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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| /x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 | |
| For the Quarter Ended September 30, 2000 |
||
| / / |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 06425
SENTO CORPORATION
Exact Name of Small Business Issuer as Specified in its Charter
| Utah (State or other Jurisdiction of Incorporation or Organization) |
87-0284979 (I.R.S. Employer Identification No.) |
|
| 808 East Utah Valley Drive American Fork, Utah (Address of Principal Executive Offices) |
|
84003 (zip code) |
(801) 492-2000
Issuer's telephone number, including area code:
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:
| Class |
Outstanding at September 30, 2000 |
|
|---|---|---|
| Common capital stock $.25 par value |
8,596,374 |
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
SENTO CORPORATION
Quarterly Report on Form 10-QSB
Quarter ended September 30, 2000
TABLE OF CONTENTS
| PART I |
|
FINANCIAL INFORMATION |
|
1 |
| Item 1. |
|
Financial Statements |
|
1 |
| |
|
Condensed Consolidated Balance Sheets |
|
1 |
| |
|
September 30, 2000 and March 31, 2000 |
|
|
| |
|
Condensed Consolidated Statements of Operations |
|
2 |
| |
|
Three and Six Months ended September 30, 2000 and 1999 |
|
|
| |
|
Condensed Consolidated Statements of Cash Flows |
|
3 |
| |
|
Six Months ended September 30, 2000 and 1999 |
|
|
| |
|
Notes to Condensed Consolidated Financial Statements |
|
4 |
| Item 2. |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations. |
|
8 |
| PART II. |
|
OTHER INFORMATION |
|
15 |
| Item 4. |
|
Submission of Matters to Vote of Security Holders |
|
15 |
| Item 6. |
|
Exhibits and Reports on Form 8-K |
|
15 |
| |
|
SIGNATURES |
|
16 |
1
SENTO CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| |
September 30, 2000 |
March 31, 2000 |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| |
(Unaudited) |
|
|||||||
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash | $ | 3,501,187 | $ | 2,382,321 | |||||
| Accounts receivable (net) | 4,141,517 | 3,422,359 | |||||||
| Other current assets | 220,061 | 216,207 | |||||||
| Total current assets | 7,862,765 | 6,020,887 | |||||||
| Property and equipment (net) | 3,216,457 | 2,158,887 | |||||||
| Other assets | 74,974 | 217,026 | |||||||
| Total Assets | $ | 11,154,196 | $ | 8,396,800 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|
||||||||
| Current liabilities: | |||||||||
| Current portion of long-term debt | $ | 177,766 | $ | 80,492 | |||||
| Accounts payable | 1,822,977 | 752,976 | |||||||
| Accrued liabilities | 1,223,530 | 1,278,420 | |||||||
| Deferred revenue | 103,597 | 247,540 | |||||||
| Total current liabilities | 3,327,870 | 2,359,428 | |||||||
| Long-term liabilities: | |||||||||
| Convertible debt | 1,042,053 | 998,414 | |||||||
| Long-term debt, net of current portion | 670,619 | 140,677 | |||||||
| Total long-term liabilities | 1,712,672 | 1,139,091 | |||||||
| Stockholders' equity: | |||||||||
| Common stock | 2,149,094 | 2,078,351 | |||||||
| Additional paid-in capital | 10,956,110 | 10,395,230 | |||||||
| Deferred compensation | (56,438 | ) | (136,052 | ) | |||||
| Accumulated deficit | (6,935,112 | ) | (7,439,248 | ) | |||||
| Total stockholders' equity | 6,113,654 | 4,898,281 | |||||||
| Total liabilities and stockholders' equity | $ | 11,154,196 | $ | 8,396,800 | |||||
1
SENTO CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| |
Three Months Ended September 30 |
Six Months Ended September 30 |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
2000 |
1999 |
|||||||||||
| Revenue | $ | 6,421,225 | $ | 3,570,354 | $ | 12,474,277 | $ | 6,872,075 | |||||||
| Cost of sales | 5,231,426 | 2,649,829 | 9,971,592 | 4,990,839 | |||||||||||
| Gross profit | 1,189,799 | 920,525 | 2,502,685 | 1,881,236 | |||||||||||
| Costs and expenses: | |||||||||||||||
| Selling, general and administrative | 928,290 | 1,123,104 | 1,804,144 | 2,288,605 | |||||||||||
| Research and development | — | 89,958 | — | 117,314 | |||||||||||
| Total costs and expenses | 928,290 | 1,213,062 | 1,804,144 | 2,405,919 | |||||||||||
