UNITED
STATES
 SECURITIES AND EXCHANGE
COMMISSION
 Washington, D.C.
20549
  AMENDED FORM
10-Q
 AMENDMENT 1
   (Mark One)
  þ
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the quarterly period ended
December 31, 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 of incorporation or
              
              (I.R.S.
      Employer Identification No.)organization)
   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). Yes o No o
  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
              
              Smaller
      reporting company þ(Do
      not check if a smaller reporting company)
  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
February 15th, 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 — December 31, 2009
      (unaudited) (Unreviewed) and March 31, 2009
      (audited)
              4Consolidated Statements of Operations — For the
      three months ended December 31, 2009 and 2008 (unaudited) (Unreviewed)
              5Consolidated Statements of Operations — For the nine months
      ended December 31, 2009 and 2008 (unaudited) (Unreviewed)
              6Consolidated Statements of Stockholders’ Deficit —
      December 31, 2009 (unaudited)  (Unreviewed) and March 31, 2009
      (audited)
              7Consolidated Statements of Cash Flows — For the
      nine months ended December 31, 2009 and 2008 (unaudited) (Unreviewed)
              8Notes to Consolidated Financial Statements
      (unaudited) (Unreviewed)
              10Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              18Item 3. Quantitative and Qualitative Disclosures
      About Market Risk
              26Item 4T. Controls and
      Procedures
              26PART II: OTHER INFORMATIONItem 1. Legal Proceedings
              27Item 1A. Risk Factors
              27Item 2. Unregistered Sales of Equity Securities
      and Use of Proceeds
              27Item 3. Defaults Upon Senior
      Securities
              27Item 4. Submission of Matters to a Vote of
      Security Holders
              28Item 5. Other Information
              28Item 6. Exhibits
              29SIGNATURES
              30
  
 2
  EXPLANATORY
NOTES
  Amendment
No. 1 to the Quarterly Report on Form 10-Q (the “Report”) for the fiscal
quarter ended December 31, 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 this report.
  3
  Part I. FINANCIAL
INFORMATION
  Item 1. Financial
Statements
 CISTERA
NETWORKS, INC. & SUBSIDIARIES
 CONSOLIDATED BALANCE
SHEETS
  December
      31, 2009
              
              
              March
      31st, 2009(Unaudited)
      (Unreviewed)
              
              
              (Audited)Current
      assetsCash
      and cash equivalents
              
              $
              15,124
              
              
              $
              1,493Accounts
      receivable, net of allowance for doubtful accounts of $-0-
              
              
              268,413
              
              
              
              151,322Inventory
              
              
              71,376
              
              
              
              124,656Prepaid
      expenses
              
              
              29,291
              
              
              
              37,341Total
      current assets
              
              
              384,204
              
              
              
              314,812Property
      and equipment, net
              
              
              228,418
              
              
              
              324,217Intangible
      assets, net
              
              
              1,547,611
              
              
              
              1,751,442Total
      long-term assets
              
              
              1,776,028
              
              
              
              2,075,659TOTAL
      ASSETS
              
              $
              2,160,232
              
              
              $
              2,390,471Current
      liabilitiesAccounts
      payable
              
              
              443,035
              
              
              
              517,052Accrued
      liquidated damages — outside investors
              
              
              
              
              
              
              177,402Accrued
      liabilities
              
              
              503,417
              
              
              
              1,527,811Deferred
      revenue
              
              
              947,862
              
              
              
              865,271Convertible
      promissory notes and other notes payable, net of discount
              
              
              976,427
              
              
              
              976,427Note
      payable
              
              
              —
              
              
              
              7,781Total
      current liabilities
              
              
              2,870,741
              
              
              
              4,071,743Accrued
      liquidated damages — outside investors
              
              
              177,402
              
              
              
              —Litigation
      Reserve
              
              
              650,000
              
              
              
              —Convertible
      promissory notes and other notes payable, net of discount
              
              
              
              
              
              
              —Deferred
      Revenue
              
              
              —
              
              
              
              174,554Other
      long-term liabilities
              
              
              423,175
              
              
              
              58,031Total
      long-term liabilities
              
              
              1,250,577
              
              
              
              409,987Total
      liabilities
              
              
              4,121,318
              
              
              
              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
              
              
              (21,269,727
              )
              
              
              (21,222,499
              )Total
      stockholders’ deficit
              
              
              (1,983,155
              )
              
              
              (1,913,857
              )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
              $
              2,160,232
              
              
              $
              2,390,471
  The
accompanying notes are an integral part of these consolidated financial
statements.
 
