<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 December 31, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 06425
UTAH SENTO CORPORATION 87-0284979
Exact Name of Small Business
Issuer as Specified
(State or other Jurisdiction of in its Charter (I.R.S. Employer
Incorporation or Organization) Identification No.)
808 East Utah Valley Drive
American Fork, Utah 84003
(Address of Principal Executive Offices)
Issuer's 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
December 31, 1999
-------------------- -----------------
<S> <C>
Common capital stock 8,027,960
$.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 December 31, 1999
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1999 and March 31, 1999 3
Condensed Consolidated Statements of
Operations Three Months and Nine Months
ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of
Cash Flows Nine Months ended December 31,
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 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash $ 203,983 $ 275,893
Accounts receivable (net) 3,257,436 3,075,460
Income taxes receivable -- 375,148
Other current assets 375,412 391,882
----------- -----------
Total current assets 3,836,831 4,118,383
Property and equipment (net) 3,135,324 2,907,897
Other assets 512,990 274,891
----------- -----------
Total Assets $ 7,485,145 $ 7,301,171
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 1,200,000 $ 1,000,000
Current portion of long-term debt 132,724 409,923
Accounts payable 871,717 2,197,129
Accrued liabilities 1,366,300 1,548,779
Deferred revenue 115,684 500,321
----------- -----------
Total current liabilities 3,686,425 5,656,152
Long-term liabilities:
Convertible bonds -- 472,266
Long-term debt, net of current portion 87,057 286,317
----------- -----------
Total long-term liabilities 87,057 758,583
Stockholders' equity:
Common stock 2,057,430 1,580,607
Additional paid-in capital 9,714,016 7,247,143
Deferred compensation (26,704) (204,814)
Accumulated deficit (7,626,449) (7,327,537)
Accumulated other comprehensive loss - foreign
Currency translation (20,067) (22,400)
Treasury stock (386,563) (386,563)
----------- -----------
Total stockholders' equity 3,711,663 886,436
----------- -----------
Total liabilities and stockholders' equity $ 7,485,145 $ 7,301,171
=========== ===========
</TABLE>
3
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 5,527,932 $ 1,931,894 $ 12,400,007 $ 4,936,104
Cost of sales 4,241,493 1,723,094 9,232,332 3,621,856
------------ ------------ ------------ ------------
Gross profit 1,286,439 208,800 3,167,675 1,314,248
Costs and expenses:
Selling general and
administrative 1,114,645 2,590,321 3,415,213 6,492,056
Amortization of intangible assets -- 196,482 -- 375,577
Research and development 88,324 49,748 193,675 146,336
Write-off of in-process research
and development costs -- 92,095 -- 92,095
Impairment of assets -- 426,296 -- 426,296
------------ ------------ ------------ ------------
Total costs and expenses 1,202,969 3,354,942 3,608,888 7,532,360
------------ ------------ ------------ ------------
Operating income (loss) 83,470 (3,146,142) (441,213) (6,218,112)
Other income (net) 38,753 283,918 104,399 1,164,327
------------ ------------ ------------ ------------
Income (loss) before taxes 122,223 (2,862,224) (336,814) (5,053,785)
Income tax benefit (expense) (46,112) 126,170 89,291 474,098
------------ ------------ ------------ ------------
Income (loss) from continuing operations 76,111 (2,736,054) (247,523) (4,579,687)
Loss from discontinued operations, net of
income taxes -- (719,198) (51,389) (1,171,184)
------------ ------------ ------------ ------------
Net income (loss) $ 76,111 $ (3,455,252) $ (298,912) $ (5,750,871)
============ ============ ============ ============
Basic income (loss per) share:
Income (loss) from continuing operations $ 0.01 $ (0.46) $ (0.03) $ (0.78)
Loss from discontinued operations $ -- (0.12) (0.01) (0.20)
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.01 $ (0.58) $ (0.04) $ (0.98)
============ ============ ============ ============
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ (0.46) $ (0.03) $ (0.78)
Loss from discontinued operations -- (0.12) (0.01) (0.20)
