the following conditions
are met:




a) The transferred assets have been
isolated from the transferor — put presumptively beyond the reach of the
transferor and it creditors, even in bankruptcy or other
receivership.




If the
transaction is determined by the bankruptcy court to be a true sale, and the
factor is the owner of the accounts receivable, then the accounts will not be
part of the bankruptcy proceeding.




The
November 2008 factoring agreement for Cistera states on page 1, item #3
—




Acceptance of Offer— Allied may accept Seller’s offer to
sell Accounts . . . by either (i) paying the Purchase Price (less the Reserve).
.. . (ii) by oral or written notice to Seller identifying the Accounts which
appear on the Schedule that Allied is unwilling to purchase and paying the
Purchase Price (less the Reserve) for the remaining accounts; and (xi) shall be
evidenced by an invoice which has been issued to and received by the Account
Debtor, and each such invoice shall have printed on the face thereof a statement
notifying the Account Debtor that the invoice has been sold and assigned to
Allied and is payable only to Allied . . .




Page 3 item #9 of Agreement, .
.. .Invoice (x) shall be
reflected on Seller’s books and records as having been transferred, sold and
conveyed to Allied if Allied purchases such Accounts.




Therefore,
it is Cistera’s position that this meets the test of a sale. The receivables are
isolated beyond the reach of Cistera, its creditors and any bankruptcy
proceedings.




b) Each transferee has the right to
pledge or exchange the assets it received, and no condition both constrains the
transferee from taking advantage of its right to pledge or exchange and provides
more than a trivial benefit to the transferor.




As per
the agreement entered into between Cistera and Allied Capital (November 19th
2008), these invoices, also called receivables, are the property of Allied and
therefore such items can be used for collateral and bank financing if Allied so
chooses. The factoring agreement also states that Allied has the right to sell
these items on the “open and public market”. After a review of the factoring
agreement, no statements or language was found to contradict this understanding
of the agreement. There are no constraints on Allied rights whether written or
imputed in the November 2008 agreement. The benefit for Allied is not trivial
and involves the collection of the receivable, interest income and factoring
fees for each Account and invoice.




c) The transferor does not maintain
effective control over the transferred asset through either (1) an agreement
that both entitles and obligates the transferor to repurchase or redeem them
before their maturity or (2) the ability to unilaterally cause the holder to
return specific assets, other than through a cleanup call.




14






CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




In the
said factoring agreement, the Seller has no demands for the return of the
Accounts or invoices. Even at the time of termination of the agreement, the
invoices are still the full property of Allied to the limit of the reserve
amount remaining at such termination. What this means, is the reserve amount
remaining is netted as payment against the remaining outstanding invoices and if
the reserve is greater than those invoices, the monies are then wired or
transferred to Cistera. If the reserve is less than the remaining outstanding
invoices, Allied collects the payment on those invoices and wires the “left
over” monies caused by those collections. Even after termination of the
agreement, and reconciliation of the reserve against the outstanding accounts,
all payments are still the property of Allied until the overage payments are
transferred and wired to Cistera.




As far as
obligation or entitlement to “repurchase” the Accounts or invoices, this
obligation is after the “maturity” or due date of the invoices plus 90 days. At
which time the invoice is “offset” against the Reserve account and no “monies”
are exchanged. This Reserve account is separated on a net basis from Cistera
owned receivables in section Balance Sheet Accounts” Table known as “Accounts
receivable are comprised of the following:”. It is the understanding and
agreement of Cistera management there is no obligation or entitlement to these
Accounts after they are sold to Allied. Therefore it is Cistera’s position that
the accounting practices used to maintain the records of the account receivables
are correct.