 4
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 (Unreviewed)
  Three
      months ended December 31,2009
              
              
              2008RevenuesConvergence
      solutions
              
              $
              229,725
              
              
              $
              712,340Professional
      services
              
              
              31,932
              
              
              
              98,514Support
      and maintenance
              
              
              311,787
              
              
              
              261,633Total
      revenues
              
              
              573,444
              
              
              
              1,072,487Cost
      of revenuesConvergence
      solutions
              
              
              50,608
              
              
              
              254,675Professional
      services
              
              
              7,035
              
              
              
              55,680Support
      and maintenance
              
              
              68,685
              
              
              
              24,250Total
      cost of revenues
              
              
              126,328
              
              
              
              344,605Gross
      Profit
              
              
              447,116
              
              
              
              737,882Operating
      expensesSales
      and marketing
              
              
              5
              
              
              
              319,758Software
      development
              
              
              88,736
              
              
              
              188,956Engineering
      and support
              
              
              104,600
              
              
              
              172,923General
      and administrative
              
              
              144,981
              
              
              
              338,210Depreciation
      and amortization
              
              
              24,128
              
              
              
              103,538Total
      operating expenses
              
              
              362,450
              
              
              
              1,123,385Income
      / (Loss) from operations
              
              
              84,665
              
              
              
              (385,503
              )Other
      income (expense)Interest
      income
              
              
              —
              
              
              
              158Other
      income
              
              
              7
              
              
              
              —Interest
      expense
              
              
              (46,541
              )
              
              
              (43,124
              )Abandonment
      loss
              
              
              
              
              
              
              —Charge
      for inducements related to stock issued to convertible note
      holders
              
              
              —
              
              
              
              —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)
              
              
              (46,534
              )
              
              
              (151,884
              )Net
      Income / (Loss)
              
              $
              38,131
              
              
              $
              (537,387
              )Basic
      & diluted net income / (loss) per share
              
              $
              0.00
              
              
              $
              (0.03
              )Weighted
      average shares outstanding — basic and diluted
              
              
              17,423,410
              
              
              
              17,423,410
  
 5
 
 CISTERA
NETWORKS, INC. & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 (Unreviewed)
  Nine
      months ended December 31,2009
              
              
              2008RevenuesConvergence
      solutions
              
              $
              798,206
              
              
              $
              2,247,809Professional
      services
              
              
              166,518
              
              
              
              204,347Support
      and maintenance
              
              
              817,595
              
              
              
              709,394Total
      revenues
              
              
              1,782,319
              
              
              
              3,161,550Cost
      of revenuesConvergence
      solutions
              
              
              276,987
              
              
              
              664,417Professional
      services
              
              
              111,380
              
              
              
              148,680Support
      and maintenance
              
              
              108,931
              
              
              
              71,684Total
      cost of revenues
              
              
              497,298
              
              
              
              884,781Gross
      Profit
              
              
              1,285,021
              
              
              
              2,276,769Operating
      expensesSales
      and marketing
              
              
              113,226
              
              
              
              900,230Software
      development
              
              
              224,971
              
              
              
              612,289Engineering
      and support
              
              
              245,505
              
              
              
              579,323General
      and administrative
              
              
              489,229
              
              
              
              1,098,827Depreciation
      and amortization
              
              
              77,541
              
              
              
              302,368Total
      operating expenses
              
              
              1,150,472
              
              
              
              3,493,037Income
      / (loss) from operations
              
              
              134,549
              
              
              
              (1,216,268
              )Other
      income (expense)Interest
      income
              
              
              —
              
              
              
              326Other
      income
              
              
              70Interest
      expense
              
              
              (171,170
              )
              
              
              (190,933
              )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
              
              
              —
              
              
              
              (1,297,773
              )Amortization
      of discount on convertible notes — related parties
              
              
              —
              
              
              
              (41,060
              )Credit
      (charge) for estimated liquidated damages
              
              
              —
              
              
              
              11,299Total
      other income (expense)
              
              
              (186,915
              )
              
              
              (2,842,585
              )Net
      Income (loss)
              
              $
              (52,366
              )
              
              
              (4,058,853
              )Basic
      & diluted net loss per share
              
              $
              0.00
              
              
              $
              (0.28
              )Weighted
      average shares outstanding — basic and diluted
              
              
              17,423,410
              
              
              
              14,725,627
  The
accompanying notes are an integral part of these consolidated financial
statements.
  
 6
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (DEFICIT)
 (Unreviewed)
  TotalAdditional
              
              
              Accumulated
              
              
              stockholders’Preferred
      Stock
              
              
              Common
      Stock
              
              
              paid-in
      capital
              
              
              deficit
              
              
              equity
      (deficit)Shares
              
              
              Amount
              
              
              Shares
              
              
              AmountBalances
      at March 31, 2009
              
              
              —
              
              
              
              —
              
              
              
              17,423,410
              
              
              $
              17,423
              
              
              $
              19,291,219
              
              
              $
              (21,307,784
              )
              
              $
              (1,999.142
              )Net
      income / (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              38,130
              
              
              
              38,130Balance
      Adjustment from September 30, 2009
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (73
              )
              
              
              (73
              )Balances
      at December 31, 2009
              
              
              —
              
              
              $
              —
              
              
              
