<PAGE>
===============================================================================
UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 06425
SENTO CORPORATION
Exact Name of Small Business Issuer as
Specified in its Charter
UTAH 87-0284979
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
(Address of Principal Executive Offices)
808 East Utah Valley Drive
American Fork, Utah 84003
Issuers telephone number, including area code: (801) 492-2000
Indicate by check mark whether the issuer (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 issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at
September 30, 1999
-------------------- ------------------
<S> <C>
Common capital stock 7,939,416
$.25 par value
</TABLE>
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
===============================================================================
<PAGE>
SENTO CORPORATION
Quarterly Report on Form 10-QSB
Quarter ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of
Operations Three Months and Six Months
ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows Six Months ended September 30,
1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 4. Submission of Matters to Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPT. 30, 1999 MARCH 31, 1999
(UNAUDITED)
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 427,005 $ 275,893
Accounts receivable (net) 2,104,710 3,075,460
Income taxes receivable 50,919 375,148
Other current assets 240,884 391,882
----------- -----------
Total current assets 2,823,518 4,118,383
Property and equipment (net) 3,042,298 2,907,897
Other assets 295,066 274,891
----------- -----------
Total Assets $ 6,160,882 $ 7,301,171
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 500,000 $ 1,000,000
Current portion of long-term debt 148,878 409,923
Accounts payable 915,478 2,197,129
Accrued liabilities 981,662 1,548,779
Deferred revenue 167,142 500,321
----------- -----------
Total current liabilities 2,713,160 5,656,152
Long-term liabilities:
Convertible bonds - 472,266
Long-term debt, net of current portion 45,880 286,317
----------- -----------
Total long-term liabilities 45,880 758,583
Stockholders' equity:
Common stock 2,035,294 1,580,607
Additional paid-in capital 9,515,973 7,247,143
Deferred compensation (34,549) (204,814)
Accumulated deficit (7,702,560) (7,327,537)
Accumulated other comprehensive loss - foreign
currency translation (25,753) (22,400)
Treasury stock (386,563) (386,563)
----------- -----------
Total stockholders' equity 3,401,842 886,436
----------- -----------
Total liabilities and stockholders' equity $ 6,160,882 $ 7,301,171
=========== ===========
</TABLE>
3
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 3,570,354 $1,517,845 $ 6,872,075 $ 3,004,210
Cost of sales 2,649,829 1,214,739 4,990,839 1,898,762
----------- ---------- ----------- -----------
Gross profit 920,525 303,106 1,881,236 1,105,448
Costs and expenses:
Selling general and administrative 1,123,104 2,085,904 2,288,605 3,901,735
Amortization of intangible assets - 107,729 - 179,095
Research and development 89,958 34,274 117,314 96,588
----------- ---------- ----------- -----------
Total costs and expenses 1,213,062 2,227,907 2,405,919 4,177,418
----------- ---------- ----------- -----------
Operating loss (292,537) (1,924,801) (524,683) (3,071,970)
Other income (net) 114,722 361,609 65,646 880,409
----------- ---------- ----------- -----------
Loss before taxes (177,815) (1,563,192) (459,037) (2,191,561)
Income tax benefit 69,124 347,928 135,403 347,928
----------- ---------- ----------- -----------
Net loss from continuing operations (108,691) (1,215,264) (323,634) (1,843,633)
Loss from discontinued operations, net of
income taxes - (182,366) (51,389) (451,988)
----------- ---------- ----------- -----------
Net loss $ (108,691) $(1,397,630) $ (375,023) $(2,295,621)
=========== ========== =========== ===========
Basic and diluted loss per share:
Loss from continuing operations $ (0.01) $ (0.21) $ (0.05) $ (0.32)
Loss from discontinued operations (0.00) (0.03) (0.00) (0.08)
----------- ---------- ----------- -----------
Net loss per common share $ (0.01) $ (0.24) $ (0.05) $ (0.40)
=========== ========== =========== ===========
Weighted average number of
common and Common equivalent
shares outstanding:
