**United StatesSecurities and Exchange Commission**

#### **Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý**                                   | **Quarterly Report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|----------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                         |                                                                                          |
| **For the Quarter Ended September 30, 2003** |
|                                         |                                                                                          |
| **o**                                        | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                         |
| **Commission File Number 06425**             |

 

|                                                            |   | **SENTO CORPORATION**                                            |   |                                  |
|-----------------------------------------------------------------|--------|------------------------------------------------------------------|--------|---------------------------------------|
|                                                            |   | Exact Name of Small Business Issuer as  Specified in its Charter |   |                                  |
|                                                            |   |                                                             |   |                                  |
| **Utah**                                                        |   |                                                             |   | **87-0284979**                        |
| (State or other Jurisdiction of  Incorporation or Organization) |   |                                                             |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                                             |   |                                  |
|                                                            |   | **808 East Utah Valley DriveAmerican Fork, Utah 84003**          |   |                                  |
|                                                            |   | (Address of Principal Executive Offices)                         |   |                                  |

# ** **

Issuer’s telephone number, including areacode:  **(801)772-1100**

 

 

Indicateby check mark whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the issuer was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes ý    No o

 

Statethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 

| **Class**                            |   | **Outstanding at  October 31, 2003** |
|--------------------------------------|--------|--------------------------------------|
| Common capital stock  $.25 par value |   | 2,337,738                            |

 

Transitional Small Business Disclosure Format (check one):

 

Yes o    No ý

 

 

----

 

**SENTOCORPORATION**

Quarterly Report on Form 10-QSB

Quarter ended September 30, 2003

 

TABLE OF CONTENTS

 
| PART  I   FINANCIAL INFORMATION                                  |                                                                                                                |
|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
| Item 1.  Financial Statements                                              |                                                                                                                |
|                                                                            |                                                                                                                |
|                                                                            | Condensed  Consolidated Balance Sheets  September 30, 2003 and March 31, 2003                                       |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Condensed Consolidated Statements of OperationsThree and six months ended September 30, 2003 and September 28, 2002 |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Condensed Consolidated Statements of Cash Flows  Six months ended September 30, 2003 and September 28, 2002         |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Notes to Condensed Consolidated Financial  Statements                                                               |   |
|                                                                            |                                                                                                                |   |
| Item 2.   Management’s Discussion and Analysis or Plan of Operations. |                                                                                                                |
|                                                                            | Critical Accounting  Policies                                                                                       |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Results of Operations                                                                                               |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Liquidity and Capital Resources                                                                                     |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Contractual Obligations                                                                                             |   |
|                                                                            |                                                                                                                |   |
|                                                                            | Risks Related to Existing and Proposed  Operations                                                                  |   |
|                                                                            |                                                                                                                |   |
| Item 3.  Controls and  Procedures                                          |                                                                                                                |
|                                                                            |                                                                                                                |
| PART II.  OTHER  INFORMATION                                          |                                                                                                                |
|                                                                            |                                                                                                                |
| Item 2.                                                                         | Changes in Securities                                                                                               |   |
|                                                                            |                                                                                                                |   |
| Item 6.                                                                         | Exhibits and Reports on Form 8-K                                                                                    |   |
|                                                                            |                                                                                                                |   |
| SIGNATURES                                                                      |                                                                                                                |
|                                                                                 |                                                                                                                     |  |  |

 

i

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# **PARTI - FINANCIAL INFORMATION**

## Item 1.   Financial Statements

 

#### **SENTO CORPORATION**

**ANDSUBSIDIARY**

 

### **Condensed Consolidated BalanceSheets**

 
|                                                       |   | **September  30, 2003** |      | **March 31, 2003** |   |
|------------------------------------------------------------|--------|-------------------------|-----------|--------------------|--------|
|                                                       |   | **(Unaudited)**         |      |               |   |
| **ASSETS**                                                 |   |
| Current  assets:                                           |   |                    |      |               |   |
| Cash                                                       |   | $                       | 2,274,448 |               | $      | 2,583,337 |   |
| Accounts  receivable, net                                  |   | 2,537,253               |      | 2,848,863          |   |
| Other current  assets                                      |   | 174,426                 |      | 220,091            |   |
| Total current assets                                       |   | 4,986,127               |      | 5,652,291          |   |
|                                                       |   |                    |      |               |   |
| Property and  equipment, net                               |   | 3,694,834               |      | 4,130,921          |   |
| Other assets                                               |   | 429,049                 |      | 321,521            |   |
| Total Assets                                               |   | $                       | 9,110,010 |               | $      | 10,104,733 |   |
|                                                       |   |                    |      |               |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**              |   |
|                                                       |   |                    |      |               |   |
| Current liabilities:                                       |   |                    |      |               |   |
| Current  portion of long-term debt and capital leases      |   | $                       | 2,013,953 |               | $      | 1,333,170 |   |
| Accounts  payable                                          |   | 1,494,307               |      | 1,728,768          |   |
| Accrued  liabilities                                       |   | 1,144,077               |      | 1,474,738          |   |
| Deferred  revenue and other current liabilities            |   | 265,458                 |      | 46,453             |   |
| Total current  liabilities                                 |   | 4,917,795               |      | 4,583,129          |   |
|                                                       |   |                    |      |               |   |
| Long-term debt  and capital leases, net of current portion |   | 563,909                 |      | 888,825            |   |
| Convertible  debt                                          |   | 512,441                 |      | 1,202,821          |   |
| Total  liabilities                                         |   | 5,994,145               |      | 6,674,775          |   |
|                                                       |   |                    |      |               |   |
| Stockholders’  equity:                                |   |                    |      |               |   |
| Common stock                                               |   | 580,885                 |      | 524,953            |   |
| Additional  paid-in capital                                |   | 12,567,123              |      | 11,919,653         |   |
| Accumulated  deficit                                       |   | (10,032,143             | )         | (9,014,648         | )      |
| Total  stockholders’ equity                           |   | 3,115,865               |      | 3,429,958          |   |
| Total Liabilities  and Stockholders’ Equity           |   | $                       | 9,110,010 |               | $      | 10,104,733 |   |

 

1

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**SENTOCORPORATION**

**ANDSUBSIDIARY**

 

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
|                                                                                           |   | **Three Months Ended**    |      | **Six Months Ended**      |   |
|------------------------------------------------------------------------------------------------|--------|---------------------------|-----------|---------------------------|--------|
|                                                                                           |   | **September 30,****2003** |      | **September 28,****2002** |   | **September 30,****2003** |   | **September 28,****2002** |   |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Revenue                                                                                        |   | $                         | 4,085,034 |                      | $      | 3,485,775 |   | $ | 8,239,665 |   | $ | 7,708,509 |   |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Cost of sales                                                                                  |   | 3,742,276                 |      | 3,755,097                 |   | 7,695,432 |   | 8,065,517 |   |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Gross profit  (loss)                                                                           |   | 342,758                   |      | (269,322                  | )      | 544,233 |   | (357,008 | ) |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Selling,  general and administrative expenses                                                  |   | 663,586                   |      | 615,134                   |   | 1,264,933 |   | 1,203,122 |   |
| Stock-based  compensation                                                                      |   | 35,341                    |      | —                    |   | 49,558 |   | — |   |
| Operating loss                                                                                 |   | (356,169                  | )         | (884,456                  | )      | (770,258 | ) | (1,560,130 | ) |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Non-cash  charge for valuation of warrants and conversion of debentures                        |   | (46,154                   | )         | (21,613                   | )      | (102,546 | ) | (42,255 | ) |
| Other expense,  net                                                                            |   | (75,583                   | )         | (121,359                  | )      | (144,691 | ) | (200,743 | ) |
| Net loss                                                                                       |   | $                         | (477,906  | )                         | $      | (1,027,428 | ) | $ | (1,017,495 | ) | $ | (1,803,128 | ) |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Basic and  diluted net loss per share                                                          |   | $                         | (0.21     | )                         | $      | (0.49 | ) | $ | (0.46 | ) | $ | (0.86 | ) |
|                                                                                           |   |                      |      |                      |   |   |   |   |   |
| Basic and  diluted weighted average number of common and common equivalent shares  outstanding |   | 2,270,162                 |      | 2,098,942                 |   | 2,201,695 |   | 2,098,910 |   |

