##### **United States**

**Securitiesand 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 December 31, 2002**                                                                     |
|                                                                                                            |   |   |
| **o****   Transition report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934** |
|                                                                                                            |   |   |

 

#### **Commission File Number 06425**

** **

| **SENTO  CORPORATION**                                                         |
|--------------------------------------------------------------------------------|
| Exact Name of Small Business Issuer as  Specified in its Charter               |
|                                                                           |   |   |   |   |
| **Utah**                                                                       |   |   |   | **87-0284979** |
| (State or other Jurisdiction of  Incorporation or Organization)                |   |   |   | (I.R.S. Employer  Identification No.) |
|                                                                           |   |   |   |   |
| **808 East Utah Valley Drive   American Fork, Utah 84003**                     |
| (Address of Principal Executive Offices)                                       |
|                                                                           |
| Issuer’s telephone number, including area code:  **(801)  492-2000** |

 

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:

 

| **Class**                           |   | **Outstanding at January 31, 2003** |
|-------------------------------------|--------|-------------------------------------|
| Common capital stock $.25 par value |   | 2,099,971                           |

 

Transitional Small BusinessDisclosure Format (check one):

 

Yes  o    No ý

 

 

----

 

**SENTO CORPORATION**

Quarterly Report on Form 10-QSBQuarter ended December 31, 2002

 

 

TABLE OF CONTENTS

 

 

 
| PART I           | FINANCIAL INFORMATION                                                                                                |
|------------------|----------------------------------------------------------------------------------------------------------------------|
|             |                                                                                                                 |
| Item 1.          | Financial Statements                                                                                                 |
|             |                                                                                                                 |
|             | Condensed Consolidated Balance Sheets   December 31, 2002 and March 30, 2002                                         |
|             |                                                                                                                 |
|             | Condensed Consolidated Statements of Operations  Three and nine months ended December 31, 2002 and December 29, 2001 |
|             |                                                                                                                 |
|             | Condensed Consolidated Statements of Cash Flows  Nine months ended December 31, 2002 and December 29, 2001           |
|             |                                                                                                                 |
|             | Notes to Condensed Consolidated Financial Statements                                                                 |
|             |                                                                                                                 |
| Item 2.          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations.                         |
|             |                                                                                                                 |
|             | Critical Accounting Policies                                                                                         |
|             |                                                                                                                 |
|             | Payments Due by Period                                                                                               |
|             |                                                                                                                 |
| Item 3.          | Controls  and Procedures                                                                                             |
|             |                                                                                                                 |
| PART II.         | OTHER INFORMATION                                                                                                    |
|             |                                                                                                                 |
| Item 4.          | Submission  of Matters to Vote of Security Holders                                                                   |
|             |                                                                                                                 |
| Item 5.          | Other  Information                                                                                                   |
|             |                                                                                                                 |
| Item 6.          | Exhibits and Reports on Form 8-K                                                                                     |
|             |                                                                                                                 |
| SIGNATURES       |
|             |                                                                                                                 |
| CERTIFICATIONS * |

 

i

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# **PART I** - FINANCIAL INFORMATION

## Item1.  FinancialStatements

 

#### **SENTO CORPORATIONAND SUBSIDIARIES**

 