Basic 7,861,083 5,737,233 7,077,069 5,716,783
Diluted 7,861,083 5,737,233 7,077,069 5,716,783
</TABLE>
4
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SEPTEMBER 30
--------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (375,023) $(2,295,621)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 516,691 504,221
(Gain)loss on disposal of assets 5,718 (127,640)
Amortization of deferred compensation 19,690 64,690
Changes in operating assets and liabilities:
Accounts receivable 970,750 1,082,541
Prepaid taxes 324,229 -
Other assets (85,110) 784,959
Accounts payable (1,281,651) (246,169)
Accrued liabilities (470,242) 351,258
Deferred revenue (126,179) (936,272)
----------- -----------
Net cash used in operating activities (501,127) (818,033)
Cash flows used in investing activities:
Business disposals (acquisitions), net of cash 50,000 (100,000)
Purchase of furniture and equipment (682,877) (1,228,349)
----------- -----------
Net cash used in investing activities (632,877) (1,328,349)
Cash flows from financing activities:
Proceeds from issuance of stock 1,880,522 296,318
Issuance of long-term debt - 146,219
Net payments on line of credit (500,000) -
Proceeds from stock options exercised 8,122 -
Principal payments of long-term debt (100,175) (101,876)
----------- -----------
Net cash provided by financing activities 1,288,469 340,661
Effect of foreign exchange rates on cash (3,353) (11,922)
----------- -----------
Net increase (decrease) in cash 151,112 (1,817,643)
Cash at beginning of period 275,893 5,807,014
----------- -----------
Cash at end of period $ 427,005 $ 3,989,371
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 39,911 $ 2,542
Income taxes $ 3,678 $ 3,615
</TABLE>
5
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
are stated in accordance with the instructions to Form 10-QSB and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the three and six months ended September 30, 1999
are not necessarily indicative of the results that may be expected for
the full year. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended March 31, 1999.
Certain balances in the financial statements for the three-month and
six-month periods ended September 30, 1998 have been reclassified to
conform to the current presentation.
B. COMPREHENSIVE LOSS
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," effective April 1, 1998.
SFAS 130 establishes standards for reporting and displaying
comprehensive loss and its components in financial statements. The
components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-----------------------------------------------------------
<S> <C> <C>
Net loss $(108,691) $(1,397,630)
Foreign currency translation
adjustment 601 (8,855)
--------- -----------
Comprehensive loss $(108,090) $(1,406,485)
========= ===========
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-----------------------------------------------------------
<S> <C> <C>
Net loss $(375,023) $(2,295,621)
Foreign currency translation
Adjustment (3,353) (11,922)
--------- -----------
Comprehensive loss $(378,376) $(2,307,543)
========= ===========
</TABLE>
6
<PAGE>
C. COMMON STOCK
SIX MONTHS ENDED SEPTEMBER 30, 1999
During the six months ended September 30, 1999, the following
transactions occurred which affected common stock:
All outstanding convertible bonds ($500,000 principal) including
accrued interest were converted into 401,264 shares of the Company's
common stock.
The Company also completed a private placement of common stock in June
of 1999, whereby 600,000 units, consisting of two shares of common
stock and a warrant to purchase one share of common stock, were sold.
The units were sold at a price of $3.20 per unit for total proceeds of
$1,880,522 (net of $39,478 in offering costs). The warrants are
exercisable for a three-year period at $2.50 per share.
On August 11, 1999, the Company issued 169,097 shares of common stock
pursuant to a settlement and release agreement (the "Agreement") with
Educational Systems, Inc ("ESI"). The Agreement called for the issuance
of common stock in full satisfaction of unpaid costs that had been
accrued by the Company under an acquisition agreement executed by
Sento, Sento Training and ESI in August of 1998.
Options to purchase 48,384 shares of common stock were exercised during
the six months ended September 30, 1999.