 

2

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**SENTOCORPORATION**

**ANDSUBSIDIARY**

 

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
|                                                                                 |   | **Six Months Ended**    |       |
|--------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                 |   | **September 30,  2003** |       | **September 28,  2002** |   |
| Cash flows from  operating activities:                                               |   |                    |       |   |   |
| Net loss                                                                             |   | $                       | (1,017,495 | ) | $ | (1,803,128 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:     |   |                    |       |   |   |
| Depreciation  and amortization                                                       |   | 831,643                 |       | 880,570 |   |
| Accretion of  debenture for warrant and non-cash charge for conversion of debentures |   | 102,546                 |       | 42,255 |   |
| Stock-based  compensation                                                            |   | 49,558                  |       | — |   |
| Gain on  disposal of assets                                                          |   | —                  |       | (5,030 | ) |
| Revaluation of  warrants issued for services                                         |   | —                  |       | 7,131 |   |
| Write-down of  assets held for sale                                                  |   | —                  |       | 58,668 |   |
| Realized loss  on sale of short-term investments                                     |   | —                  |       | 8,806 |   |
| Changes in  operating assets and liabilities:                                        |   |                    |       |   |   |
| Accounts  receivable                                                                 |   | 311,610                 |       | 1,881,066 |   |
| Other assets                                                                         |   | (61,642                 | )          | (23,996 | ) |
| Accounts  payable                                                                    |   | (234,461                | )          | (44,958 | ) |
| Accrued  liabilities                                                                 |   | (98,802                 | )          | 56,672 |   |
| Deferred  revenue and other current liabilities                                      |   | 219,005                 |       | (198,203 | ) |
| Net cash  provided by operating activities                                           |   | 101,962                 |       | 859,853 |   |
| Cash flows  from investing activities:                                               |   |                    |       |   |   |
| Proceeds from  sale of short-term investments                                        |   | —                  |       | 132,090 |   |
| Purchase of  short-term investments                                                  |   | —                  |       | (16,980 | ) |
| Proceeds from  sale of equipment                                                     |   | —                  |       | 9,440 |   |
| Purchase of  property and equipment                                                  |   | (330,362                | )          | (241,352 | ) |
| Net cash used  in investing activities                                               |   | (330,362                | )          | (116,802 | ) |
| Cash flows  from financing activities:                                               |   |                    |       |   |   |
| Principal  payments on long-term debt and debentures                                 |   | (1,292,721              | )          | (591,958 | ) |
| Net borrowings  under line of credit                                                 |   | 664,934                 |       | — |   |
| Issuance of  long-term debt and debentures                                           |   | 540,000                 |       | — |   |
| Proceeds from  stock options exercised                                               |   | 7,298                   |       | — |   |
| Proceeds from  stock issued through employee stock purchase plan                     |   | —                  |       | 20,003 |   |
| Net cash used  in financing activities                                               |   | (80,489                 | )          | (571,955 | ) |
| Net increase  (decrease) in cash                                                     |   | (308,889                | )          | 171,096 |   |
| Cash at  beginning of period                                                         |   | 2,583,337               |       | 1,047,731 |   |
| Cash at end of  period                                                               |   | $                       | 2,274,448  |   | $ | 1,218,827 |   |
|                                                                                 |   |                    |       |   |   |
| Supplemental disclosures of cash flow  information                                   |   |                    |       |   |   |
| Cash paid for:                                                                       |   |                    |       |   |   |
| Interest                                                                             |   | $                       | 115,463    |   | $ | 134,528 |   |
|                                                                                 |   |                    |       |   |   |
| Non-cash  investing and financing activities:                                        |   |                    |       |   |   |
|                                                                                 |   |                    |       |   |   |
| Value of warrants issued with long-term  debt and convertible debentures             |   | $                       | 179,849    |   | $ | — |   |
| Value of  warrants issued to placement agent                                         |   | 36,031                  |       | — |   |
| Conversion  of debentures (including accrued interest of $6,859)                     |   | 383,554                 |       | — |   |
| Equipment purchased through capital lease                                            |   | 23,790                  |       | 431,288 |   |

 

3

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#### **SENTO CORPORATION**

**ANDSUBSIDIARY**

 

### **Notesto Condensed Consolidated Financial Statements**

**September30, 2003**

**(Unaudited)**

 

 

A.                                   BASIS OFPRESENTATION

 

Theaccompanying unaudited condensed consolidated financial statements are statedin accordance with the instructions to Form 10-QSB and do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded.

 

Operating results for the three and sixmonths ended September 30, 2003 are not necessarily indicative of the resultsthat may be expected for the full fiscal year. The unaudited condensed consolidated financial statements should be readin conjunction with the audited consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-KSB for the yearended March 31, 2003.

 

The Company has adopted the footnotedisclosure provisions of Statement of Financial Accounting Standards No. 123, *Accountingfor Stock Based-Compensation* (SFAS 123).  SFAS 123 encourages entities to adopt a fair value based methodof accounting for stock options or similar equity instruments.  However, it also allows an entity tocontinue measuring compensation cost for stock-based compensation using theintrinsic-value method of accounting prescribed by Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees* (APB 25).  The Company has elected to continue to applythe provisions of APB 25 and provide pro forma footnote disclosures required bySFAS 123, which has been determined as if the Company had accounted for itsemployee stock options under the fair value method.

 

Thefair value of each option grant is estimated on the date of grant using theBlack Scholes option-pricing model with the following weighted-averageassumptions: expected dividend yield of zero percent, risk-free interest rateof 2.8 percent, expected life of 5 years, and expected stock-price volatilityof 68 percent.

 

TheCompany applies APB 25 in accounting for options issued under the Plan.  Had the Company determined compensation costbased on the fair value at the grant date for its stock options under SFAS 123,the Company’s net income (loss) would have been changed to the pro formaamounts indicated below for the three and six months ended September 30, 2003:

 
|                                      |   |        |   | **Three Months** |     | **Six Months** |   |
|-------------------------------------------|--------|-------------|--------|------------------|----------|----------------|--------|
| Net loss                                  |   | As reported |   | $                | (477,906 | )              | $      | (1,017,495 | ) |
|                                      |   | Pro forma   |   | (530,904         | )        | (794,715       | )      |
| Basic and diluted income (loss) per share |   | As reported |   | (0.21            | )        | (0.46          | )      |
|                                      |   | Pro forma   |   | (0.23            | )        | (0.36          | )      |
|                                           |        |             |        |                  |          |                |        |  |  |

 

The full impact of calculating compensationcost for stock options under SFAS 123 may not be representative of the effectson reported net income (loss) for future years.

 

 

B.            CONVERTIBLE DEBT

 

On April 15, 2003, the Company completed a refinancing of itsconvertible subordinated debentures.  The refinancing included the issuance of new convertiblesubordinated debentures and the issuance of a new $300,000, 8% term loan with abank that was used to pay down a portion of the Company’s existing debentures.  In total, the Company issued 1,002 units at$1,000 each, consisting of one $990 debenture and warrants to purchase 250shares of the Company’s common stock at $2.25 per share.

 

4

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The debenturesare convertible at any time into shares of the Company’s common stock at $1.75per share.  The debentures mature onApril 15, 2006, and the exercise period for the warrants expire on the samedate.  Each existing debenture holderhad the ability to exchange all or part of his/her old debentures for the newdebentures.  New debentures totaling$991,980 were issued, including the exchange of $531,630 in existingdebentures.  The Company also issuedwarrants to a finder for 50,000 shares of common stock that expire on April 15,2006, 37,500 of which are exercisable at $1.60 per share, and 12,500 of whichare exercisable at $2.25 per share.