### **Condensed Consolidated BalanceSheets**

** **
|                                                       |   | **December  31, 2002** |       | **March 30, 2002** |       |
|------------------------------------------------------------|--------|------------------------|------------|--------------------|------------|
|                                                       |   | **(Unaudited)**        |       |               |       |
|                                                       |   |                   |       |               |       |
| **ASSETS**                                                 |   |                   |       |               |       |
|                                                       |   |                   |       |               |       |
| Current assets:                                            |   |                   |       |               |       |
| Cash                                                       |   | $                      | 2,008,804  |               | $          | 1,047,731 |   |
| Short-term investments                                     |   | —                 |       | 928,522            |       |
| Accounts receivable, net                                   |   | 1,782,158              |       | 3,514,487          |       |
| Other current assets                                       |   | 632,787                |       | 790,752            |       |
| Total current assets                                       |   | 4,423,749              |       | 6,281,492          |       |
|                                                       |   |                   |       |               |       |
| Property and equipment, net                                |   | 4,540,695              |       | 5,226,257          |       |
| Other assets                                               |   | 279,496                |       | 124,293            |       |
| Total Assets                                               |   | $                      | 9,243,940  |               | $          | 11,632,042 |   |
|                                                       |   |                   |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**              |   |                   |       |               |       |
|                                                       |   |                   | ** ** |               | ** ** |
| Current liabilities:                                       |   |                   |       |               |       |
| Current portion of long-term  debt and capital leases      |   | $                      | 1,358,768  |               | $          | 1,117,838 |   |
| Accounts payable                                           |   | 945,330                |       | 1,230,108          |       |
| Accrued liabilities                                        |   | 1,430,406              |       | 847,292            |       |
| Deferred revenue and other  current liabilities            |   | 44,878                 |       | 250,668            |       |
| Convertible debt                                           |   | 1,283,584              |       | 1,197,442          |       |
| Total current liabilities                                  |   | 5,062,966              |       | 4,643,348          |       |
|                                                       |   |                   |       |               |       |
| Long-term debt and capital  leases, net of current portion |   | 815,397                |       | 1,504,839          |       |
|                                                       |   |                   |       |               |       |
| Stockholders’ equity:                                 |   |                   |       |               |       |
| Common stock                                               |   | 524,993                |       | 523,299            |       |
| Additional paid-in capital                                 |   | 11,919,963             |       | 11,892,628         |       |
| Accumulated other comprehensive  loss                      |   | —                 |       | (28,772            | )          |
| Accumulated deficit                                        |   | (9,079,379             | )          | (6,903,300         | )          |
| Total stockholders’ equity                            |   | 3,365,577              |       | 5,483,855          |       |
| Total Liabilities and  Stockholders’ Equity           |   | $                      | 9,243,940  |               | $          | 11,632,042 |   |

 

1

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**SENTO CORPORATIONAND SUBSIDIARIES**

 

### **Condensed Consolidated Statementsof Operations**

**(Unaudited)**

 
|                                                               |   | **Three Months Ended**   |      | **Nine Months Ended**    |   |
|--------------------------------------------------------------------|--------|--------------------------|-----------|--------------------------|--------|
|                                                               |   | **December 31,****2002** |      | **December 29,****2001** |   | **December 31,****2002** |   | **December 29,  2001** |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Revenue                                                            |   | $                        | 3,952,971 |                     | $      | 5,363,430 |   | $ | 11,661,480 |   | $ | 16,637,889 |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Cost of sales                                                      |   | 3,624,857                |      | 4,511,099                |   | 11,690,374 |   | 14,666,461 |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Gross profit (loss)                                                |   | 328,114                  |      | 852,331                  |   | (28,894 | ) | 1,971,428 |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Selling, general and  administrative expenses                      |   | 588,572                  |      | 539,561                  |   | 1,791,694 |   | 1,412,143 |   |
| Operating income (loss)                                            |   | (260,458                 | )         | 312,770                  |   | (1,820,588 | ) | 559,285 |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Other expense, net                                                 |   | (112,493                 | )         | (84,141                  | )      | (355,491 | ) | (235,328 | ) |
| Income (loss) from continuing  operations                          |   | (372,951                 | )         | 228,629                  |   | (2,176,079 | ) | 323,957 |   |
| Gain on disposal of  discontinued operations                       |   | —                   |      | —                   |   | — |   | 102,786 |   |
| Net income (loss)                                                  |   | $                        | (372,951  | )                        | $      | 228,629 |   | $ | (2,176,079 | ) | $ | 426,743 |   |
| Basic income (loss) per share:                                     |   |                     |      |                     |   |   |   |   |   |
| Income (loss) from continuing  operations                          |   | $                        | (0.18     | )                        | $      | 0.11 |   | $ | (1.04 | ) | $ | 0.15 |   |
| Income from discontinued  operations                               |   | 0.00                     |      | 0.00                     |   | 0.00 |   | 0.05 |   |
| Net income (loss) per common  share                                |   | $                        | (0.18     | )                        | $      | 0.11 |   | $ | (1.04 | ) | $ | 0.20 |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Diluted income (loss) per  share:                                  |   |                     |      |                     |   |   |   |   |   |
| Income (loss) from continuing  operations                          |   | $                        | (0.18     | )                        | $      | 0.11 |   | $ | (1.04 | ) | $ | 0.15 |   |
| Income from discontinued  operations                               |   | 0.00                     |      | 0.00                     |   | 0.00 |   | 0.05 |   |
| Net income (loss) per common  share                                |   | $                        | (0.18     | )                        | $      | 0.11 |   | $ | (1.04 | ) | $ | 0.20 |   |
|                                                               |   |                     |      |                     |   |   |   |   |   |
| Weighted average common and  common equivalent shares outstanding: |   |                     |      |                     |   |   |   |   |   |
| Basic                                                              |   | 2,099,960                |      | 2,093,193                |   | 2,099,260 |   | 2,100,276 |   |
| Diluted                                                            |   | 2,099,960                |      | 2,095,303                |   | 2,099,260 |   | 2,111,994 |   |