As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that
date, we began to accrue interest on the December PP2 Notes at a default rate of
18% per annum, which is the maximum allowable rate as stipulated under the PP2
Note purchase agreement. As of April 5, 2009, we were in default on
approximately $1,100,000 of principal and accrued interest on certain PP2 Notes
(the “April PP2 Notes”). As of that date, we began to accrue interest on the
April PP2 Notes at a default rate of 18% per annum, which is the maximum
allowable rate as stipulated under the PP2 Note purchase agreement. We will need
to renegotiate the payment or conversion of the principal and interest due on
all of the PP2 Notes, or raise additional capital, or a combination of the two.
If we need to raise additional capital it could be in the form of equity or
debt, or a combination of the two. The capital markets are extremely challenging
at this time and there can be no assurance that we will be successful in raising
additional funds and, if so, on favorable terms or that the cost savings or
required new capital will be sufficient. We are also actively exploring other
strategic alternatives.




NOTE 3 — DEBT




As of
September 30, 2009, the Company had $976,426 of gross principal, accrued
interest of $333,010 and accrued liquidated damages of $177,402 outstanding on
its PP1 Notes and PP2 Notes. The PP1 Notes and the PP2 Notes were due in
December 2008 and April 2009 (the “April PP2 Notes”), respectively, and are in
default. The Notes bear interest at an annual rate of 18%, compounded
quarterly.




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




15







CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




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.




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






16









CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




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 debt as of September 30, 2009, all of which is current, is as
follows:




PP1
      and PP2 Notes:Principal
            
            $
            976,426Accrued
      interest
            
            
            333,010Accrued
      estimated liquidated damages
            
            
            177,402Total
            
            $
            1,486,838




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.




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
            )






17







CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)






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 December 31, 2008, the Company believes that this amount
represents the best estimate of a potential settlement.




NOTE 5 — RELATED PARTY
TRANSACTIONS




On April
5, 2007, the Company issued PP2 Notes to the Company’s President, CEO and
director, Derek Downs, and the Company’s Chief Technology Officer and director,
Greg Royal for accrued, but unpaid base salary due to each as of this date. On
June 24, 2008, both individuals converted their PP2 notes plus accrued interest
as part of the STIIP. Mr. Downs and Mr. Royal converted $38,940 and $91,871,
respectively into 73,471 and 173,341 shares of our common stock at a conversion
price of $0.53. After this conversion, the Company no longer had any
indebtedness with either Mr. Downs or Mr. Royal.




On
November 1, 2008, the Company issued to an employee 100,000 common stock
purchase warrants that were immediately exercisable at $0.40 per share and have
a five-year life. The Company calculated the fair value of the warrants using
the Black-Scholes model and recorded a charge in the amount $22,728 for the
December 2008 quarter.




On
December 4, 2008, an employee advanced the Company $25,000 for the period
through December 31, 2008. In consideration for this advance, the Company issued
to the employee 25,000 common stock purchase warrants that were immediately
exercisable at $0.40 per share and have a five-year life. The Company calculated
the fair value of the warrants using the Black-Scholes model and recorded a
charge in the amount $4,100 for the December 2008 quarter. As of June 30, 2009,
the entire obligation has been repaid.




NOTE 6 — SUBSEQUENT
EVENTS




Reverse/Forward
Split




On the
25th June 2009, the Company filed a an Information Statement to inform the
stockholders of (i) the approval on June 9, 2009 of resolutions by the Board of
Directors proposing amendments to the Articles of Incorporation to effect a 3
for 1 reverse stock split of our common stock followed immediately by a 3 for 1
forward stock split of the common stock (the “Reverse/Forward Stock Split”), and
(ii) receipt of written consents dated June 9, 2009, approving such amendment by
stockholders holding 65.6% of the voting power of all of our stockholders
entitled to vote on the matter as of June 9, 2009. 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.




When the
Reverse/Forward Stock Split becomes effective, the Company will have fewer than
300 stockholders of record, and will be eligible to cease filing periodic
reports with the Commission, and the Company intends to cease




18









CISTERA
NETWORKS, INC. & SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited) (Unreviewed)




public
registration and terminate the listing of our Common Stock on the OTC Bulletin
Board. Once the Company ceases public registration and terminates the listing of
our Common Stock, the Company will not be required to provide our Stockholders
with periodic or other reports regarding the Company, although they intend to
continue to provide similar information through the Pink Sheets News
Service.




