**United States**

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

 

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

 

Indicate by check mark whetherthe issuer (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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      ý       No o

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

 

|                 |   | **Outstanding  at** |
|----------------------|--------|---------------------|
| **Class**            |   | **July 31,  2003**  |
| Common capital stock |   | 2,257,735           |
| $.25 par value       |   |                |

 

Transitional Small BusinessDisclosure Format (check one):

 

Yes  o         No ý

 

 

----

 

**SENTO CORPORATION**

Quarterly Report on Form 10-QSB

Quarter ended June 30, 2003

 

TABLE OF CONTENTS

 

 
| PART I FINANCIAL  INFORMATION                                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.  Financial  Statements                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                            |
| Condensed Consolidated Balance Sheets June  30, 2003 and March 31, 2003                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                            |
| Condensed Consolidated Statements of  Operations Three months ended June 30, 2003 and June 29, 2002                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                            |
| Condensed Consolidated Statements of Cash Flows Three months ended  June 30, 2003 and June 29, 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                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                            |
| Item 3.  Controls and  Procedures                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                            |
| PART II.   OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                            |
| Item 2.                                                          Changes in Securities             |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |
| Item 6.                                                          Exhibits and Reports on Form  8-K |
|                                                                                                                                                                                                                                                                                                                                                                                            |   |
| SIGNATURES                                                                                                                                                                                                                                                                                                                                                                                      |

 

 

1

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PART I   - FINANCIAL INFORMATION

Item 1.    FinancialStatements

 

**SENTO CORPORATIONAND SUBSIDIARY**

** **

**CondensedConsolidated Balance Sheets**

 

**ASSETS**

 
|                        |   | **June 30,  2003** |      | **March 31, 2003** |   |
|-----------------------------|--------|--------------------|-----------|--------------------|--------|
|                        |   | **(Unaudited)**    |      |               |   |
| Current assets:             |   |               |      |               |   |
| Cash                        |   | $                  | 2,739,451 |               | $      | 2,583,337 |   |
| Accounts receivable, net    |   | 1,944,396          |      | 2,848,863          |   |
| Other current assets        |   | 183,774            |      | 220,091            |   |
| Total current assets        |   | 4,867,621          |      | 5,652,291          |   |
|                        |   |               |      |               |   |
| Property and equipment, net |   | 3,770,368          |      | 4,130,921          |   |
| Other assets                |   | 461,074            |      | 321,521            |   |
| Total Assets                |   | $                  | 9,099,063 |               | $      | 10,104,733 |   |

 

**LIABILITIES ANDSTOCKHOLDERS’ EQUITY**

 
| Current liabilities:                                       |   |       |      |       |   |
|------------------------------------------------------------|--------|------------|-----------|------------|--------|
| Current portion of long-term  debt and capital leases      |   | $          | 1,612,418 |       | $      | 1,333,170 |   |
| Accounts payable                                           |   | 1,427,531  |      | 1,728,768  |   |
| Accrued liabilities                                        |   | 1,179,762  |      | 1,474,738  |   |
| Deferred revenue and other  current liabilities            |   | 33,262     |      | 46,453     |   |
| Total current liabilities                                  |   | 4,252,973  |      | 4,583,129  |   |
|                                                       |   |       |      |       |   |
| Long-term debt and capital  leases, net of current portion |   | 819,043    |      | 888,825    |   |
| Convertible debt                                           |   | 623,546    |      | 1,202,821  |   |
| Total liabilities                                          |   | 5,695,562  |      | 6,674,775  |   |
|                                                       |   |       |      |       |   |
| Stockholders’ equity:                                 |   |       |      |       |   |
| Common stock                                               |   | 558,653    |      | 524,953    |   |
| Additional paid-in capital                                 |   | 12,399,085 |      | 11,919,653 |   |
| Accumulated deficit                                        |   | (9,554,237 | )         | (9,014,648 | )      |
| Total stockholders’ equity                            |   | 3,403,501  |      | 3,429,958  |   |
| Total Liabilities and  Stockholders’ Equity           |   | $          | 9,099,063 |       | $      | 10,104,733 |   |

 

2

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**SENTO CORPORATION**

**AND SUBSIDIARY**

 

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
|                                                                                          |   | **Three Months Ended** |      |
|-----------------------------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                                          |   | **June 30,****2003**   |      | **June 29,****2002** | ** ** |
|                                                                                          |   |                   |      |   |   |
| Revenue                                                                                       |   | $                      | 4,154,631 |   | $ | 4,222,734 |   |
|                                                                                          |   |                   |      |   |   |
| Cost of sales                                                                                 |   | 3,953,156              |      | 4,310,420 |   |
|                                                                                          |   |                   |      |   |   |
| Gross profit (loss)                                                                           |   | 201,475                |      | (87,686 | ) |
|                                                                                          |   |                   |      |   |   |
| Selling, general and  administrative expenses                                                 |   | 601,347                |      | 587,988 |   |
| Operating loss                                                                                |   | (399,872               | )         | (675,674 | ) |
|                                                                                          |   |                   |      |   |   |
| Stock-based compensation                                                                      |   | (14,217                | )         | — |   |
| Non-cash charge for valuation  of warrants and conversion of debentures                       |   | (56,392                | )         | (20,642 | ) |
| Other expense, net                                                                            |   | (69,108                | )         | (79,384 | ) |
| Net loss                                                                                      |   | $                      | (539,589  | ) | $ | (775,700 | ) |
|                                                                                          |   |                   |      |   |   |
| Basic and diluted net loss per  share                                                         |   | $                      | (0.25     | ) | $ | (0.37 | ) |
|                                                                                          |   |                   |      |   |   |
| Basic and diluted weighted  average number of common and common equivalent shares outstanding |   | 2,133,227              |      | 2,098,878 |   |