 

2

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**SENTO CORPORATION**

**AND SUBSIDIARIES**

 

### **Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
|                                                                                      |   | **Nine Months Ended**  |       |
|-------------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                      |   | **December 31,  2002** |       | **December 29,  2001** |   |
| Cash flows from operating  activities:                                                    |   |                   |       |   |   |
| Net income (loss)                                                                         |   | $                      | (2,176,079 | ) | $ | 426,743 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |   |                   |       |   |   |
| Depreciation and amortization                                                             |   | 1,357,141              |       | 1,372,452 |   |
| Gain (loss) on disposal of  assets                                                        |   | 3,824                  |       | (407 | ) |
| Revaluation of warrants issued  for services                                              |   | 7,131                  |       | — |   |
| Write-down of assets held for  sale                                                       |   | 58,668                 |       | — |   |
| Accretion on debenture for  warrant                                                       |   | 64,882                 |       | 56,414 |   |
| Realized loss on sale of  short-term investments                                          |   | 11,618                 |       | — |   |
| Changes in operating assets and  liabilities:                                             |   |                   |       |   |   |
| Accounts receivable                                                                       |   | 1,732,329              |       | 1,658,990 |   |
| Other assets                                                                              |   | (43,867                | )          | (362,399 | ) |
| Accounts payable                                                                          |   | (284,778               | )          | (505,954 | ) |
| Accrued liabilities                                                                       |   | 583,114                |       | (636,807 | ) |
| Deferred revenue and other  current liabilities                                           |   | (205,790               | )          | (36,592 | ) |
| Net cash provided by  operating activities                                           |   | 1,108,193              |       | 1,972,440 |   |
| Cash flows from investing  activities:                                                    |   |                   |       |   |   |
| Proceeds from sale of  short-term investments                                             |   | 965,238                |       | — |   |
| Purchase of short-term  investments                                                       |   | (19,562                | )          | — |   |
| Proceeds from sale of equipment                                                           |   | 37,834                 |       | 29,765 |   |
| Purchase of property and  equipment                                                       |   | (272,728               | )          | (2,791,365 | ) |
| Net cash provided by (used in)  investing activities                                      |   | 710,782                |       | (2,761,600 | ) |
| Cash flows from financing  activities:                                                    |   |                   |       |   |   |
| Principal payments on long term  debt                                                     |   | (879,800               | )          | (711,571 | ) |
| Issuance of long-term debt                                                                |   | —                 |       | 886,777 |   |
| Purchase of treasury stock                                                                |   | —                 |       | (417,299 | ) |
| Proceeds from stock issued  through employee stock purchase plan                          |   | 21,898                 |       | 23,649 |   |
| Proceeds from stock options  exercised                                                    |   | —                 |       | 8,384 |   |
| Net cash used in financing  activities                                                    |   | (857,902               | )          | (210,060 | ) |
| Net increase (decrease) in cash                                                           |   | 961,073                |       | (999,220 | ) |
| Cash at beginning of period                                                               |   | 1,047,731              |       | 3,575,740 |   |
| Cash at end of period                                                                     |   | $                      | 2,008,804  |   | $ | 2,576,520 |   |
|                                                                                      |   |                   |       |   |   |
| Supplemental disclosures of cash flow  information                                        |   |                   |       |   |   |
| Cash paid for:                                                                            |   |                   |       |   |   |
| Interest                                                                                  |   | $                      | 243,273    |   | $ | 269,432 |   |