| Operating income (loss) | 261,509 | (292,537 | ) | 698,541 | (524,683 | ) | |||||||||
| Equity loss on investment in EchoPass Corporation |
|
|
— |
|
|
— |
|
|
(149,795 |
) |
|
— |
|
||
| Other income (expense) (net) | (32,397 | ) | 114,722 | (44,610 | ) | 65,646 | |||||||||
| Income (loss) before taxes | 229,112 | (177,815 | ) | 504,136 | (459,037 | ) | |||||||||
| Income tax benefit | — | 69,124 | — | 135,403 | |||||||||||
| Income (loss) from continuing operations | 229,112 | (108,691 | ) | 504,136 | (323,634 | ) | |||||||||
| Loss from discontinued operations, net of income taxes | — | — | — | (51,389 | ) | ||||||||||
| Net income (loss) | $ | 229,112 | $ | (108,691 | ) | $ | 504,136 | $ | (375,023 | ) | |||||
| Basic income (loss per) share: | |||||||||||||||
| Income (loss) from continuing operations | $ | 0.03 | $ | (0.01 | ) | $ | 0.06 | $ | (0.05 | ) | |||||
| Income (loss) from discontinued operations | — | — | — | — | |||||||||||
| Net income (loss) per common share | $ | 0.03 | $ | (0.01 | ) | $ | 0.06 | $ | (0.05 | ) | |||||
| Diluted income (loss) per share: | |||||||||||||||
| Income (loss) from continuing operations | $ | 0.03 | $ | (0.01 | ) | $ | 0.05 | $ | (0.05 | ) | |||||
| Income (loss) from discontinued operations | — | — | — | — | |||||||||||
| Net income (loss) per common share | $ | 0.03 | $ | (0.01 | ) | $ | 0.05 | $ | (0.05 | ) | |||||
| Weighted average common shares outstanding: | |||||||||||||||
| Basic | 8,499,367 | 7,861,083 | 8,408,873 | 7,077,069 | |||||||||||
| Diluted | 9,070,165 | 7,861,083 | 9,230,324 | 7,077,069 | |||||||||||
2
SENTO CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| |
Six Months Ended September 30, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
||||||||
| Cash flows from operating activities: | ||||||||||
| Net income (loss) | $ | 504,136 | $ | (375,023 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash | ||||||||||
| provided by (used) in operating activities: | ||||||||||
| Depreciation and amortization | 582,810 | 536,381 | ||||||||
| Loss on disposal of assets | — | 5,718 | ||||||||
| Equity loss on investment in EchoPass Corporation | 149,795 | — | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Accounts receivable | (719,158 | ) | 970,750 | |||||||
| Prepaid taxes | — | 324,229 | ||||||||
| Other assets | (45,428 | ) | (85,110 | ) | ||||||
| Accounts payable | 1,070,001 | (1,281,651 | ) | |||||||
| Accrued liabilities | (54,890 | ) | (470,242 | ) | ||||||
| Deferred revenue | (143,943 | ) | (126,179 | ) | ||||||
| Net cash provided by (used) in operating activities | 1,343,323 | (501,127 | ) | |||||||
| Cash flows used in investing activities: | ||||||||||
| Business disposal, net of cash | — | 50,000 | ||||||||
| Purchase of property and equipment | (1,499,294 | ) | (682,877 | ) | ||||||
| Net cash used in investing activities | (1,499,294 | ) | (632,877 | ) | ||||||
| Cash flows from financing activities: | ||||||||||
| Proceeds from issuance of stock | — | 1,880,522 | ||||||||
| Principal payments of long term debt | (47,319 | ) | (100,175 | ) | ||||||
| Issuance of long-term debt | 690,533 | — | ||||||||
| Net payments on credit line | — | (500,000 | ) | |||||||
| Proceeds from stock issued through employee stock purchase plan | 139,349 | — | ||||||||
| Proceeds from stock options exercised | 492,274 | 8,122 | ||||||||
| Net cash provided by financing activities | 1,274,837 | 1,288,469 | ||||||||
| Effect of foreign exchange rates on cash | — | (3,353 | ) | |||||||
| Net increase in cash | 1,118,866 | 151,112 | ||||||||
| Cash at beginning of period | 2,382,321 | 275,893 | ||||||||
| Cash at end of period | $ | 3,501,187 | $ | 427,005 | ||||||
| Supplemental disclosures of cash flow information | ||||||||||
| Cash paid for: | ||||||||||
| Interest | $ | 63,866 | $ | 39,911 | ||||||
| Income taxes | $ | — | $ | 3,678 | ||||||
3
SENTO CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(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, 2000 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, 2000.