The
Company estimates the cost of the Reverse/Forward Stock Split, to be
approximately $25,800. However, if on the date immediately preceding the
effective date of the Reverse/Forward Stock Split, they believe that the cash
required to pay for the Reverse/Forward Stock Split exceeds the reasonable
estimate of the amount of cash necessary to consummate the Reverse/Forward
Split, they reserve the right not to effect the Reverse/Forward Stock
Split.




The
Reverse/Forward Stock Split has been submitted to the Securities and Exchange
Commission for proposal and comment. If the Reverse/Forward Stock Split is
approved by the SEC, the transaction will become complete 20 days after the
shareholders have been notified by letter. Currently, Cistera Networks, Inc. has
17,423,410 shares outstanding. If the transaction is approved and completed, 477
shares will be repurchased at $0.14 per share or $66.78, leaving 17,422,933
shares outstanding.




19











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




FORWARD-LOOKING
STATEMENTS




This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. In many but not all cases you can
identify forward-looking statements by words such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,”
“will” and “would” or the negative of these terms or other similar expressions.
These forward-looking statements include statements regarding our expectations,
beliefs, or intentions about the future, and are based on information available
to us at this time. We assume no obligation to update any of these statements
and specifically decline any obligation to update or correct any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. Actual
events and results could differ materially from our expectations as a result of
many factors, including those identified in this report. We urge you to review
and consider those factors, and those identified from time to time in our
reports and filings with the SEC, for information about risks and uncertainties
that may affect our future results. All forward-looking statements we make after
the date of this filing are also qualified by this cautionary statement and
identified risks. Additional risk factors are discussed in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2009 and our other reports filed
with the SEC, to which reference should be made.




EXECUTIVE
SUMMARY AND RECENT BUSINESS DEVELOPMENTS




For the
second quarter ending 30th September 2009, we saw a 41% decrease in revenues as
compared to the same quarter in the prior year. We experienced a drop in revenue
on a sequential quarter basis as a result of the deteriorating global economic
situation. High margin recurring revenue from support and maintenance continues
to become a more significant piece of our revenues as our installed base grows.
Despite the economic slowdown, our pipeline of opportunities is increasing in
both number of opportunities and project size.




Our
business model relies upon the leverage of a network of strong reseller partners
to sell our products. During the quarter, we continued to invest in building out
our internal technical, sales and business development organizations to properly
support our channel reseller program. This program allows us to effectively
apply our resources to focus on the partners that are significant generators of
revenue.




Even in a
period of economic constraints, we recognize the importance of continuing and
extending our R&D efforts to ensure that our products offer features and
functionality specific to industry requirements and that add measurable value
for our customers. Our ability to invest in R&D is limited. However we have
been successful in gaining R&D investments through existing customer and
federal government contracts.




We
continued to make good penetration into the public sector markets where our
solutions are increasingly well received as the answer to critical communication
challenges. This quarter, we have extended our efforts to enter the Federal
market and have invested a significant amount of time and effort in extending
our relationships with the federal government.




In light
of the significant downturn in the U.S. economy, we are carefully monitoring our
sales pipeline and have refocused our solutions selling efforts onto our top
reseller relationships. Further, beginning January 1, 2009, we instituted
additional operating expense reductions, including salary reductions for the
management team, employee terminations and marketing program elimination. We are
seeing market segments, such as government and healthcare are more resilient to
the current economic conditions, primarily due to continued demand for event
alerting and notification solutions for public safety infrastructure. With the
demographics of an aging population, healthcare is also an industry that is
continuing to grow. Because there are fewer employees to operate facilities, the
efficiencies and increased productivity our products provide can measurably
enhance business operations.




On the
14th May 2009, the company announced the release of version 1.9 of the Cistera
Convergence Server. Cistera ConvergenceServer Version1.9 is the result of over
five years of work on enterprise application platforms for Unified
Communications and is the most advanced solution set available
today.






20











On the
10th June 2009, the company announced the the addition of the ZoneSpeakTM IP Speaker to its
successful Event Alerting and Notification Solution Set.




On the
16th September 2009, the company announced the release of the latest version of
its award-winning platform, the Cistera ConvergenceServer (CCS) Version 1.9 has
successfully completed Interoperability Verification Testing (IVT) for Cisco
Unified Communications Manager (CUCM 7.1).