#### ** **

#### **Non-cash investing and financingactivities:**

 

During the nine months endedDecember 31, 2002, equipment totaling $431,288 was purchased through a capitallease.

#### **During the nine months endedDecember 29, 2001, the Company received a $50,000 note receivable for the saleof equipment and $489,906 of equipment was purchased through a capital lease.**

#### ** **

3

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**SENTO CORPORATION**

**AND SUBSIDIARIES**

 

### **Notes t**o Condensed Consolidated FinancialStatements

**December 31, 2002**

**(Unaudited)**

 

 

A.            BASISOF PRESENTATION

 

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 accruals)considered necessary for a fair presentation have been included.

 

Operating results for thethree and nine months ended December 31, 2002 are not necessarily indicative ofthe results that may be expected for the full fiscal year.  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 30, 2002.

 

B.            EQUIPMENT FINANCING

 

During the nine monthsended December 31, 2002, the Company purchased equipment through two capitalleases.  Each of these leases has aone-dollar purchase option.  The firstlease for $160,538 has monthly payments of $4,174 over four years.  The second lease for $270,750 has monthlypayments of $10,022 over three years.

 

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 of Financial Condition andResults of Operations prior to the record date of the reverse stock split havebeen restated to reflect the reverse stock split on a retroactive basis.

 

Nine months ended December 31, 2002

 

A total of 6,778 sharesof common stock were sold to employees under the Company’s Employee StockPurchase Plan during the nine months ended December 31, 2002.

 

Nine months ended December 29, 2001

 

Options to purchase 1,198shares of common stock were exercised and 5,474 shares of common stock weresold to employees under the Company’s Employee Stock Purchase Plan during thenine months ended December 29, 2001.

 

There were 44,550 sharesof common stock repurchased during the nine-month period ended December 29,2001 at a total cost of  $417,299pursuant to a stock repurchase program approved by the Board of Directors inSeptember 2000.  The repurchase programauthorized the repurchase of up to $1,000,000 of the Company’s commonstock.  The repurchase was conditionedupon the Company’s having cash balances of at least $3,500,000 and $3,000,000of unused bank line of credit immediately prior to the purchase of stock.

 

As of October 16, 2001, the Board of Directorsunanimously called for the cessation of the common stock buyback program, as itwas determined the Company’s resources would be better used on 

 

4

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selling and marketing efforts.  During the repurchase program, the Companyrepurchased a cumulative total of 72,423 shares of the Company’s common stockfor $702,000.

 

D.            INCOME (LOSS) PER SHARE

 

Income (loss) per shareis computed in accordance with Financial Accounting Standards Board Standard128, “Earnings Per Share.”  Basic income(loss) per share is computed by dividing net income (loss) by the weightedaverage number of shares of common stock outstanding for the period.  Diluted income (loss) per share reflects thepotential dilution that could occur from shares of common stock issuablethrough stock options, warrants and other convertible securities, ifdilutive.  Options and warrants topurchase 113 and 5,894 shares, respectively, of common stock have not beenincluded in the calculation of diluted common stock outstanding for the threeand nine months ended December 31, 2002, because to do so would beanti-dilutive.  Shares issuable pursuantto convertible debentures (64,350 shares) have not been included in thecalculations of diluted common stock outstanding for the three and nine monthsended December 31, 2002 and December 29, 2001 as to do so would beanti-dilutive.

