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

___________________________________

FORM 10-Q

(Mark One)

[X]     Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2011

OR

[   ]    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 0-23391

XFORMITY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

4100 Spring Valley Road, Suite 800,  Dallas, Texas 75244 
(Address of principal executive offices, including zip code)
Issuer's Telephone No., including area code: (972) 661-1200

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

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

Smaller reporting company   X

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

The number of shares outstanding of the Issuer’s Common stock, $0.0001 par value, at February 10, 2011 is 53,756,553.

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XFormity Technologies, Inc. and Subsidiary

Consolidated Balance Sheets

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

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XFormity Technologies, Inc. and Subsidiary

Consolidated Statements of Operations

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

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        XFormity Technologies, Inc. and Subsidiary

            Consolidated Statements of Cash Flows

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

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XFormity Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011

(Unaudited)

Note 1   Organization and Nature of Business.

The reporting entity in this form 10-Q is XFormity Technologies, Inc. (a Colorado Corporation) ("XFormity" or the "Company") and includes the operations of XFormity, Inc. (a Texas Corporation) (“XFM”), the wholly owned subsidiary of the Company.  XFormity provides technology and services to multi-unit business operators.  The Company’s core products are hosted Business Intelligence (BI), Balanced Scorecard and Benchmarking solutions.  These solutions help customers with operational data analysis, trend reporting, issue identification and tracking.  The Company provides data integration and management services which feed the BI and Scorecard solution with data from many key data sources.  The Company’s solutions are provided to customers as a hosted (software-as-a-service) model, which allows the Company to rapidly configure and implement solutions for new customers in an affordable, cost-effective manner.

The Company provides services for franchisors and franchisees in a growing list of customers across the United States and Canada.  XFormity is the provider of Burger King Corporation's (BKC) operational reporting for all company owned and operated restaurants in the US and Canada. In addition to this deployment, the Company has had success in delivering solutions on a big scale by the use of its balanced scorecard and financial benchmarking tools for all Burger King Corporate restaurants in the United States and Canada, totalling nearly 6,500 restaurants. The Company has expanded its services to customers in both fine and casual dining.

Note 2    Basis of Financial Statement Presentation.

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been consolidated or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of such consolidated financial statements.

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operation, financial position or cash flow.

Although management believes the disclosures and information presented are adequate to not make the information misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto included in its June 30, 2011 Annual Report on Form 10-K. Operating results for the three months and six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other period.

The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The ability of the Company to continue as a

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going concern is dependent on the Company; (1) to obtain adequate capital from outside sources, or (2) to fund itself through profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 3   Going Concern

As shown in the accompanying consolidated financial statements, the Company has incurred an accumulated deficit of $8,960,521 and a working capital deficit of $1,918,662 through the six months ended December 31, 2011. The Company is continually reviewing its operations and attempting to improve operating results and its balance sheet.  The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 4    Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.  Depreciation of property and equipment is computed for financial statement purposes using accelerated methods over a five year estimated useful life of the assets. Accumulated depreciation at December 31, 2011 was $179,001 and $173,564 at June 30, 2011.  Management has evaluated the difference between the straight line and accelerated method used and has deemed the difference immaterial.

Note 5    Deferred Credits

In January 2006, the Board of Directors, agreed to offer then seven major customers, (“consortium members”) the following options in exchange for any further billing credits: (1) a right to receive $150,000 in billing credits applied against their monthly business intelligence software billings at a rate of 25% of the billings commencing July 1, 2006, or (2) a right to receive an additional 833,333 shares of the Company’s common stock per consortium member. These shares would be in addition to the shares issued to consortium members in exchange for their original $100,000 investment in fiscal 2004.  

Two consortium members elected option (1), one commencing January 1, 2006, and the other commencing July 1, 2006.  The five remaining consortium members elected option (2) and in May 2006, the Company issued 4,166,665 shares under this agreement. The deferred credits at December 31, 2011 in the respective amounts of $69,742 and $73,615, net of amortization, are expected to be utilized over a 11 to 12 year period based on their current billing rates using a 5% discount rate that approximated the risk-free rate in effect during the offered option period.