On the
29th October 2009, the company announces the release of the newest configuration
of its award-winning platform, the Cistera ConvergenceServer 9500 (CCS 9500)
specifically tailored for large-scale applications.




We remain
focused on maintaining profitability, and believe our emphasis on strong
presence in key markets will lead to the continued pipeline growth, completed
installations and increased average deal size that will be necessary to maintain
profitability.




We
believe that our products are ideally suited to Federal, State and Local
Government applications and continue to make strong headway in these markets. 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. Our product is
extremely well received by customers and forms a cornerstone of their
communications strategy.





21











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, 2009 and 2008 based on the percentage
of revenue for each line item, as well as the dollar and percentage change of
each of the items.




Results of Operations for the Three
Months Ended September 30, 2008 Compared to the Three Months Ended
September 30, 2007




For
      the three months ended September 30,%of
            
            
            
            
            
            
            %of2009
            
            
            revenue
            
            
            2008
            
            
            revenueRevenues:Convergence
      solutions
            
            $
            380,403
            
            
            
            51
            %
            
            $
            1,013,075
            
            
            
            79
            %Professional
      services
            
            
            98,018
            
            
            
            13
            %
            
            
            45,125
            
            
            
            3
            %Support
      and maintenance
            
            
            272,488
            
            
            
            36
            %
            
            
            230,303
            
            
            
            18
            %Total
      revenues
            
            
            750,909
            
            
            
            100
            %
            
            
            1,288,503
            
            
            
            100
            %Cost
      of revenues:Convergence
      solutions
            
            
            123,366
            
            
            
            16
            %
            
            
            276,710
            
            
            
            22
            %Professional
      services
            
            
            56,627
            
            
            
            8
            %
            
            
            42,500
            
            
            
            3
            %Support
      and maintenance
            
            
            22,246
            
            
            
            3
            %
            
            
            24,250
            
            
            
            2
            %Total
      cost of revenues
            
            
            202,239
            
            
            
            27
            %
            
            
            343,460
            
            
            
            27
            %Gross
      Profit
            
            
            548,670
            
            
            
            73
            %
            
            
            945,043
            
            
            
            73
            %Operating
      expenses:Sales
      and marketing
            
            
            53,723
            
            
            
            7
            %
            
            
            301,043
            
            
            
            23
            %Software
      development
            
            
            106,803
            
            
            
            14
            %
            
            
            226,875
            
            
            
            18
            %Engineering
      and support
            
            
            73,112
            
            
            
            10
            %
            
            
            201,969
            
            
            
            15
            %General
      and administrative
            
            
            193,476
            
            
            
            26
            %
            
            
            422,105
            
            
            
            36
            %Depreciation
      and amortization
            
            
            (44,247
            )
            
            
            (5
            %)
            
            
            100,674
            
            
            
            10
            %Total
      operating expenses
            
            
            384,867
            
            
            
            52
            %
            
            
            1,252,666
            
            
            
            97
            %Profit
      (loss) from operations
            
            
            163,803
            
            
            
            (22
            %)
            
            
            (307,623
            )
            
            
            (24
            %)Other
      income (expense)Interest
      income
            
            
            7
            
            
            
            —
            %
            
            
            86
            
            
            
            —
            %Interest
      expense
            
            
            (57,595
            )
            
            
            (8
            %)
            
            
            (50,117
            )
            
            
            (8
            %)Amortization
      of discount on convertible notes
            
            
            —
            
            
            
            
            
            
            
            (108,918
            )
            
            
            (8
            %)Charge
      for inducements related to stock issued to convertible note
      holders
            
            
            —
            
            
            
            
            
            
            
            (131,631
            )
            
            
            (10
            %)Total
      other income (expense)
            
            
            (57,588
            )
            
            
            (8
            %)
            
            
            (209,580
            )
            
            
            (22
            %)Net
      Profit (loss)
            
            $
            106,215
            
            
            
            14
            %
            
            $
            (598,203
            )
            
            
            (46
            %)




Revenue




Revenue
for the quarter ended September 30, 2009 decreased $537,504 or approximately 41%
from the comparable prior year quarterly period primarily due to the
deteriorating global economic environment. Revenue from






22











professional
services increased 117% from the prior year quarter primarily due to the timing
of completion of certain project service engagements and as a result of a change
of certifying reseller partners to handle installations in lieu of performing
them ourselves, as well as decreased sales activity. We have also refocused our
efforts on high-value markets where customers are significantly less sensitive
to price. This has resulted in lower revenues but more profitable
contracts.