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.01 $ (0.58) $ (0.04) $ (0.98)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding:
Basic 7,954,666 5,955,871 7,369,601 5,839,236
Diluted 8,717,077 5,955,871 7,369,601 5,839,236
</TABLE>
4
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31
---------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (298,912) $(5,750,871)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 794,943 1,063,504
(Gain)loss on disposal of assets 10,003 (127,640)
Restructuring charges -- 633,894
Write-off of in-process research and development costs -- 92,095
Deferred taxes (22,786) (52,999)
Minority interest -- (31,136)
Stock issued for compensation and/or services -- 7,854
Amortization of deferred compensation 27,535 140,659
Changes in operating assets and liabilities:
Accounts receivable (181,976) 652,580
Prepaid taxes 375,148 --
Other assets (178,872) 1,071,832
Accounts payable (1,325,412) 773,096
Accrued liabilities (85,604) 432,033
Deferred revenue (177,637) (1,148,543)
----------- -----------
Net cash used in operating activities (1,063,570) (2,243,642)
Cash flows used in investing activities:
Business disposals (acquisitions), net of cash 50,000 (693,529)
Proceeds from sale of assets -- 200,781
Investment in investee (232,620) --
Purchase of furniture and equipment (1,058,440) (2,388,942)
----------- -----------
Net cash used in investing activities (1,241,060) (2,881,690)
Cash flows from financing activities:
Proceeds from issuance of stock 1,880,522 305,975
Issuance of long-term debt 89,330 146,219
Net proceeds from line of credit 200,000 --
Proceeds from stock options and warrants exercised 225,017 --
Principal payments of long-term debt (164,482) (288,197)
----------- -----------
Net cash provided by financing activities 2,230,387 163,997
Effect of foreign exchange rates on cash 2,333 (15,185)
----------- -----------
Net decrease in cash (71,910) (4,976,520)
Cash at beginning of period 275,893 5,807,014
----------- -----------
Cash at end of period $ 203,983 $ 830,494
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 52,378 $ 15,300
Income taxes $ 3,678 $ 25,152
</TABLE>
5
<PAGE>
SENTO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 nine months ended December 31, 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
nine-month periods ended December 31, 1998 have been reclassified to
conform to the current presentation.
B. COMPREHENSIVE INCOME (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 income (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------
<S> <C> <C>
Net income (loss) $ 76,111 $(3,455,252)
Foreign currency translation
adjustment 5,686 (3,263)
----------- -----------
Comprehensive income (loss) $ 81,797 $(3,458,515)
=========== ===========
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------
<S> <C> <C>
Net loss $ (298,912) $(5,750,871)
Foreign currency translation
adjustment 2,333 (15,185)
----------- -----------
Comprehensive loss $ (296,579) $(5,766,056)
=========== ===========
</TABLE>
6
<PAGE>
C. COMMON STOCK
NINE MONTHS ENDED DECEMBER 31, 1999
During the nine months ended December 31, 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 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.
Warrants to purchase 85,000 shares of common stock at $2.50 per share
were exercised.
Options to purchase 51,928 shares of common stock were exercised.
NINE MONTHS ENDED DECEMBER 31, 1998
During the nine-month period ended December 31, 1998, the following
transactions occurred which affected common stock:
Warrants to purchase 73,894 shares of common stock at $3.50 per share
were exercised.
A total of 12,207 shares of common stock were issued in lieu of
employee bonuses.
A total of 11,455 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.
A total of 4,080 shares of common stock were issued to ESI for partial
payment of accrued royalties.
Options to purchase 7,788 shares of common stock were exercised.
A total of 142,559 shares of common stock (including 12,903 shares for
services of third parties) were issued as partial consideration for the
acquisition of Functional Software Pty., Ltd.
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. INCOME/LOSS PER SHARE
Income/loss per share is computed in accordance with Financial
Accounting Standards Board Standard No. 128, "Earnings Per Share."