SIX MONTHS ENDED SEPTEMBER 30, 1998
During the six-month period ended September 30, 1998, the following
transactions occurred which affected common stock:
Warrants to purchase 73,894 shares of common stock were exercised for
proceeds of $258,629.
A total of 11,082 shares of common stock were issued in lieu of
employee bonuses.
A total of 11,453 shares of common stock were issued under the Employee
Stock Purchase Plan.
Convertible bonds ($100,000 principal) were converted to 33,393 shares
of common stock.
The Company sold a building to a former employee who was also a
director of the Company at the time of sale. The property was sold for
$192,722 in cash and 58,000 shares of common stock. The net gain on the
sale was $124,578.
D. LOSS PER SHARE
Loss per share is computed in accordance with Financial Accounting
Standards Board Standard No. 128, "Earnings Per Share". Basic loss per
share is computed as net loss divided by the weighted average number of
shares of common stock outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur from shares of
common stock issuable through stock options, warrants and other
convertible securities. The computation of diluted loss per share for
the six months ended September 30, 1999 excludes the assumed conversion
of $500,000 in convertible bonds prior to the conversion to common
stock on June 16, 1999 and June 20, 1999, because the impact of the
conversion would be anti-dilutive. The computation of diluted earnings
per share for the six months ended September 30, 1998 excludes the
assumed conversion of $900,000 in convertible bonds because the impact
of the conversion would be anti-dilutive. Employee stock options of
1,774,787 and 2,128,601, and warrants of 767,500 and 560,000 to
purchase common stock that were outstanding during the six months ended
September 30, 1999 and 1998, respectively, were not included in the
computation of diluted loss per share because to do so would be
anti-dilutive.
E. DISCONTINUED OPERATIONS
In June of 1999, the Company completed the sale of its VAR business and
certain related assets. The VAR business was sold effective June 30,
1999. The Company received cash of $50,000 and future contingent
earn-out payments of up to $350,000 to be received over 36 months. The
Company recognized a gain on
7
<PAGE>
the sale before income taxes of approximately $5,000 that has been
included in the loss from discontinued operations for the six months
ended September 30, 1999.
The VAR business has been accounted for as discontinued operations, and
accordingly, the results of operations are segregated from continuing
operations in the accompanying statements of operations. Revenue,
operating costs and expenses, other income and expenses, and income
taxes of this business have been reclassified to discontinued
operations for the three and six months ended September 30, 1999 and
1998. No allocation of general corporate overhead has been made to
discontinued operations relating to this business. The assets and
liabilities related to discontinued operations as of March 31, 1999
were approximately $240,000 and $210,000, respectively.
F. SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Company's two reportable
business segments have separate management teams. The segments consist
of Technical Services and Training Services.
TECHNICAL SERVICES: This segment offers a range of IT outsourcing
services consisting of "call center," "help desk," and technical
support services provided through the Company's "eCustomer Contact
Center."
TRAINING SERVICES: This segment provides seminar training workshops,
customized corporate training programs and multi-media presentations,
all of which are designed to teach and reinforce skills required to
make IT systems work effectively.
The "Other" column includes corporate related items and results of
insignificant operations.