Gross Profit and Gross
Margin




Gross
profit for the quarter ended September 30, 2009 decreased $396,373 or
approximately 41% from the comparable prior year quarter primarily due to
decreased revenue. Gross margin also maintained a constant level as a percentage
of sales at 73%.




Operating
Expenses




Operating
expenses, excluding depreciation and amortization decreased from $1,252,666 in
the September 2008 quarter to $384,867 in the September 2009 quarter, a decrease
of $867,799 or approximately 69%. This dramatic reduction was as a result of the
intense restructuring effort in response to the significant drop in the United
States economy in 2009. The market for unified communications suffered a serious
decline in new license revenue and the company was forced to respond
accordingly.




The
decrease was primarily attributable to:




•
            
            Decrease
      headcount in all departments;•
            
            Decrease
      in payroll taxes as a result of reduced personnel;•
            
            Reductions
      in travel, marketing and sales expenses;•
            
            Decrease
      in software licensing costs;•
            
            Elimination
      of all unnecessary professional services and
  fees.




Sales and
Marketing costs reduced from $301,043 to $53,723 through reductions in
headcount, commissions payable, travel and marketing expenses across the
board.




Software
development costs reduced from $226,875 to $106,803 through reductions in
headcount and general expenses.




Engineering
and Support costs reduced from $201,969 to $73,112 through reductions in
headcount and travel related expenses. The company has dramatically increased
the number of remote installations significantly reducing costs.




General
and Administrative costs have been reduced from $193,803 to $422,105 through
reduction in headcount and the elimination of all unnecessary professional
services and fees.




The
Depreciation and Amortization is a reduction from $100,674 to ($44,247) as
compared to same quarter 2008 and is due to an adjustment and correcting of the
fixed asset depreciation schedule dating back to April 1, 2009. The aggregate
impact of this adjustment is $68,425 or $34,213 per quarter and is not deemed
material on a quarterly basis.




An error
in the Payroll accrual account was made which resulted in a reversal of $393,810
of duplicate expense to the payroll expense accounts. After reversal of this
accrual, payroll was accrued for $52,301 reflecting the pay period September 15
— September 30, 2009. The net effect to the profits of the company were a
positive $341,509. The filings for period 30 June 2009 have been amended to
reflect this change as it relates to that period.




Interest
Expense




Interest
expense for the September 2009 quarter increased $7,478 from the September 2008
quarter primarily due to the decrease in accrued interest on the PP2 Notes due
to the decrease in the PP2 Notes as a result of the conversions under the STIIP
in June 2008. Offsetting the overall interest expense decrease generated from
the PP2 Notes was an increase in interest on our accounts receivable factoring
facility as a result of higher factorings in the September 2009 quarter as
compared to the September 2008 quarter.






23











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
            %Profit
      (Loss) from operations
            
            
            49,884
            
            
            
            4
            %
            
            
            (830,765
            )
            
            
            (40
            %)Other
      income (expense)Interest
      income
            
            
            —
            
            
            
            —
            %
            
            
            168
            
            
            
            —
            %Other
      income
            
            
            63
            
            
            
            —
            %Charge
      for inducements related to stock Issued to convertible note
      holders
            
            
            —
            
            
            
            —
            %
            
            
            (1,324,444
            )
            
            
            (64
            %)Amortization
      of discount on convertible Notes
            
            
            —
            
            
            
            —
            %
            
            
            (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
      Profit (Loss)
            
            $
            (90,497
            )
            
            
            (7
            )%
            
            
            (3,521,466
            )
            
            
            (168
            %)






24











Revenue




Revenue
for the six months ended September 30, 2009 decreased $880,188 or approximately
42% from the comparable prior year six months primarily due to the deteriorating
global economic environment. Revenue from professional services increased 27%
from the prior year quarter primarily due to the timing of completion of certain
project service engagements and as a result of a change of certifying reseller
partners to handle installations in lieu of performing them ourselves, as well
as decreased sales activity. We have also refocused our efforts on high-value
markets where customers are significantly less sensitive to price. This has
resulted in lower revenues but more profitable contracts.