 

3

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**SENTO CORPORATION**

**AND SUBSIDIARY**

 

**Condensed ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
|                                                                                 |   | **Three  Months Ended** |      |
|--------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                 |   | **June 30,  2003**           |      | **June 29,  2002** | ** ** |
| Cash flows from operating  activities:                                               |   |                         |      |   |   |
| Net loss                                                                             |   | $                            | (539,589  | ) | $ | (775,700 | ) |
| Adjustments to reconcile net  loss to net cash provided by operating activities:     |   |                         |      |   |   |
| Depreciation and amortization                                                        |   | 413,756                      |      | 440,978 |   |
| Accretion of debenture for  warrant and non-cash charge for conversion of debentures |   | 56,392                       |      | 20,642 |   |
| Stock-based compensation                                                             |   | 14,217                       |      | — |   |
| Loss on disposal of assets                                                           |   | —                       |      | 686 |   |
| Revaluation of warrants issued  for services                                         |   | —                       |      | 7,131 |   |
| Realized loss on sale of  short-term investments                                     |   | —                       |      | 8,806 |   |
| Changes in operating assets and  liabilities:                                        |   |                         |      |   |   |
| Accounts receivable                                                                  |   | 904,467                      |      | 2,234,995 |   |
| Other assets                                                                         |   | (72,454                      | )         | 99,153 |   |
| Accounts payable                                                                     |   | (301,237                     | )         | (17,187 | ) |
| Accrued liabilities                                                                  |   | (67,198                      | )         | (60,914 | ) |
| Deferred revenue and other  current liabilities                                      |   | (13,191                      | )         | (124,399 | ) |
| Net cash provided by  operating activities                                      |   | 395,163                      |      | 1,834,191 |   |
| Cash flows from investing  activities:                                               |   |                         |      |   |   |
| Proceeds from sale of  short-term investments                                        |   | —                       |      | 132,090 |   |
| Purchase of short-term  investments                                                  |   | —                       |      | (7,504 | ) |
| Purchase of property and  equipment                                                  |   | (36,855                      | )         | (18,968 | ) |
| Net cash provided by (used in)  investing activities                                 |   | (36,855                      | )         | 105,618 |   |
| Cash flows from financing  activities:                                               |   |                         |      |   |   |
| Principal payments on long –  term debt and debentures                          |   | (1,037,702                   | )         | (299,806 | ) |
| Net borrowings under line of  credit                                                 |   | 295,508                      |      | — |   |
| Issuance of long-term debt and  debentures                                           |   | 540,000                      |      | — |   |
| Proceeds from stock issued through  employee stock purchase plan                     |   | —                       |      | 20,003 |   |
| Net cash used in financing  activities                                               |   | (202,194                     | )         | (279,803 | ) |
| Net increase in cash                                                                 |   | 156,114                      |      | 1,600,006 |   |
| Cash at beginning of period                                                          |   | 2,583,337                    |      | 1,047,731 |   |
| Cash at end of period                                                                |   | $                            | 2,739,451 |   | $ | 2,707,737 |   |
|                                                                                 |   |                         |      |   |   |
| Supplemental disclosures of cash flow  information                                   |   |                         |      |   |   |
| Cash paid for:                                                                       |   |                         |      |   |   |
| Interest                                                                             |   | $                            | 71,260    |   | $ | 96,637 |   |
|                                                                                 |   |                         |      |   |   |
| Non-cash investing and  financing activities:                                        |   |                         |      |   |   |
|                                                                                 |   |                         |      |   |   |
| Value of  warrants issued with convertible debentures                                |   | $                            | 179,849   |   | $ | — |   |
| Value of warrants issued to  placement agent                                         |   | 36,031                       |      | — |   |
| Conversion of debentures  (including accrued interest of $2,778)                     |   | 235,923                      |      | — |   |
| Equipment purchased through capital lease                                            |   | —                       |      | 160,538 |   |

 

4

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**SENTO CORPORATION****AND SUBSIDIARY**

 

**Notes to Condensed Consolidated FinancialStatements**

**June 30, 2003**

**(Unaudited)**

 

 

A.                                   BASISOF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statementsare stated in accordance with the instructions to Form 10-QSB and do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.

 

Operating results for the three months ended June 30, 2003 are notnecessarily indicative of the results that may be expected for the full fiscalyear.  The unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and footnotes thereto included in theCompany’s Annual Report on Form 10-KSB for the year ended March 31, 2003.