B. COMMON STOCK
Six months ended September 30, 2000
During the six months ended September 30, 2000, options to purchase 241,991 shares of common stock were exercised and 40,985 shares of common stock were purchased under the Company's Employee Stock Purchase Plan.
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 common stock.
A private placement of common stock was completed in June of 1999, whereby 600,000 units, each unit 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.
Options to purchase 48,384 shares of common stock were exercised.
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 Corporation, a wholly owned subsidiary of the Company, and ESI in August of 1998.
C. INCOME/LOSS PER SHARE
Income/loss per share is computed in accordance with Financial Accounting Standards Board Standard 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
4
through stock options, warrants and other convertible securities. The effect of employee stock options to purchase 1,647,813 shares of common stock and warrants to purchase 858,751 shares of common stock have been included in the calculation of diluted common stock outstanding for the three and six months ended September 30, 2000. Shares issuable pursuant to convertible debentures (257,400 shares) have not been included in the calculation of diluted common stock outstanding for the three and six months ended September 30, 2000 because to do so would be anti-dilutive due to interest expense added back to net income.
Employee stock options to purchase 1,774,787 shares of common stock and warrants to purchase 767,500 shares of common stock that were outstanding during the three and six months ended September 30, 1999 were not included in the computation of diluted loss per share because to do so would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six months ended September 30, 2000 and 1999:
| |
Three Months Ended September 30 |
|||||||
|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
||||||
| Basic net income (loss) per share: | ||||||||
| Net income (loss) | $ | 229,112 | $ | (108,691 | ) | |||
| Weighted average common shares outstanding | 8,499,367 | 7,861,083 | ||||||
| Basic net income (loss) per share | $ | 0.03 | $ | (0.01 | ) | |||
| Diluted net income (loss) per share: | ||||||||
| Net income (loss) | $ | 229,112 | $ | (108,691 | ) | |||
| Weighted average common shares outstanding | 8,499,367 | 7,861,083 | ||||||
| Dilutive stock options and stock purchase warrants | 570,798 | — | ||||||
| Weighted average common and common equivalent shares outstanding for purposes of computing diluted net income (loss) per share | 9,070,165 | 7,861,083 | ||||||
| Diluted net income (loss) per share | $ | 0.03 | $ | (0.01 | ) | |||
| |
Six Months Ended September 30 |
|||||||
|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
||||||
| Basic net income (loss) per share: | ||||||||
| Net income (loss) | $ | 504,136 | $ | (375,023 | ) | |||
| Weighted average common shares outstanding | 8,408,873 | 7,077,069 | ||||||
| Basic net income (loss) per share | $ | 0.06 | $ | (0.05 | ) | |||
| Diluted net income (loss) per share: | ||||||||
| Net income (loss) | $ | 504,136 | $ | (375,023 | ) | |||
| Weighted average common shares outstanding | 8,408,873 | 7,077,069 | ||||||
| Dilutive stock options and stock purchase warrants | 821,451 | — | ||||||
| Weighted average common and common equivalent shares outstanding for purposes of computing diluted net income (loss) per share | 9,230,324 | 7,077,069 | ||||||
| Diluted net income (loss) per share | $ | 0.05 | $ | (0.05 | ) | |||
5
D. 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. As of September 30, 2000, the Company had received $26,651 in earn-out payments under this arrangement. 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 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 1999 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 six months ended September 30, 1999. No allocation of general corporate overhead has been made to discontinued operations relating to this business.
E. ECHOPASS CORPORATION
Pursuant to a shareholder vote at a special shareholder meeting in December 1999, the Company consummated the sale of certain technology to EchoPass Corporation (EchoPass) in exchange for 4,000,000 shares of EchoPass' Series A preferred stock in March 2000. EchoPass was formed in fiscal 2000 and is a development stage company. Sento has recorded its investment in EchoPass at the historical carrying value of the underlying technology that was transferred to EchoPass. As of March 31, 2000 Sento's investment represented a 26% ownership interest in EchoPass. Therefore, Sento has recorded its pro-rata share of EchoPass losses under the equity method of accounting. As of September 30, 2000, the investment in EchoPass had been written down to a zero balance as the result of recording Sento's pro-rata share of EchoPass losses.
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 Centers."
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.