Basic income/loss per share is computed as net income or loss divided
by the weighted average number of shares of common stock outstanding
for the period. Diluted income 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 nine months ended
December 31, 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
nine months ended December 31, 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 1,917,243 and
2,527,813, and warrants of 682,500 and 490,000 to purchase common stock
that were outstanding during the nine months ended
7
<PAGE>
December 31, 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
The Company completed the sale of its VAR business and certain related
assets 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 the sale
before income taxes of approximately $5,000 that has been included in
the loss from discontinued operations for the nine months ended
December 31, 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 nine months ended December 31, 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. BUSINESS ACQUISITIONS
In October 1998, the Company acquired equipment and intellectual
property from Functional Software Pty., Ltd. ("Functional") for
$450,000 in cash and 129,656 restricted shares of the Company's common
stock. The Company also incurred acquisition costs of $98,878 and
assumed approximately $50,000 of Functional's liabilities. The
transaction was accounted for under the purchase method of accounting.
Therefore, the amount of the purchase price in excess of the fair value
of the assets acquired has been allocated to goodwill. The following is
a summary of the acquisition:
<TABLE>
<S> <C>
Consideration:
Cash $450,000
Value of common stock (129,656 shares at $2.71 per share) 351,692
Acquisition costs incurred 98,878
--------
Total consideration 900,570
--------
Assets acquired and liabilities assumed:
Equipment 76,800
Intellectual property 571,421
Accrued liabilities (50,000)
--------
Total assets acquired and liabilities assumed 598,221
Purchase price in excess of fair value 302,349
In-process research and development costs (92,095)
--------
Goodwill $210,254
========
</TABLE>
All of the assets of Functional were subsequently sold and all
unamortized goodwill was written off in March of 1999.
G. ASSET IMPAIRMENT
During December 1998, the Company recorded impairment of assets
totaling $426,296. The impairment represents the write-down of
unamortized goodwill and non-compete agreements purchased with it's
acquisition of Astron, Inc., a provider of IT classroom based training,
during the year ended March 31, 1998. The decision to write down the
assets was based on incurred losses and projected negative cash flow
from operations relating to classroom based training. The Company is
focusing on more intensive multi-week training, seminar based training
and customized corporate training products for future revenue growth in
its training division.
8
<PAGE>
H. 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 nine months ended December 31, 1999
and 1998 is shown in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
DECEMBER 31, 1999 SERVICES SERVICES OTHER TOTAL
---------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 4,264,383 $ 1,112,275 $ 151,274 $ 5,527,932
Cost of sales 3,401,245 738,726 101,522 4,241,493
Depreciation 208,796 25,045 44,411 278,252
Segment operating income
(loss) 360,360 (210,897) (65,993) 83,470
Total assets as of
December 31, 1999 5,271,945 761,075 1,452,125 7,485,145
<CAPTION>
THREE MONTHS ENDED TECHNICAL TRAINING
DECEMBER 31, 1998 SERVICES SERVICES OTHER TOTAL
---------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 685,881 $ 842,102 $ 403,911 $ 1,931,894
Cost of sales 1,037,135 508,356 177,603 1,723,094
Depreciation 169,904 21,559 49,927 241,390
Amortization of intangible
assets - 111,931 84,551 196,482
Segment operating loss (683,675) (1,733,861) (728,606) (3,146,142)
Total assets as of
December 31, 1998 2,378,324 1,011,752 7,589,398 10,979,474
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED TECHNICAL TRAINING
DECEMBER 31, 1999 SERVICES SERVICES OTHER TOTAL
---------------------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 8,711,506 $ 3,015,001 $ 673,500 $ 12,400,007
Cost of sales 7,215,194 1,730,550 286,588 9,232,332
Depreciation 621,157 42,707 124,250 788,114
Segment operating loss (62,186) (299,282) (79,745) (441,213)
Total assets as of
December 31, 1999 5,271,945 761,075 1,452,125 7,485,145
<CAPTION>
NINE MONTHS ENDED DECEMBER TECHNICAL TRAINING
31, 1998 SERVICES SERVICES OTHER TOTAL
---------------------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 1,267,803 $ 2,399,873 $ 1,268,428 $ 4,936,104
Cost of sales 1,547,807 1,597,070 476,979 3,621,856
Depreciation 202,915 58,404 110,572 371,891
Amortization of intangible
assets - 263,066 112,511 375,577
Segment operating loss (1,287,152) (3,632,582) (1,298,378) (6,218,112)
Total assets as of
December 31, 1998 2,378,324 1,011,752 7,589,398 10,979,474
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
Sento Corporation provides technical services for organizations using Windows
NT and UNIX client-server computing environments. These services include
Contract Technical Support, Help Desk Services, Technical Training and
Education.
