##### **United StatesSecurities and Exchange Commission**

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

#### ** **

**FORM 10-QSB**

 

#### **ý**                                 Quarterly Report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

#### ** **

#### **For the Quarter EndedJune 30, 2004**

 

**Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

#### **Commission FileNumber 06425**

 

**SENTO CORPORATION**

Exact Name of Small Business Issuer asSpecified 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**

 

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d)of the Exchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý     Noo

 

State the numberof shares outstanding of each of the issuer’s classes of common equity, as ofthe latest practicable date:

 
| **Class**                            | ** ** | **Outstanding at  July 31, 2004** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| Common capital stock  $.25 par value |       | 3,727,173                              |       |

 

Transitional Small Business Disclosure Format (check one):

 

Yes o     Noý

 

 

----

 

**SENTO CORPORATION**

Quarterly Report on Form 10-QSB

Quarter ended June 30, 2004

 

TABLE OF CONTENTS

 
| PART  I       - FINANCIAL INFORMATION                  |   |
|---------------------------------------------------------------------------------|--------|
|                                                                            |   |
| Item  1. Financial Statements                                              |   |
|                                                                            |   |
| Condensed  Consolidated Balance Sheets                                          |   |
|                                                                            |   |
| Condensed  Consolidated Statements of Operations                                |   |
|                                                                            |   |
| Condensed Consolidated Statements of Cash  Flows                                |   |
|                                                                            |   |
| Notes to Condensed Consolidated Financial  Statements                           |   |
|                                                                            |   |
| Item 2.   Management’s Discussion and Analysis or Plan of Operations. |   |
|                                                                            |   |
| Overview                                                                        |   |
|                                                                            |   |
| Critical Accounting Policies                                                    |   |
|                                                                            |   |
| Results of Operations                                                           |   |
|                                                                            |   |
| Liquidity and Capital Resources                                                 |   |
|                                                                            |   |
| Seasonality                                                                     |   |
|                                                                            |   |
| 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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# **PART I**        - FINANCIAL INFORMATION

# ** **

## Item 1.             Financial Statements

##  

**SENTO CORPORATIONAND SUBSIDIARY**

 

### **CondensedConsolidated Balance Sheets**

### ** **

| ** **                                                 | ** ** | **June 30, 2004 ** | ** ** | **March 31, 2004** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
|                                                       |       | **(Unaudited)**              |       |                    |       |
| **ASSETS**                                                 |       | ** **                   |       |                    |       |
| ** **                                                 |       | ** **                   |       |                    |       |
| Current  assets:                                           |       | ** **                   |       |                    |       |
| Cash                                                       |       | $                            | 7,212,242  |                    | $          | 6,567,811 |   |
| Accounts  receivable, net                                  |       | 3,073,799                    |       | 4,632,111               |       |
| Other current  assets                                      |       | 257,244                      |       | 456,182                 |       |
| Total current assets                                       |       | 10,543,285                   |       | 11,656,104              |       |
|                                                       |       |                         |       |                    |       |
| Property and  equipment, net                               |       | 4,284,651                    |       | 4,220,560               |       |
| Other assets                                               |       | 275,877                      |       | 132,896                 |       |
| Total Assets                                               |       | $                            | 15,103,813 |                    | $          | 16,009,560 |   |
| ** **                                                 |       |                         |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**              |       |                         |       |                    |       |
| ** **                                                 |       |                         |       |                    |       |
| Current  liabilities:                                      |       |                         |       |                    |       |
| Current  portion of long-term debt and capital leases      |       | $                            | 784,985    |                    | $          | 728,357 |   |
| Accounts  payable                                          |       | 1,191,691                    |       | 1,334,409               |       |
| Accrued  liabilities and other                             |       | 1,430,188                    |       | 2,394,204               |       |
| Total current  liabilities                                 |       | 3,406,864                    |       | 4,456,970               |       |
|                                                       |       |                         |       |                    |       |
| Long-term debt  and capital leases, net of current portion |       | 829,037                      |       | 656,324                 |       |
| Total  liabilities                                         |       | 4,235,901                    |       | 5,113,294               |       |
|                                                       |       |                         |       |                    |       |
| Stockholders’  equity:                                |       |                         |       |                    |       |
| Common stock                                               |       | 931,727                      |       | 863,225                 |       |
| Additional  paid-in capital                                |       | 20,570,733                   |       | 20,512,919              |       |
| Accumulated  deficit                                       |       | (10,634,548                  | )          | (10,479,878             | )          |
| Total  stockholders’ equity                           |       | 10,867,912                   |       | 10,896,266              |       |
| Total  Liabilities and Stockholders’ Equity           |       | $                            | 15,103,813 |                    | $          | 16,009,560 |   |

 

*See accompanying notes.*

 

1

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**SENTO CORPORATION**

**AND SUBSIDIARY**

 

### **CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Three  Months Ended**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                     | ** ** | **June 30,****2004** | ** ** | **June 30,****2003** | ** ** |
| ** **                                                                                     | ** ** | ** **                | ** ** |
|                                                                                           |       |                      |       |   |   |
| Revenue                                                                                        |       | $                         | 6,566,748  |   | $ | 4,154,631 |   |
|                                                                                           |       |                      |       |   |   |
| Cost of sales                                                                                  |       | 5,775,952                 |       | 3,953,156 |   |
|                                                                                           |       |                      |       |   |   |
| Gross profit                                                                                   |       | 790,796                   |       | 201,475 |   |
|                                                                                           |       |                      |       |   |   |
| Product  development                                                                           |       | 119,013                   |       | — |   |
| Selling,  general and administrative expenses                                                  |       | 826,481                   |       | 601,347 |   |
| Stock-based  compensation expense (benefit)                                                    |       | (150,749                  | )          | 14,217 |   |
| Operating loss                                                                                 |       | (3,949                    | )          | (414,089 | ) |
|                                                                                           |       |                      |       |   |   |
| Non-cash  charge for valuation of warrants and conversion of debentures                        |       | (115,849                  | )          | (56,392 | ) |
| Other expense,  net                                                                            |       | (34,872                   | )          | (69,108 | ) |
| Net loss                                                                                       |       | (154,670                  | )          | (539,589 | ) |
| Deemed divided  as a result of warrant modification                                            |       | (37,875                   | )          | — |   |
| Net loss  attributable to common stockholders                                                  |       | $                         | (192,545   | ) | $ | (539,589 | ) |
|                                                                                           |       |                      |       |   |   |
| Basic and  diluted net loss per share                                                          |       | $                         | (0.05      | ) | $ | (0.25 | ) |
|                                                                                           |       |                      |       |   |   |
| Basic and  diluted weighted average number of common and common equivalent shares  outstanding |       | 3,627,686                 |       | 2,133,227 |   |