6
Summarized financial information concerning the Company's reportable segments for the three and six months ended September 30, 2000 and 1999 is shown in the following tables:
| Three Months Ended September 30, 2000 |
Technical Services |
Training Services |
Other |
Total |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | $ | 5,394,214 | $ | 1,027,011 | $ | — | $ | 6,421,225 | |||||
| Cost of sales | 4,674,295 | 557,131 | — | 5,231,426 | |||||||||
| Depreciation | 185,671 | 34,842 | 9,311 | 229,824 | |||||||||
| Segment operating income (loss) | 211,977 | 49,901 | (369 | ) | 261,509 | ||||||||
| Total assets as of September 30, 2000 | $ | 6,217,215 | $ | 698,589 | $ | 4,238,392 | $ | 11,154,196 | |||||
| Three Months Ended September 30, 1999 |
|
Technical Services |
|
Training Services |
|
Other |
|
Total |
|
||||
| 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 | |||||
| Six Months Ended September 30, 2000 |
|
Technical Services |
|
Training Services |
|
Other |
|
Total |
|
||||
| Revenues | $ | 10,250,259 | $ | 2,224,018 | $ | — | $ | 12,474,277 | |||||
| Cost of sales | 8,822,084 | 1,149,508 | — | 9,971,592 | |||||||||
| Depreciation | 359,214 | 63,957 | 18,553 | 441,724 | |||||||||
| Segment operating income | 516,704 | 49,901 | 131,936 | 698,541 | |||||||||
| Total assets as of September 30, 2000 | $ | 6,217,215 | $ | 698,589 | $ | 4,238,392 | $ | 11,154,196 | |||||
| Six Months Ended September 30, 1999 |
|
Technical Services |
|
Training Services |
|
Other |
|
Total |
|
||||
| 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 income (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 | |||||
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Sento provides IT outsourcing services, including technical support services, help-desk functions, and technical training and education. Through its state-of-the-art eCustomer Contact Centers, Sento provides domestic and international technical support services to leading computer hardware and software companies. Sento also provides instructor-led technical training, including distance learning through computer-based training ("CBT") methods.
Results of Operations
Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999
Revenues. Revenues from continuing operations increased 80% or $2,851,000 from $3,570,000 for the three months ended September 30, 1999 to $6,421,000 for the three months ended September 30, 2000. These revenues were generated primarily from the following two areas:
Technical services revenues increased 133%, or $3,075,000, from $2,319,000 for the three months ended September 30, 1999 to $5,394,000 for the three months ended September 30, 2000. The significant increase in eCustomer Contact Centers revenues was principally the result of the acquisition of new customers and increased revenues from existing customers. There were 316 agents in one facility in American Fork, Utah as of September 30, 1999; and there were 647 agents in three facilities as of September 30, 2000. Revenues by quarter for this segment for the nine quarters ended September 30, 2000 were as follows:
| Three Months Ended |
Revenues |
Increase (Decrease) From Prior Quarter |
|||||
|---|---|---|---|---|---|---|---|
| September 30, 1998 | $ | 294,468 | $ | 7,014 | |||
| December 31, 1998 | $ | 685,881 | $ | 391,413 | |||
| March 31, 1999 | $ | 1,575,429 | $ | 889,548 | |||
| June 30, 1999 | $ | 2,128,492 | $ | 553,063 | |||
| September 30, 1999 | $ | 2,318,631 | $ | 190,139 | |||
| December 31, 1999 | $ | 4,264,383 | $ | 1,945,752 | |||
| March 31, 2000 | $ | 5,267,371 | $ | 1,002,988 | |||
| June 30, 2000 | $ | 4,856,045 | $ | (411,326 | ) | ||
| September 30, 2000 | $ | 5,394,214 | $ | 538,169 | |||
Training revenues remained consistent between the two quarters with only a modest increase of 2%, or $20,000, from $1,007,000 for the three months ended September 30, 1999 to $1,027,000 for the three months ended September 30, 2000. Growth in this division has been affected by the market's reaction to Microsoft's introduction of Windows 2000 and the migration from Microsoft's NT to Windows 2000 related certifications.
Cost of Sales. Cost of sales from continuing operations increased 97%, or $2,582,000, from $2,649,000 for the three months ended September 30, 1999 to $5,231,000 for the three months ended September 30, 2000. This increase was due in part to additional expenses necessary to generate increased revenue. Gross profit as a percentage of revenues decreased by 7 percentage points, from 26% of revenues during the three months ended September 30, 1999 to 19% of revenues for the three months ended September 30, 2000. This decrease in gross profit percentage was due, in large part, to up-front training and hiring costs for new agents, and the time lag before they generate revenue. Management expects to continue substantial additional hiring and training in the quarter ending
8
December 31, 2000 in order to meet forecasted growth. As a result, training and hiring costs are expected to continue to have an adverse impact on margins during the next quarter.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 17%, or $195,000, from $1,123,000 for the three months ended September 30, 1999 to $928,000 for the three months ended September 30, 2000. The decrease was due primarily to the cessation of operations of Sento Australia and the continuing efforts of management to control and reduce selling, general and administrative expenses.