 

The Company has adopted the footnote disclosure provisions of Statementof Financial Accounting Standards No. 123, *Accounting for Stock Based-Compensation*(SFAS 123).  SFAS 123 encouragesentities to adopt a fair value based method of accounting for stock options orsimilar equity instruments.  However, italso allows an entity to continue measuring compensation cost for stock-basedcompensation using the intrinsic-value method of accounting prescribed byAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (APB25).  The Company has elected tocontinue to apply the provisions of APB 25 and provide pro forma footnotedisclosures required by SFAS 123, which has been determined as if the Companyhad accounted for its employee stock options under the fair value method.

 

The fair value of each option grant is estimated on the date of grantusing the Black Scholes option-pricing model with the followingweighted-average assumptions: expected dividend yield of zero percent,risk-free interest rate of         percent,expected life of 5 years, and expected stock-price volatility of     percent.

 

The Company applies APB 25 in accounting for options issued under thePlan.  Had the Company determinedcompensation cost based on the fair value at the grant date for its stockoptions under SFAS 123, the Company’s net income (loss) would have been changedto the pro forma amounts indicated below for the quarter ended June 30, 2003:

 
| Net loss                                  |   | As reported | ** ** | **$**        | **(539,589** | **)** |
|-------------------------------------------|--------|-------------|------------|--------------|--------------|-------|
|                                      |   | Pro forma   |       | **(783,136** | **)**        |
| Basic and diluted income (loss) per share |   | As reported | ** ** | **(0.25**    | **)**        |
|                                      |   | Pro forma   |       | **(0.37**    | **)**        |

 

The full impact of calculating compensation cost for stock optionsunder SFAS 123 may not be representative of the effects on reported net income(loss) for future years.

 

B.            CONVERTIBLE DEBT

 

On April 15, 2003, the Company completed arefinancing of its convertible subordinated debentures.  The refinancing included the issuance of newconvertible subordinated debentures and the issuance of a new $300,000, 8% termloan with a bank that was used to pay down a portion of the Company’s existingdebentures.  In total, the Companyissued 1,002 units at $1,000 each, consisting of one $990 debenture andwarrants to purchase 250 shares of the Company’s common stock at $2.25 pershare.

 

5

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The debentures are convertible at any time into shares of the Company’scommon stock at $1.75 per share.  Thedebentures mature on April 15, 2006, and the exercise period for the warrantsexpire on the same date.  Each existingdebenture holder had the ability to exchange all or part of his/her olddebentures for the new debentures.  Newdebentures totaling $991,980 were issued, including the exchange of $531,630 inexisting debentures.  The Company alsoissued warrants to a finder for 50,000 shares of common stock that expire onApril 15, 2006, 37,500 of which are exercisable at $1.60 per share, and 12,500of which are 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 debentureoffering and the warrants issued to the finder.  The value of the warrants included in the debenture offering wascredited to additional paid in capital and charged as a discount against thebook value of convertible debt.  Thevalue of the warrants issued to the finder was capitalized as deferredfinancing costs with a corresponding credit to paid in capital.  The value of these warrants will beamortized to interest expense over the life of the related 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.

 

Three months ended June 30, 2003

 

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 $233,145, togetherwith associated accrued interest of $2,778, were converted into 134,811 sharesof the 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 three monthsended June 30, 2003, the Company recorded $14,217 of stock-based compensation forthese options.

 

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 by employees.  Moreover, because the precise amount ofcompensation expense will depend on the market price of the Company’s commonstock at the end of each quarterly period, the Company will not be able toforecast in advance the amount of compensation expense related to these optionsthat it will incur in any future period.

 

Three months ended June 29, 2002

 

A total of 5,748 shares of common stock were purchased by employeesunder the Company’s Employee Stock Purchase Plan during the three months endedJune 29, 2002.

 

6

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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 the weightedaverage number of shares of common stock outstanding for the period.  Diluted income or loss per share reflectsthe potential dilution that could occur from shares of common stock issuablethrough stock options, warrants and other convertible securities, ifdilutive.  Options and warrants topurchase 18,552 and 16,391 shares, respectively, of common stock have not beenincluded in the calculation of diluted common stock outstanding for the threemonths ended June 30, 2003 and June 29, 2002, because to do so would beanti-dilutive.  Shares issuable pursuantto convertible debentures (427,963 shares as of June 30, 2003 and 64,350 sharesas of June 29, 2002) have not been included in the calculations of diluted commonstock outstanding for the three months ended June 30, 2003 and June 29, 2002 asto do so would be anti-dilutive.