Sento Technical Services Corporation ("Sento Technical Services") offers a
range of IT outsourcing services consisting of "call center," "helpdesk," 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. The Company conducts substantially all of its foreign operations
through Sento Australia Pty. Ltd. ("Sento Australia") based in Sydney,
Australia.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1998.
Revenues
Revenues increased 186%, or $3,596,038, from $1,931,894 for the three months
ended December 31, 1998 to $5,527,932 for the three months ended December 31,
1999. These revenues were generated primarily from the following two areas:
Technical services revenues increased 522%, or $3,578,502, from $685,881 for
the three months ended December 31, 1998 to $4,264,383 for the three months
ended December 31, 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. The American Fork
facility originally employed 21 agents in August of 1998 and is now at
capacity with 470 agents.
The rapid personnel growth in the eCustomer Contact Center operations has an
initial negative impact on the Company's earnings because of the up-front
training and hiring costs for new agents and the time lag before the new
agents generate revenue. However, a substantial number of the new employees
were hired and trained early during the three months ended December 31, 1999.
This allowed the new agents to be trained in time to generate revenue for
more than half of the quarter. As a result, the eCustomer Contact Center
operations were profitable for the three months ended December 31, 1999. The
growth is expected to continue throughout the remainder of the year ending
March 31, 2000 and into the next year. As a result, the Company is planning
the opening of a second eCustomer Contact Center in Evanston, Wyoming.
Initially, this second eCustomer Contact Center will employ up to 50 agents
with a capacity for 300 agents. Revenue by quarter for this segment through
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months Three Months Three Months
Ended Ended Ended Ended Ended Ended
Sep. 30, 1998 Dec. 31, 1998 Mar. 31, 1999 Jun. 30, 1999 Sep. 30, 1999 Dec. 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Revenue $294,468 $685,881 $1,575,429 $2,128,492 $2,318,631 $4,264,383
======== ======== ========== ========== ========== ==========
Increase in
revenue from
prior quarter $ 7,014 $391,413 $ 889,548 $553,063 $ 190,139 $1,945,752
======== ======== ========= ========= ========= ==========
</TABLE>
Training revenues increased 32%, or $270,173, from $842,102 for the three
months ended December 31, 1998 to $1,112,275 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. While the
multi-week classroom training courses, as a core component of the training
division, have shown positive growth, the remainder of the operations of this
division did not grow as expected, resulting in a loss for the division
during the three months ended December 31, 1999.
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 146%, or $2,518,399, from $1,723,094 for the three
months ended December 31, 1998 to $4,241,493 for the same period in 1999.
Gross profit as a percentage of revenues increased by 12 percentage points,
from 11% of revenues during the three months ended December 31, 1998 to 23%
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 57%, or $1,475,676,
from $2,590,321 for the three months ended December 31, 1998 to $1,114,645
for same 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 December 31, 1998.
The Company recorded $196,482 of amortization expense relating to intangible
assets during the three months ended December 31, 1998. The intangible assets
that were amortized in 1998 were subsequently disposed of or written off due
to impairment. Therefore, there was no amortization expense for the three
months ended December 31, 1999.