 

The above-mentioned warrants were valued at $179,841 and $36,031,respectively, for the warrants included in the debenture offering and thewarrants issued to the finder.  Thevalue of the warrants included in the debenture offering was credited toadditional paid in capital and charged as a discount against the book value ofconvertible debt.  The value of thewarrants issued to the finder was capitalized as deferred financing costs witha corresponding credit to paid in capital. The value of these warrants will be amortized over the life of therelated debt.

 

C.            COMMON STOCK

 

On November 14, 2002, the shareholders of the Company’s common stockapproved a one-for-four reverse split of the Company’s common stock.  The record date of the reverse split wasNovember 25, 2002.  All references tocommon stock, additional paid in capital, accumulated deficit, common sharesoutstanding, average numbers of common stock shares outstanding, stock options,warrants to purchase common stock and per share amounts in these condensedconsolidated financial statements, notes to condensed consolidated financialstatements and Management’s Discussion and Analysis or Plan of Operations priorto the record date of the reverse stock split have been restated to reflect thereverse stock split on a retroactive basis.

 

Sixmonths ended September 30, 2003

 

During the six months ended September 30, 2003, options to purchase4,561 shares of common stock were exercised.

 

A credit to additional paid-in-capital of $215,872 was recorded for thevaluation of the warrants discussed in note B. In addition, debentures with a face value of $376,695, together withassociated accrued interest of $6,859, were converted into 219,167 shares ofthe Company’s common stock.

 

On April 23, 2003, the Company’s Board ofDirectors approved an employee stock option exchange program (“ExchangeProgram”), pursuant to which the Company granted options to purchase 313,592shares of the Company’s common stock at an exercise price of $1.60 per share inexchange for options to purchase 377,342 shares of the Company’s common stockat exercise prices in excess of $2.00 per share.  The new options issued under the Exchange Program are subject tovariable plan accounting in accordance with FASB Interpretation No. 44“Accounting for Certain Transactions Involving Stock Compensation”(“Interpretation 44”).  Under variableplan accounting, the Company is required to recognize compensation expense inits consolidated statements of operations for any increase in the market priceof the Company’s common stock above $1.60 (the market price at April 23, 2003which was the effective date of the exchange). This compensation must be recorded on quarterly basis until the newoptions issued under the Exchange Program are exercised, forfeited or expireunexercised.  During the six monthsended September 30, 2003, the Company recorded $49,558 of stock-based compensationfor these options.

 

Of the options to purchase 377,342 shares ofthe Company’s common stock that were exchanged on April 23, 2003, options topurchase 100,980 shares of common stock were not cancelled as the correspondingnew options replacing these options were issued under parallel option agreements.  The parallel option agreements allow theholders of options under the agreements to exercise either the new optionsissued on April 23, 2003 or the old, higher priced options that wereeffectively being replaced.  Under theseagreements, a corresponding number of old options are cancelled upon theexercise of the parallel or new options. If a holder of a parallel option elects to exercise an old option, acorresponding parallel option is cancelled.  Management believes that it is highly unlikely that any of the oldoptions effectively being replaced under the parallel option agreements will beexercised due to their unfavorable pricing as compared to the paralleloptions.  Therefore, the old options associatedwith the parallel options

 

5

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have not been included in any pro forma calculations requiringdisclosure under FASB 123 in the accompanying condensed consolidated financialstatements.

 

The impact of the new options issued underthe Exchange Program on the Company’s consolidated financial statements willdepend on quarterly fluctuations in the Company’s common stock price and thedates of exercises, forfeitures or cancellations of the new options byemployees.  Moreover, because theprecise amount of compensation expense will depend on the market price of theCompany’s common stock at the end of each quarterly period, the Company willnot be able to forecast in advance the amount of compensation expense relatedto these options that it will incur in any future period.

 

Sixmonths ended September 28, 2002

 

A total of 5,748 shares of common stock were purchased by employeesunder the Company’s Employee Stock Purchase Plan during the six months endedSeptember 28, 2002.

 

D.            LOSS PER SHARE

 

Loss per share is computed in accordance with Financial AccountingStandards Board Standard 128, “Earnings Per Share.”  Basic loss per share is computed by dividing net loss by theweighted average number of shares of common stock outstanding for theperiod.  Diluted income or loss pershare reflects the potential dilution that could occur from shares of commonstock issuable through stock options, warrants and other convertiblesecurities, if dilutive.  Options andwarrants to purchase 204,156 and 111,354 shares, respectively, of common stockhave not been included in the calculation of diluted common stock outstandingfor the three and six months ended September 30, 2003 because to do so would beanti-dilutive.  Options and warrants topurchase 1,176 and 8,784 shares, respectively, of common stock have not beenincluded in the calculation of diluted common stock outstanding for the threeand six months ended September 28, 2002 because to do so would beanti-dilutive.  Shares issuable pursuantto convertible debentures (345,934 shares as of September 30, 2003 and 64,350shares as of September 28, 2002) have not been included in the calculations ofdiluted common stock outstanding for the three and six months ended September30, 2003 and September 28, 2002 as to do so would be anti-dilutive.

 

The followingtables set forth the computation of basic and diluted income (loss) per sharefor the three and six months ended September 30, 2003 and September 28, 2002:

 
|                                                                            |   | **Three Months Ended**  |     |
|---------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                            |   | **September 30,  2003** |     | **September 28,  2002** |   |
|                                                                            |   |                    |     |   |   |
| Net loss                                                                        |   | $                       | (477,906 | ) | $ | (1,027,428 | ) |
| Denominator for basic  and diluted net loss per share - weighted average shares |   | 2,270,162               |     | 2,098,942 |   |
|                                                                            |   |                    |     |   |   |
| Basic and diluted net  loss per share                                           |   | $                       | (0.21    | ) | $ | (0.49 | ) |

 

 
|                                                                            |   | **Six Months Ended**    |       |
|---------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                            |   | **September 30,  2003** |       | **September 28,  2002** |   |
|                                                                            |   |                    |       |   |   |
| Net loss                                                                        |   | $                       | (1,017,495 | ) | $ | (1,803,128 | ) |
| Denominator for basic  and diluted net loss per share - weighted average shares |   | 2,201,695               |       | 2,098,910 |   |
|                                                                            |   |                    |       |   |   |
| Basic and diluted net  loss per share                                           |   | $                       | (0.46      | ) | $ | (0.86 | ) |

 

6

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F.             LINE OF CREDIT AND LONG-TERM DEBT

 

On April 15, 2003, the Company entered into a new loan agreement with abank.  The new loan agreement includes arevolving credit line and two term loans. Under the credit line, the Company can borrow up to $2,500,000 or 75% ofeligible accounts receivable, after taking into account reserves that are basedprimarily on outstanding balances of the first of the two term loans.  The line of credit accrues interest at 2%over the bank’s prime rate (4.25% as of September 30, 2003) and matures onApril 15, 2004.  As of September 30,2003, the Company had $969,000 of borrowings outstanding under the line ofcredit, which is included in current portion of long-term debt in theaccompanying condensed consolidated financial statements.

 

The first term loan was extended to refinancethe Company’s existing equipment financing term debt with the bank.  The funding of this loan was limited to theremaining principal balance on existing term loans with the bank ($513,983 asof the date of funding, May 6, 2003). The loan calls for monthly principal and interest payments over 18months and accrues interest at 8%.  Thesecond term loan was extended to refinance a portion of the Company’s existingconvertible debt.  The second term loanis in the amount of $300,000 and calls for monthly principal and interestpayments over three years.  This loanaccrues interest at 8%.  The new loanagreement calls for the Company to maintain certain profitability and net worthcovenants.

 

The Company also issued a warrant to thebank, in connection with obtaining the above credit facilities, to purchase60,000 shares of Common Stock at $1.79 per share. The value ascribed to thewarrant of $42,470 has been reflected as a debt discount with an offsettingcredit to additional paid-in capital and is being amortized over the life ofthe related debt. The stock purchase warrant became exercisable on the date ofissuance (April 15, 2003) and expires April 15, 2008.  Substantially all of theassets of the Company serve as collateral for the above line of credit andloans.