Gross Profit and Gross
Margin




Gross
profit for the six months ended September 30, 2009 decreased $700,982 or
approximately 45% from the comparable prior year quarter primarily due to
decrease revenue. Gross margin increased in the six months ending September 2009
as compared to the September 2008 six months to 74% 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%. This dramatic reduction was
as a result of the intense restructuring effort in response to the significant
drop in the United States economy in 2009. The market for unified communications
suffered a serious decline in new license revenue and the company was forced to
respond accordingly.




The
decrease was primarily attributable to:




•
            
            Decrease
      headcount in all departments;•
            
            Decrease
      in payroll taxes as a result of reduced personnel;•
            
            Reductions
      in travel, marketing and sales expenses;•
            
            Decrease
      in software licensing costs;•
            
            Elimination
      of all unnecessary professional services and
  fees.




Sales and
Marketing costs reduced from $580,472 to $113,220 through reductions in
headcount, commissions payable, travel and marketing expenses across the
board.




Software
development costs reduced from $423,333 to $136,235 through reductions in
headcount and general expenses.




Engineering
and Support costs reduced from $406,400 to $140,905 through reductions in
headcount and travel related expenses. The company has dramatically increased
the number of remote installations significantly reducing costs.




General
and Administrative costs have been reduced from $760, 617 to $344, 248 through
reduction in headcount and the elimination of all unnecessary professional
services and fees.




An error
in the Payroll accrual account was made which resulted in a reversal of $393,810
of duplicate expense to the payroll expense accounts. After reversal of this
accrual, payroll was accrued for $52,301 reflecting the pay period September 15
— September 30, 2009. The net effect to the profits of the company were a
positive $341,509. The filings for period 30 June 2009 have been amended to
reflect this change as it relates to that period.




Interest Expense




Interest
expense for the six months ending September 2009 quarter decreased $23,180 from
the six months ended September 2008 quarter primarily due to the decrease in
accrued interest on the PP2 Notes due to the decrease in the PP2 Notes as a
result of the conversions under our “Short Term Investment Incentive Plan” (the
“STIIP”).






25













Offsetting
the overall interest expense decrease was an increase in the interest rate on
the PP1 and PP2 Notes due to a default on the notes.




Amortization of Debt
Discount




The
amortization of debt discount on our PP2 Notes in the six months ending
September 2009 quarter decreased $1,188,855 from the June 2008 quarter primarily
as a result of the amortization of the debt discount was completed recorded at
March 31, 2009. As required under GAAP, all unamortized debt discount
outstanding at the date of the conversion was expensed. See further discussion
of the STIIP under “Liquidity” under this Item.




Charge for Inducements Related to
Stock Issued to Convertible Note Holders




As part
of the STIIP, we lowered the conversion price of our PP2 Notes and the exercise
price of both our PP1 and PP2 Warrants. As required under US GAAP, we recorded
non-cash charges for the June 2008 quarter in the amounts of $1,192,813 related
to these inducements. See further discussion of the STIIP under “Liquidity and
Capital Resources.”




Liquidated
Damages




The
decrease in the charge for liquidated damages from the three months ended
September 2009 was primarily the result of the settlement of future liquidated
damages as of June 24, 2008. As of June 30, 2008, we recorded an adjustment to
the amount of accrued liquidated damages for PP2 Note holders who did not
convert their notes in the STIIP. As part of an agreement dated June 30, 2008
with the investor in the PP2 offering that had the contractual right to
liquidated damages, we issued to the investor 58,777 shares of our common stock
in exchange for a waiver on future liquidated damages after June 24, 2008. The
agreement terminated any assessment of liquidated damages beyond June 24,
2008.