During the three months ended December 31, 1998, the Company recorded
impairment of assets totaling $426,296. The impairment represents a
write-down of goodwill and non-compete agreements relating to the Company's
acquisition of Astron, Inc. in January 1998. The decision to write down these
assets was based on continued losses in the classroom-based training
department of the Company's training division. These training courses were
being held primarily at conference rooms in hotels at various locations
throughout the United States. The Company is now focusing its continued
efforts on more intense multi-week IT courses held primarily at the Company's
American Fork facility, seminar-based training and customized corporate
training. The Company has recorded no impairment of assets during the three
months ended December 31, 1999.
During the three months ended December 31, 1998, the Company acquired
equipment and technology from Functional Software Pty., Ltd. ("Functional").
As part of this acquisition, the portion of the purchase price allocated to
in-process research and development costs ($92,095) was charged to
operations. In March of 1999, all of the assets acquired from Functional were
sold. There have been no such acquisitions during the three months ended
December 31, 1999, and therefore, no write-off of in-process research and
development costs.
Other Income (Expense)
During the three months ended December 31, 1999, the Company recorded $38,753
of other income (net), as compared to $283,918 for the three months ended
December 31, 1998. The decrease of $245,165 was primarily due to the
realization of income during the three months ended December 31, 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 $719,198 for the three
months ended December 31, 1998, and there was no loss to report for
discontinued operations for the three months ended December 31, 1999.
12
<PAGE>
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1998.
Revenues
Revenues increased 151%, or $7,463,903, from $4,936,104 for the nine months
ended December 31, 1998 to $12,400,007 for the nine months ended December 31,
1999. These revenues were generated primarily from the following two areas:
Technical services revenues increased 587%, or $7,443,703, from $1,267,803
for the nine months ended December 31, 1998 to $8,711,506 for the nine months
ended December 31, 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. The American Fork
facility originally employed 21 agents in August of 1998 and is now at
capacity with 470 agents.
Rapid personnel growth in the eCustomer Contact Center operations has an
initial negative impact on the Company's earnings because of the up-front
training and hiring costs for new agents and the time lag before the new
agents generate revenue. However, the Company substantially completed the
hiring and training of new employees by October of 1999. This allowed the new
agents to be trained in time to generate revenue during November and December
of 1999. As a result, the eCustomer Contact Center operations were profitable
during the final two months of the period. The growth is expected to continue
throughout the remainder of the year ending March 31, 2000 and into the next
year. As a result, the Company is planning the opening of a second eCustomer
Contact Center in Evanston, Wyoming. Initially, this second eCustomer Contact
Center will employ up to 50 agents with a capacity for 300 agents. Revenue by
quarter for this segment from July 1, 1998 through December 31, 1999 is
disclosed in management's discussion and analysis of the three months ended
December 31, 1999 and 1998.
Training revenues increased 26%, or $615,128, from $2,399,873 for the nine
months ended December 31, 1998 to $3,015,001 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. While the
multi-week classroom training courses, as a core component of the training
division, have shown positive growth, the remainder of the operations of this
division did not grow as expected, resulting in a loss for the division
during the nine months ended December 31, 1999.
Cost of Sales
Cost of sales increased 155%, or $5,610,476, from $3,621,856 for the nine
months ended December 31, 1998 to $9,232,332 for the same period in 1999.
This increase was due primarily to additional expenses necessary to generate
increased revenue. Gross profit as a percentage of revenues remained
constant, decreasing only by one percentage point, from 27% of revenues
during the nine months ended December 31, 1998 to 26% of revenues for the
same nine-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 were offset by lower sales and marketing expenses
needed to generate technical service revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 47%, or $3,076,843,
from $6,492,056 for the nine months ended December 31, 1998 to $3,415,213 for
same 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 nine-month
period ended December 31, 1998.
The Company recorded $375,577 of amortization expense relating to intangible
assets during the nine months ended December 31, 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 nine
months ended December 31, 1999.