Summarized financial information concerning the Company's reportable
segments for the three months and six months ended September 30, 1999
and 1998 is shown in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1999 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 2,318,631 $ 1,006,984 $ 244,739 $ 3,570,354
Cost of sales 2,069,611 503,116 77,102 2,649,829
Depreciation 186,300 10,762 45,901 242,963
Segment operating income
(loss) (301,420) 35,524 (26,641) (292,537)
Total assets as of
September 30, 1999 4,095,180 690,224 1,375,478 6,160,882
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1998 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 294,468 $ 781,668 $ 441,709 $ 1,517,845
Cost of sales 462,112 591,476 161,151 1,214,739
Depreciation 27,148 21,830 134,078 183,056
Amortization of intangible
assets - 93,749 13,980 107,729
Segment operating loss (555,963) (1,124,275) (244,563) (1,924,801)
Total assets as of
September 30, 1998 3,397,503 1,374,140 9,358,265 14,129,908
8
<PAGE>
<CAPTION>
SIX MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1999 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 4,447,123 $ 1,902,726 $ 522,226 $ 6,872,075
Cost of sales 3,813,949 991,824 185,066 4,990,839
Depreciation 412,361 17,662 86,668 516,691
Segment operating loss (422,546) (88,385) (13,752) (524,683)
Total assets as of
September 30, 1999 4,095,180 690,224 1,375,478 6,160,882
<CAPTION>
SIX MONTHS ENDED TECHNICAL TRAINING
SEPTEMBER 30, 1998 SERVICES SERVICES OTHER TOTAL
---------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 581,922 $ 1,557,771 $ 864,517 $ 3,004,210
Cost of sales 510,672 1,088,714 299,376 1,898,762
Depreciation 33,011 36,845 255,270 325,126
Amortization of intangible
assets - 151,135 27,960 179,095
Segment operating loss (603,477) (1,898,721) (569,772) (3,071,970)
Total assets as of
September 30, 1998 3,397,503 1,374,140 9,358,265 14,129,908
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
Sento Corporation ("Sento" or the "Company") provides integrated information
technology ("IT") solutions for Windows NT, UNIX, Open VMS,
Internet/Intranet, and networked computing environments. Through its
wholly-owned subsidiaries, Sento delivers outsourced training and technical
support services.
Sento Training Corporation ("Sento Training") provides classroom training
courses, seminar training workshops, customized corporate training programs
and multi-media presentations, all of which are designed to teach and
reinforce skills required to make IT systems work effectively. Sento
Technical Services Corporation ("Sento Technical Services") offers a range of
IT outsourcing services consisting of "call center", "helpdesk", and
technical support services. The Company conducts substantially all of its
foreign operations through Sento Australia Pty. Ltd. ("Sento Australia")
based in Sydney, Australia.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
Revenues
Revenues increased 135%, or $2,052,509 from $1,517,845 for the three months
ended September 30, 1998 to $3,570,354 for the three months ended September
30, 1999. These revenues were generated primarily from the following two
areas:
Technical services revenues increased 687%, or $2,024,163 from $294,468 for
the three months ended September 30, 1998 to $2,318,631 for the three months
ended September 30, 1999. The Company began its technical services operations
during the quarter ended March 31, 1998, and in August of 1998, moved to its
"state of the art" eCustomer Contact Center in American Fork, Utah. The
significant increase in revenues reflects the Company's strategic focus on
providing IT services through its eCustomer Contact Center. Agent headcount
has increased from 21 agents at June 30, 1998 to 316 at September 30, 1999.
Management expects to be at capacity at the American Fork location during
November 1999 with over 400 agents. Management believes the personnel growth
Sento is experiencing has had and, in the near term will continue to have, a
negative impact on its earnings because of upfront training and hiring costs
for new agents and the time lag before they generate revenue. Management
expects this personnel growth to continue into the near future, and this
division may not turn profitable in Sento's third quarter due to this
division's expanding customer base. The rate of personnel growth, as well as
other factors, will determine if the Company's technical services become
profitable. Management is currently unable to forecast when or if such
profitability will be achieved. Revenue by quarter for this segment through
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months Three Months Three Months
Ended Ended Ended Ended Ended Ended
JUN. 30, 1998 SEP. 30, 1998 DEC. 31, 1998 MAR. 31, 1999 JUN. 30, 1999 SEP. 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 287,454 $ 294,468 $ 685,881 $1,575,429 $2,128,492 $2,318,631
========== ========== ========== ========== ========== ==========
Increase in
revenue from
prior quarter N/A $ 7,014 $ 391,413 $ 889,548 $ 553,063 $ 190,139
========== ========== ========== ========== ==========
</TABLE>
Training revenues increased 29%, or $225,316 from $781,668 for the three
months ended September 30, 1998 to $1,006,984 for the same period in 1999.