 

*See accompanying notes.*

 

2

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**SENTO CORPORATION**

**AND SUBSIDIARY**

 

### **CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 

 
| ** **                                                                          | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                          | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| Cash flows  from operating activities:                                              |       |                    |       |   |   |
| Net loss                                                                            |       | $                       | (154,670   | ) | $ | (539,589 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:    |       |                    |       |   |   |
| Depreciation  and amortization                                                      |       | 389,931                 |       | 413,756 |   |
| Accretion of  debenture for warrant and revaluation of warrants issued for services |       | 115,849                 |       | 56,392 |   |
| Stock-based  compensation                                                           |       | (150,749                | )          | 14,217 |   |
| Changes in  operating assets and liabilities:                                       |       |                    |       |   |   |
| Accounts  receivable                                                                |       | 1,558,312               |       | 904,467 |   |
| Other assets                                                                        |       | 46,687                  |       | (72,454 | ) |
| Accounts payable                                                                    |       | (142,718                | )          | (301,237 | ) |
| Accrued  liabilities and other                                                      |       | (361,414                | )          | (80,389 | ) |
| Net cash  provided by operating activities                                          |       | 1,301,228               |       | 395,163 |   |
| Cash flows  used in investing activities:                                           |       |                    |       |   |   |
| Purchase of  property and equipment                                                 |       | (287,616                | )          | (36,855 | ) |
| Cash flows  from financing activities:                                              |       |                    |       |   |   |
| Principal  payments on long-term debt and debentures                                |       | (246,971                | )          | (1,037,702 | ) |
| Net borrowings  under line of credit                                                |       | —                  |       | 295,508 |   |
| Issuance of  long-term debt and debentures                                          |       | 316,140                 |       | 540,000 |   |
| Payment of  accrued offering costs                                                  |       | (603,823                | )          | — |   |
| Proceeds from  stock options exercised                                              |       | 125,607                 |       | — |   |
| Proceeds from  stock issued through employee stock purchase plan                    |       | 39,866                  |       | — |   |
| Net cash used  in financing activities                                              |       | (369,181                | )          | (202,194 | ) |
| Net increase  in cash                                                               |       | 644,431                 |       | 156,114 |   |
| Cash at  beginning of period                                                        |       | 6,567,811               |       | 2,583,337 |   |
| Cash at end of  period                                                              |       | $                       | 7,212,242  |   | $ | 2,739,451 |   |
|                                                                                |       |                    |       |   |   |
| Supplemental disclosures of cash flow  information                                  |       |                    |       |   |   |
| Cash paid for:                                                                      |       |                    |       |   |   |
| Interest                                                                            |       | $                       | 36,006     |   | $ | 71,260 |   |
|                                                                                |       |                    |       |   |   |
| 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 $7,483)                    |       | —                  |       | 235,923 |   |
| Equipment  financed through long-term note                                          |       | 157,136                 |       | — |   |

 

*Seeaccompanying notes.*

 

3

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#### **SENTO CORPORATION**

**AND SUBSIDIARY**

 

### **Notes to CondensedConsolidated Financial Statements**

**June 30, 2004**

**(Unaudited)**

 

A.                                   BASIS OFPRESENTATION

 

The accompanyingunaudited condensed consolidated financial statements are stated in accordancewith the instructions to Form 10-QSB and do not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring entries) considerednecessary for a fair presentation have been included.

 

Operating results for the three months endedJune 30, 2004 are not necessarily indicative of the results that may beexpected for the full fiscal year.  Theunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-KSB/A for the yearended March 31, 2004.

 

The Company has adopted the footnotedisclosure provisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock Based-Compensation* (SFAS 123).  SFAS 123 encourages entities to adopt a fairvalue based method of accounting for stock options or similar equityinstruments.  However, it also allows anentity to continue measuring compensation cost for stock-based compensationusing the intrinsic-value method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* (APB 25). The Company has elected to continue to apply the provisions of APB 25and provide pro forma footnote disclosures required by SFAS 123, which has beendetermined as if the Company had accounted for its employee stock options underthe fair value method.

 

The fair value of eachoption grant is estimated on the date of grant using the Black Scholesoption-pricing model with the following weighted-average assumptions: expecteddividend yield of zero percent, risk-free interest rate of 3.8 percent,expected life of 5 years, and expected stock-price volatility of 76 percent.

 

The Company applies APB25 in accounting for options issued under the Sento Corporation 1999 OmnibusStock Incentive Plan.  Had the Companydetermined compensation cost based on the fair value at the grant date for itsstock options under SFAS 123, the Company’s net loss would have been changed tothe pro forma amounts indicated below for the three months ended June 30,2004:

 

 
| ** **                                    | ** ** | ** **  | ** ** | **Three Months** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------|------------|
| Net loss attributable to common  stockholders |       | As reported |       | $                | (192,545   | ) |
|                                          |       | Pro forma   |       | (339,543         | )          |
| Basic and diluted loss per share              |       | As reported |       | (0.05            | )          |
|                                          |       | Pro forma   |       | (0.09            | )          |
|                                               |            |             |            |                  |            |  |

 

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

 

B.                                     LONG-TERM DEBT ANDCAPITAL LEASES

 

On May 11, 2004, the Companyrefinanced its line of credit and existing term loans with a bank, wherein theline of credit was renewed and the existing three term loans were combined intoone term loan.  The agreement also allowsthe Company to draw on an additional term loan for up to $1,500,000 ofequipment financing.  The line of creditwas increased from a maximum of $2,500,000 to $3,000,000 (subject to a limit of80% of eligible accounts receivable), has an interest rate of the bank’s primerate plus 1% and has a two-year term, including provisions for extension,subject to approval.  The line of credit

 

4

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terms also contain an annual commitment fee of 0.75%.  The new term loan for $750,000 includes therepayment of the three existing term loans plus $316,140 in additionalequipment financing.  The terms of thisloan include a 1.0% commitment fee, an interest rate of 7.4%, monthly paymentsof $23,260 including interest, and a term of three years.  The Company also has a commitment from thebank for a term loan of up to $1,500,000 for future equipment financing.  The Company may take advances on this loan ina minimum amount of $100,000 through March 31, 2005. The underlying termloans will have a term of three years, will require monthly principal andinterest payments, have a fixed interest rate determined at the date of theadvance based on the three-year U.S. Treasury Bond rate plus 4.5%, and have acommitment fee of 1%.