Note 6   Accounts Payable

Accounts payable represents balances due to trade creditors, licensors and fees for professional services incurred for legal, and audit services.  

Note 7  Accrued Expenses

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Note 8   Convertible Debentures

If all of the remaining debenture holders at December 31, 2011 elected to convert their debentures and warrants into shares of the Company’s common stock, the Company would be required to issue an additional 17,463,064 shares.

Note 9    Derivative Liabilities

The Company’s warrants and its Convertible Notes have reset provisions to the exercise price and conversion price if the Company issues equity or other derivatives at a price less than the exercise price set forth in such warrants and notes. This ratchet provision results in a derivative liability in our financial statements.

Our derivative liabilities decreased to $449,894 at December 31, 2011, from $514,086 at June 30, 2011. During the three months and six months ended December 31, 2011, respectively, the Company recorded gains of $8,237 and $55,955, respectively, for the change in fair value.  

The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at December 31, 2011 and June 30, 2011:

Note 10    Earnings per Share  

Basic earnings per share are calculated based on the weighted-average number of outstanding common shares.  As of December 31, 2011, the Company had 53,756,553 shares outstanding, As of December 31, 2011, the Company had convertible debentures of $1,206,763 convertible at a conversion price of the lesser of (i) 70% of the price per share of common stock or common stock equivalent paid by investors in the Company’s next round of equity or debt financing consisting of at least $1,000,000 in cumulative gross proceeds, or (ii) $0.12, warrants outstanding of 4,802,642 consisting of 2,401,321 with an exercise price of $0.14 and 2,401,321 with an exercise price of $0.18.

For the six months ended December 31, 2011, the conversion of all of the above would result in a possible dilution of 22,265,706 shares.  However, as the convertible debentures, options, and warrants have a strike price equal to or in excess of the market price, $0.04 at December 31, 2011, and are considered not “in the money”, they are excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

Note 11    Income Taxes

As of July 1, 2007, the Company adopted the current accounting guidance for the Accounting for Uncertainty in Income Taxes, which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions.  The Company believes it does not have any uncertain tax positions taken or expected to be taken in its income tax returns.

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At December 31, 2011, the Company had net operating loss carry-forwards approximating $15,100,000 that begin to expire in 2018 through 2029.  The carry-forward losses and the related deferred tax benefit are significantly limited by the provisions of Internal Revenue Code Section 382. The Company’s taxable losses, as determined by an independent tax advisor, have created a deferred tax benefit of approximately $1,936,000 which is fully reserved.

Note 12   Related Party Transactions  

Six of our customers who are also stockholders in the Company, generated revenues approximating $38,500 and $76,700 in the three months and six months ended December 31, 2011.  In the same periods in the prior year, revenues approximated $48,800 and $116,600. A principal in one current customer serves as a member of the Board of Directors and the Audit Committee.

Of the total 9% convertible debentures issued through December 31, 2011, $906,682 is held by related parties. Interest expense accrued to related parties for the three months and six months ended December 31, 2011 was $20,795 and $41,590, respectively.

Note 13    Commitments and Contingencies

The Company entered into a 65 month net lease at its Dallas, Texas office, commencing June 1, 2008, with rent approximating $4,300 per month. The Company also has a month-to-month lease for $700 per month at its Northbrook, Illinois office, which includes administrative services.  Total rent expense for the three months and six months ended December 31, 2011 was $15,086 and $30,171 compared to $15,085 and $25,179 for the three months and six months ended December 31, 2010 The Company accounts for these leases as operating leases.

Note 14  Subsequent Events

Management reported that there are no reportable events through the date of this filing.

Safe Harbour - Forward Looking Statements

When used in this Quarterly Report on Form 10-Q, in documents incorporated herein and elsewhere by us from time to time, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements concerning our business operations, economic performance and financial condition, including in particular, our business strategy and means to implement the strategy, our objectives, the amount of future capital expenditures required, the likelihood of our success in developing and introducing new products and expanding the business, and the timing of the introduction of new and modified products or services. These forward looking statements are based on a number of assumptions and estimates which are inherently subject to significant risks and uncertainties, many of which are beyond our control and reflect future business decisions which are subject to change.