This increase represents the Company's transition to intensive multi-week IT
certification courses and custom corporate training from shorter, less
intensive courses and other multi-media forms of IT training.
Cost of Sales
Costs of sales consists primarily of salaries and employee benefits for the
Company's full and part-time employees, consultants, engineers, agents, and
instructors; travel expenses relating to consulting and training activities;
facilities costs; and depreciation on property and equipment used in
providing technical support services.
10
<PAGE>
Cost of sales increased 118%, or $1,435,090, from $1,214,739 for the three
months ended September 30, 1998 to $2,649,829 for the same period in 1999.
Gross profit as a percentage of revenues increased by 6 percentage points,
from 20% of revenues during the three months ended September 30, 1998 to 26%
of revenues for the same three-month period in 1999. The increase in gross
margin, which is offset by upfront training costs of new agents discussed
above, is primarily the result of increased utilization of the Company's
facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 46%, or $962,800 from
$2,085,904 for the three months ended September 30, 1998 to $1,123,104 for
same three-month period in 1999. The decrease was due primarily to
management's focus on cost reduction, a shift to less expensive marketing
methods and a reduction in the level of expenditures associated with the
start-up of the eCustomer Contact Center and the training division during the
three-month period ended September 30, 1998.
The Company recorded $107,729 of amortization expense relating to intangible
assets during the three months ended September 30, 1998. The intangible
assets that were amortized in 1998 were subsequently disposed of or written
off due to impairment. Therefore, there is no amortization expense for the
three months ended September 30, 1999.
Other Income (Expense)
During the three months ended September 30, 1999, the Company recorded other
income (net) of $114,722, as compared to $361,609 for the three months ended
September 30, 1998. The decrease of $246,887 was primarily due to the
realization of income during the three months ended September 30, 1998 from
the sale of assets. Management does not expect other income to be significant
in future periods.
Discontinued Operations
The Company sold all of its VAR business and related assets as of June 30,
1999. Loss from these discontinued operations was $182,366 for the three
months ended September 30, 1998, and there was no loss to report for
discontinued operations for the three months ended September 30, 1999.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1998.
Revenues
Revenues increased 129%, or $3,867,865 from $3,004,210 for the six months
ended September 30, 1998 to $6,872,075 for the six months ended September 30,
1999. These revenues were generated primarily from the following two areas:
Technical services revenues increased 664%, or $3,865,201 from $581,922 for
the six months ended September 30, 1998 to $4,447,123 for the six months
ended September 30, 1999. The Company began its technical services operations
during the quarter ended March 31, 1998, and in August of 1998, moved to its
"state of the art" eCustomer Contact Center in American Fork, Utah. The
significant increase in revenues reflects the Company's strategic focus on
providing IT services through its eCustomer Contact Center. Agent headcount
has increased from 21 agents at June 30, 1998 to 316 at September 30, 1999.
Management expects to be at capacity at the American Fork location during
November 1999 with over 400 agents. Management believes the personnel growth
Sento is experiencing has had and, in the near term will continue to have, a
negative impact on its earnings because of upfront training and hiring costs
for new agents and the time lag before they generate revenue. Management
expects this personnel growth to continue into the near future, and this
division may not turn profitable in Sento's third quarter due to this
division's expanding customer base. The rate of personnel growth, as well as
other factors, will determine if the Company's technical services become
profitable. Management is currently unable to forecast when or if such
profitability will be achieved. Revenue by quarter for this segment through
September 30, 1999 is disclosed in management's discussion and analysis of
the three months ended September 30, 1999 and 1998.
Training revenues increased 22%, or $344,955 from $1,557,771 for the six
months ended September 30, 1998 to $1,902,726 for the same period in 1999.
This increase represents the Company's transition to intensive multi-week IT
certification courses and custom corporate training from shorter, less
intensive courses and other multi-media forms of IT training.