 

During the three months ended June 30,2004, the Company purchased $157,136 of software under a note payable.  The note calls for quarterly payments of$13,773 through April 2007.

 

C.                                     COMMONSTOCK

 

Three months endedJune 30, 2004

 

During the threemonths ended June 30, 2004, options to purchase 93,179 shares of commonstock were exercised and 14,820 shares of common stock were purchased byemployees under the Company’s Employee Stock Purchase Plan, resulting in$39,866 of net proceeds to the Company.

 

During the threemonths ended June 30, 2004, warrants to purchase 204,250 shares of commonstock were exercised under cashless provisions of the underlying warrantagreements resulting in the Company issuing 167,853 shares of common stock.

 

On April 23, 2003, the Company’s Boardof Directors 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 ExchangeProgram are subject to variable plan accounting in accordance with FASBInterpretation 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 a quarterly basis until the new options issued under the ExchangeProgram are exercised, forfeited or expire unexercised.  During the three months ended June 30,2004, the Company recorded $150,749 of stock-based compensation benefit forthese options since the value of the Company’s common stock decreased betweenMarch 31, 2004 and June 30, 2004.

 

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.  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. As of June 30, 2004, options to purchase 180,996 shares of commonstock remain outstanding under the Exchange Program.

 

In January 2004, the Company enteredinto a two–year consulting agreement for services with terms that require theCompany to issue the consultant warrants to purchase 5,000 shares of commonstock each month.  As of June 30,2004 warrants to purchase 30,000 shares of common stock were outstanding underthis agreement, of which, warrants to purchase 15,000 shares of common stockwere issued during the three months ended June 30, 2004. The warrants vest25% every three months from date of issuance, have a term of three and one-halfyears, and have an exercise price of $3.00 per share.  The consultant agreement can be terminatedupon 60 days written notice, subject to various cancellation provisions.  During the three months ended June 30,2004, the Company recorded $111,592 of expense for the value of warrants issuedduring the three-month period. Unless terminated earlier, the Company isobligated under this agreement to issue additional warrants for the purchase of90,000 shares of common stock over the next 18 months.  The value of the warrants is expensed as theconsulting services are provided.

 

5

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Effective May 21, 2004, the Company’s boardof directors modified certain warrants to extend the expiration date from May31, 2004 to August 31, 2004.  Thevalue of this warrant modification, as determined using the Black-Scholesvaluation model, was $37,875 (which is the difference between the value of theoriginal warrants immediately prior to the modification and the value of theextended warrants).  In connection withthis modification, the warrant holders did not provide any additional stated orunstated rights, privileges, or agreements to the Company. Accordingly, thistransaction has been reflected as a “deemed dividend as a result of warrantmodification” on the accompanying statement of operations and in determiningnet loss attributable to common stockholders.

 

Three months endedJune 30, 2003

 

Additionalpaid-in-capital increased $215,872 relating to the warrants issued inconjunction with convertible debentures. In addition, debentures with a face value of $233,145, together withassociated accrued interest of $2,778, were converted into 134,811 shares ofthe Company’s common stock.

 

During the three months ended June 30,2003, the Company recorded $14,217 of stock-based compensation for options underthe above-mentioned Exchange Program.

 

D.                                    LOSS PER SHARE

 

Loss per share iscomputed in accordance with Financial Accounting Standards Board Standard 128,“Earnings Per Share.”  Basic loss pershare is computed by dividing net loss by the weighted average number of sharesof common stock outstanding for the period. Diluted income or loss per share reflects the potential dilution thatcould occur from shares of common stock issuable through stock options,warrants and other convertible securities, if dilutive.  Options and warrants to purchase 405,319shares of common stock have not been included in the calculation of dilutedcommon stock outstanding for the three months ended June 30, 2004, becauseto do so would be anti-dilutive.  Optionsand warrants to purchase 18,552 shares of common stock have not been includedin the calculation of diluted common stock outstanding for the three monthsended June 30, 2003, because to do so would be anti-dilutive.  Shares issuable pursuant to convertibledebentures (427,963 shares as of June 30, 2003) have not been included inthe calculations of diluted common stock outstanding for the three months endedJune 30 2003, as to do so would be anti-dilutive.

 

The following tables setforth the computation of basic and diluted loss per share for the three monthsended June 30, 2004 and June 30, 2004:

 

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|                                                                            |       |                   |       |   |   |
| Net loss attributable to common  stockholders                                   |       | $                      | (192,545   | ) | $ | (539,589 | ) |
| Denominator for basic and diluted net loss  per share - weighted average shares |       | 3,627,686              |       | 2,133,227 |   |
|                                                                            |       |                   |       |   |   |
| Basic and diluted net loss per share                                            |       | $                      | (0.05      | ) | $ | (0.25 | ) |

 

6

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Item 2.  Management’s Discussion and Analysis or Planof Operations.

##  

### **Overview**

### ** **

Sento Corporation (“**Sento***,*” “**we**,” “**us**” or the “**Company**”)is a leading provider of outsourced customer care and sales support services,managing customer relationships for a growing number of high-profile companiesacross multiple industries.  ThroughSento’s Customer Choice Platform, an integrated suite of multi-channel CRMtechnologies, customers are given a choice of self-service and assisted-serviceoptions – via web, e-mail, chat and phone – for increased customer satisfactionwith significant cost savings to Sento’s clients when compared to traditionalmodels.  We provide this support in 17languages. We conduct our principal business operations through ourwholly-owned subsidiary, Sento Technical Services Corporation.

 

We believe that a significant issue currently facing our companyrelates to the variable pricing of a significant number of our outstandingemployee stock options.  InApril 2003, we repriced the majority of the then outstanding employeestock options to the then current market price of $1.60 per share.  This repricing was done to give our employeesincentive to grow revenues and improve profitability, with the objective ofincreasing stockholder value.  We believethis repricing contributed in a large part to our improved operating resultsduring the fiscal year ended March 31, 2004.  Under accounting principles generallyaccepted in the United States (“**GAAP**”),we are required to “mark to market” these employee options, by adjusting thenon-cash compensation expense we record on these stock options on a quarterlybasis until they are exercised, forfeited or expire. This non-cash expense iscalculated by multiplying the number of currently exercisable options by theamount that the current market price of our common stock is above the exerciseprice of $1.60 per share, less any amounts previously recorded as expense forvested shares.  Thus, in a period ofincreasing stock prices we may record a significant amount of non-cashcompensation expense.  Conversely, if ourstock price falls in a future period, we may subsequently reverse a portion ofthe expense previously recognized with respect to stock options that remainoutstanding.  These periodic adjustmentsof our non-cash compensation expense may result in significant volatility inthe results of our operations.  Duringthe three months ended June 30, 2004 and 2003, we recognized net non-cashcompensation benefit (expense) of $150,749 and ($14,217), respectively, toreflect adjustments to the value of the options due to the changes in marketprice of our common stock above the exercise price of $1.60 per share.  See Note C to our unaudited condensedconsolidated financial statements.