During the nine months ended December 31, 1998, the Company recorded
impairment of assets totaling $426,296. The impairment represents a
write-down of goodwill and non-compete agreements relating to the Company's
acquisition of Astron, Inc. in January 1998. The decision to write down these
assets was based on continued losses
13
<PAGE>
in the classroom-based training department of the Company's training
division. These training courses were being held primarily at conference
rooms in hotels at various locations throughout the United States. The
Company is now focusing its continued efforts on more intense multi-week IT
courses held primarily at the Company's American Fork facility, seminar-based
training and customized corporate training. The Company has recorded no
impairment of assets during the nine months ended December 31, 1999.
During the nine months ended December 31, 1998, the Company acquired
equipment and technology from Functional. As part of this acquisition, the
portion of the purchase price allocated to in-process research and
development costs ($92,095) was charged to operations. In March of 1999, all
of the assets acquired from Functional were sold. There have been no such
acquisitions during the nine months ended December 31, 1999, and therefore,
no write-off of in-process research and development costs.
Other Income (Expense)
During the nine months ended December 31, 1999, the Company recorded $104,399
of other income (net), as compared to $1,164,327 for the nine months ended
December 31, 1998. The decrease of $1,059,928 was primarily due to the
realization of income during the nine months ended December 31, 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 nine months ended December 31, 1999 and December 31, 1998
excludes the VAR business' revenues and expenses. Loss from these
discontinued operations was $51,389 for the nine months ended December 31,
1999 and $1,171,184 for the nine months ended December 31, 1998.
Liquidity and Capital Resources
Cash balances decreased 19%, or $71,910, from $275,893 at March 31, 1999 to
$203,983 at December 31, 1999. However, working capital increased to $150,406
at December 31, 1999 from a $(1,537,769) deficit at March 31, 1999. The
improved liquidity was primarily due to proceeds received from the Company's
private placement of common stock in June of 1999, discussed below. The
private placement funds have sustained the Company's growth during the nine
months ended December 31, 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
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 December 31, 1999 there was $1,200,000 of borrowings
outstanding under this bank line of credit. The loan matures in April of 2000
and is renewable upon the mutual agreement of the Company and the bank.
The Company is funding its second eCustomer Contact Center in Evanston,
Wyoming through grants and low interest loans from the state of Wyoming and
the City of Evanston. These grants and low interest loans (totaling up to
$1.3 million) are incentives to Sento for providing jobs in Wyoming. A
portion of this funding will not require repayment if jobs are created by
Sento.
In addition to the financing committed to Sento upon the opening of the
Wyoming eCustomer Contact Center, Sento is in the process of closing $1.2
million in additional financing in the form of 7% Subordinated Convertible
Debentures to fund future growth.
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
14
<PAGE>
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
Based on the information available as of the time of this filing, the Company
has not experienced any significant Year 2000 related system failures in its
internal operations. The Company's business operations are heavily dependent
on 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. Through January of 2000,
the Company's key clients, service providers, strategic alliance partners,
vendors, suppliers and others have not reported any significant Year 2000
compliance problems, and the Company's financial results have not been
negatively impacted by Year 2000 failures of third parties. However, because
the Company's continued Year 2000 compliance in calendar 2000 is in part
dependent on the continued Year 2000 compliance of third parties, there can
be no assurance that the Company's efforts alone have resolved all Year 2000
issues or that key third parties will not experience Year 2000 compliance
failures as calendar year 2000 progresses.
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 are 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 Company's ability to develop IT solutions that
keep pace with continuing changes in technology, evolving industry standards
and changing client preferences; a downturn in the market for hardware and/or
software products; economic fluctuations; the formation of an independent
internet technology company that will pursue development and
commercialization of the Company's integrated voice and internet customer
care technology; other unanticipated factors; 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
On May 11, 1999, June 2, 1999, September 30, 1999,
and December 10, 1999, the Company issued 41,829,
3,548, 3,007, and 3,544 shares of common stock,
respectively, upon the exercise of options granted
pursuant to the Company's stock option plan.