Research and Development Expense. The Company expensed $90,000 in research and development costs during the three months ended September 30, 1999. The majority of these costs related to the development of technology that was later sold to EchoPass. No significant research and development costs were incurred during the three months ended September 30, 2000, and the Company does not expect to incur significant research and development costs in the future.
Other Income (Expense). During the three months ended September 30, 2000, the Company recorded other expense (net) of ($32,000), as compared to other income (net) of $115,000 during the three months ended September 30, 1999. The decrease of $147,000 was primarily due to the realization of income during the three months ended September 30, 1999 from the sale of assets. Management does not expect other income (expense) to be significant in future periods.
Six Months Ended September 30, 2000 Compared to the Six Months Ended September 30, 1999
Revenues. Revenues from continuing operations increased 82% or $5,602,000 from $6,872,000 for the six months ended September 30, 1999 to $12,474,000 for the six months ended September 30, 2000. These revenues were generated primarily from the following two areas:
Technical services revenues increased 130%, or $5,803,000, from $4,447,000 for the six months ended September 30, 1999 to $10,250,000 for the six months ended September 30, 2000. The significant increase in eCustomer Contact Centers revenues was principally the result of the acquisition of new customers and increased revenues from existing customers. There were 316 agents in one facility in American Fork, Utah as of September 30, 1999; and there were 647 agents in three facilities as of September 30, 2000.
Training revenues increased 17%, or $321,000, from $1,903,000 for the six months ended September 30, 1999 to $2,224,000 for the six months ended September 30, 2000. 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. Cost of sales from continuing operations increased 100%, or $4,981,000, from $4,991,000 for the six months ended September 30, 1999 to $9,972,000 for the six months ended September 30, 2000. This increase was due in part to additional expenses associated with the Company's efforts to generate increased revenue. Gross profit as a percentage of revenues decreased by 7 percentage points, from 27% of revenues during the six months ended September 30, 1999 to 20% of revenues for the six months ended September 30, 2000. This decrease in gross profit percentage was due, in large part, to up-front training and hiring costs for new agents, and the time lag before they generate revenue.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 21%, or $485,000, from $2,289,000 for the six months ended September 30, 1999 to $1,804,000 for the six months ended September 30, 2000. The decrease was due primarily to the cessation of operations of Sento Australia and the continuing efforts of management to control and reduce selling, general and administrative expenses.
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Research and Development Expense. The Company expensed $117,000 in research and development costs during the six months ended September 30, 1999. The majority of these costs related to the development of technology that was later sold to EchoPass. No material research and development costs were incurred during the six months ended September 30, 2000, and the Company does not expect to incur significant research and development costs in the future.
Other Income (Expense). The Company accounts for its investment in EchoPass under the equity method of accounting. During the six months ended September 30, 2000, the Company recognized its portion of EchoPass' losses up to its total investment in EchoPass and will not recognize any further losses on this investment. Should EchoPass become profitable in the future, the Company will recognize its portion of the profits after its portion of unrecognized losses have been offset by profits.
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 Condensed Consolidated Statement of Operations for the six months ended September 30, 1999 excludes the VAR business' revenues and expenses. Loss from these discontinued operations was $51,000 for the six months ended September 30, 1999.
Liquidity and Capital Resources
Cash balances increased 47%, or $1,119,000, from $2,382,000 at March 31, 2000 to $3,501,000 at September 30, 2000. Working capital increased to $4,535,000 at September 30, 2000 from $3,661,000 at March 31, 2000. These increases in cash and working capital originated mostly from positive cash flow from operations of $1,343,000. In addition, the Company has unused lines of credit in the amount of approximately $3.5 million.
On September 13, 2000 the Board of Directors approved the repurchase of up to $1,000,000 of the Company's common stock. The repurchase program is conditioned upon the Company's maintenance of total cash of at least $3,500,000 plus an unused bank line of credit of $3,000,000.