 

Because the actual amount of compensation expense we will recognizewith respect to outstanding stock options will depend on the market price ofour common stock at the end of each quarterly period and the timing ofexercise, forfeiture or expiration of outstanding options, we are not be ableto forecast the amount of non-cash compensation expense related to these stockoptions that we may incur in any future period.

 

Pursuant to aconsulting agreement with Remsen Funding Corporation of New York (“Remsen”), wehave agreed to issue to Remsen, as partial consideration for consultingservices, a warrant to purchase 5,000 shares of our common stock each monthduring the term of the agreement, which is terminable by either party at anytime upon sixty days advance notice. Through July 1, 2004, we have issued to Remsen warrants to purchase 35,000shares of common stock.  The warrantspermit the holder to acquire shares of common stock at an exercise price of$3.00 per share at any time prior to the date that is three and one-half yearsafter the date of issuance.  Each warrantvests with respect to 25% of the shares subject thereto on the first day ofeach calendar quarter following its issuance. The warrants also include a net exercise provision and anti-dilutionprovisions pursuant to which the exercise price and number of shares issuablethereunder will be adjusted proportionately in the event of a stock split,stock dividend, recapitalization or similar transaction.  We have also granted the warrant holderpiggyback registration rights with respect to any registration (other than onForm S-4 or Form S-8) that permits the registration of secondary sales.

 

We will recognizeexpense based on the fair value of the warrants over the period which theconsulting services are provided. Because the fair value of the warrants changes based on the changes inthe underlying value of the common stock, the expense related to this agreementcould increase or decrease significantly based on the changes in the value ofthe our common stock.

 

Effective May 21, 2004, our board of directors modified certainwarrants to extend the expiration date from May 31, 2004 to August 31,2004.  The value of this warrantmodification, as determined using the Black-Scholes valuation model, was$37,875 (which is the difference between the value of the original warrantsimmediately prior to the modification and the value of the extendedwarrants).  In connection with thismodification, the warrant holders did not provide any additional stated orunstated rights, privileges, or agreements to the Company. Accordingly, thistransaction has been reflected as a “deemed dividend as a result of warrantmodification” on our accompanying statement of operations and in determiningnet loss attributable to common stockholders.

 

7

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### **Critical Accounting Policies**

### ** **

Our significant accounting policies are described in Note 2 to ourConsolidated Financial Statements for the year ended March 31, 2004. Thosefinancial statements were prepared in accordance with accounting principlesgenerally accepted in the United States and are included in our Form 10-KSB, asamended, which has been filed with the Securities and Exchange Commission.  Included within these policies are our“critical accounting policies.”  Criticalaccounting policies are those policies that are most important to thepreparation of our consolidated financial statements and require management’ssubjective and complex judgments due to the need to make estimates about theeffect of matters that are inherently uncertain.  Our critical accounting policies relate torevenue recognition, credit risk and stock-based compensation.  The application of these accounting policiesinvolves the exercise of judgment and the use of assumptions as to futureuncertainties, and as a result, actual results will differ, and could differmaterially, from such estimates.

 

The development and selection of these critical accounting policieshave been discussed, and are reviewed each year, with the Audit Committee ofour Board of Directors.

 

*RevenueRecognition.*Revenue is recognized when persuasive evidence of an arrangement exists,delivery of services has occurred, the fee is fixed or determinable, andcollection of the resulting receivable is reasonably assured.  We generate revenue by delivering technicalassistance to users of our clients’ products through the use of live chat, Webcollaboration, email and telephone interactions.  We recognize revenues as services areprovided, according to the terms of the underlying agreement with our clientswhich specify how the client will be charged, generally based on a monthly,hourly, per minute or per-call rate.  Wealso provide licenses to a limited number of our clients for the use of ourcustomer contact software tools that we host. In these arrangements, we charge our client a monthly fee based on thenumber of users.  Revenue under thosearrangements is recognized as the service is provided.

 

Revenues generatedfrom professional and consulting services are recognized as the service isprovided, based on time and materials incurred at contractually agreed uponrates.

 

*Credit Risk.* We haveestablished an allowance for doubtful accounts to reserve for uncollectibleaccounts receivable.  Each quarter wereview the receivables on an account-by-account basis and determine theprobability of collection.  Managementjudgment is used in determining the probability of collection. Factors weconsider in making this judgment are the age of the receivable, the financialresources of our clients, previous client history and recent client communications.  Our credit losses have generally been withinour expectations, however, there can be no assurance that our future creditlosses will be within our expectations. In addition, our revenues and accounts receivable are concentrated in arelatively few number of customers.  Asignificant change in the liquidity or financial position of any one of thesecustomers or a further deterioration in the economic environment, in general,could have an adverse impact on the collectability of our accounts receivableand our future operating results.

 

*Stock –Based Compensation.*Statement of Financial Accounting Standards No. 123, *Accountingfor Stock Based Compensation* (SFAS 123) encourages entities to adopta fair-value-based method of accounting for stock options or similar equityinstruments.  However, it also allows anentity to continue measuring compensation cost for stock based compensationusing the intrinsic-value method of accounting prescribed by Accounting PrinciplesBoard Opinion No. 25, *Accounting for StockIssued to Employees* (APB 25). We have elected to continue to apply the provisions of APB 25 andprovide pro forma disclosures required by SFAS 123 in the footnotes to theconsolidated financial statements.  Weuse the Black Scholes option-pricing model to determine the amount ofadditional pro forma expense related to these options as presented in ourdisclosures.  Had we adopted afair-value-based method of accounting for stock options, the pro forma expensefor these options in our disclosures would be recorded as expense in ourstatements of operations and could materially affect our operating results.

 

In April 2003, we repriced certain of our outstanding employeestock options. We account for stock options that were repriced in accordancewith FASB Interpretation No. 44 “Accounting for Certain Transactions InvolvingStock Compensation” (“Interpretation 44”), which requires that we adjust thecompensation expense we record on these stock options based on the market priceof our underlying common stock until the options are exercised, forfeited orexpire.  This adjustment to compensationexpense is done quarterly and can fluctuate significantly due to the volatilityof our common stock.