11
<PAGE>
Cost of Sales
Cost of sales consists primarily of salaries and employee benefits for the
Company's full and part-time employees, consultants, engineers, agents, and
instructors; travel expenses relating to consulting and training activities;
facilities costs; and depreciation on property and equipment used in
providing technical support services.
Cost of sales increased 163%, or $3,092,077 from $1,898,762 for the six
months ended September 30, 1998 to $4,990,839 for the same period in 1999.
Gross profit as a percentage of revenues decreased by 10 percentage points,
from 37% of revenues during the six months ended September 30, 1998 to 27% of
revenues for the same six-month period in 1999. The decrease in gross margin
is primarily the result of a shift in the Company's revenue mix caused by the
substantial increase in technical service revenues, which generate lower
gross margins, and the upfront training costs of new agents discussed above.
Generally, the lower gross profit margins are offset by lower sales and
marketing expenses needed to generate technical service revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 41%, or $1,613,130
from $3,901,735 for the six months ended September 30, 1998 to $2,288,605 for
same six-month period in 1999. The decrease was due primarily to management's
focus on cost reduction and a shift to less expensive marketing methods and a
reduction in the level of expenditures associated with the start-up of the
eCustomer Contact Center and the training division during the six-month
period ended September 30, 1998.
The Company recorded $179,095 of amortization expense relating to intangible
assets during the six months ended September 30, 1998. The intangible assets
that were amortized in 1998 were subsequently disposed of or written off due
to impairment. Therefore, there is no amortization expense for the six months
ended September 30, 1999.
Other Income (Expense)
During the six months ended September 30, 1999, the Company recorded other
income (net) of $65,646 as compared to $880,409 for the six months ended
September 30, 1998. The decrease of $814,763 was primarily due to the
realization of income during the six months ended September 30, 1998 from the
sale of assets. Management does not expect other income to be significant in
future periods.
Discontinued Operations
The Company sold all of its VAR business and related assets as of June 30,
1999. The loss from continuing operations reflected in the Statements of
Operations for the six months ended September 30, 1999 and September 30, 1998
excludes the VAR business' revenues and expenses. Loss from these
discontinued operations was $51,389 for the six months ended September 30,
1999 and $451,988 for the six months ended September 30, 1998.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of $110,358 and cash
balances had increased 55% or $151,112 from $275,893 at March 31, 1999 to
$427,005 at September 30, 1999. The improved liquidity was primarily due to
proceeds received from the Company's private placement of common stock in
June of 1999.
On June 29, 1999, the Company completed a private placement of common stock
and warrants resulting in total consideration received (net of offering
costs) of $1,880,552. This private placement was in the form of 600,000 units
consisting of two shares of common stock and a warrant to purchase one share
of common stock. The units were sold at a price of $3.20 per unit. The stock
purchase warrants are exercisable at $2.50 per share. With this new financing
and revenues from the Company's operations, management believes the Company
will be able to continue its existing operations and fund part of its
expected growth.
This new financing also made it possible for the Company to restructure its
loan with a bank, which provides up to $2,000,000 of financing. The amount
available under the bank loan is based on Sento's outstanding accounts
receivable. As of September 30, 1999 there was $500,000 of borrowings
outstanding under this bank line of credit. The loan matures in February of
2000 and is renewable upon the mutual agreement of the Company and the bank.
12
<PAGE>
The Company's primary sources of liquidity have been cash received from sales
of assets and cash provided through private sales of equity as well as
borrowings under a bank line of credit. In addition, the Company has financed
some of its equipment utilized in its business through long-term leasing
arrangements. The current growth rate of the technical services division
consumes a substantial amount of cash monthly, and the Company continues to
pursue additional funding opportunities. In the event the Company is not able
to find such alternate sources of funding, its ability to pursue its planned
business strategy will be limited and it may be forced to reduce operations.
There can be no assurance that the Company will be able to obtain necessary
capital funding on terms favorable to the Company, if at all.