 

7

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## Item 2. Management’s Discussion and Analysis or Plan of Operations.

 

**General**

 

Sento Corporationprovides Web-enabled CRM (Customer Relationship Management) solutions for adiversified portfolio of organizations. These services include self-help, livechat via Text TalkSM, Web collaboration, email, and telephone.Utilizing a tested and proven technology set, Sento provides enhanced customerexperience at a significant cost reduction compared to traditional models.

 

Subsequent to the end of the quarter, the Company announced that it hasobtained new contracts for significant additional business.  The Company will be required to invest inadditional equipment and hire additional personnel to service such contractsand new business. This requirement for additional capital comes at a time whenleasing and other finance companies have become much more restrictive inproviding financing because of the economic downturn, which coupled with theCompany’s losses during the most recent eighteen months and its significantdecrease in working capital have made it more difficult for the Company toobtain the needed capital for equipment financing and new hires.

 

The Company has also signed a lease for additional space in a new Utahlocation and has subleased to a third party a portion of the space in itsexisting location.  The Company isallowed to use cubicles owned by the new landlord.  This will allow the Company to take advantage of currently lowlease rates to reduce its rent expenses (by moving some of its operations outof facilities with higher lease rates) and to forego certain capitalexpenditures that would otherwise be required to service the new business.  The new business described above will causethe Utah facilities to be utilized at near capacity.  The Company’s facility in Evanston, Wyoming, idled two years agobecause of the loss of a significant customer, currently remains un-utilized.

 

# **CriticalAccounting Policies**

 

Sento’ssignificant accounting policies are described in Note 2 to Sento’s ConsolidatedFinancial Statements for the year ended March 31, 2003. Those financialstatements were prepared in accordance with accounting principles generallyaccepted in the United States and are included in Sento’s Form 10-KSB which hasbeen filed with the Securities and Exchange Commission.  Included within these policies are theCompany’s “critical accounting policies.” Critical accounting policies are those policies that are most importantto the preparation of the Company’s consolidated financial statements andrequire management’s subjective and complex judgments due to the need to makeestimates about the effect of matters that are inherently uncertain.  The Company’s critical accounting policiesrelate to revenue recognition, credit risk and stock-based compensation and theevaluation of asset impairment.  Theapplication of these accounting policies involves the exercise of judgment andthe use of assumptions as to future uncertainties and, as a result, actualresults could differ materially from these estimates.

 

The development and selection of these critical accounting policieshave been discussed with the Audit Committee. Such policies are reviewed periodically during each year by the AuditCommittee.

 

*Revenue Recognition.* Revenue is generallyrecognized when persuasive evidence of an arrangement exists, delivery ofservices has occurred, the fee is fixed or determinable, and collection of theresulting receivable is reasonably assured. This generally occurs when the Company provides customer supportservices to the end-user.  Certain ofthe Company’s customer support services are delivered over a period oftime.  Revenue associated with theseservices is deferred until the customer support is completed and Sento has noremaining obligation to provide further support services.

 

*Credit Risk.*Inthe normal course of business, the Company provides unsecured credit terms toits customers.  Accordingly, the Companyperforms ongoing credit evaluations of its customers and maintains allowancesfor possible losses.  Except for thesignificant losses incurred during the fourth quarter of fiscal 2001, theCompany’s credit losses have generally been within management’sexpectations.  However, there can be noassurance that the Company’s future credit losses will be within management’sexpectations.  In addition, theCompany’s revenues and accounts receivable are concentrated in a relatively fewnumber of customers.  A significantchange in the liquidity or financial position of any one of these customers ora further deterioration in the economic environment, in general, could have anadverse impact on the collectability of the Company’s accounts receivable andthe Company’s future operating results.

 

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*Stock –Based Compensation.* Statement ofFinancial Accounting Standards No. 123, *Accounting for Stock Based Compensation*(SFAS 123) encourages entities to adopt a fair value based method of accountingfor stock options or similar equity instruments.  However, it also allows an entity to continue measuringcompensation cost for stock based compensation using the intrinsic-value methodof accounting prescribed by Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB 25).  The Company has elected to continue to apply the provisions ofAPB 25 and provide pro forma disclosures required by SFAS 123 in the footnotesto the consolidated financial statements. Sento also issues equity-based incentive compensation to non-employeesfrom time to time.  Pursuant to EmergingIssues Task Force (EITF) 96-18, *Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring or in Conjunction with Selling Goods orServices*, Sento accounts for these arrangements based on the fairvalue of the equity instrument issued. The fair value of such instruments is measured each quarter as therelated goods or services are provided. The resulting change in value of the instrument is either charged orcredited to income.

 

On April 23,2003, the Company’s Board of Directors approved an employee stock optionexchange program (“Exchange Program”), pursuant to which the Company grantedoptions to purchase 313,592 shares of the Company’s common stock at an exerciseprice of $1.60 per share in exchange for options to purchase 377,342 shares ofthe Company’s common stock at exercise prices in excess of $2.00 pershare.  The new options issued under theExchange Program are subject to variable plan accounting in accordance withFASB Interpretation No. 44 “Accounting for Certain Transactions Involving StockCompensation” (“Interpretation 44”).  Undervariable plan accounting, the Company is required to recognize compensationexpense in its consolidated statements of operations for any increase in themarket price of the Company’s common stock above $1.60 (the market price atApril 23, 2003 which was the effective date of the exchange).  This compensation must be recorded on aquarterly basis until the new options issued under the Exchange Program areexercised, forfeited or expire unexercised.

 

The impact ofthe new options issued under the Exchange Program on the Company’s consolidatedfinancial statements will depend on quarterly fluctuations in the Company’scommon stock price and the dates of exercises, forfeitures or cancellations ofthe new options by employees.  Moreover,because the precise amount of compensation expense will depend on the marketprice of the Company’s common stock at the end of each quarterly period, theCompany will not be able to forecast in advance the amount of compensationexpense related to these options that it will incur in any future period.

 

*Excess Capacity*.  Due to the loss of a significant customer inApril 2002 as well as the continuing poor economic conditions in the U.S.technology sector in general, the Company has excess capacity to serviceadditional call volumes.  Although theCompany has been successful in replacing a portion of the revenue lost andcurrently anticipates that its Utah facilities will be utilized at nearcapacity to service the recently announced new business, the loss of thiscustomer has continued to have an adverse effect on the Company’s revenues andprofitability and will continue to have an adverse effect due to the currentremaining non-utilization of the Evanston, Wyoming facility.  The Company believes that this excesscapacity will be used in the foreseeable future, and therefore, a charge forimpairment of long-lived assets is not necessary at this time.  The Company will continue to monitor andanalyze this issue during the fiscal year in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*

 

### **Results of Operations**

 

**Three Months EndedSeptember 30, 2003, Compared to Three Months Ended September 28, 2002**

 

*Revenues.* Revenues increased $599,000 or 17%, from $3,486,000 for the three monthsended September 28, 2002 to $4,085,000 for the three months ended September 30,2003.  The increase in revenue is due toan overall net increase in volume from existing clients as well as revenuegenerated from new clients.  The Companycurrently has excess capacity to service additional call volume, particularlyin its Evanston, Wyoming facility.  Thiscapacity was acquired in anticipation of higher demand for the Company’sservices and to fulfill the required service commitments of two technologycustomers.  However, with the currenteconomic conditions, it is difficult to predict the Company’s ability to fillthis excess capacity with new business in the future.  In the event that the Company is unable to fill the unutilizedcapacity in the Evanston, Wyoming facility, it may have to record an impairmentcharge relating to its assets at that facility.