 

We also issue equity-based incentive compensation to non-employees fromtime to time.  Pursuant to EmergingIssues Task Force (EITF) 96-18, *Accounting for EquityInstruments that are Issued to Other than Employees for Acquiring or inConjunction with Selling Goods or Services*, we account for thesearrangements

 

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based on the fair value of the equity instrument issued.  The fair value of these instruments isremeasured each quarter as the related goods or services are provided and theunderlying securities vest.  We use theBlack Scholes pricing model to determine the value of these instruments.  The resulting quarterly change in value ofthese instruments is either charged or credited to income and can alsofluctuate significantly based on the change in value of the underlying commonstock.

 

### **Resultsof Operations**

### ** **

**Three months ended June 30, 2004 compared to three months endedJune 30, 2003**

 

*Revenues.*  Our revenues increased 58%, or $2,412,000,from $4,155,000 for the three months ended June 30, 2003 to $6,567,000 forthe three months ended June 30, 2004. The primary reason for the increase was $1,910,000 of revenue generatedfrom four new clients.  We were also ableto generate a net increase of $502,000 in revenue from our existing clientbase.

 

*Cost of Sales.*  Our cost of sales increased $1,823,000, or46%, from $3,953,000 for the three months ended June 30, 2003 to$5,776,000 for the three months ended June 30, 2004.  This increase in cost was a result ofincreased business as discussed in the revenue section above.  Our gross profit as a percentage of salesincreased to 12% for the three months ended June 30, 2004.  This represents a seven-point improvement ingross profit percentage, compared to our 5% gross profit percentage for thethree months ended June 30, 2003. This improved gross profit percentage was due mainly to higherutilization of our capacity with increased business.  However, the efficiencies we realized frombetter utilization of our capacity were adversely impacted by approximately$55,000 of upfront training and labor costs associated with the increase in newand existing business.

 

*Product Development*.  We spent $119,000 in product developmentduring the three months ended June 30, 2004.  We believe that this product development isnecessary for anticipated new business and to enhance our productofferings.  We incurred no significantproduct development costs during the three months ended June 30, 2003.

 

*Selling, General and Administrative Expenses.*  Our selling, general and administrativeexpenses increased by 37%, or $225,000, from $601,000 for the three monthsended June 30, 2003 to $826,000 for the three months ended June 30,2004.  This increase was primarily due toincreased marketing efforts that contributed to increased revenues for the threemonths ended ended June 30, 2004. As a percentage of revenue, our selling, general and administrativeexpenses decreased almost two percentage points, from 14.5% of revenue duringthe three months ended June 30, 2003 to 12.6% of revenue during the threemonths ended June 30, 2004.

 

*Stock-Based Compensation.*  In April 2003, our Board of Directorsapproved an employee stock option exchange program.  Under this program, options to purchase377,342 shares of common stock with exercise prices above $2.00 per share wereexchanged for options to purchase 313,592 shares of common stock at an exerciseprice equal to the then current market price of $1.60.  This exchange program was considered to be aneffective “repricing” of stock options, which requires us to adjust the amountof compensation expense we recognize each quarter until the stock options areexercised, forfeited or expire (see Note C to our unaudited condensedconsolidated financial statements).  Thecumulative amount of this charge is calculated by multiplying the exercisablenumber of options by the difference between the market price of the stock andthe exercise price of $1.60, less any amounts previously recognized.

 

During the three months ended June 30, 2004 we recorded a non-cashstock-based compensation benefit of $151,000, a $165,000 changed from $14,000of non-cash stock-based compensation expense that we recorded during the threemonths ended June 30, 2003.  Thisincrease was primarily a result of changes in vested and unexercised options underthe stock option Exchange Program and fluctuations in the market value of ourcommon stock.

 

The market value of our common stock has fluctuated from $1.60 atApril 23, 2003, the date of the exchange program approval, to $12.35 as ofMarch 31, 2004, and to $8.20 as of June 30, 2004. Due to the pricevolatility of our common stock and the inability to predict when and how manystock options will be exercised or cancelled, we cannot project the impact ofoptions under this exchange program on future quarters.

 

*Non-Cash Charge for Valuation of Warrants andConversion of Debentures.*  This expense relates to i) the amortizationof debt discount created by allocating a portion of the proceeds received inconjunction with convertible debentures and notes payable financings towarrants issued with the debt, and ii) recognizing charges for

 

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the value of warrants issued to consultants.  We amortize these costs over the life of thecorresponding debt and over the period the consulting services areprovided.  This cost increased $60,000,or 107%, from $56,000 for the three months ended June 30, 2003 to $116,000for the three months ended June 30, 2004. The majority of the costs recorded during the three months endedJune 30, 2004 were the result of the value associated with warrants issuedunder a consulting agreement. The majority of the costs recorded during thethree months ended June 30, 2003 related to the amortization of the debtdiscount associated with warrants issued in conjunction with convertibledebentures.

 

*Other Expense, Net. *Other expense, net,decreased $34,000, or 49%, from $69,000 during the three months endedJune 30, 2003 to $35,000 during the three months ended June 30,2004.  This decrease was mainly due to a$31,000 decrease in interest expense caused by a reduction in our long-termdebt and capital leases, as well as the conversion of all of our convertibledebt prior to the three months ended June 30, 2004.

 

### **Liquidity and Capital Resources**

### ** **

Ourworking capital remained substantially constant at $7,136,000 at June 30,2004 when compared to $7,199,000 at March 31, 2004, a decrease of lessthan one percentage point.  Our cashbalances increased $644,000, or 10%, from $6,568,000 at March 31, 2004 to$7,212,000 at June 30, 2004.  Duringthe three months ended June 30, 2004, we generated $1,301,000 of cash flowfrom operations, used $288,000 of cash flow for investing in property andequipment and used $369,000 of cash flow from financing activities.  The primary reason for the change in theamount of cash generated from operating activities was the timing of cashreceipts and payments on working capital balances, such as accounts receivable,accounts payable and accrued liabilities. The net decrease in receivables from March 31, 2004 toJune 30, 2004 was $1,535,000. Because our business tends to be seasonalwith a significant increase in business in the fourth quarter of our fiscalyear, accounts receivable is typically higher at March 31 and decreases inthe first fiscal quarter as the receivables are collected.  There was a net decrease in payables andaccrued liabilities from March 31, 2004 to June 30, 2004, alsoprimarily due to decreased business volume caused by the seasonality of ourbusiness.  The net decrease in accountspayable and accrued liabilities partially offset the increased cash flow fromthe collection of receivables.  Includedin our cash flow from financing activities is $604,000 in payments of offeringcosts relating to our March 2004 private placement that were accrued andunpaid at March 31, 2004.  This useof cash was partially offset by $473,000 of proceeds from new long-term debtissuances.