              17,423,410
              
              
              $
              17,423
              
              
              $
              19,291,219
              
              
              $
              (21,269,727
              )
              
              $
              (1,961,085
              )
  The
accompanying notes are an integral part of these consolidated financial
statements.
  7
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Unreviewed)
  Nine
      months ended December 31,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income (loss)
              
              $
              (52,366
              )
              
              $
              (4,058,853
              )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
              
              
              —
              
              
              
              1,297,773Amortization
      of discount on convertible promissory notes — Outside
    Parties
              
              
              —
              
              
              
              41,060Amortization
      of discount on convertible promissory notes — Related
    Parties
              
              
              —
              
              
              
              26,829Abandonment
      loss
              
              
              15,815
              
              
              
              —Gain
      on disposition of assets
              
              
              1,717
              
              
              
              —Depreciation
      and amortization
              
              
              77,541
              
              
              
              302,368Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              117,091
              
              
              
              181,775Inventory
              
              
              53,280
              
              
              
              66,829Prepaid
      expenses
              
              
              (8,050
              )
              
              
              11,209Accounts
      payable
              
              
              (74,017
              )
              
              
              (34,160
              )Note
      Payable
              
              
              (7,781
              )
              
              
              —Accrued
      liabilities
              
              
              (374,394
              )
              
              
              172,716Deferred
      revenue
              
              
              (91,963
              )
              
              
              (207,317
              )Other
      long-term liabilities
              
              
              365,144
              
              
              
              51,066Net
      cash provided by (used) in operating activities
              
              
              22,017
              
              
              
              (835,479
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment, net
              
              
              —
              
              
              
              (61,422
              )Net
      cash used in investing activities
              
              
              —
              
              
              
              (61,422
              )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
              
              
              —
              
              
              
              25,630Net
      proceeds from exercise of warrants
              
              
              —
              
              
              
              843,604Payments
      on convertible promissory notes and other loans
              
              
              —
              
              
              
              (19,153
              )Payments
      on other notes payable and capital lease
              
              
              (8,386
              )
              
              
              —Net
      cash provided by (used) financing activities
              
              
              (8,386
              )
              
              
              882,578Net
      increase in cash and cash equivalents
              
              
              13,631
              
              
              
              (14,323
              )Cash
      and cash equivalents at beginning of period
              
              
              1,493
              
              
              
              125,007Cash
      and cash equivalents at end of period
              
              $
              15,124
              
              
              $
              110,684
  The
accompanying notes are an integral part of these consolidated financial
statements.
  
 8
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
 (Unreviewed)
  Nine
      months ended December 312009
              
              2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
              
              $
              14,853
              
              
              $
              53,740Income
      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
              
              
              —
              
              
              
              46,989
  The
accompanying notes are an integral part of these consolidated financial
statements.
 
 9
   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
  
 10
   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:
 December
      31, 2009
              
              
              March
      31,     2009Receivables
      assigned to factor
              
              $
              0
              
              
              $
              125,402Advances
      to (from) factor
              
              
              (0
              )
              
              
              (70,570
              )Fees,
      expenses and charges to reserve
              
              
              (0
              )
              
              
              (792
              )Amounts
      due from reserve account
              
              
              0
              
              
              
              —Amounts
      due from factor
              
              
              0
              
              
              
              54,040Non-factored
      Accounts Receivable
              
              
              268,413
              
              
              
              97,282Total
      accounts receivable
              
              $
              268,413
              
              
              $
              151,322
  Accrued
liabilities are comprised of the following:
 December
      31, 2009
              
              
              March
      31,     2009Accrued
      expenses
              
              $
              75,951
              
              
              $
              82,924Reserve
      for litigation contingency
              
              
              —
              
              
              
              650,000Accrued
      compensation and payroll taxes
              
              
              247,863
              
              
              
              545,626Accrued
      Interest
              
              
              —
              
              
              
              225,330Customer
      Deposits
              
              
              126,672
              
              
              
              —Other
              
              
              52,931
              
              
              
              23,931Total
      Accrued liabilities
              
              $
              503,417
              
              
              $
              1,527,811
  Other
long-term liabilities are comprised of the following:
 December
      31, 2009
              
              
              March
      31,     2009Deferred
      rent
              
              $
              45,722
              
              
              $
              58.031$
              45,722
              
              
              $
              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 December 31, 2009 and 2008,
respectively. These potentially dilutive common stock equivalents have been
excluded from the diluted share calculations for the three months ended December
31, 2009 and 2008, respectively, as they were
 