 

*Cost of Sales.*  Cost of sales decreased less than onepercent or $13,000, from $3,755,000 for the three months ended September 28,2002 to $3,742,000 for the three months ended September 30, 2003.  Management has reduced certain costs, and asa result of these reductions in costs, the Company reported a gross profit of$343,000

 

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for the three months endedSeptember 30, 2003 versus a $(269,000) loss at the gross profit line for lastyear’s second fiscal quarter.  The mostsignificant cost savings resulted from consolidation of telephone and dataservices with the installation of a new PBX switch.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 8%, or $49,000 from $615,000 for the three months ended September28, 2002 to $664,000 for the three months ended September 30, 2003.  The increase in expenses is due mainly toincreased selling personnel and marketing activity.  As a percentage of revenue, selling, general and administrativeexpenses decreased two percentage points to 16% of revenue for the three monthsended September 30, 2003 from 18% of revenue for the three months endedSeptember 28, 2002.  Managementanticipates that selling, general and administrative expenses will increase infuture periods as a result of increased selling efforts to improve sales.

 

*Stock-based compensation.*  During the three months ended September 30,2003, the Company recorded a charge of $35,000 for variable-priced stockoptions issued in April 2003.  Theseoptions will be revalued on a quarterly basis with any change being recorded tostock-based compensation over the related vesting period.  There was no charge for stock-basedcompensation during the three months ended September 28, 2002, as there were novariable-priced stock options outstanding at that time.

 

*Non-cash charge for valuation of warrants andconversion of debentures*.  Non-cash charges for valuation of warrants and the conversion ofdebentures increased 109%, or $24,000 from $22,000 for the three months endedSeptember 28, 2002 to $46,000 for the three months ended September 30,2003.  This increase is due mainly to theconversion of debentures into common stock during the three months endedSeptember 30, 2003 and an associated acceleration in debenture warrantaccretion due to the conversions.  Therewere no conversions of debentures during the three months ended September 28,2002.

 

*Other expense, net*.  Other expense decreased by 37%, or $45,000from $121,000 for the three months ended September 28, 2002 to $76,000 duringthe three months ended September 30, 2003. This decrease is primarily due to a $59,000 write-down of assets heldfor sale during the three months ended September 28, 2002.  There was no comparable write-down duringthe three months ended September 30, 2003.

 

**Six Months EndedSeptember 30, 2003, Compared to Six Months Ended September 28, 2002**

 

*Revenues.* Revenues increased $531,000 or 7%, from $7,709,000 for the six monthsended September 28, 2002 to $8,240,000 for the six months ended September 30,2003.  The increase in revenue is due toan overall net increase in volume from existing clients as well as revenuegenerated from new clients.  The Companycurrently has excess capacity to service additional call volume, particularlyin its Evanston, Wyoming facility.  Thiscapacity was acquired in anticipation of higher demand for the Company’sservices and to fulfill the required service commitments of two technologycustomers.  However, with the currenteconomic conditions, it is difficult to predict the Company’s ability to fillthis excess capacity with new business in the future.  In the event that the Company is unable to fill the unutilizedcapacity in the Evanston, Wyoming facility, it may have to record an impairmentcharge relating to its assets at that facility.

 

*Cost of Sales.*  Cost of sales decreased 5%, or $370,000,from $8,065,000 for the six months ended September 28, 2002, to $7,695,000 forthe six months ended September 30, 2003. Management has reduced certain costs, and as a result of thesereductions in costs, the Company reported a gross profit of $544,000 for thesix months ended September 30, 2003 versus a $(357,000) loss at the grossprofit line for last year’s first six months. The most significant cost savings resulted from consolidation oftelephone and data services with the installation of a new PBX switch.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 5%, or $62,000 from $1,203,000 for the six months ended September28, 2002, to $1,265,000 for the six months ended September 30, 2003.  The increase in expenses is mainly due toincreased selling personnel and marketing activity.  As a percentage of revenue, selling, general and administrativeexpenses remained constant at 15% and 16%, respectively for the six monthsended September 30, 2003, and September 28, 2002.  Management anticipates that selling, general and administrativeexpenses will increase in future periods as a result of increased sellingefforts to improve sales.

 

*Stock-based compensation.*  During the six months ended September 30,2003, the Company recorded a charge of $50,000 for variable-priced stockoptions issued in April 2003.  Theseoptions will be revalued on a

 

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quarterly basis with any changebeing recorded to stock-based compensation over the related vestingperiod.  There was no charge forstock-based compensation during the six months ended September 28, 2002, asthere were no variable-priced stock options outstanding at that time.

 

*Non-cash charge for valuation of warrants andconversion of debentures*.  Non-cash charges for valuation of warrants and the conversion ofdebentures increased 145%, or $61,000 from $42,000 for the six months endedSeptember 28, 2002, to $103,000 for the six months ended September 30, 2003.  This increase is due mainly to theconversion of debentures into common stock during the six months endedSeptember 30, 2003, and an associated acceleration in debenture warrantaccretion due to the conversions.  Therewere no conversions of debentures during the six months ended September 28,2002.

 

*Other expense, net*.  Other expense decreased by 28%, or $56,000from $201,000 for the six months ended September 28, 2002 to $145,000 duringthe six months ended September 30, 2003. This decrease is primarily due to a $59,000 write-down of assets heldfor sale during the six months ended September 28, 2002.  There was no comparable write-down duringthe six months ended September 30, 2003.

 

### **Liquidity andCapital Resources**

 

Cash and short-term investment balances decreased 12%, or $309,000 from$2,583,000 at March 31, 2003 to $2,274,000 at September 30, 2003.  Working capital decreased $1,001,000 duringthe same period, from $1,069,000 as of March 31, 2003, to $68,000 as ofSeptember 30, 2003. The primary reason for the decrease in working capital wasprincipal payments of long-term debt and convertible debentures in excess ofcash received from new long-term debt.

 

On April 15,2003, the Company completed a refinancing of its convertible subordinateddebentures.  The refinancing includedthe issuance of new convertible subordinated debentures and the issuance of anew $300,000, 8% term loan with a bank that was used to pay down a portion ofthe Company’s existing debentures.  Intotal, the Company issued 1,002 units at $1,000 each, consisting of one $990debenture and warrants to purchase 250 shares of the Company’s common stock at$2.25 per share.  The debentures areconvertible at any time into shares of the Company’s common stock at $1.75 pershare.  The debentures mature on April15, 2006, and the exercise period for the warrants expire on the samedate.  Each existing debenture holderhad the ability to exchange all or part of old debentures for the newdebentures.  New debentures totaling$991,980 were issued, including the exchange of $531,630 in existingdebentures. During the six months ended September 30, 2003, debentures with aface value of $376,695, together with associated accrued interest of $6,859,were converted into 219,167 shares of the Company’s common stock.

 

On April 15,2003, the Company entered into a new loan agreement with a bank.  The new loan agreement includes a revolvingcredit line and two term loans.  Underthe credit line, the Company can borrow up to $2,500,000 or 75% of eligibleaccounts receivable, after taking into account reserves that are basedprimarily on outstanding balances of the first of the two term loans.  The line of credit accrues interest at 2%over the bank’s prime rate (4.25% as of September 30, 2003) and matures onApril 15, 2004.  As of September 30,2003, the Company had $969,000 of borrowings outstanding under the line ofcredit, which is included in current portion of long-term debt in theaccompanying condensed consolidated financial statements.

 

The first term loan was extended to refinance the Company’s existingequipment financing term debt with the bank. The funding of this loan was limited to the remaining principal balanceon existing term loans with the bank ($513,983 as of the date of funding, May6, 2003).  The loan calls for monthlyprincipal and interest payments over 18 months and accrues interest at 8%.  The second term loan was extended torefinance a portion of the Company’s existing convertible debt.  The second term loan is in the amount of$300,000 and calls for monthly principal and interest payments over threeyears.  This loan accrues interest at8%.  The new loan agreement calls forthe Company to maintain certain profitability and net worth covenants.