 

The followingtables set forth the computation of basic and diluted income (loss) per sharefor the three and nine months ended June 30, 2003 and June 29, 2002:

 
|                                                                            |   | **Three  Months Ended** |     |
|---------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                            |   | **June 30,  2003**      |     | **June 29,  2002** | ** ** |
| Net loss                                                                        |   | $                       | (539,589 | ) | $ | (775,700 | ) |
| Denominator for basic and diluted net loss  per share - weighted average shares |   | 2,133,227               |     | 2,098,878 |   |
|                                                                            |   |                    |     |   |   |
| Basic and diluted net loss per share                                            |   | $                       | (0.25    | ) | $ | (0.37 | ) |

 

 

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 June 30, 2003) and matures on April 15,2004.  As of June 30, 2003, the Companyhad $600,000 of borrowings outstanding under the line of credit, which isincluded in current portion of long-term debt in the accompanying condensed consolidatedfinancial 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 also issued a warrant to the bank, in connection withobtaining the above credit facilities, to purchase 60,000 shares of CommonStock at $1.79 per share. The value ascribed to the warrant of $42,470 has beenreflected as a debt discount with an offsetting credit to additional paid-incapital and is being amortized to interest expense over the life of the relateddebt. The stock purchase warrant became exercisable on the date of issuance(April 15, 2003) and expires April 15, 2008. Substantially all of the assets ofthe Company serve as collateral for the above line of credit and loans.

 

7

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

 

**General**

 

Usingstate-of-the-art Portal Services and Customer Contact Solutions Centers, Sentoprovides domestic and international support services to Fortune 1000 companies,multinational companies, product manufacturers and software publishingcompanies.  By allowing companies to focuson their core business, Sento helps its clients reduce headcount, eliminateunnecessary capital expenditures, and improve the experience for the client’scustomers.

 

# **Critical**Accounting 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 important tothe preparation of the Company’s consolidated financial statements and requiremanagement’s subjective and complex judgments due to the need to make estimatesabout 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.

 

Thedevelopment and selection of these critical accounting policies have beendiscussed with the Audit Committee. Such policies are reviewed periodically during each year by the AuditCommittee.

 

*Revenue Recognition.*Revenue is generally recognized when persuasive evidence of an arrangementexists, delivery of services has occurred, the fee is fixed or determinable,and collection of the resulting receivable is reasonably assured.  This generally occurs when the Companyprovides customer support services to the end-user.  Certain of the Company’s customer support services are deliveredover a period of time.  Revenueassociated with these services is deferred until the customer support iscompleted and Sento has no remaining obligation to provide further supportservices.

 

*Credit Risk.*In thenormal course of business, the Company provides unsecured credit terms to itscustomers.  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.

 

*Stock – Based Compensation.*Statement of Financial 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 anemployee stock option exchange program (“Exchange Program”), pursuant to whichthe Company granted options to purchase 313,592 shares of the Company’s commonstock at an exercise price of $1.60 per share in exchange for options topurchase 377,342

 

8

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sharesof the 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”). Under variable plan accounting, the Company is required to recognizecompensation expense in its consolidated statements of operations for anyincrease in the market price of the Company’s common stock above $1.60 (themarket price at April 23, 2003 which was the effective date of theexchange).  This compensation must berecorded on quarterly basis until the new options issued under the ExchangeProgram are exercised, 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, the Companywill not be able to forecast in advance the amount of compensation expenserelated 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, theloss of this customer has continued to have a adverse effect on the Company’s revenuesand profitability.  The Company believesthat this excess capacity will be used during the next two years, andtherefore, a charge for impairment of long-lived assets is not necessary atthis time.  The Company will continue tomonitor and analyze this issue during the fiscal year in accordance with SFASNo. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets.*

 

**Results****of Operations**

 

**Three Months Ended June 30, 2003 Compared toThree Months Ended June 29, 2002**

 

*Revenues.*  Revenues decreased $68,000 or 2%, from$4,223,000 for the three months ended June 29, 2002 to $4,155,000 for the threemonths ended June 30, 2003.  Thisrelatively small decrease in revenue is primarily due to the loss of a significantcustomer, which accounted for $141,000 of revenue in April 2002, the finalmonth of this customer’s contract with Sento. Although this decrease in revenue is not substantial on a quarter toquarter comparison, the loss of this customer has been the primary contributorto the Company’s excess capacity to service additional call volume,particularly in its Evanston, Wyoming facility.  This capacity was acquired in anticipation of higher demand forthe Company’s services and to fulfill the required service commitments of twotechnology customers.  However, with thecurrent economic conditions, it is difficult to predict the Company’s abilityto fill this excess capacity with new business in the future.  In the event that the Company is unable tofill the unutilized capacity in the Evanston, Wyoming facility, it may have torecord an impairment charge relating to its assets at that facility.

 

*Cost of Sales.*  Cost of sales decreased 8%, or $357,000,from $4,310,000 for the three months ended June 29, 2002 to $3,953,000 for thethree months ended June 30, 2003.  Thisdecrease in cost of sales was principally attributable to the Company’s effortsin managing costs and a shift from traditional call center support to PortalServices support, which has a lower cost. As a result of the decrease in cost of sales, the Company’s gross profitincreased $289,000 to a gross profit of $201,000 for the three months endedJune 30, 2003, from a gross loss of $(88,000) for the three months ended June29, 2002.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 2%, or $13,000 from $588,000 for the three months ended June 29,2002 to $601,000 for the three months ended June 30, 2003.  As a percentage of revenue, selling, generaland administrative expenses was virtually unchanged at 14% for both the threemonths ended June 30, 2003 and June 29, 2002. Management anticipates that selling, general and administrative expenseswill increase in future periods as a result of increased selling efforts toimprove sales.