A variety of factors could cause actual results to differ materially from those expected in our forward-looking statements, including those set forth from time to time in our press releases and reports and other filings made with the Securities and Exchange Commission. We caution that such factors are not exclusive. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements and readers are cautioned not to place undue reliance on these forward-

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looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release the results of any revisions of such forward-looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

REVENUE   The Company’s primary revenue is derived by delivering software as a service, or hosted solutions for its clients billed on a monthly basis for each location serviced.  For the three months and six months ended December 31, 2011, the Company generated $341,647 and $738,099, respectively, in revenues compared to $455,031 and $932,702 in the comparable prior year’s periods.  The decreases in revenues were attributable to; decreases in license fees of $75,000 in the current quarter and $131,250 in the six months ended December 31, 2011 that were terminated, one at the end of the previous fiscal year, and one during the first quarter, price reductions in the first quarter approximating $9,500 required by the competitive market-place, and decreased professional service contracts for special projects and other revenue sources in the six months ended December 31, 2011.

In 2008, the Company received payments under contracts for the development of various solutions, subject to multi-year licensing agreements. The revenues under the contracts were recognized over a 3 year period to coincide with the terms of the related licensing fees. As of June 30, 2011, all of the revenues under the agreements were fully recognized. The Company recognized $11,000 and $22,000 in the three months and six months ended December 31, 2010 for the development work and $75,000 and $150,000, respectively, in the same periods in the prior year under the license agreements.

COST OF REVENUE   The cost of revenue for the three months and six months ended December 31, 2011 and 2010, consist primarily of personnel, related payroll costs and support service costs in the respective amounts of $109,005 and $256,681 compared to $165,662 and $337,011 in the comparable prior year’s periods. Other costs include travel, data hosting services, telecommunication costs and depreciation of computer equipment used in the maintenance and processing of customers' data.  The decrease was primarily attributable to a reduction in personnel and related payroll costs, further decreased by a reallocation of time to research and development from existing personnel, for reductions of $50,235 and $67,625, respectively.  Other operating costs including license fees decreased by $6,422 and $12,705, respectively.

RESEARCH AND DEVELOPMENT   Research and development costs are charged to operations as incurred and consist primarily of personnel, related benefit costs and outside contracted services. The costs for the three months and six months ended December 31, 2011 and 2010 were $118,630 and $214,308, respectively, and $102,380 and $207,704, respectively, in the prior year’s periods. In the current year’s periods, the Company re-allocated personnel time from operations to research and development, resulting in increased payroll and related costs of $34,554 and $35,841, respectively. The Company further reduced the use of outside contractors by $17,000 and $26,000, respectively, and its other costs by $1,304 and $3,237, respectively, in the three and six months ended December 31, 2011. The Company’s research and development is part of its strategic plan to provide enhancements and integration into new and existing franchise operations in the retail market.

MARKETING AND SELLING   The costs for the three months and six months ended December 31, 2011 were $37,262 and $68,945 compared to $90,643 and $152,392 in the comparable periods of the prior year. The Company’s marketing and selling expenses in the current periods decreased due to re-allocated personnel time from marketing and sales to operations and administration, in the respective amounts of $12,415 and $20,755. The Company, working with its outside sales consultant, agreed to a reduction of

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$4,500 and $7,500 in the sales compensation paid for the three and six months ended December 31, 2011 as compared to the same periods in the prior year.  

The Company had an agreement with an outside consulting firm that provided for monthly payments of $3,000 for five years terminating on June 30, 2011 and the issuance of one million shares of the Company’s common stock valued at $147,048 that was also fully amortized at June 30, 2011. The decrease in commission expenses for the three and six months ended December 31, 2011 were $18,191 and $36,381 as compared to the same periods in the prior year.  