Historically the Company's primary sources of liquidity have been cash received from sales of assets and cash provided through private sales of equity and debt, as well as borrowings under a bank line of credit, and for the six months ended September 30, 2000 liquidity and cash were provided by positive cash flow from operations. In addition, the Company has financed some of the equipment utilized in its business through long-term leasing arrangements. The historic growth rate of the technical services division has consumed substantial amounts of cash, and the Company will be required to pursue additional funding opportunities to fund future growth should such growth accelerate in excess of historical and planned future growth. In the event the Company is not able to find such alternate sources of funding, its ability to pursue its planned business strategy may be limited. There can be no assurance that the Company will be able to obtain necessary capital funding on terms favorable to the Company.
The statements contained in this Quarterly Report on Form 10-QSB that are not purely historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements involve various risks and uncertainties. Forward-looking statements contained in this Report include statements regarding the Company's plans to develop and deliver integrated information technology services, acquisition plans, market opportunities and acceptance, expectations, goals, revenues, financial performance, strategies, mission and intentions for the future. Such forward-looking statements are included under. "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward-looking statements included in this Report are made as of the date hereof, based on information available to the Company as of such date, and the Company assumes no obligation to update any forward-looking statement. It is important to note that such statements may not prove to be accurate and that the Company's actual results and future events could differ materially from those anticipated in such statements.
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Among the factors that could cause actual results to differ materially from the Company's expectations are those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risks Related to Existing and Proposed Sento Operations." All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this section and other factors included elsewhere in this Report.
Risks Related to Existing and Proposed Sento Operations
In addition to other information in this Report, the following are important factors that should be considered carefully in evaluating the Company and its business.
Dependence on Key Customers. Three customers accounted for 67% of the revenues of the Company for the year ended March 31, 2000, and for the six months ended September 30, 2000 two customers accounted for 57% of the revenues of the Company. Consistent with industry standards, Sento's contracts are generally cancelable by the customer on short-term notice. Sento's loss of a significant amount of business with any of its key customers could have, and the loss of a substantial amount of business with any of its principal existing technical support customers would have, a material adverse effect on Sento's business, financial condition and results of operations. In addition, Sento's future revenue growth is dependent upon its ability to attract and retain new customers.
Reliance on EchoPass for Outsourced Services. Since completion of the EchoPass transactions in March 2000, Sento no longer possesses the technology and no longer employs a number of former technical support employees who were formerly engaged in developing the technology and maintaining Sento's eCustomer Contact Centers. Many of these technical support functions are now provided by EchoPass employees on an outsourced basis pursuant to a services agreement. As a result, Sento is dependent on EchoPass for many of the technical support functions related to Sento's eCustomer Contact Centers. The outsourcing relationship could result in decreased attention to Sento's needs, slower response times and the lack of redundant support functions. If EchoPass fails in its business efforts, Sento would be required to re-develop the technical services necessary to support its operations or identify and retain an alternate third party provider of such services. In addition, if EchoPass does not provide to Sento high-quality technical support services at competitive prices, Sento may elect or be forced to obtain replacement services from alternate sources. There can be no assurance that Sento would be able to obtain such services at a reasonable cost, if at all, or without a material interruption of its business.
Conflicts Between Sento and EchoPass. EchoPass owns the technology utilized in Sento's eCustomer Contact Centers. Although a services agreement between Sento and EchoPass grants to Sento the right to utilize substantially all of such technology in the operation of its existing and future eCustomer Contact Centers, EchoPass will likely have the opportunity to license such technology to third parties, including existing and potential competitors of Sento.
Changing Needs of the e-business Customer Service Market. The e-business customer service industry is characterized by rapid technological change, changes in customer requirements and preferences and the emergence of new industry standards and practices that could render Sento's existing and proposed products, services, proprietary technology and systems obsolete. To remain competitive, Sento must continually improve the performance, features and reliability of its products and services, including its existing e-business customer service applications, and develop new products and services that address the increasingly sophisticated and varied needs of its prospective customers. If Sento cannot adapt or respond in a cost-effective and timely manner to changing industry standards, market conditions or customer requirements, its business and operating results would suffer and could negatively impact Sento's business and/or financial condition.
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Dilution of Sento's Ownership. EchoPass' success in developing and licensing its technology will depend to a significant extent on EchoPass' ability to obtain financing required to develop, market and sell its technology. As a result, EchoPass will have an incentive to issue additional capital stock to sources of such financing. The issuance of such additional capital stock would have the effect of diluting Sento's ownership of the EchoPass capital stock and reducing Sento's ability to influence the management and policies of EchoPass.