 

**Liquidity****and Capital Resources**

 

Cash andshort-term investment balances increased 6%, or $156,000 from $2,583,000 atMarch 31, 2003 to $2,739,000 at June 30, 2003. However, working capital decreased $454,000 during the same period, from$1,069,000 as of March 31, 2003, to $615,000 as of June 30, 2003. The primaryreason for the decrease in working capital was a decrease in accountsreceivable (caused by a decrease in revenue resulting from lower sales volumefor 

 

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the quarter ended June 30, 2003as compared to the quarter ended March 31, 2003) of $905,000 or 32% from$2,849,000 as of March 31, 2003 to $1,944,000 as of June 30, 2003 and the paydown of accounts payable.

 

On April 15, 2003, the Company completed a refinancing of itsconvertible subordinated debentures. The refinancing included the issuance of new convertible subordinateddebentures and the issuance of a new $300,000, 8% term loan with a bank thatwas 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.  The debentures are convertible at any timeinto shares of the Company’s common stock at $1.75 per share.  The debentures mature on April 15, 2006, andthe exercise period for the warrants expire on the same date.  Each existing debenture holder had theability 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. During the three months ended June 30, 2003, debentureswith a face value of $233,145, together with associated accrued interest of$2,778, were converted into 134,811 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 June 30, 2003) and matures on April 15,2004.  As of June 30, 2003, the Companyhad $600,000 of borrowings outstanding under the line of credit, which isincluded in current portion of long-term debt in the accompanying condensedconsolidated financial statements.

 

The first termloan was extended to refinance the Company’s existing equipment financing termdebt with the bank.  The funding of thisloan was limited to the remaining principal balance on existing term loans withthe bank ($513,983 as of the date of funding, May 6, 2003).  The loan calls for monthly principal andinterest 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 Companyhas contractual obligations, including debt agreements and leases that willrequire the use of substantial amounts of cash.  The following table sets forth the Company’s contractualobligations as of June 30, 2003:

 

**Contractual****Obligations**

 
|                                          |   | **Payments Due by  Period** |      |
|-----------------------------------------------|--------|-----------------------------|-----------|
|                                          |   | **Under 1 Year**            |      | **1-3 Years** |   | **4-5 Years** |   | **After 5 Years** |   | **Total** |   |
| Line of Credit (1)                            |   | $                           | 600,000   |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Long Term Debt (principal only) (2)           |   | 732,000                     |      | 476,000 |   | — |   | — |   | 1,208,000 |   |
| 8% Convertible Debentures (principal only)(3) |   | —                      |      | 749,000 |   | — |   | — |   | 749,000 |   |
| Capital Leases                                |   | 338,000                     |      | 419,000 |   | — |   | — |   | 757,000 |   |
| Operating Leases                              |   | 915,000                     |      | 1,227,000 |   | 286,000 |   | — |   | 2,428,000 |   |
| Total Contractual Cash Obligations            |   | $                           | 2,585,000 |   | $ | 2,871,000 |   | $ | 286,000 |   | $ | — |   | $ | 5,742,000 |   |

 

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(1)          TheCompany’s credit line accrues interest at 2% over the bank’s prime rate (4.25%at June 30, 2003).

(2)          TheCompany’s long-term debt carries interest rates of 6% to 8%.

(3)          Assumesdebentures, due in April 2006, will not be converted into shares of Sento’scommon stock.

 

In addition to the abovecontractual obligations, the Company is contingently liable for an equipmentlease that was assumed by Echopass Corporation.  The lease expires in June 2004 and calls for monthly leasepayments of $6,140.

 

For the threemonths ended June 30, 2003, net cash provided by operations was $395,000 ascompared to $1,834,000 for the three months ended June 29, 2002.  During the three months ended June 30, 2003the Company

 

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used $37,000 of cash forinvesting activities as compared to generating $106,000 from investingactivities during the three months ended June 29, 2002.  During the three months ended June 29, 2003,the Company used $202,000 for financing activities as compared to using$280,000 for financing activities during the three months ended June 29, 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 wellas borrowings under a bank line of credit. During the three years ended March31, 2003 and the three months ended June 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 the economicdownturn, making it more difficult for the Company to obtain equipmentfinancing.  The growth of the Companyhas consumed substantial amounts of cash, and the Company may be required toobtain additional financing to sustain current operations.  In the event the Company is not able to findadditional sources of funding and enter into financing transactions onreasonable terms, its ability to sustain current operations will be limited, orit may be forced to reduce or suspend its operations.  There can be no assurance that the Company will be able to obtainnecessary capital funding on terms favorable 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 regarding futureevents.  Words such as “expects,” “believes,”“anticipates,” “should,” and “likely” also identify forward-looking statements.All forward-looking statements included in this Report are made as of the datehereof, based on information available to the Company as of such date, and theCompany assumes no obligation to update any forward-looking statement.  It is important to note that such statementsmay not prove to be accurate and that the Company’s actual results and futureevents could differ materially from those anticipated in such statements.  Among the factors that could cause actualresults to differ materially from the Company’s expectations are thosedescribed under “Management’s Discussion and Analysis or Plan ofOperations—Risks Related to Existing and Proposed Operations.”  All subsequent written and oralforward-looking statements attributable to the Company or persons acting on itsbehalf are expressly qualified in their entirety by this section and otherfactors included elsewhere in this Report.*

 

**Risks Related to Existing and ProposedOperations**

 

In addition toother information in this Report, the following are important factors thatshould be considered carefully in evaluating the Company and its business.