Other selling costs decreased by $ 18,275 and $18,811 for the respective three months and six months ended December 31, 2011.  For the current fiscal year, the Company continues to expand its customer base through direct sales, related business partnerships, trade shows and referrals from its relationship with existing clients.

GENERAL AND ADMINISTRATIVE   The Company’s general and administrative costs consist primarily of executive salaries and related benefits, professional fees for attorneys, our independent auditor, rent, expenses related to being a public company and other administrative costs.  The costs for the three month and six month period ended December 31, 2011 were $99,062 and $ 211,453 compared to $111,243 and $215,594 in the comparable periods of the prior year. In the current periods, due to a reallocation of time from marketing and sales, payroll and related costs increased by $4,202 and $14,030, respectively.  Other operating costs decreased for the three and six months ended December 31, 2011 by $16,383 and $18,171, respectively.

INTEREST EXPENSE   Interest expense consists of the following:

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NET (LOSS) INCOME   The net loss for the three months and six months ended December 31, 2011 was $108,670 and $132,385, respectively, compared to net losses of $201,322 and $171,796, respectively, for the comparable periods in 2010.  The decrease in the net loss was primarily the result of the change in fair value of the derivatives compared to the prior year and reductions in most other categories as noted above, offset by termination of license fee revenues and price reductions due to competition

The net (loss) per share for the three months and six months ended December 31, 2011 was ($0.00) and ($0.00) per share on 53,756,553 and 53,548,264, weighted average common shares outstanding, respectively, and ($0.00) and ($0.00) per share, respectively, in both of the comparable periods in the prior year on 51,931,553 weighted average common shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

While the Company continues to develop a significant pipeline of business opportunities that include multi-unit, full service and casual dining restaurants within the hospitality industry, there can be no assurances that these beliefs will be achievable. Two of the Company’s license fee arrangements were cancelled in the new 2012 fiscal year that will result in a decrease in revenues of approximately $290,000. The Company has taken steps to partially offset this decrease through reduced payroll, related costs and other operating expenses.

As of December 31, 2011, there was an accumulated deficit of $8,960,521 and the Company’s cash position is $72,829.  While there can be no assurances that the Company will continue to increase its customer base and related revenues necessary to cover its operating costs; the Company’s management believes the opportunities identified in its pipeline are achievable to continue generating operating profitability and positive cash flow in the near future.  

The Company may need additional financing and there is no assurance that such financing will be available, if at all, at terms acceptable to the Company.  If additional funds are raised by the issuance of equity securities, existing stockholders may experience dilution of their ownership interests and these securities may have rights senior to those of holders of the common stock.  If adequate funds are not available or not available on acceptable terms, it could have a material adverse effect on the Company's financial condition and results of operations.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our chief executive  officer  and  chief  financial  officer,  the effectiveness  of  our  disclosure controls  and  procedures  (as defined  in  Rules  13a-15(e) and 15d-15(e) of the  Exchange  Act).   Based  upon that evaluation,  our  principal executive officer and principal financial officer concluded that, as  of  the  end  of  the  period covered  in  this  report,  our disclosure controls and procedures were ineffective to ensure  that information required to be disclosed in reports filed  under  the Securities Exchange Act of 1934, as amended (the "Exchange  Act") is  recorded,  processed,  summarized  and  reported  within  the required time periods and is accumulated and communicated to  our management,   including  our  principal  executive  officer   and principal  financial  officer, as  appropriate  to  allow  timely decisions regarding required disclosure.

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Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or 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.   Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Due to 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. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

In addition, our management with the participation of our Principal Executive Officer and Principal Financial Officer have determined that no change in our internal control over financial reporting occurred during or subsequent to the quarter ended December 31, 2011 that has materially affected, or is (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1       Legal Proceedings

None

Item 1A    Risk Factors

None

Item 2      Unregistered Sales of Securities and Use of Proceeds

None, except as previously reported.

ITEM 3    Defaults upon Senior Securities

None, except as previously reported.

ITEM 4   [Removed]

ITEM 5     Other information

None

ITEM 6      Exhibits

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SIGNATURES

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

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