 

During the three months ended June 30, 2004, we generated $395,000of cash flow from operations, used $37,000 of cash flows for investing inproperty and equipment and used $202,000 of cash flow for financingactivities.  Cash flows from operationswere primarily the result of changes in working capital balances.  Accounts receivable decreased by $904,000 asnet receivables were collected, thereby increasing cash flows fromoperations.  There was also a decrease inaccounts payable and accrued liabilities caused by the seasonality of ourbusiness.  This decrease in payables andaccrued liabilities partially offset our cash flows from the collection ofreceivables.  Cash flows used byfinancing activities are the result of $1,038,000 in principal payments onlong-term debt and debentures.  This useof cash flows for financing activities was partially offset by $836,000received from issuing long-term debt and net borrowings under our line ofcredit.

 

We have contractual obligations, including debt agreements and leases,that will require the use of cash.  Thefollowing table sets forth our contractual obligations as of June 30,2004:

 

 
| **Contractual  Obligations:**       | ** **       | **Payments Due by Period** | ** **    |
|-------------------------------------|------------------|----------------------------|---------------|
| ** **                          | **Under 1 Year** | ** **                 | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
| Long Term Debt (principal only) (1) |             | 408,000                    |          | 604,000 |   | — |   | — |   | 1,012,000 |   |
| Capital Leases                      |             | 424,000                    |          | 262,000 |   | — |   | — |   | 686,000 |   |
| Operating Leases                    |             | 1,134,000                  |          | 1,293,000 |   | 357,000 |   | — |   | 2,784,000 |   |
| Less: subleases                     |             | (246,000                   | )             | (143,000 | ) | (51,000 | ) | — |   | (440,000 | ) |
| Total Contractual Obligations       |             | $                          | 1,720,000     |   | $ | 2,016,000 |   | $ | 306,000 |   | $ | — |   | $ | 4,042,000 |   |
|                                     |                  |                            |               |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                      Ourlong-term debt carries interest rates of 3.5% to 7.4%.

 

At present, we believe we will be able tomeet our current obligations as they come due.

 

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On May 11, 2004, we refinanced our line of creditand existing term loans with a bank, wherein the line of credit was renewed andthe existing three terms loans were combined into one term loan.  The agreement also allows us to draw on anadditional term loan for up to $1,500,000 of equipment financing.  The line of credit was increased from amaximum of $2,500,000 to $3,000,000 (subject to a limit of 80% of eligibleaccounts receivable), has an interest rate of the bank’s prime rate plus 1% andhas a two-year term, including provisions for extension, subject toapproval.  The line of credit terms alsocontain an annual commitment fee of 0.75%. The new term loan for $750,000 includes the repayment of the threeexisting term loans plus $316,140 in additional equipment financing.  The terms of this loan include a 1.0%commitment fee, an interest rate of 7.4%, monthly payments of $23,260 includinginterest, and a term of three years.  Wealso have a commitment from the bank for a term loan of up to $1,500,000 for futureequipment financing.  We may takeadvances on this loan in a minimum amount of $100,000 through March 31,2005.  The underlying term loans willhave a term of three years, require monthly principal and interest payments,will have a fixed interest rate determined at the date of the advance based onthe three-year U.S. Treasury Bond rate plus 4.5%, and have a commitment fee of1%.

 

### **Seasonality**

 

Our operating results have historically been affected by the seasonalvariances experienced by some of our significant clients.  Our results are favorably affected by asignificant increase in service requests we experience during our fourth fiscalquarter, resulting primarily from our support of a client’s tax preparationsoftware programs during the months preceding April 15th ofeach year.  To a lesser degree, theoperating results for our third fiscal quarter are favorably affected byincreased support requirements of an on-line retailer during the holiday monthsof November and December.

 

*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 of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.  All forward-lookingstatements involve various risks and uncertainties.  Forward-looking statements contained in thisReport include statements regarding our plans to develop and deliver integratedinformation technology services, market opportunities and acceptance,expectations, goals, revenues, financial performance, strategies, mission andintentions for the future.  Suchforward-looking statements are included under “Management’s Discussion andAnalysis or Plan of Operations” and encompass Sento’s beliefs, expectations,hopes or intentions regarding future events. Words such as “expects,” “believes,” “anticipates,” “should,” and“likely” also identify forward-looking statements. All forward-lookingstatements included in this Report are made as of the date hereof, based oninformation available to us as of such date, and we assume no obligation toupdate any forward-looking statement.  Itis important to note that such statements may not prove to be accurate and thatour actual results and future events could differ materially from those anticipatedin such statements.  Among the factorsthat could cause actual results to differ materially from our expectations arethose described 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 Sento or persons acting on ourbehalf are expressly qualified in their entirety by this section and otherfactors included elsewhere in this Report.*

 

### **Risks Related to Existing and Proposed Operations**

### ** **

There are a number of factors that may affect our operating results,including the risks and uncertainties identified in the followingparagraphs.  In addition to otherinformation set forth in this Report, readers should review and carefullyconsider the following factors.

 

***Volatile economicconditions have affected and will likely continue to affect our operations andfinancial results.***

 

Volatile economic conditions have adversely affected our operations andfinancial results.  The slowing economyin recent years caused us to lose some clients and also resulted in increasedpricing pressures and lower call volumes from some existing clients.  Slower economic conditions may limit ourability to attract new clients or retain existing clients.  These factors contributed to the decline inour revenues and the net losses we experienced during most of 2002 and2003.  The slower economy also resultedin excess capacity to service call volumes. A substantial percentage of our expenses are attributable to labor costsassociated with staffing Customer Contact Solutions Centers, which we may notbe able to significantly reduce on short notice in order to compensate forunexpected shortfalls in call volumes. We cannot forecast future fluctuations in economic conditions, and ouroperations and financial results may be materially and adversely affected byeconomic volatility.

 

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***We repriced ouremployee stock options and may have significant volatility in our earnings ifour stock price increases or decreases.***

 

In April 2003, we repriced certain employee and director stockoptions in an effort to provide an adequate incentive to assist in theretention and motivation of our employees and directors.  Current accounting rules require us to adjustthe amount of compensation expense we recognize in our financial statements forchanges in the stock price until the stock options are exercised, forfeited orexpire.  If our stock price is volatile,our future stock compensation charges may affect our profitability, eitherpositively or negatively.