The dilution of Sento's economic interests could result in Sento receiving less financial benefit from EchoPass' use of its technology than Sento could have obtained through commercializing the technology itself. Sento's lack of voting control over EchoPass could result in EchoPass' taking actions in conflict with or adverse to the interests of Sento. In addition, Sento will not have the unrestricted right to develop new applications for the EchoPass technology without obtaining the consent of EchoPass. Without a controlling interest in EchoPass, Sento will not be assured of obtaining EchoPass' consent for such additional applications.
Competition. The market for providing IT services is highly fragmented and very competitive. The IT services industry is comparatively young with many small regional service companies supplying some training and technical support, or systems integration services coupled with hardware and software sales. There are many small IT training companies specializing in various vertical market niches.
The IT services industry, however, has begun to experience a degree of consolidation and the entry of major IT companies, which has resulted in an additional level of competition from service providers that have greater name recognition, larger installed customer bases, and significantly greater financial, technical and marketing resources than Sento. Over the past several years, a number of existing companies have enjoyed increasing success and rapid internal growth. Several of these companies have been active in acquiring the smaller regional training companies and are becoming major competitors with a measurable share of this rapidly expanding market. In addition, major sole-source IT services companies such as Andersen Consulting, Computer Sciences Corp. ("CSC"), Electronic Data Systems ("EDS"), and IBM are providing full "turnkey" solutions to their large customers.
Also, many major computer hardware and software companies provide their own technical support and customer training. Therefore, such companies are not within the potential customer base for IT service providers and have the capability of providing services that compete with those provided by Sento.
Sento cannot provide any assurance that better and more efficient services will not be provided by new or existing IT service providers in competition with Sento. The services provided by such competitors may be more effective or less expensive than those provided by Sento. There can be no assurance that Sento will improve, refine or enhance the services it provides.
Competition in the e-business Customer Service Market. The e-business customer service market is new and intensely competitive. There are no substantial barriers to entry, and established or new entities may enter this market in the near future. Furthermore, established enterprise software companies, including IBM, Hewlett-Packard Company, Microsoft Corporation and similar companies, may leverage their existing relationships and capabilities to offer e-business customer service applications. Any delays in the general market acceptance of the e-business customer service applications and EchoPass' proposed products and services would likely harm EchoPass' competitive position. Delays would allow EchoPass' competitors additional time to approve their service or product offerings, and also provide time for new competitors to develop e-business customer service applications and solicit prospective customers within EchoPass' target markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share.
Risk of Emergency Interruption of eCustomer Contact Center Operations. Sento's business depends to a large extent on computer and telecommunications equipment and software systems (both
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equipment and systems maintained by Sento and equipment and systems maintained by third parties, including EchoPass). Sento cannot provide any assurance that natural disaster, human error, equipment malfunction or inadequacy, or other events would not result in a prolonged interruption in Sento's ability to provide support services to its clients. The temporary or permanent loss of computer or telephone equipment or systems, through casualty, operating malfunction or otherwise, could have a material adverse effect on Sento. Property and business interruption insurance may not be adequate to compensate Sento for all losses that it may incur.
Changing Market. The market for IT services is characterized by rapid technological advances, new product introductions and enhancements, and changes in customer requirements. Sento's future success will depend in large part on its ability to service new products, platforms and rapidly changing technology. These factors will require Sento to provide adequately trained personnel to address the increasingly sophisticated, complex and evolving needs of its customers. The complex nature of support services has resulted in the demand for technical support services to expand beyond the telephone and now includes e-mail, faxes and the Internet. Services include resolution of problems relating to the configuration and set-up, installation and interoperability of different products, and the level of support requests ranges from simple error messages to complex network configurations. These services cover a broad set of technologies, including operating environments, applications, databases, communication and network products, systems tools, development environments and Internet/intranet products. There can be no assurance that Sento will be able to provide such services profitably. The failure by Sento to adapt to the changing IT service industry would have an adverse impact on Sento's results of operations and financial condition.
Sento's success will depend in part on EchoPass' ability to develop solutions that keep pace with the continuing changes in information technology, evolving industry standards and changing client requirements. There can be no assurance that Sento will be successful in adequately addressing these developments on a timely basis or that, if these developments are addressed, Sento will be successful in the marketplace. In addition, there can be no assurance that products or technologies developed by others will not render Sento's services non-competitive or obsolete. Sento's or EchoPass' failure to address these developments could have a material adverse effect on Sento's business and financial condition.