 11
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 Notes
to Consolidated Financial Statements
 (Unaudited)
 (Unreviewed)
  anti-dilutive
as a result of the net losses incurred for those periods. Accordingly, basic
shares equal diluted shares for all periods presented.
  Accounts receivable and concentration
of credit risk
  The
Company has no significant off-balance sheet concentrations of credit risk such
as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
  The
Company is subject to credit risk from accounts receivable with its customers.
The Company’s accounts receivable are due from both governmental and commercial
entities. Credit is extended based on evaluation of the customers’ financial
condition and, generally, collateral is not required. Accounts receivable are
generally due within 30 to 60 days and are stated at amounts due from customers
net of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due.
  The
Company assesses potential reserves against its accounts receivable by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customers’
current ability to pay their obligations to the Company and economic and
industry conditions. Based on these factors, the Company has concluded that an
allowance for doubtful accounts as of December 31, 2009 and March 31, 2009 is
not required.
  As of
December 31, 2009, the Company receives approximately 39% 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 March 31, 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
$2.48 million as of December 31, 2009. In addition, we had a net loss of $52,366
for the nine months ended December 31, 2009.
  Accordingly,
as of December 31, 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.
   12
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 Notes
to Consolidated Financial Statements
 (Unaudited)
 (Unreviewed)
  The
Company maintained a factoring facility with Allied Capital Partners, L.P.
(“Allied”) for up to $1,500,000 of the Company’s customer accounts receivable.
The facility allows for an advance rate up to 85.88% and initial factoring
charges are 1.75% of the total accounts receivable balance. An additional
funding agreement became effective in November of 2008 allowing for the
factoring of support renewals at an advance rate of 50.88% and initial factoring
charges of 1.75% of the total accounts receivable balance. Advances made by
Allied are collateralized by the Company’s accounts receivable, chattel paper,
general intangibles, supporting obligations, inventory and proceeds thereof. The
term of the current agreement is for a period of two years with an automatic
one-year renewal thereafter. Advances under the factoring facility at December
31, 2009 were $0 and are netted against total accounts receivable on the
Consolidated Balance Sheet.
  On
December 10th 2009, the factoring facility was terminated by mutual agreement.
We believe that the cost of this facility outweighed the benefits to the
Company. In addition, by terminating this facility, we expect to save over
$135,000 annually.
  As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that
date, we began to accrue interest on the December PP2 Notes at a default rate of
18% per annum, which is the maximum allowable rate as stipulated under the PP2
Note purchase agreement. As of April 5, 2009, we were in default on
approximately $1,100,000 of principal and accrued interest on certain PP2 Notes
(the “April PP2 Notes”). As of that date, we began to accrue interest on the
April PP2 Notes at a default rate of 18% per annum, which is the maximum
allowable rate as stipulated under the PP2 Note purchase agreement. We will need
to renegotiate the payment or conversion of the principal and interest due on
all of the PP2 Notes, or raise additional capital, or a combination of the two.
If we need to raise additional capital it could be in the form of equity or
debt, or a combination of the two. The Company is currently negotiation
restructuring of this debt.
  NOTE 3 — DEBT
  PP1 Notes and
Warrants
  The
outstanding principal and accrued interest are convertible into shares of common
stock at a conversion rate equal to the lesser of (a) $1.30 per share, or (b) a
25% discount to the average closing bid price of the Company’s common stock for
the five days including and immediately preceding the interest compounding date,
provided that in no event shall the conversion price per share be less than
$1.00 per share. The PP1 Notes may be converted, in whole or in part, at the
option of the PP1 Note holder on any interest compounding date. The PP1 Notes
converted in December 2005 were converted at $1.00 per share.
  The PP1
Warrants have a term of five years and are exercisable at an exercise price of
$1.30 per share. Subject to an effective registration statement covering the
resale of the shares of common stock issuable upon exercise of the PP1 Warrants,
the Company may, upon thirty days prior written notice, redeem the PP1 Warrants