 

The Company has contractual obligations, including debt agreements andleases that will require the use of substantial amounts of cash.  The following table sets forth the Company’scontractual obligations as of September 30, 2003:

 

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**Contractual Obligations**

 
|                                          |   | **Payments Due by  Period** |      |
|-----------------------------------------------|--------|-----------------------------|-----------|
|                                          |   | **Under 1  Year**           |      | **1-3 Years** |   | **4-5 Years** |   | **After 5  Years** |   | **Total** |   |
| Line of Credit (1)                            |   | $                           | 969,000   |   | $ | — |   | $ | — |   | $ | — |   | $ | 969,000 |   |
| Long Term Debt (principal only) (2)           |   | 749,000                     |      | 273,000 |   | — |   | — |   | 1,022,000 |   |
| 8% Convertible Debentures (principal only)(3) |   | —                      |      | 605,000 |   | — |   | — |   | 605,000 |   |
| Capital Leases                                |   | 347,000                     |      | 359,000 |   | — |   | — |   | 706,000 |   |
| Operating Leases                              |   | 915,000                     |      | 1,033,000 |   | 250,000 |   | — |   | 2,198,000 |   |
| Total Contractual Cash Obligations            |   | $                           | 2,980,000 |   | $ | 2,270,000 |   | $ | 250,000 |   | $ | — |   | $ | 5,500,000 |   |

 

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(1)          The Company’s credit line accrues interest at2% over the bank’s prime rate (4.25% at September 30, 2003).

(2)          The Company’s long-term debt carries interestrates of 6% to 8%.

(3)          Assumes debentures, due in April 2006, willnot be converted into shares of Sento’s common stock.

 

For the sixmonths ended September 30, 2003, net cash provided by operations was $102,000as compared to $860,000 for the six months ended September 28, 2002.  During the six months ended September 30,2003 the Company used $330,000 of cash for investing activities as compared to$117,000 from investing activities during the six months ended September 28,2002.  During the six months endedSeptember 30, 2003, the Company used $80,000 for financing activities ascompared to using $572,000 for financing activities during the six months endedSeptember 28, 2002.

 

Historicallythe Company’s primary sources of liquidity have been cash received from salesof assets and cash provided through private sales of equity and debt, as well asborrowings under a bank line of credit. During the three years ended March 31,2003, and the six months ended September 30, 2003, liquidity and cash were alsoprovided by positive cash flow from operations.  In addition, the Company has financed some of the equipmentutilized in its business through long-term leasing and loan arrangements.  However, leasing and other finance companieshave become much more restrictive in providing financing because of theeconomic downturn, making it more difficult for the Company to obtain equipmentfinancing.  Subsequent to September 30,2003 the Company has obtained significant new contracts that require theCompany to invest in equipment and hire additional personnel.  In addition because of the Company’s lossesduring the most recent eighteen months and the decrease in the Company’sworking capital, it has become increasingly difficult for the Company tofinance needed equipment purchases essential to the Company’s growth.  The Company’s excess capacity, coupled withthe recent business growth of the Company, has consumed and will continue toconsume substantial amounts of cash, and the Company will be required to obtainadditional financing for its planned and committed growth and to sustaincurrent operations.  In the event theCompany is not able to find additional sources of funding and enter intofinancing transactions on reasonable terms, its ability to sustain currentoperations will be limited, or it may be forced to reduce or suspend itsoperations.  There can be no assurancethat the Company will be able to obtain necessary capital funding on termsfavorable to the Company, if at all.

 

*The statements contained in this QuarterlyReport on Form 10-QSB that are not purely historical are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  All forward-looking statementsinvolve various risks and uncertainties. Forward-looking statements contained in this Report include statementsregarding the Company’s plans to develop and deliver integrated informationtechnology services, market opportunities and acceptance, expectations, goals,revenues, financial performance, strategies, mission and intentions for thefuture.  Such forward-looking statementsare included under “Management’s Discussion and Analysis or Plan of Operations”and encompass Sento’s beliefs, expectations, hopes or intentions regardingfuture events.  Words such as “expects,”“believes,” “anticipates,” “should,” and “likely” also identify forward-lookingstatements. All forward-looking statements included in this Report are made asof the date hereof, based on information available to the Company as of suchdate, and the Company assumes no obligation to update any forward-lookingstatement.  It is important to note thatsuch statements may not prove to be accurate and that the Company’s actualresults and*

 

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*future events could differ materially fromthose anticipated in such statements. Among the factors that could cause actual results to differ materiallyfrom the Company’s expectations are those described under “Management’sDiscussion and Analysis or Plan of Operations---Risks Related to Existing andProposed Operations.”  All subsequentwritten and oral forward-looking statements attributable to the Company orpersons acting on its behalf are expressly qualified in their entirety by thissection and other factors included elsewhere in this Report.*

 

**Risks Related to Existing and ProposedOperations**

 

In addition to other information in this Report, the following areimportant factors that should be considered carefully in evaluating the Companyand its business.

 

*Volatile Economic Conditions Have Affected and Will Likely**Continueto Affect Sento’s Operations and Financial Results*.  Volatile economic conditions have adverselyaffected the Company’s operations and financial results.  The slowing economy has resulted inincreased pricing pressures and lower call volumes from some existing clients,and may have limited the Company’s ability to attract new clients.  These factors have contributed to a declinein the historical Company’s revenues and net income and have resulted in theCompany’s excess capacity to service call volumes.  A substantial percentage of the Company’s expenses isattributable to labor costs associated with staffing Customer Contact SolutionsCenters, which the Company may not be able to reduce on short notice in order tocompensate for unexpected shortfalls in call volumes.  The Company cannot forecast future fluctuations in economicconditions, and its operations and financial results may be materially andadversely affected by continued economic volatility.

 

*Dependence on Key Clients.*  Three clients accounted for approximately57% of the Company’s revenues for the six months ended September 30, 2003.  These three clients accounted forapproximately 33%, 12%, and 12%, respectively of revenues for fiscal 2003.  For the six months ended September 28, 2002,four clients accounted for approximately 74% of the Company’s revenues.  These four clients accounted forapproximately 35%, 14%, 13%, and 12%, respectively, of revenues for the sixmonths ended September 28, 2002.

 

Consistent with industry standards, the Company’s contracts aregenerally cancelable by the client on short-term notice.  The Company’s loss of a significant amountof business with any of its key clients could have, and the loss of asubstantial amount of business with any of its largest existing technicalsupport clients would have, a material adverse effect on the Company’sbusiness, financial condition, and results of operations.  In addition, the Company’s future revenuegrowth is dependent upon its ability to attract and retain new clients.

 

*Liquidity and Capital Resources*.  At September 30, 2003, the Company hadworking capital of $68,000.  Futuregrowth, particularly growth in excess of planned growth, will depend on theCompany’s ability to obtain financing. The historic growth rate of theCompany’s Customer Contact Solutions operations (most of which was in theUnited States) has consumed substantial amounts of cash.  Subsequent to September 30, 2003, theCompany has obtained significant new contracts that require the Company toinvest in equipment and hire additional personnel.  Because of the Company’s significant losses during the mostrecent eighteen months and the decrease in the Company’s working capital, ithas become increasingly difficult for the Company to finance needed equipmentpurchases essential to the Company’s growth. The Company’s historical excess capacity, coupled with the recentbusiness growth of the Company has consumed substantial amounts of cash, andthe Company will be required to obtain additional financing for its planned andcommitted growth and to sustain current operations.  In the event the Company is not able to find additional sourcesof funding and enter into financing transactions on reasonable terms, itsability to sustain current operations will be limited, or it may be forced toreduce or suspend its operations.  Therecan be no assurance that the Company will be able to obtain necessary capitalfunding on terms favorable to the Company, if at all.