 

***Several key clientsrepresent a significant portion of our revenues, and the loss of a key clientcould affect our revenues and profitability.***

 

Three clients accounted for approximately 53% of our revenues for thethree months ended June 30, 2004. These three clients accounted for approximately 25%, 17% and 11%,respectively, of our revenues for the three months ended June 30,2004.  A key client, who accounted for28% of revenues in fiscal 2002, cancelled its contract with us early in fiscal2003.  The loss of this client had asignificant negative impact on our revenue and profitability in fiscal 2003 andfor the first nine months of fiscal 2004, until this business was replaced.

 

Our clients can generally cancel their contracts on short notice.  It can take a significant amount of time todevelop and obtain new clients and retrain employees to replace revenue from alost client.  Thus, the loss of any ofour key clients could have a significant effect on our revenues andprofitability.  In addition, our futurerevenue growth is dependent upon our ability to attract and retain new clients.

 

***We have a history oflosses and may continue to experience losses****.*

 

We experienced net losses in four of our last five fiscal years.  For the three months ended June 30, 2004and 2003, we had net losses of $(154,670) and $(539,589), respectively, and wehad an accumulated deficit of $(10,634,548) as of June 30, 2004.  We may continue to incur net losses if welose clients, are unable to attract and retain new clients or do not properlyutilize our resources.  We cannot ensurethat we will be able to achieve or maintain consistent profitable operations.

 

***We may be unable toattract, train and retain key management, technical and marketing personnel.***

 

Our success will depend, in large part, on our ability to attract,retain and train highly qualified technical, managerial and marketing personnelwith the expertise required to successfully conduct our operations.  We have not entered into employmentagreements that obligate any of our key managerial or technical personnel toremain with us for any specified period of time. If we lose any key personnelor are unable to attract, retain, train or motivate qualified personnel, ourbusiness operations and financial condition may be materially and adverselyaffected.

 

***A failure of ourcomputers, telecommunications equipment or software systems could interrupt ourability to provide our services****.*

 

Our business depends to a large extent on computers, telecommunicationsequipment and software systems (both equipment and systems maintained by us andequipment and systems maintained by third parties).  A natural disaster, human error, equipment malfunctionor inadequacy or multiple other events could result in a prolonged interruptionin our ability to provide support services to clients or their customers.  The temporary or permanent loss of computeror telephone equipment or systems, through casualty, operating malfunctions orotherwise, could have a material adverse effect on our operations, property orfinancial condition, and business interruption insurance may not be adequate tocompensate for all losses that may be incurred.

 

***We rely on third-partysoftware companies for our chat and email applications*.**

 

We contract with third-party software companies to provide chat andemail tools used with our CRM software, reporting and management services.  If one of these software companies fail inits business efforts, we may lose our access to these software tools.  Our failure to obtain adequate replacementsoftware tools would cause us to experience service delays, interruptions orcancellations.

 

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***We are subject tocollections risks and may be unable to collect our accounts receivablebalances.***

 

We provide unsecured credit terms to our clients.  Based on credit evaluations and otherinformation gathered by our management, we establish credit terms for eachclient; however, there can be no assurance that our future credit losses willbe consistent with management’s expectations. A significant change in the liquidity or financial condition of one ormore key clients, or a larger number of smaller clients, or furtherdeterioration in the economic environment, in general, could have an adverseimpact on the collectability of our accounts receivable and our futureoperating results.

 

***Managing theutilization level of our resources is necessary in order to achieve our desiredprofitability.***

 

Our business strategy requires us to fully utilize excess personnel andphysical facilities in an effort to increase our profits.  As we expand our operations, we may notalways be able to manage the level of personnel and facilities to reach ourdesired levels of utilization, which may affect our profitability.  Also, if we lose existing clients, we mayhave excess personnel and physical facilities that would have an adverse effecton our business operations and our profitability.

 

***Implementation ofour growth plans will be dependent on our ability to market and sell ourservices to new and existing clients.***

 

Our growth plans are dependent upon our ability to attract and retainnew clients and to generate additional business from existing clients.  Our efforts to market and sell our serviceswill be affected by fluctuations in technology and industry standards, changesin customer requirements and preferences, and general economic conditions,among other factors.  Many of thesefactors are beyond our control.  If weare incorrect in our assessment of the feasibility of our growth plans, if weare not effective in our efforts to market and sell our services or ifcircumstances change in a way that we did not foresee or anticipate, we may notgrow as planned or our growth strategy may have an adverse effect on businessoperations and our profitability.

 

***Competitivepressures could harm our financial performance.***

 

The market for customer contact services is highly fragmented and verycompetitive.  In certain segments of theindustry, however, the customer contact services industry has begun toexperience a degree of consolidation, and the development of major customercontact center companies has resulted in an additional level of competitionfrom service providers that have greater name recognition, larger installedcustomer bases, and significantly greater financial, technical, and marketingresources than we have.  Largeestablished enterprise software companies may leverage their existingrelationships and capabilities to offer customer service applications.  In other instances, many large companiesprovide their own in-house customer care support and customer training.  Also, a number of existing companies haveexperienced rapid internal growth, and several of these companies have beenactive in acquiring smaller regional customer contact services companies andare becoming major competitors with a measurable share of this rapidlyexpanding market.  If our competitorsprovide more efficient or less expensive services, we may lose market share andrevenues.

 

***A delay in marketacceptance of our products and services could negatively impact our businessand revenues.***

 

The customer contact services market is extremely competitive.  We were a relatively early entrant in thecustomer self-services and chat markets; however, we have struggled in ourefforts to market and sell our products and services and have been slow todevelop certain business operations. Further delays in the development of our products and services wouldallow our competitors additional time to improve their service or productofferings, and also provide time for new competitors to develop e-businesscustomer service applications and solicit prospective clients within our targetmarkets.  This would increase competitionthat could result in additional pricing pressures, and we may lose market shareand revenues.

 

***If we do not keep upwith the rapid technological change experienced by the customer contact servicemarket, our products and services may become obsolete and we may lose clients...***

 

The customer contact service industry is characterized by rapidtechnological change, alterations in customer requirements and preferences, andthe emergence of new industry standards and practices.  Our operating results and financial conditionwill depend, in part, on our ability to develop solutions that keep pace withcontinuing changes in information technology, evolving industry standards, andchanging client requirements.  There canbe no assurance that we will be successful in adequately addressing thesedevelopments on a timely basis or that, if these developments are addressed, wewill be successful in the marketplace. In addition, products or

 

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technologies developed by others could render our servicesnon-competitive or obsolete.  Our failureto address these developments could have a material negative effect on ourbusiness and financial condition.