Liquidity and Capital
Resources




The
unaudited consolidated financial statements contained in this report have been
prepared in conformity with US GAAP (except with regard to omission of certain
disclosures within interim financial statements, as permitted by the SEC), which
contemplate our continuation as a going concern and do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary if
we were unable to continue as a going concern. However, the report of our
independent registered public accounting firm on our consolidated financial
statements, as of and for the year ended March 31, 2009, contains an explanatory
paragraph expressing substantial doubt as to our ability to continue as a going
concern. The “going concern” explanatory paragraph resulted from, among other
things, the substantial losses from operations we have incurred since inception,
our liquidity position and net loss of $4.6 million for the year ended March 31,
2009, which included non-cash charges of $1.4 million related to amortization of
discounts associated with our PP2 Notes and negative working capital (current
liabilities in excess of current assets) of $3.0 million as of March 31, 2009.
In addition, we had a net loss of $90,497 for the six months ended September 30,
2009. Also, as of September 30, 2009, we have negative working capital (current
liabilities in excess of current assets) of $1.7 million.




Accordingly,
as of September 30, 2009, the recoverability of a major portion of the recorded
asset amounts is dependent on our continuing operations, which in turn is
dependent on our ability to maintain our current financing arrangements and our
ability to become profitable in our future operations through generating higher
revenues or lowering operating costs, or a combination of the two. These factors
raise substantial doubt about our ability to continue as a going concern. These
consolidated financial statements do not reflect adjustments that would be
necessary if we were unable to continue as a going concern.




Our
primary source of working capital liquidity is a factoring facility we have with
Allied Capital Partners, L.P. (“Allied”), which allows for cash advances of up
to $1,500,000 on our customer accounts receivable, subject to the approval of
Allied of the customer and the type of product or service that is invoiced. The
facility allows for an advance rate up to 85.88% and initial factoring charges
are 1.75% of the total accounts receivable balance. An additional funding
agreement became effective in November of 2008 allowing for the factoring of
support renewals at an advance rate of 50.88% and initial factoring charges of
1.75% of the total accounts receivable balance.






26











Advances
made by Allied are collateralized by our accounts receivable, chattel paper,
general intangibles, supporting obligations, inventory and proceeds thereof. The
term of the current agreement is for a period of two years with an automatic
one-year renewal thereafter. Advances under the factoring facility at September,
2009 were $186,299 and are netted against total accounts receivable on our
Consolidated Balance Sheet.




As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that
date, we began to accrue interest on the December PP2 Notes at a default rate of
18% per annum, which is the maximum allowable rate as stipulated under the PP2
Note purchase agreement. We will need to renegotiate the payment or conversion
of the principal and interest due on all of the PP2 Notes, of which
approximately $1.1 million is due in April 2009, or raise additional capital, or
a combination of the two. If we need to raise additional capital it could be in
the form of equity or debt, or a combination of the two. The capital markets are
extremely challenging at this time and there can be no assurance that we will be
successful in raising additional funds and, if so, on favorable terms or that
the cost savings or required new capital will be sufficient. We are also
actively exploring other strategic alternatives.




As of
April 5, 2009, we were in default on approximately $1,100,000 of principal and
accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of that date,
we began to accrue interest on the April PP2 Notes at a default rate of 18% per
annum, which is the maximum allowable rate as stipulated under the PP2 Note
purchase agreement. We will need to renegotiate the payment or conversion of the
principal and interest due on all of the PP2 Notes or raise additional capital,
or a combination of the two. If we need to raise additional capital it could be
in the form of equity or debt, or a combination of the two. The capital markets
are extremely challenging at this time and there can be no assurance that we
will be successful in raising additional funds and, if so, on favorable terms or
that the cost savings or required new capital will be sufficient. We are also
actively exploring other strategic alternatives.