 

*Credit Risk.*  Inthe normal course of business, the Company provides unsecured credit terms toits customers.  Accordingly, the Companyperforms ongoing credit evaluations of its customers and maintains allowancesfor possible losses.  Except for thesignificant losses incurred during the fourth quarter of fiscal 2001, theCompany’s credit losses have generally been within management’sexpectations.  However, there can be noassurance that the Company’s future credit losses will be within management’sexpectations.  In addition, theCompany’s revenues and accounts receivable are concentrated in a relatively fewnumber of customers.  A significantchange in the liquidity or financial position of any one of these customers ora further deterioration in the economic environment, in general, could have anadverse impact on the collectability of the Company’s accounts receivable andthe Company’s future operating results.

 

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*Risks of Growth*Strategy.The Company’s business strategy is premised, in part, upon fully utilizingexcess personnel and physical facilities and subsequently upon expansion of itsoperations. Substantial risks accompany the Company’s growth plans. Forexample, the Company’s growth plans are dependent upon its ability to attractand retain new clients and additional business from existing clients.  The Company’s failure to attract and retainnew clients and additional business from existing clients, or the loss ofexisting clients, will not only prevent the implementation of its businessstrategy, but may continue the current circumstance of excess personnel andphysical facilities, which would have a negative impact on the Company’sresults of operations and financial condition (see Liquidity and Capital Resources).

 

The Company’s growth plans are also subject to fluctuations intechnology and industry standards, changes in customer requirements andpreferences and general economic conditions, among other factors.  Many of these factors are beyond theCompany’s control.  If the Company isincorrect in its assessment of the feasibility of its growth plans, or ifcircumstances change in a way that the Company did not foresee or anticipate,the Company may not be able to grow as planned or its growth strategy may havean adverse effect on its business operations and financial condition.

 

*Reliance on a Software Company for Chat and Email applications*.  The Company contracts with a softwarecompany to provide chat and email tools used with the Company’s CRM software,reporting and management services.  Ifthis software company fails in its business efforts, the Company may berequired to identify and retain one or more alternate third-party providers ofsuch services and could experience service delays, interruptions, cancellationsor increased costs.

 

*Changing Needs of the CustomerContact Service Market*.  The customer contact service industry ischaracterized by rapid technological change, changes in customer requirementsand preferences, and the emergence of new industry standards and practices thatcould render the Company’s existing and proposed products, services, technologyand systems obsolete.  To remaincompetitive, the Company must continually improve the performance, features,and reliability of its products and services, including its existing customercontact service applications, and develop new products and services thataddress the increasingly sophisticated and varied needs of its prospectiveclients.  If the Company cannot adapt orrespond in a cost-effective and timely manner to changing industry standards,market conditions, or client’s requirements, its business and operating resultswould suffer and could negatively impact the Company’s financial condition.

 

The Company’s success may also depend in part onits ability to develop solutions that keep pace with continuing changes ininformation technology, evolving industry standards, and changing clientrequirements.  There can be no assurancethat the Company will be successful in adequately addressing these developmentson a timely basis or that, if these developments are addressed, the Companywill be successful in the marketplace. In addition, there can be no assurance that products or technologiesdeveloped by others will not render the Company’s services non-competitive orobsolete.  The Company’s failure toaddress these developments could have a material adverse effect on its businessand financial condition.

 

*Competition*.  The market for customer contact services ishighly fragmented and very competitive. The customer contact services industry, however, has begun to experiencea degree of consolidation, and the existence of major customer contact centercompanies has resulted in an additional level of competition from serviceproviders that have greater name recognition, larger installed customer bases,and significantly greater financial, technical, and marketing resources thanthe Company.  Over the past severalyears, a number of existing companies have enjoyed increasing success and rapidinternal growth.  Several of thesecompanies have been active in acquiring smaller regional customer contactservices companies and are becoming major competitors with a measurable shareof this rapidly expanding market.  Also,many major companies provide their own in-house customer care support andcustomer training.

 

The Company cannot provide any assurance thatbetter and more efficient services will not be provided by new or existingcustomer contact service providers in competition with the Company.  The services provided by such competitorsmay be more effective or less expensive than those provided by theCompany.  There can be no assurance thatthe Company will improve, refine or enhance the services it provides.

 

*Competition in CustomerContact Services Market*.  The customer contact services market isrelatively new and intensely competitive. There are no substantial barriers to entry, and established or newentities may enter this market in the near future.  Furthermore, established enterprise software companies, includingIBM, Hewlett-Packard Company, Microsoft Corporation, and similar companies, mayleverage their existing relationships and capabilities to offer customerservice applications.  The Company was arelatively early entrant in the customer self-services and

 

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chat markets.  Any delays in market acceptance of internetcustomer contact service applications in general, or the Company’s proposedproducts and services in particular, would likely harm the Company’scompetitive position.  Delays wouldallow the Company’s competitors additional time to improve their service orproduct offerings, and also provide time for new competitors to develope-business customer service applications and solicit prospective clients withinthe Company’s target markets.  Increasedcompetition could result in additional pricing pressures, reduced operatingmargins and loss of market share.

 

*Risk of Emergency Interruptionof Customer Contact Solutions Center Operations*.  The Company’s business depends to a largeextent on computer and telecommunications equipment and software systems (bothequipment and systems maintained by the Company and equipment and systemsmaintained by third parties).  TheCompany cannot provide any assurance that natural disaster, human error,equipment malfunction or inadequacy, or other events would not result in aprolonged interruption in the Company’s ability to provide support services toits clients.  The temporary or permanentloss of computer or telephone equipment or systems, through casualty, operatingmalfunction or otherwise, could have a material adverse effect on theCompany.  Property and businessinterruption insurance may not be adequate to compensate the Company for alllosses that it may incur.

 

*Attracting, Training, and Retaining Quality Management andEmployees*.  TheCompany’s success will depend, in large part, on its ability to attract, retainand train highly qualified technical, managerial and marketing personnel withthe required expertise.  The Company hasnot entered into employment agreements that require the services of any of itskey managerial or technical personnel to remain with the Company for anyspecified period of time.  There can beno assurance that the Company will be able to attract and maintain thepersonnel necessary for the development and operation of its business or thatit will be able to train its current employees on new developments intechnology.  Specifically, the loss ofany key personnel or an inability to attract, retain, train or motivatequalified personnel could have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

In addition, the Company’s total employee counthas fluctuated from approximately 585 as of March 31, 2000 to a high ofapproximately 953 as of December 31, 2000, and decreased to approximately 200as of June 30, 2003.  At October 31,2003, the Company’s total employee count was approximately 450.  The support required for one of theCompany’s largest clients is seasonal. There is, therefore, a necessity for very rapid increases in employeesand subsequent decreases in the number of employees as the requirements forsupport change.  The Company cannotprovide any assurance that its current management team can successfully managethe Company’s rapidly evolving business, and any failure to do so could have amaterial adverse effect upon the Company’s operating results.

 

During the time period beginning July 2000 and continuing to date, theCompany has partnered and continues to partner with offshore entities thatsupply Customer Contact Center services on a contract basis to theCompany.  Currently there areapproximately 160 agents in these offshore contracted Customer Contact Centers.Managing the quality of services rendered to the Company’s clients is furthercomplicated by the remote location and language and cultural differences ofagents supplying these services, and there can be no assurance that the Companycan adequately manage these remote agents. The lack of proper management of these offshore agents or the deliveryof low-quality services by such agents could have a material adverse effectupon the Company’s operating results.

 

*Dependence on Industry Trendto Outsource Services*.  The Company’s business depends in large parton the trend within the IT industry to outsource certain services.  The Company cannot provide any assurancethat this trend will continue or that, if the trend continues, it will continueat the same rate of growth.  The failureof this trend to continue could have a material adverse effect on the Company’sbusiness, financial condition, and results of operations.

 

*Potential SignificantFluctuations in Quarterly Results*.  The value of individual transactions canconstitute a substantial percentage of the Company’s quarterly revenue, andparticular transactions may generate a substantial portion of the operatingprofits for a quarter.  Because theCompany’s staffing and other operating expenses are based on anticipatedrevenue levels, and a high percentage of its expenses are fixed, delays in thereceipt of orders can cause significant variations in operating results fromquarter to quarter.  In addition, theCompany may expend significant resources pursuing potential sales that will notbe consummated.  The Company also maychoose to reduce prices or to increase spending in response to competition orto pursue new market opportunities, which may adversely affect its operatingresults.