Year 2000
Sento Corporation has organized a Year 2000 oversight committee that
conducted an analysis of the Company's internal compliance and implementing
necessary changes to ensure compliance. An overall five-phase plan was
implemented to coordinate the efforts of all offices worldwide.
The five-phase plan is outlined below:
- - Discovery: Creation of Year 2000 Project Plan, Organization of
Oversight Committee consisting of Site Coordinators for each of the
Sento Sites, Members of IT Management and Sr. Management, and Project
Manager. Communication with Board of Directors.
- - Risk Assessment: Identify and document critical path items for all
departments throughout Sento worldwide. Assess risk on each item.
Determine current Year 2000 compliance status for each at risk item.
- - Equipment and Products: Inventory of internal systems and software and
embedded logic equipment. Contacting all suppliers and manufacturers of
equipment and products regarding Year 2000 status on products as well
as their internal company Year 2000 readiness.
- - Testing: Conduct internal testing on all mission critical systems to
assure no disruption of service or date-logic concerns.
- - Reporting and Contingency Plans: Reporting of results of above phases
and proposed contingency plans for all high-risk items.
The Company has completed all of the above phases and is not aware of any
significant deficiencies in the Company's internal operations that have not
been resolved. The Company's mission critical systems primarily consist of
newly purchased computers with Intel processors running Microsoft NT/Windows
software. The Company's primary mission critical applications have been
purchased with documented Year 2000 compliance. The telephone and security
systems for the Company's corporate office are newly purchased and Year 2000
certification verification has been received.
While the Company is not aware of any existing potential claims, the
occurrence of Year 2000 related system failures in the information systems of
clients of the Company or other third parties including service providers
(particularly providers of telephone and other utility services), strategic
alliance partners, vendors or suppliers, could have a material adverse effect
on the Company's business, financial condition and results of operation,
whether or not the Company bears any responsibility, legal or otherwise, for
the occurrence of those problems.
Factors Affecting Future Results
This Form 10-QSB contains certain forward-looking statements (as defined in
Section 21E of the Securities Exchange Act of 1934, as amended) that involve
substantial risks and uncertainties. When used in this Form 10-QSB, the words
"anticipate" and "expect" and similar expressions as they relate to the
Company or its management is intended to identify such forward-looking
statements. The Company's actual results, performance or achievements will
differ, and could differ materially from the results, performance or
achievements expressed in, or implied by, these forward-looking statements.
Risks and uncertainties and other factors that could cause or contribute to
such differences include, but are not limited to, the Company's ability to
obtain capital funding necessary to pursue its business strategy;
difficulties in attracting and retaining highly skilled employees; the
Company's ability to manage rapid growth and expansion into new geographic
areas and service lines; the
13
<PAGE>
Company's ability to develop IT solutions that keep pace with continuing
changes in technology, evolving industry standards and changing client
preferences; and risks related to Year 2000 failures in client's information
systems. These and other risks, uncertainties and other factors are more
fully described in the Company's Annual Report on Form 10-KSB.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
a. Pursuant to a Convertible Bond and Warrant Purchase Agreement
dated as of July 8, 1997, between Canadian Imperial Holdings,
Inc. ("CIHI") and the Company, the Company sold to CIHI a
Convertible Bond with an "issue price" of $1,000,000 and
bearing interest at the rate of six percent (the "Convertible
Bond"). The Convertible Bond, including interest on the
principal thereof, was convertible by CIHI into shares of the
common stock in accordance with the conversion rate set forth
in the Convertible Bond upon the earlier of (a) at any time
after October 6, 1997 in the discretion of CIHI or (b)
automatically on July 8, 1999.
On June 16, 1999 and June 22, 1999, CIHI elected to convert
$200,000 and $300,000, respectively, of principal value of the
Convertible Bond, together with accrued interest thereon, into
shares of common stock. In exchange for the cancellation of
the converted portion of the Convertible Bond and the Company
issued to CIHI 401,264 shares of common stock. Upon the
completion of these conversions, the Convertible Bond has been
converted in its entirety.