 

*Volatile Economic Conditions Have Affectedand Will Likely**Continue to Affect Sento’s Operations and FinancialResults*.  Volatile economicconditions have adversely affected the Company’s operations and financialresults.  The slowing economy hasresulted in increased pricing pressures and lower call volumes from existingclients, and may have limited the Company’s ability to attract newclients.  These factors have contributedto a decline in the 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 orderto compensate for unexpected shortfalls in call volumes.  The Company cannot forecast futurefluctuations in economic conditions, and its operations and financial resultsmay be materially and adversely affected by continued economic volatility.

 

*Dependence on Key Clients.*  Three clients accounted for approximately58% of the Company’s revenues for the three months ended June 30, 2003.  These three clients accounted forapproximately 30%, 16%, and 12%, respectively of revenues for fiscal 2003.  For the three months ended June 29, 2002,four clients accounted for approximately 72% of the Company’s revenues.  These four clients accounted forapproximately 36%, 13%, 12%, and 11%, respectively of revenues for the threemonths ended June 29, 2002.

 

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Consistentwith industry standards, the Company’s contracts are generally cancelable bythe client on short-term notice.  TheCompany’s loss of a significant amount of business with any of its key clientscould have, and the loss of a substantial amount of business with any of its largestexisting technical support clients would have, a material adverse effect on theCompany’s business, 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 June 30, 2003, the Company had workingcapital of $615,000 (representing a decline of 42% from March 31, 2003) and acash and short-term investment balance of $2,739,000 (representing an increaseof 6% from March 31, 2003).  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.  The Company anticipates that future growthof its operations in the United States can be supported with moderate capitalinvestment by reconfiguring the existing space.  This reconfiguration will allow for approximately 350 additionalseats without the need for additional real estate.  It should be noted that there is very little capital spendingrequired for growth using offshore partners. The Company may be required to pursue additional funding opportunitiesto sustain its current operations.  Inthe event the Company is not able to find such additional sources of funding,its ability to sustain current operations may be limited, or it may be forcedto reduce or suspend its operations. There can be no assurance that the Company will be able to obtainnecessary capital funding 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’s expectations.  However, there can be no assurance that theCompany’s future credit losses will be within management’s expectations.  In addition, the Company’s revenues andaccounts receivable are concentrated in a relatively few number ofcustomers.  A significant change in theliquidity or financial position of any one of these customers or a furtherdeterioration in the economic environment, in general, could have an adverseimpact on the collectability of the Company’s accounts receivable and theCompany’s future operating results.

 

*Risks of Growth*Strategy. The Company’s business strategy is premised, in part, uponexpansion of its operations. Substantial risks accompany the Company’s growthplans. For example, the Company’s growth plans are dependent upon its abilityto attract and retain new clients and additional business from existingclients.  The Company’s failure toattract and retain new clients and additional business from existing clients,or the loss of existing clients, will not only prevent the implementation ofits business strategy, but may continue the current circumstance of excesspersonnel and physical facilities, which would have a negative impact on theCompany’s results of operations and financial condition.

 

The Company’sgrowth plans are also subject to fluctuations in technology and industrystandards, changes in customer requirements and preferences and generaleconomic conditions, among other factors. Many of these factors are beyond the Company’s control.  If the Company is incorrect in itsassessment of the feasibility of its growth plans, or if circumstances changein a way that the Company did not foresee or anticipate, the Company may not beable to grow as planned or its growth strategy may have an adverse effect onits business operations and financial condition.

 

*Reliance on a Software Company for Chat andEmail applications*. The Company contracts with a software company to provide chat and emailtools used with the Company’s CRM software, reporting and management services.  If this software company fails in itsbusiness efforts, the Company may be required to identify and retain one ormore alternate third-party providers of such services and could experienceservice delays, interruptions, cancellations or increased costs.

 

*Changing Needs of the Customer Contact Service Market*.  Thecustomer contact service industry is characterized by rapid technologicalchange, changes in customer requirements and preferences, and the emergence ofnew industry standards and practices that could render the Company’s existingand proposed products, services, technology and systems obsolete.  To remain competitive, the Company mustcontinually improve the performance, features, and reliability of its productsand services, including its existing customer contact service applications, anddevelop new products and services that address the increasingly sophisticatedand varied needs of its prospective clients. If the Company cannot adapt or respond in a cost-effective and timelymanner to changing industry standards, market conditions, or client’srequirements, its business and operating results would suffer and couldnegatively impact the Company’s financial condition.

 

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The Company’s success mayalso depend in part on its ability to develop solutions that keep pace withcontinuing changes in information technology, evolving industry standards, andchanging client requirements.  There canbe no assurance that the Company will be successful in adequately addressingthese developments on a timely basis or that, if these developments areaddressed, the Company will be successful in the marketplace.  In addition, there can be no assurance thatproducts or technologies developed by others will not render the Company’sservices non-competitive or obsolete. The Company’s failure to address these developments could have amaterial adverse effect on its business and financial condition.