Item 4. Submission of Matters to Vote of Security Holders
On December 16, 1999, the Company convened a special meeting of
shareholders for the purpose of considering a proposal to approve the
terms of a Contribution Agreement by and between Sento and EchoPass
Corporation, a newly formed Utah corporation ("EchoPass") and
consummate a series of related transactions. The Contribution Agreement
and the related transactions (collectively, the "EchoPass Transactions)
currently consist principally of the following:
(i) Sento to transfer to EchoPass substantially all of the
technology currently owned and utilized by Sento in the
operation of its eCustomer Contact Center, including related
sales and marketing rights (collectively, the "Technology"),
in exchange for 4,000,000 shares of EchoPass Series A
Convertible Preferred Stock (the "EchoPass Preferred");
15
<PAGE>
(ii) Sento and EchoPass to enter into a Services Agreement,
enabling Sento to utilize the Technology (at most-favored
customer pricing) in developing its existing and future
eCustomer Contact Centers;
(iii) Sento to transfer to EchoPass certain tangible assets,
consisting primarily of computer equipment, in exchange for
EchoPass' delivery of a secured promissory note in the
original principal amount of approximately $1,100,000;
(iv) EchoPass to transfer 1,000,000 shares of EchoPass Preferred to
Genesys Telecommunication Laboratories, Inc., a leading
developer of enterprise interaction management software
("Genesys"), in exchange for $2,000,000 in cash; and
(v) Sento and EchoPass to enter into a Facilities and Services
Agreement pursuant to which EchoPass will obtain the right to
use certain office and research and development space at
Sento's principal offices and Sento will provide to EchoPass
accounting and other general and administrative services
The proposal to approve the Contribution Agreement and consummate the
EchoPass Transactions was approved at the Company's special meeting of
shareholders. There were 5,136,613 shares voted in favor of the
proposal, 43,681 shares voted in opposition, 268,694 shares abstaining,
and 2,490,428 broker non-votes.
On January 25, 2000, EchoPass announced that it had reached an
agreement in principle with New Enterprise Associates and Cannan
partners, whereby these two venture capital firms would participate
in the first round of venture financing for EchoPass, presently
estimated to provide approximately $22.7 million to EchoPass.
Although the terms of the proposed financing remain subject to
completion, Sento currently anticipates that, upon the completion
of the EchoPass Transactions and the first round of venture financing
described above, Sento will own 4,000,000 shares of the EchoPass
Series A Preferred, representing approximately 27% of the outstanding
shares of EchoPass on an "as-converted" basis (approximately 20% of
the shares of EchoPass on a fully diluted basis, after giving effect
to the exercise of outstanding and proposed options to acquire
shares of the common stock of EchoPass). The venture financing
transactions remain subject to the execution of definitive agreements
and the satisfaction of closing conditions, and there can be no
assurance that the proposed financing transactions will be completed
on such terms or at all. Sento management hopes that the EchoPass
Transactions, as well as the closing of the proposed EchoPass venture
financing transactions, will be completed during February 2000.
Item 6. Exhibits and Reports on Form 8-K
a. Reg. SB item 27, Financial Data Schedule
b. Reports on Form 8-K
The Company filed a Report on Form 8-K on
December 1, 1999.
16
<PAGE>
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
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 203,983
<SECURITIES> 0
<RECEIVABLES> 3,305,570
<ALLOWANCES> 48,134
<INVENTORY> 0
<CURRENT-ASSETS> 3,836,831
<PP&E> 4,823,840
<DEPRECIATION> 1,688,516
<TOTAL-ASSETS> 7,485,145
<CURRENT-LIABILITIES> 3,686,425
<BONDS> 87,057
0
0
<COMMON> 2,057,430
<OTHER-SE> 1,654,233
<TOTAL-LIABILITY-AND-EQUITY> 7,485,145
<SALES> 673,500
<TOTAL-REVENUES> 12,400,007
<CGS> 286,588
<TOTAL-COSTS> 9,232,332
<OTHER-EXPENSES> 3,608,888
<LOSS-PROVISION> 32,088
<INTEREST-EXPENSE> 61,012
<INCOME-PRETAX> (336,814)
<INCOME-TAX> (89,291)
<INCOME-CONTINUING> (247,523)
<DISCONTINUED> (51,389)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (298,912)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