for $0.10 per share, in whole or in part, if our common stock closes with a bid
price of at least $3.50 for any ten (10) out of fifteen (15) consecutive trading
days.
  PP2 Notes and
Warrants
  The
outstanding principal and accrued interest are convertible into shares of common
stock at a fixed rate of $0.75 per share. The PP2 Notes may be converted, in
whole or in part, at the option of the PP2 Note holder on any interest
compounding date. The Company may prepay the PP2 Notes in whole or in part, upon
thirty days prior written notice to note holders; provided that partial
prepayments may be made only in increments of $10,000 and, provided further,
that the PP2 Note holders may convert the amount of the proposed prepayment into
shares of our common stock at any time.
  The PP2
Warrants have a term of five years and are exercisable at an exercise price of
$1.00 per share. Subject to an effective registration statement covering the
resale of the shares of common stock issuable upon exercise of the
PP2
   13
  CISTERA
NETWORKS, INC. & SUBSIDIARY
 Notes
to Consolidated Financial Statements
 (Unaudited)
 (Unreviewed)
  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.
  As of
December 31, 2009, the Company had $976,426 of principal, accrued interest of
$377,437 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.
  STIIP
  Under the
STIIP, which commenced on June 9, 2008, the Company temporarily modified the
terms of its outstanding PP1 Notes, PP2 Notes, PP1 Warrants and PP2 Warrants.
During the period beginning June 9, 2008 through June 24, 2008 (the “Conversion
Period”), the conversion prices of the PP1 Notes and PP2 Notes, which were $1.00
and $0.75 per share, respectively, were reduced to $0.53 per share. In addition,
the exercise prices for the PP1 Warrants and the PP2 Warrants, which were $1.30
and $1.00 per share, respectively, were reduced to $0.40 per share. Under the
STIIP, certain PP2 Note holders converted $3,240,290, comprised of $2,470,156 in
principal and $770,134 in accrued interest and liquidated damages into
approximately 6.2 million shares of the Company’s common stock at the reduced
conversion price.
  Also
under the STIIP, certain PP1 and PP2 Warrant holders exercised approximately 2.3
million PP1 and PP2 Warrants at an exercise price of $0.40 per share. All PP1
and PP2 Warrant holders who exercised their warrants also received three
additional warrants (the “Bonus Warrants”) for every ten warrants exercised. The
Bonus Warrants were exercisable during the Conversion Period at an exercise
price of $0.30 per share, and if not exercised on or before such date, the
exercise price for such Bonus Warrants was increased to $0.60 per share. A total
of 507,675 Bonus Warrants were exercised at $0.30 per share. The bonus warrants
were valued using the Black-Scholes option pricing model (“Black-Scholes model”)
and a charge and a corresponding credit to additional paid-in capital were
recorded for the June 30, 2008 and September 30, 2008 quarters in the amounts of
$36,125 and $131,631, respectively. The bonus warrants expire on April 6, 2012.
The total cash proceeds received from the exercises of the PP1, PP2 and Bonus
Warrants was approximately $844,000.
  The
Company accounted for the reduction in the conversion prices of the PP2 Notes
under the STIIP in accordance with FASB Statement No. 84, “Induced Conversions
of Convertible Debt an amendment of APB Opinion No. 26” (“SFAS 84”).
Accordingly, the Company calculated and recorded an inducement charge and a
corresponding credit to additional paid-in capital in the June 30, 2008 quarter
in the amount of $931,893 for the fair value of common stock issued based on the
reduced price in excess of the fair value of the common stock issuable pursuant
to the original conversion price.
  The
Company accounted for the reduction in the exercise price of the PP1 and PP2
Warrants exercised under the STIIP in accordance with the guidance in SFAS
123(R), “Share-based payment” (“SFAS 123R”) and FASB Staff Position No. FSP FAS
123(R)-6, “Technical Corrections of FASB Statement No. 123(R)” for a
modification due to a short-term inducement. Accordingly, the Company recorded a
charge and a corresponding credit to additional paid-in capital in the June 30,
2008 quarter in the amount of $202,743 for the difference between the fair value
of the PP1 and PP2 Warrants immediately before and after the modification
multiplied by the number of PP1 and PP2 Warrants that were exercised during the
Conversion Period of the STIIP. The fair value of the PP1 and PP2 Warrants were
calculated using the Black-Scholes model. The total non-cash charge recorded for
the inducement on the PP2 Notes and the reduction in exercise price on the PP1
and PP2 Warrants was $1,134,216.
  14
   CISTERA
NETWORKS, INC. & SUBSIDIARY
 Notes
to Consolidated Financial Statements
 (Unaudited)
 (Unreviewed)
  The
Company’s total debt as of December 31, 2009, all of which is current, is as
follows:
  PP1
      and PP2 Notes:Principal
              