 

*Competition*.  The market for customercontact services is highly fragmented and very competitive.  The customer contact services industry,however, has begun to experience a degree of consolidation, and the existenceof major customer contact center companies has resulted in an additional levelof competition from service providers that have greater name recognition,larger installed customer bases, and significantly greater financial,technical, and marketing resources than the Company.  Over the past several years, a number of existing companies haveenjoyed increasing success and rapid internal growth.  Several of these companies have been active in acquiring smallerregional customer contact services companies and are becoming major competitorswith a measurable share of this rapidly expanding market.  Also, many major companies provide their ownin-house customer care support and customer training.

 

The Company cannot provideany assurance that better and more efficient services will not be provided bynew or existing customer contact service providers in competition with theCompany.  The services provided by suchcompetitors may 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 Customer Contact Services Market*.  Thecustomer contact services market is relatively new and intenselycompetitive.  There are no substantialbarriers to entry, and established or new entities may enter this market in thenear future.  Furthermore, establishedenterprise software companies, including IBM, Hewlett-Packard Company,Microsoft Corporation, and similar companies, may leverage their existingrelationships and capabilities to offer customer service applications.  The Company was a relatively early entrantin the customer self-services and chat markets.  Any delays in market acceptance of internet customer contactservice applications in general, or the Company’s proposed products andservices in particular, would likely harm the Company’s competitive position.  Delays would allow the Company’s competitorsadditional time to improve their service or product offerings, and also providetime for new competitors to develop e-business customer service applicationsand solicit prospective clients within the Company’s target markets.  Increased competition could result inadditional pricing pressures, reduced operating margins and loss of marketshare.

 

*Risk of Emergency Interruption of Customer Contact SolutionsCenter 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 QualityManagement and Employees*.  The Company’s successwill depend, in large part, on its ability to attract, retain and train highlyqualified technical, managerial and marketing personnel with the requiredexpertise.  The Company has not enteredinto employment agreements that require the services of any of its keymanagerial or technical personnel to remain with the Company for any specifiedperiod of time.  There can be noassurance that the Company will be able to attract and maintain the personnelnecessary for the development and operation of its business or that it will beable to train its current employees on new developments in technology.  Specifically, the loss of any key personnelor an inability to attract, retain, train or motivate qualified personnel couldhave a material adverse effect on the Company’s business, financial conditionand results of operations.

 

In addition, the Company’stotal employee count has fluctuated from approximately 585 as of March 31, 2000to a high of approximately 953 as of December 31, 2000, and has decreased toapproximately 200 as of June 30, 2003. The support required for one of the Company’s largest clients isseasonal.  There is, therefore, anecessity for very rapid increases in employees and subsequent decreases in thenumber of employees as the requirements for support change.  The Company cannot provide any assurancethat its current management team can successfully

 

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manage the Company’s rapidly evolvingbusiness, and any failure to do so could have a material adverse effect uponthe Company’s operating results.

 

During thetime period beginning July 2000 and continuing to date, the Company haspartnered and continues to partner with offshore entities that supply CustomerContact Center services on a contract basis to the Company.  Currently there are approximately 170 agentsin these offshore contracted Customer Contact Centers. Managing the quality ofservices rendered to the Company’s clients is further complicated by the remotelocation and language and cultural differences of agents supplying theseservices, and there can be no assurance that the Company can adequately managethese remote agents.  The lack of propermanagement of these offshore agents or the delivery of low-quality services bysuch agents could have a material adverse effect upon the Company’s operatingresults.

 

*Dependence on Industry Trend to Outsource Services*.  TheCompany’s business depends in large part on the trend within the IT industry tooutsource certain services.  The Companycannot provide any assurance that this trend will continue or that, if thetrend continues, it will continue at the same rate of growth.  The failure of this trend to continue couldhave a material adverse effect on the Company’s business, financial condition,and results of operations.

 

*Potential Significant Fluctuations in Quarterly Results*.  Thevalue of individual transactions can constitute a substantial percentage of theCompany’s quarterly revenue, and particular transactions may generate asubstantial portion of the operating profits for a quarter.  Because the Company’s staffing and otheroperating expenses are based on anticipated revenue levels, and a highpercentage of its expenses are fixed, delays in the receipt of orders can causesignificant variations in operating results from quarter to quarter.  In addition, the Company may expendsignificant resources pursuing potential sales that will not beconsummated.  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.

 

In particular, the Company’squarterly revenues from its Customer Contact Solutions Center operations arepotentially volatile.  Such revenues areprincipally a function of the number of support requests received by theCompany, and the time 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 thereasons identified above, management believes that period-to-period comparisonsof the Company’s results of operations may not be meaningful and that no oneshould rely upon them as an indication of future performance.  Furthermore, the Company cannot provide anyassurance that it will be able to achieve or sustain profitability on aquarterly basis.