The sale of the Convertible Bond and the issuance of the
shares of common stock upon the conversion thereof were
effected in reliance upon the exemption for sales of
securities not involving a public offering, as set forth in
Section 4(2) of the Securities Act of 1993, as amended (the
"Securities Act"). The Company's reliance upon such exemption
was based upon representations and warranties of CIHI
contained in transaction documents submitted to the Company by
CIHI.
On May 11, 1999, June 2, 1999 and September 30, 1999, the
Company issued 41,829, 3,548, and 3,007 shares of common
stock, respectively, upon the exercise of options granted
pursuant to the Company's stock option plan.
On June 29, 1999, the Company completed a private placement of
its common stock whereby 600,000 units consisting of two
shares of the common stock and one warrant to purchase one
share of common stock were sold. The units were sold at a
price of $3.20 per unit and the stock purchase warrants are
exercisable for a three-year period at $2.50 per share. The
private placement of the units was effected in reliance upon
the exemption for sales of securities not involving a public
offering, as set forth in Section 4(2) of the Securities Act
and Regulation D promulgated thereunder. The Company's
reliance on such exemptions was based upon representations and
warranties of the purchasers contained in purchase documents
delivered to the Company by each purchaser.
On August 11, 1999, the Company issued 169,097 shares of
common stock pursuant to a settlement and release agreement
(the "Settlement Agreement") with Educational Systems, Inc
(ESI). The Settlement Agreement called for the issuance of
common stock in full satisfaction of unpaid costs that had
been accrued by the Company under an acquisition agreement
executed by Sento, Sento Training and ESI in August of 1998.
The issuance of shares of common stock was undertaken in
reliance upon the exemption for sales of securities not
involving a public offering, as set forth in Section 4(2) of
the Securities Act. The Company's reliance on such exemption
was based upon representations and warranties of the
purchasers contained in the Settlement Agreement.
14
<PAGE>
Item 4. Submission of Matters to Vote of Security Holders
a. On September 23, 1999, the Company held its Annual Meeting of
Shareholders (the "Annual Meeting"). At the Annual Meeting,
two matters were submitted to the Company's shareholders for
consideration and approval. Those matters, together with the
voting results for each matter, are described in the following
paragraphs.
(a) Three directors of the Company were elected to serve
until the 2000 Annual Meeting of Shareholders of the
Company. The directors elected, together with votes
received are: Kieth E. Sorenson 5,412,727 votes;
Arthur F. Coombs, III 5,611,909 votes; and Gary B.
Filler 5,611,909 votes.
(b) The Company's shareholders approved the adoption of
the Sento Corporation 1999 Omnibus Stock Incentive
Plan (the "Plan"). The Plan replaces, in part, the
Sento Corporation Stock Incentive Plan, as amended
(the "Predecessor Plan"), and therefore, the Common
Stock previously authorized for the granting of stock
options under the Predecessor Plan remain outstanding
pursuant to the terms of the Predecessor Plan. The
Plan authorizes an aggregate of 3,500,000 shares of
Common Stock that may be subject to awards under the
Plan. Accordingly, only an additional 1,000,000
shares of Common Stock will be available for awards
under the Plan in excess of the number of shares that
were available under the Predecessor Plan. With
respect to this proposal, there were 2,853,077 votes
cast in favor of the proposal, 1,115,237 votes cast
against the proposal, and 32,590 votes abstained.
Item 6. Exhibits and Reports on Form 8K
a. Reg. SB item 27, Financial Data Schedule
SIGNATURES
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.
SENTO CORPORATION
(Registrant)
By: /s/ ARTHUR F. COOMBS III
------------------------------------------
Arthur F. Coombs, III
President and Chief Executive Officer
By: /s/ STANLEY J. CUTLER
------------------------------------------
Stanley J. Cutler
Corporate Controller and Secretary
15
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