              $
              976,426Accrued
      interest
              
              
              377,437Accrued
      estimated liquidated damages
              
              
              177,402Total
              
              $
              1,531,265
  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
              )
   15
  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
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.
  On the
1st December 2009, the Company entered into a professional services agreement
with Blue Kiwi Group Ltd. This agreement provides for the services of Mr Royal
to act as Company Board Member and CEO of the Company. The consideration is
$150,000 per annum for a period of two years. The agreement is attached as
exhibit 33.1.
  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 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.
   16
 
 CISTERA
NETWORKS, INC. & SUBSIDIARY
 Notes
to Consolidated Financial Statements
 (Unaudited)
 (Unreviewed)
  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.
   17
  Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
  FORWARD-LOOKING
STATEMENTS
  This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. In many but not all cases you can
identify forward-looking statements by words such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,”
“will” and “would” or the negative of these terms or other similar expressions.
These forward-looking statements include statements regarding our expectations,
beliefs, or intentions about the future, and are based on information available
to us at this time. We assume no obligation to update any of these statements
and specifically decline any obligation to update or correct any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. Actual
events and results could differ materially from our expectations as a result of
many factors, including those identified in this report. We urge you to review
and consider those factors, and those identified from time to time in our
reports and filings with the SEC, for information about risks and uncertainties
that may affect our future results. All forward-looking statements we make after
the date of this filing are also qualified by this cautionary statement and
identified risks. Additional risk factors are discussed in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2009 and our other reports filed
with the SEC, to which reference should be made.
  EXECUTIVE
SUMMARY AND RECENT BUSINESS DEVELOPMENTS
  For the
third quarter ending 31st December 2009, we saw a 46.5% 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 continues to
increase in both number of opportunities and project size.
  Cistera
Networks is approximately half-way through a restructuring plan designed to make
the company sustain-ably profitable and dominate in the strongest key markets we
operate in. We believe that our products are ideally suited to Federal, State
and Local Government applications, Healthcare and Public Safety 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.
  In
December 2009 Cistera Networks incorporated a wholly owned subsidiary Cistera
Federal Systems Inc. As has been previously discussed, Cistera is increasing
it’s presence in the federal government market. This market offers significant
opportunities for Cistera products and the company has made significant progress
in developing this market. Cistera Federal Systems Inc was incorporated to
further develop this market as well as hold the necessary procurement contracts
and compliance requirements for the federal government.
  Cistera
Networks has also believes that there are significant opportunities in the
public safety market dominated by Federal, State and Local government customers,
particularly Land Mobile Radio P.25 markets. In December 2009 Cistera Networks
Inc incorporated a wholly owned subsidiary Telmarine Communications Inc to
specifically focus on the development the market for Unified Communications for
Land Mobile Radio. Telmarine is currently pursuing technology agreements and
relationships with third parties to grow the product offering for the public
safety markets.
  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.
  18
  On the
14th May 2009, the company announced the release of version 1.9 of the Cistera
Convergence Server. Cistera ConvergenceServer Version 1.9 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.
  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 announced the release of the newest configuration
of its award-winning platform, the Cistera ConvergenceServer 9500 (CCS 9500)
specifically tailored for large-scale applications.
   19
  RESULTS OF
OPERATIONS
  Selected Consolidated Statements of
Operations Data
  The
following tables present consolidated statements of operations data for the
three and nine months ended December 31, 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 December 31, 2009 Compared to the Three Months Ended
December 31, 2008
  For
      the three months ended December 31,%
      of
              
              
              
              
              
              
              %
      of2009
              
              
              revenue
              
              
              2008
              
              
              revenueRevenues:Convergence
      solutions
              
              $
              229,725
              
              
              
              40
              %
              
              $
              712,340
              
              
              
              67
              %Professional
      services
              
              
              31,932
              
              
              
              6
              %
              
              
              98,514
              
              
              
              9
              %Support
      and maintenance
              
              
              311,787
              
              
              
              54
              %
              
              
              261,633
              
              
              
              24
              %Total
      revenues
              
              
              573,444
              
              
              
              100
              %
              
              
              1,072,487
              
              
              
              100
              %Cost
      of revenues:Convergence
      solutions
              
              
              50,608
              
              
              
              9
              %
              
              
              254,675
              
              
              
              24
              %Professional
      services
              
              
              7,035
              
              
              
              1
              %
              
              
              55,680
              
              
              
              5
              %Support
      and maintenance
              
              
              68,685
              
              
              
              12
              %
              
              
              24,250
              
              
              
              2
              %Total
      cost of revenues
              
              
              126,328
              
              
              
              22
              %
              
              
              334,605
              
              
              
              31
              %Gross
      Profit
              
              
              447,116
              
              
              
              78
              %
              
              
              737,882
              
              
              
              69
              %Operating
      expenses:Sales
      and marketing
              
              
              5
              
              
              
              0
              %
              
              
              319,758
              
              
              
              30
              %Software
      development
              
              
              88,736
              
              
              
              15
              %
              
              
              188,956
              
              
              
              18
              %Engineering
      and support
              
              
              104,600
              
              
              
              18
              %
              
              
              172,923
              
              
              
              16
              %General
      and administrative
              
              
              144,981
              
              
              
              25
              %
              
              
              338,210
              
              
              
              31
              %Depreciation
      and amortization
              
              
              24,128
              
              
              
              4
              %
              
              
              103,538
              
              
              
              10
              %Total
      operating expenses
              
              
              362,450
              
              
              
              63
              %
              
              
              1,123,385
              
              
              
              105
              %Loss
      from operations
              
              
              84,665
              
              
              
              15
              %
              
              
              (385,503
              )
              
              
              (36
              %)Other
      income (expense)Interest
      income
              
              
              7
              
              
              
              —
              %
              
              
              158
              
              
              
              —Interest
      expense
              
              
              (46,541
              )
              
              
              0
              %
              
              
              (43,124
              )
              
              
              (4
              %)Amortization
      of discount on convertible notes
              
              
              
              
              
              
              (8
              %)
              
              
              (108,918
              )
              
              
              (10
              %)Charge
      for inducements related to stock issued to convertible note
      holders
              
              
              
              
              
              
              0
              %
              
              
              —
              
              
              
              —Total
      other income (expense)
              
              
              (46,534
              )
              
              
              (8
              %)
              
              
              (151,884
              )
              
              
              (14
              %)Net
      loss
              
              $
              38,130
              
              
              