 

*Volatility of Stock Price*.  Thetrading price of the Company’s Common Stock has fluctuated widely in responseto variations in quarterly operating results, announcements by the Company orits competitors, industry trends, general economic conditions or other events orfactors.  Such fluctuations, as well asfluctuations in the trading volume of the Common Stock, may continue in thefuture.  Regardless of the generaloutlook for the Company’s business, the announcement of quarterly operatingresults below analyst and investor expectations could have a material andadverse effect on the market price of the Common Stock.

 

The Company received ade-listing notice from Nasdaq on September 17, 2002, due to the bid for theCompany’s Common Stock being below $1.00, the minimum bid price for continuedlisting on the Nasdaq Small Cap Market. However, the Company was able to obtain an extension after a hearingbefore a Nasdaq Listing Qualification Panel ("Nasdaq Panel") that washeld on October 24, 2002.  In addition,the Company’s shareholders voted in favor of amending the Company’s amended andrestated articles of incorporation to effect a one-for-four reverse split ofthe outstanding shares of the Company’s Common Stock.  The reverse split became effective November 25, 2002 and the bidfor the Company’s Common Stock has remained above $1.00 since that time and theNasdaq Panel then determined to continue the Company's listing and close thehearing file.

 

The Company values itslisting on the Small Cap Market, and will seek to remain in compliance with theapplicable listing qualification standards; however, the price of the CommonStock is determined by a number of factors, including general economic andmarket conditions, industry trends and public perception, many of which arebeyond the Company’s control.  If thebid price for the Common Stock does not remain above $1.00 on a consistentbasis, the Company may lose its listing privileges on the Nasdaq Small CapMarket, and may be forced to find another forum for trading of its CommonStock.

 

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*Anti-Takeover Considerations.* TheCompany’s Articles of Incorporation and Bylaws, the Utah Revised BusinessCorporation Act, and the Utah Control Shares Acquisition Act each contain certainprovisions that may have the effect of inhibiting a non-negotiated merger orother business combination.  TheCompany’s Articles of Incorporation grant to the Board of Directors theauthority, without further action by the Company’s shareholders, to fix therights and preferences of, and issue shares of preferred stock.  These provisions may deter hostile takeoversor delay or prevent changes in control of the Company or changes in theCompany’s management, including transactions in which shareholders mightotherwise receive a premium for their shares over the then-current marketprices.  In addition, these provisionsmay limit the ability of shareholders to approve transactions that they maydeem 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 July 31, 2003, the Company had2,257,735 shares of Common Stock outstanding, substantially all of which wereeligible as of such date under applicable securities laws for immediate sale inthe public market without restriction, except for any shares purchased by any“affiliate” of the Company (as that term is defined under the rules andregulations of the Securities Act) which will be subject to the resalelimitations of Rule 144 under the Securities Act or any successor rule (“Rule144”). As of July 31, 2003, there remain up to 145,602 shares issuable upon conversionof debentures that may be eligible for immediate sale as described in Part II —Recent Sales of Unregistered Securities.

 

*Dividends.*  Dividends are payable on the Common Stockwhen, as and if declared by the Company’s Board of Directors.  No dividend has been declared or paid on theCommon Stock to date.  At present theCompany intends to retain any future earnings for use in its business andtherefore does not anticipate paying any dividends on the Common Stock in theforeseeable future.

 

Item 3.    Controls and Procedures

 

As of June 30, 2003, an evaluation was performed under the supervisionand with the participation of the Company’s management, including the ChiefExecutive 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, the disclosurecontrols and procedures were effective in timely alerting them to materialinformation relating to the Company required to be included in the Company’speriodic SEC filings.  Subsequent to thedate of that evaluation, there have been no significant changes in the internalcontrols or in other factors that could significantly affect internal controls,nor were any corrective actions required with regard to significantdeficiencies and material weaknesses.

 

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PART II.                OTHER INFORMATION

 

Item 2.    Changesin Securities

 

Recent Salesof 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 memorandumdetailing Sento’s business and financial information, including copies ofSento’s Annual Report on Form 10-KSB for the fiscal year endedMarch 30, 2002 and Sento’s Quarterly Reports on Form 10-QSB for theperiods ending June 29, 2002, September 28, 2002, andDecember 31, 2002. Sento paid commissions of $46,960 to a placement agentin connection with the sale of the convertible debentures and issued a warrantto purchase 50,000 shares to a finder. As of July 31, 2003, 157,925 shares ofCommon Stock have been issued upon conversion of such debentures.

 

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 circumstancesin which 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)              Exhibitsattached to the 10-QSB are as follows:

 

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

 

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

 

b)             Reportson Form 8-K:

 

Current reportdated April 24, 2003 filed for the purposes of disclosing to shareholders andthe financial markets a press release also dated April 24, 2003 and filed as anexhibit to the Form 8-K.  This pressrelease discussed the Company’s unaudited financial results for the fourthquarter and audited financial results for the year ending March 31, 2003.

 

Current reportdated July 24, 2003 filed for the purposes of disclosing to shareholders andthe financial markets a press release also dated July 24, 2003 and filed as anexhibit to the Form 8-K.  This pressrelease discussed the Company’s unaudited financial results for the firstquarter of the year ending March 31, 2004.

 

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SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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 August  13, 2003. |               |
|                         |                    |  |  |  |

 

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