Cash and Cash
Flows




Our cash
and cash equivalents at September 30, 2009 were $35,377. For the six months
ended September 30, 2009, net cash used in operations was $42,270. The primary
use of cash was the loss from operations incurred for the period of $90,427
adjusted for non-cash charges of $72,378 for depreciation and amortization,
abandonment loss and gain from disposition of assets.




Contractual
Obligations




Our
current material contractual obligations are our current and former corporate
office leases and the principal, accrued interest and accrued liquidated damages
under our PP1 and PP2 Notes. In December 2008, we executed a sublease for our
former corporate office facility at approximately $4,100 per month for the
remaining lease term, which is through November 2009. On May 29, 2009 the
property manager informed us that our sub-lessee had vacated the premises. We
are actively seeking a new sublease for this space but given the short timeframe
to lease termination it is unlikely that we will find a subtenant for this
space.




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 2009 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






27








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. Cistera’s software development costs capitalized as of the 30th of
September are $1,102,200 and for the six months ending September 30,2009 are
$135,888.




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.






28






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, 2009, 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
      transactions2.
            
            Order
      Entry Accounting & Reporting3.
            
            Debt/Equity
      Accounting & Compliance4.
            
            Cash
      & Other Working Capital Management5.
            
            Compensation
      Accounting & Administration6.
            
            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.






29




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 in doubt and we may not be successful
in generating revenue and gross profit at levels sufficient to cover our
operating costs and cash investment requirements. Our current and primary source
of cash availability is a $1.5 million credit facility with an accounts
receivable “factoring” institution, Allied Capital. Funds available to us under
the credit line with Allied Capital are limited by the amount of eligible
accounts receivable we hold at any given time. Additionally, fluctuations in the
timing of customer orders adversely affect our ability to draw on the line when
required. Allied Capital may declare the loan in default if we do not meet
certain financial covenants, and the inability to continue factoring accounts
receivable would result in a significant loss of working capital
liquidity.




Additionally,
we purchase over half of our products from one supplier—Equus Computer Systems.
(“Equus”). Equus provides us with open trade credit on 30 day terms based on a
pre-established credit limit and, historically, has provided additional credit
to support larger purchase order demands on a “one-off basis.” We purchase most
of our other products from our other suppliers on open trade credit terms with
set dollar limits. If Equus or our other significant suppliers were to cease to
sell to us on trade credit terms, or were to substantially lower the credit
limits they have set, we would need to accelerate our payments to those vendors,
creating additional demands on our cash resources, or we would need to find
other sources for those goods.




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




As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes. In addition, as of April 5, 2009, we were
in default of approximately $1,100,000 of principal and accrued interest on
certain PP2 Notes. Currently, we are accruing interest on these PP2 Notes at a
default rate of 18% per annum, which is the maximum allowable rate as stipulated
under the PP2 Note purchase agreement. If we need to raise additional capital it
could be in the form of equity or debt, or a combination of the two. There can
be no assurance that we will be successful in raising additional funds and, if
so, on favorable terms or that the cost savings or required new capital will be
sufficient.




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




None




Item
      3.
            
            Defaults
      Upon Senior Securities






30






As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of this
date, we began to accrue interest on the December PP2 Notes at a default rate of
18% per annum, which is the maximum allowable rate as stipulated under the PP2
Note purchase agreement. In addition, as of April 5, 2009, we were in default on
approximately $1,100,000 of principal and accrued interest on certain PP2 Notes.
As of this date, we began to accrue interest on the April PP2 Notes at a default
rate of 18% per annum. We will likely need to renegotiate the payment or
conversion of the principal and interest due on all of the PP2 Notes, or raise
additional capital, or a combination of the two. If we need to raise additional
capital it could be in the form of equity or debt, or a combination of the two.
There can be no assurance that we will be successful in raising additional funds
and, if so, on favorable terms or that the cost savings or required new capital
will be sufficient.




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




None.




Item
      5.
            
            Other
      Information




None.


31




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*




*
            
            Previously
      filed






32






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:
      April 21, 2010
            /s/
      Gregory T. RoyalGregory
      T. RoyalChief
      Executive Officer and interim
              Chief
      Financial Officer
              (Principal
      Executive, Financial and
              Accounting
      Officer)