              (7
              %)
              
              $
              (537,387
              )
              
              
              (50
              %)
   20
  Revenue
  Revenue
for the quarter ended December 31, 2009 decreased $499,043 or approximately 46%
from the comparable prior year quarter primarily due to the current U.S Economic
downturn and the lack of capital spending.
  Gross Profit and Gross
Margin
  Gross
profit for the quarter ended December 31, 2009 decreased $290,766 or
approximately 40% from the comparable prior year quarter primarily due to
decreased revenue. Gross margin did, however, increased in the December 2009
quarter as compared to the December 2008 quarter to 78% from 69%. This increase
was primarily due to increases in the higher margin revenue categories of
convergence solutions and support and maintenance, offset by lower margins on
professional services as a result of the timing of completion of certain project
service engagements.
  Operating
Expenses
  Operating
expenses, excluding depreciation and amortization decreased from $1,123,385 in
the December 2008 quarter to $362,450 in the December 2009 quarter, a decrease
of $760,935 or approximately 67%. The decrease was a direct reduction due to the
decrease in headcount from the previous year and continued controls over
expenses.
  Interest
Expense
  Interest
expense for the December 2009 quarter increased $3,417 from the December 2008
quarter primarily due to the increase 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 was an increase
in interest on our accounts receivable factoring facility as a result of higher
factorings in the December 2009 quarter as compared to the December 2008
quarter.
  Results of Operations for the Nine
Months Ended December 31, 2009 Compared to the Nine Months Ended
December 31, 2008
  For
      the nine months ended December 31,%
      of
              
              
              
              
              
              
              %
      of2009
              
              
              revenue
              
              
              2008
              
              
              revenueRevenues:Convergence
      solutions
              
              $
              798,206
              
              
              
              45
              %
              
              $
              2,247,809
              
              
              
              71
              %Professional
      services
              
              
              166,518
              
              
              
              9
              %
              
              
              204,347
              
              
              
              7
              %Support
      and maintenance
              
              
              817,595
              
              
              
              46
              %
              
              
              709,394
              
              
              
              22
              %Total
      revenues
              
              
              1,782,319
              
              
              
              100
              %
              
              
              3,161,500
              
              
              
              100
              %Cost
      of revenues:Convergence
      solutions
              
              
              276,987
              
              
              
              16
              %
              
              
              664,417
              
              
              
              21
              %Professional
      services
              
              
              111,380
              
              
              
              6
              %
              
              
              148,680
              
              
              
              5
              %Support
      and maintenance
              
              
              108,931
              
              
              
              6
              %
              
              
              71,684
              
              
              
              2
              %Total
      cost of revenues
              
              
              497,298
              
              
              
              28
              %
              
              
              884,781
              
              
              
              28
              %Gross
      Profit
              
              
              1,285,021
              
              
              
              72
              %
              
              
              2,276,769
              
              
              
              72
              %Operating
      expenses:Sales
      and marketing
              
              
              113,226
              
              
              
              6
              %
              
              
              900,230
              
              
              
              28
              %Software
      development
              
              
              224,971
              
              
              
              13
              %
              
              
              612,289
              
              
              
              19
              %Engineering
      and support
              
              
              245,505
              
              
              
              14
              %
              
              
              579,323
              
              
              
              18
              %General
      and administrative
              
              
              489,229
              
              
              
              27
              %
              
              
              1,098,827
              
              
              
              35
              %Depreciation
      and amortization
              
              
              77,541
              
              
              
              4
              %
              
              
              302,368
              
              
              
              10
              %Total
      operating expenses
              
              
              1,150,472
              
              
              
              64
              %
              
              
              3,493,037
              
              
              
              110
              %
   21
   For
      the nine months ended December 31,%
      of
              
              
              
              
              
              
              %
      of2009
              
              
              revenue
              
              
              2008
              
              
              revenueGain
      (Loss) from operations
              
              
              134,549
              
              
              
              8
              %
              
              
              (1,216,268
              )
              
              
              (38
              %)Other
      income (expense)Interest
      income
              
              
              70
              
              
              
              
              
              
              
              326
              
              
              
              —Other
      income
              
              
              
              
              
              
              
              
              
              
              —Charge
      for inducements related to stock Issued to convertible note
      holders
              
              
              
              
              
              
              
              
              
              
              (1,324,444
              )
              
              
              (42
              %)Amortization
      of discount on convertible Notes
              
              
              
              
              
              
              
              
              
              
              (1,338,833
              )
              
              
              (57
              %)Abandonment
      loss
              
              
              (15,815
              )Interest
      expense
              
              
              (171,170
              )
              
              
              (10
              %)
              
              
              (190,933
              )
              
              
              (6
              %)Credit
      (charge) for estimated liquidated Damages
              
              
              
              
              
              
              
              
              
              
              11,299
              
              
              
              —Total
      other income (expense)
              
              
              (186,915
              )
              