 

***If companies reducetheir reliance on outsourced services, our revenues and financial condition maybe adversely affected.***

 

Our business depends in large part on the trend within the IT industryto outsource certain services.  We cannotprovide any assurance that this trend will continue or that, if the trendcontinues, it will continue at the same rate of growth.  The failure of this trend to continue couldhave a material adverse effect on our business, financial condition, and resultsof operations.

 

***Market volatilityand fluctuations in our stock price and trading volume may cause suddendecreases in the value of an investment in our common stock.***

 

The market price of our common stock has historically been, and weexpect it to continue to be, volatile. This price has ranged between $1.94 and $17.89 in the fifty-two weekperiod ended June 30, 2004.  Themarket for our common stock has, from time-to-time, experienced extreme priceand volume fluctuations, which have often appeared to be unrelated to ouroperating performance.  Our stock pricehas also been affected by our own public announcements regarding such things asquarterly earnings, changes in clients, obtaining financing and corporatepartnerships.  Consequently, events bothwithin and beyond our control may cause shares of our common stock to losetheir value rapidly.

 

***Our revenues andquarterly results can be volatile, which makes evaluating our businessdifficult.***

 

Individualclient revenue transactions can constitute a substantial percentage of ourquarterly revenue, and some revenue transactions may generate a substantialportion of the operating profits for a quarter. Our revenues are also a function of the number of support requests wereceive, and the time we spend on such requests.  Thus, if we receive fewer support requeststhan anticipated or the time spent in resolving inquiries is greater thananticipated, our revenues may decline. Further, delays in the receipt of orders can cause significantfluctuation in revenues from quarter to quarter.

 

Because our staffing and other operating expenses are based onanticipated revenue levels, and a high percentage of our expenses are fixed,the volatility in our revenues can cause significant variations in operatingresults from quarter to quarter and we may not be able to achieve or sustainprofitability on a quarterly basis.  Inaddition, we may expend significant resources pursuing potential sales thatwill not be consummated.  Furthermore, wemay choose to reduce prices or to increase spending in response to competitionor to pursue new market opportunities, which may adversely affect our operatingresults.

 

For the reasons identified above, we believe that period-to-periodcomparisons of our revenues and operating results may not be meaningful andshould not be considered an indication of future performance.

 

***Shares eligible forfuture sale may cause the market price for our common stock to dropsignificantly, even if our business is doing well.***

 

We cannot predict the effect, if any, that future sales of our commonstock or the availability of shares for future sale will have on the marketprice of our common stock from time to time. We have entered into registration rights agreements which contemplatethat substantially all of our outstanding shares of common stock will becomefreely tradable in the public market. Other shares of our common stock issued in the future, including sharesissued upon exercise of outstanding options and warrants, may become availablefor resale in the public market from time to time, and the market price ofshares of our common stock could drop significantly if the holders of theseshares sell them or are perceived by the market as intending to sell them.  In addition, sales of a substantial number ofshares of our common stock in a short period of time could adversely affect themarket price of our shares.

 

***Provisions of ourArticles of Incorporation and Bylaws could impair or delay stockholders’ability to replace or remove our management and could discourage takeovertransactions that stockholders might consider to be in their best interests.***

 

Our Articles of Incorporation and Bylaws, the Utah Revised BusinessCorporation Act, and the Utah Control Shares Acquisition Act each containcertain provisions that may have the effect of inhibiting a non-negotiatedmerger or other business combination. Our Articles of Incorporation grant to our Board of Directors the

 

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authority, without further action by our stockholders, to fix the rightsand preferences of, and issue shares of preferred stock.  These provisions may deter hostile takeoversor delay or prevent changes in control of us or changes in our management,including transactions in which stockholders might otherwise receive a premiumfor their shares over the then-current market prices.  In addition, these provisions may limit theability of stockholders to approve transactions that they may deem to be intheir best interests.

 

***We have neverdeclared a dividend on our common stock and we do not anticipate payingdividends in the foreseeable future.***

 

No dividends have ever been declared or paid on our common stock.  We intend to retain any future earnings foruse in our business and do not anticipate paying any dividends on the CommonStock in the foreseeable future.

 

### **Item 3.**             Controls and Procedures

##  

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, or CEO, and the Company’s Chief Financial Officer, or CFO, of the effectiveness of the Company’s disclosure controls and procedures, as of June 30, 2004. Based on that evaluation, the Company’s management, including its CEO and CFO, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports filed or submitted by the Company under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

 

# **PART II.**                                                 OTHERINFORMATION

# ** **

### **Item 2.**             Changes in Securities

### ** **

Recent Sales of Unregistered Securities 

 

Duringthe three months ended June 30, 2004, warrants to purchase 204,250 sharesof common stock were exercised under cashless provisions of the underlyingwarrant agreements resulting in the Company issuing 167,853 shares of commonstock.

 

The securities issued were restricted securities taken for investment.Certificates for the securities issued bore a restrictive legend conspicuouslyon their face and stop-transfer instructions were noted respecting such certificateson our transfer records, except in circumstances in which we received a writtenopinion from legal counsel to the holders of such securities to the effect thatdue to the tacking of holding periods of previously held debentures (given inexchange for the recently issued debentures) such common share certificatesissued on debenture conversion did not need to bear a restrictive legend. Eachof the foregoing transactions was effected in reliance on the exemption fromregistration provided in Section 4(2) of the Securities Act of 1933and Rule 506 of Regulation D adopted thereunder as transactions notinvolving any public offering.

 

## Item 6.             Exhibits and Reports on Form 8-K

##  

a)              Exhibits:

 

Exhibits 31.1 and 32.1 – Certifications of the Company’s Chief ExecutiveOfficer

Exhibits 31.2 and 32.2 – Certifications of the Company’s ChiefFinancial Officer

 

b)             Reportson Form 8-K:

 

Current Report on Form 8-K, filed August 4, 2004, reportingour issuance of a press release on our first quarter results, together withrelated income statements and balance sheets

 

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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/ ANTHONY J. SANSONE |   |
|                        |              | Anthony J. Sansone |
|                        |              | Chief Financial Officer and Secretary  (Principal financial and accounting officer) |
|                        |              |
|                        |              |
| Dated August 20, 2004. |              |
|                             |                   |  |  |  |

 

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