 

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In particular, the Company’s quarterly revenuesfrom its Customer Contact Solutions Center operations are potentiallyvolatile.  Such revenues are principallya function of the number of support requests received by the Company, and thetime spent on such requests.** **Consequently, the Company’sprofitability may be adversely affected if the Company receives fewer supportrequests than anticipated or the time spent in resolving inquiries is greaterthan anticipated.

 

For the reasons identified above, managementbelieves that period-to-period comparisons of the Company’s results ofoperations may not be meaningful and that no one should rely upon them as anindication of future performance. Furthermore, the Company cannot provide any assurance that it will beable to achieve or sustain profitability on a quarterly basis.

 

*Volatility of Stock Price*.  The trading price of the Company’s CommonStock has fluctuated widely in response to variations in quarterly operatingresults, announcements by the Company or its competitors, industry trends,general economic conditions or other events or factors.  Such fluctuations, as well as fluctuationsin the trading volume of the Common Stock, may continue in the future.  Regardless of the general outlook for theCompany’s business, the announcement of quarterly operating results belowanalyst and investor expectations could have a material and adverse effect onthe market price of the Common Stock.

 

The Company values its listing on the Small CapMarket, and will seek to remain in compliance with the applicable listingqualification standards; however, the price of the Common Stock is determinedby a number of factors, including general economic and market conditions,industry trends and public perception, many of which are beyond the Company’scontrol.  If the bid price for theCommon Stock does not remain above $1.00 on a consistent basis, the Company maylose its listing privileges on the Nasdaq Small Cap Market, and may be forcedto find another forum for trading of its Common Stock.

 

*Anti-Takeover Considerations.* The Company’s Articles of Incorporation andBylaws, the Utah Revised Business Corporation Act, and the Utah Control SharesAcquisition Act each contain certain provisions that may have the effect ofinhibiting a non-negotiated merger or other business combination.  The Company’s Articles of Incorporationgrant to the Board of Directors the authority, without further action by theCompany’s shareholders, to fix the rights and preferences of, and issue sharesof preferred stock.  These provisionsmay deter hostile takeovers or delay or prevent changes in control of theCompany or changes in the Company’s management, including transactions in whichshareholders might otherwise receive a premium for their shares over thethen-current market prices.  Inaddition, these provisions may limit the ability of shareholders to approvetransactions that they may deem to be in their best interests.

 

*Common Stock Eligible for Future Sale.*  Sales of substantial amounts of the CommonStock or the perception that such sales could occur, could have a negativeimpact on the prevailing market prices for the Common Stock.  As of October 31, 2003, the Company had 2,337,738shares of Common Stock outstanding, substantially all of which were eligible asof such date under applicable securities laws for immediate sale in the publicmarket without restriction, except for any shares purchased by any “affiliate”of the Company (as that term is defined under the rules and regulations of theSecurities Act) which will be subject to the resale limitations of Rule 144under the Securities Act or any successor rule (“Rule 144”).  As of October 31, 2003, there remain up to69,196 shares issuable upon conversion of debentures that may be eligible forimmediate sale as described in Part II — Recent Sales of UnregisteredSecurities.

 

*Dividends.* Dividends are payable on the Common Stock when, as and if declared bythe Company’s Board of Directors.  Nodividend has been declared or paid on the Common Stock to date.  At present the Company intends to retain anyfuture earnings for use in its business and therefore does not anticipatepaying any dividends on the Common Stock in the foreseeable future.

 

## Item 3.    Controlsand Procedures

 

As of September 30, 2003, an evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and the Senior Vice President of Finance, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rules 13a-14 and 15d-14).  Based upon the evaluation, the Company’smanagement, including the Chief Executive Officer and Senior Vice President ofFinance, concluded that, as of the date of that evaluation, thedisclosure controls and procedures were effective in timely alerting them tomaterial information relating to the Company required to be included in theCompany’s periodic SEC filings. Subsequent to the date of that evaluation,

 

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there have been no significantchanges in the internal controls or in other factors that could significantlyaffect internal controls, nor were any corrective actions required with regardto significant deficiencies and material weaknesses.

 

# **PART II.                OTHER INFORMATION**

 

### **Item 2.    Changesin Securities**

 

Recent Sales of Unregistered Securities 

 

As reportedpreviously on Sento’s Form 10-KSB for the fiscal year ended March 31, 2003, onApril 15, 2003, Sento issued an aggregate of $1 million ofconvertible debentures to 38 purchasers. Each debenture accrues interest at therate of 8% per year, is convertible into Sento’s Common Stock at $1.75 pershare, expires in three years, and has attached warrants with an exerciseprice of $2.25 to purchase one share of Common Stock for each $4 of debenturespurchased. Those warrants expire on April 15, 2006. Each purchaser was anaccredited investor and was provided with a private placement memorandum detailingSento’s business and financial information, including copies of Sento’s AnnualReport on Form 10-KSB for the fiscal year ended March 30, 2002 andSento’s Quarterly Reports on Form 10-QSB for the periods endingJune 29, 2002, September 28, 2002, and December 31, 2002. Sentopaid commissions of $46,960 to a placement agent in connection with the sale ofthe convertible debentures and issued a warrant to purchase 50,000 shares to afinder. As of October 31, 2003, 233,367 shares of Common Stock have been issuedupon conversion of such debentures (84,356 shares of which were issued duringthe quarter ended September 30, 2003).

 

The securitiespurchased in the above transactions were restricted securities taken forinvestment. Certificates for all debentures (and shares issued upon conversionof debentures) issued in such transactions bore a restrictive legendconspicuously on their face and stop-transfer instructions were notedrespecting such certificates on our transfer records, except in circumstances inwhich Sento received a written opinion from legal counsel to the holders ofsuch securities to the effect that due to the tacking of holding periods ofpreviously held debentures (given in exchange for the recently issueddebentures) such common share certificates issued on debenture conversion didnot need to bear a restrictive legend. Each of the foregoing transactions waseffected in reliance on the exemption from registration provided inSection 4(2) of the Securities Act of 1933 and Rule 506 ofRegulation D adopted thereunder as transactions not involving any publicoffering.

 

## Item 6.    Exhibitsand Reports on Form 8-K

 

 

a)              Exhibits attached to the 10-QSB are asfollows:

 

Exhibit 10.1 – Canyon Park Technology Center Office Building LeaseAgreement

 

Exhibit 10.2 – Sublease agreement between Sento Corporation andSymantec Corporation

 

Exhibit 31.1 and 32.1 – Certification of the Company’s Chief ExecutiveOfficer

 

Exhibit 31.2 and 32.2 – Certification of the Company’s Chief FinancialOfficer

 

b)             Reportson Form 8-K:

 

Current report datedOctober 21, 2003 for the purposes of disclosing to shareholders and thefinancial markets a press release also dated October 21, 2003 and furnished asan exhibit to the Form 8-K.  This pressrelease discussed the Company’s unaudited financial results for the quarter andsix months ended September 30, 2003.

 

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### **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 theundersigned thereunto duly authorized.

 
|                     | SENTO CORPORATION |
|--------------------------|-------------------|
|                     | (Registrant)      |
|                     |              |   |
|                     | By:               | /s/ PATRICK F. O’ NEAL |   |
|                     |              | Patrick F. O’ Neal |
|                     |              | President and Chief Executive Officer |
|                     |              | (Principal executive officer) |
|                     |              |   |   |
|                     | By:               | /s/ STANLEY J. CUTLER |   |
|                     |              | Stanley J. Cutler |
|                     |              | Senior Vice President of Finance and Secretary |
|                     |              | (Principal financial and accounting officer) |
|                     |              |   |   |
| Dated November 13, 2003. |              |   |

 

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