              
              0
              %
              
              
              (2,842,585
              )
              
              
              (90
              %)Net
      Gain (Loss)
              
              
              (52,366
              )
              
              
              (3
              %)
              
              
              (4,058,853
              )
              
              
              (128
              %)
  22
  Revenue
  Revenue
for the nine months ended December 31, 2009 decreased $1,379,181 or
approximately 44% from the comparable prior year nine months primarily due to
the deteriorating global economic environment. Revenue from professional
services decreased 18.5% from the prior year quarter primarily due the reduction
in overall revenues.
  Gross Profit and Gross
Margin
  Gross
profit for the nine months ended December 31, 2009 decreased $991,748 or
approximately 43% from the comparable prior year quarter primarily due to
decreased revenue. Gross margin was stable in the nine months ending December
2009 as compared to the December 2008 nine months maintaining 72%.
  Operating
Expenses
  Operating
expenses, excluding depreciation and amortization, decreased from $3,493,037 in
the December 2008 nine months to $1,150,472 in the nine-month ending December
2009, a decrease of $2,342,565 or approximately 67%. The decrease was primarily
attributable to: 1) a decrease in overall headcount; 2) an increase in and rent
and facilities expense; 3) a decrease in sales and marketing tradeshow expenses;
4) a decrease in professional fees.
  Interest Expense
  Interest
expense for the nine months ending December 2009 quarter decreased $19,763 from
the nine months ended December 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”). 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 December
2009 quarter decreased $1,338,833 from the December 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
December 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
   23
  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
$75,435 for the nine months ended December 31, 2009. Also, as of December 31,
2009, we have negative working capital (current liabilities in excess of current
assets) of $2.51 million.
  Accordingly,
as of December 31, 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 was a factoring facility we have
with Allied Capital Partners, L.P. (“Allied”), which allows for cash advances of
up to $1,500,000 on our customer accounts receivable, subject to the approval of
Allied of the customer and the type of product or service that is invoiced. The
facility allows for an advance rate up to 85.88% and initial factoring charges
are 1.75% of the total accounts receivable balance. An additional funding
agreement became effective in November of 2008 allowing for the factoring of
support renewals at an advance rate of 50.88% and initial factoring charges of
1.75% of the total accounts receivable balance. Advances made by Allied are
collateralized by our accounts receivable, chattel paper, general intangibles,
supporting obligations, inventory and proceeds thereof.
  On
December 10th 2009, both parties mutually agreed to terminate the factoring
facility. The company believes that the cost of this facility outweighed the
benefits to the company. The company expects to save over $135,000 annually from
the termination of this facility.
  As of
December 30, 2008, we were in default on approximately $148,000 of principal and
accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that
date, we began to accrue interest on the December PP2 Notes at a default rate of
18% per annum, which is the maximum allowable rate as stipulated under the PP2
Note purchase agreement. We will need to renegotiate the payment or conversion
of the principal and interest due on all of the PP2 Notes, of which
approximately $1.1 million is due in April 2009, or raise additional capital, or
a combination of the two. If we need to raise additional capital it could be in
the form of equity or debt, or a combination of the two. The capital markets are
extremely challenging at this time and there can be no assurance that we will be
successful in raising additional funds and, if so, on favorable terms or that
the cost savings or required new capital will be sufficient. We are also
actively exploring other strategic alternatives.
  As of
April 5, 2009, we were in default on approximately $1,100,000 of principal and
accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of that date,
we began to accrue interest on the April PP2 Notes at a default rate of 18% per
annum, which is the maximum allowable rate as stipulated under the PP2 Note
purchase agreement. We will need to renegotiate the payment or conversion of the
principal and interest due on all of the PP2 Notes or raise additional capital,
or a combination of the two. If we need to raise additional capital it could be
in the form of equity or debt, or a combination of the two. The capital markets
are extremely challenging at this time and there can be no assurance that we
will be successful in raising additional funds and, if so, on favorable terms or
that the cost savings or required new capital will be sufficient. We are also
actively exploring other strategic alternatives.
  Cash and Cash
Flows
  Our cash
and cash equivalents at December 31, 2009 were $15,124. For the nine months
ended December 31, 2009, net cash provided by operations was $22,017. The
primary use of cash was the loss from operations incurred for the period of
$74,435 adjusted for non-cash charges of $96,505 for depreciation and
amortization, abandonment loss and gain from disposition of assets.
   24
   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. The
Company has successfully negotiated a termination of the former corporate office
lease in Dominion Plaza.
  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
and future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product. Our software development costs capitalized as of the 31st of December
are $1,170,144 and for the nine months ending December 31,2009 are
$203,832.
  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.
   25
  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
December 31, 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.
   26
   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.
  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
  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
   27
  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.
  28
  Item 6. Exhibits
  10.1
              
              Professional
      Services Agreement between Cistera Networks Inc and Blue Kiwi Group
      Ltd.*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 February 16, 2010*
    29
   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)