Attracting, Training and Retaining Quality Management and Employees. The IT services market suffers from a significant labor shortage. Sento's success will depend, in large part, on its ability to attract, retain and train highly-qualified technical, managerial and marketing personnel with IT expertise. Sento has not entered into employment agreements that require the services of any of its key managerial or technical personnel to remain with Sento for any specified period of time. Competition for such personnel is intense. There can be no assurance that Sento will be able to attract and maintain the personnel necessary for the development and operation of its business nor that it will be able to train its current employees on new developments in technology. Specifically, the loss of the Company's current Vice President of Operations, its Chief Executive Officer, or its Chief Financial Officer or of the services of an other key personnel or an inability to attract, retain, train and motivate qualified personnel could have a material adverse effect on the business, financial condition and results of operations of Sento.
In addition, Sento's total employee count has grown from 585 as of March 31, 2000 to 845 as of October 31, 2000. The Company cannot provide any assurance that its current management team can successfully manage Sento's rapidly evolving business, and any failure to do so could have a material adverse effect upon Sento's operating results.
Liquidity and Capital Resources. At September 30, 2000, Sento had working capital of $4,535,000 and a cash balance of $3,501,000. Sento's liquidity position has improved since September, 1999. However, future growth, particularly growth in excess of planned growth, will depend on the Company's
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ability to obtain financing. The historic growth rate of the technical services division has consumed substantial amounts of cash, and the Company may be required to pursue additional funding opportunities to fund future growth should it accelerate in excess of historical and planned future growth. In the event the Company is not able to find such alternate sources of funding, its ability to pursue its planned business strategy may be limited. 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.
Dependence on Industry Trend to Outsource Services. Sento's business depends in large part on the trend within the IT industry to outsource certain services. Sento cannot provide any assurance that this trend will continue or that, if the trend continues, it will continue at the same rate of growth. The failure of this trend to continue could have a material adverse effect on the business, financial condition and results of operations of Sento.
Potential Significant Fluctuations in Quarterly Results. The value of individual transactions can constitute a substantial percentage of Sento's quarterly revenue, and particular transactions may generate a substantial portion of the operating profits for a quarter. Because Sento's staffing and other operating expenses are based on anticipated revenue levels, and a high percentage of its expenses are fixed, delays in the receipt of orders can cause significant variations in operating results from quarter to quarter. In addition, Sento may expend significant resources pursuing potential sales that will not be consummated. Sento also may choose to reduce prices or to increase spending in response to competition or to pursue new market opportunities, which may adversely affect its operating results.
In particular, Sento's quarterly revenues from its eCustomer Contact Center operations are potentially volatile. Such revenues are principally a function of the number of support requests received by Sento and the time spent on such requests. Consequently, Sento's profitability may be adversely affected if Sento receives fewer support requests than anticipated or the time spent in resolving inquiries is greater than anticipated.
For the reasons identified above, management believes that period-to-period comparisons of Sento's results of operations may not be meaningful and that no one should rely upon them as an indication of future performance. Furthermore, Sento cannot provide any assurance that it will be able to achieve or sustain profitability on a quarterly basis.
Possible Volatility of Stock Price. The trading price of the Common Stock has fluctuated widely in response to variations in quarterly operating results, announcements by Sento or its competitors, industry trends, general economic conditions or other events or factors. Such fluctuations, as well as fluctuations in the trading volume of the Common Stock, may continue in the future. Regardless of the general outlook for Sento's business, the announcement of quarterly operating results below analyst and investor expectations could have a material and adverse effect on the market price of the Common Stock.
Anti-Takeover Considerations. Sento's Articles of Incorporation and Bylaws, the Utah Revised Business Corporation Act and the Utah Control Shares Acquisition Act each contain certain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. Sento's Articles of Incorporation grant to the Board of Directors the authority, without further action by Sento's shareholders, to fix the rights and preferences of, and issue shares of preferred stock. These provisions may deter hostile takeovers or delay or prevent changes in control of Sento or changes in Sento's management, including transactions in which shareholders might otherwise receive a premium for their shares over the then-current market prices. In addition, these provisions may limit the ability of shareholders to approve transactions that they may deem to be in their best interests.
Dividends. Dividends are payable on the Common Stock when, as and if declared by Sento's Board of Directors. No dividend has been declared or paid on the Common Stock to date. At present Sento intends to retain any future earnings for use in its business and therefore does not anticipate paying any dividends on the Common Stock in the foreseeable future.
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Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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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) |
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By: |
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/s/ DENNIS L. HERRICK Dennis L. Herrick President and Chief Executive Officer |
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By: |
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/s/ STANLEY J. CUTLER Stanley J. Cutler Corporate Controller and Secretary |
Dated November 8, 2000
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