 

The following tables setforth the computation of basic and diluted income (loss) per share for thethree and nine months ended December 31, 2002 and December 29, 2001:

 
|                                                                                              |   | **Three Months Ended** |     |
|---------------------------------------------------------------------------------------------------|--------|------------------------|----------|
|                                                                                              |   | **December 31,  2002** |     | **December 29,  2001** |   |
|                                                                                              |   |                   |     |   |   |
| Net income  (loss)                                                                                |   | $                      | (372,951 | ) | $ | 228,629 |   |
| Denominator for  basic income per share - weighted average shares                                 |   | 2,099,960              |     | 2,093,193 |   |
| Dilutive common  stock options and warrants                                                       |   | —                 |     | 2,110 |   |
| Denominator for  diluted income per share - weighted average common and common equivalent  shares |   | 2,099,960              |     | 2,095,303 |   |
|                                                                                              |   |                   |     |   |   |
| Basic income  (loss) per share                                                                    |   | $                      | (0.18    | ) | $ | 0.11 |   |
|                                                                                              |   |                   |     |   |   |
| Diluted income  (loss) per share                                                                  |   | $                      | (0.18    | ) | $ | 0.11 |   |

 
|                                                                                              |   | **Nine Months Ended**  |       |
|---------------------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                              |   | **December 31,  2002** |       | **December 29,  2001** |   |
|                                                                                              |   |                   |       |   |   |
| Net income  (loss)                                                                                |   | $                      | (2,176,079 | ) | $ | 426,743 |   |
| Denominator for  basic income per share - weighted average shares                                 |   | 2,099,260              |       | 2,100,276 |   |
| Dilutive common  stock options and warrants                                                       |   | —                 |       | 11,718 |   |
| Denominator for  diluted income per share - weighted average common and common equivalent  shares |   | 2,099,260              |       | 2,111,994 |   |
|                                                                                              |   |                   |       |   |   |
| Basic income  (loss) per share                                                                    |   | $                      | (1.04      | ) | $ | 0.20 |   |
|                                                                                              |   |                   |       |   |   |
| Diluted income  (loss) per share                                                                  |   | $                      | (1.04      | ) | $ | 0.20 |   |

 

5

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F.             LINE OF CREDIT AND LONG-TERM DEBT

 

The Company had arevolving line-of-credit agreement with a bank, which expired January 31,2003.  The Company is currently innegotiations with the bank to renew the credit line. The line of credit(including the term loan agreements) subjects the Company to certainrestrictive covenants, including minimum liquidity and tangible net worth.  The Company was in compliance with itscovenants at December 31, 2002. The line of credit enabled the Company to drawup to $2,000,000 under the agreement, subject to eligible receivable balancesand reduced by the net balances of term loans outstanding with the bank (as ofDecember 31, 2002, the Company had $782,000 of outstanding term loans with thebank, all of which have been reclassified to current liabilities).  The renewal of the credit line will likelybe contingent on the refinancing of the Company’s debentures that are due inFebruary 2003.

 

 

The Company is seekingapproval from its current debenture holders to extend the terms of repaymentand is also seeking commercial financial institutions and private investors toreplace the current debentures on commercially reasonable terms, but thispotentially may have dilutive effects on the current shareholders.  If the Company is successful in its effortsto refinance or replace its current debentures with other long-term financing,the bank may (but is not required to) renew its loan agreements.

 

6

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Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

**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 tofocus on their core business, Sento helps its clients reduce headcount,eliminate unnecessary capital expenditures, and improve the experience for thecustomer.

 

Sento’s managementbelieves there are several critical issues currently facing the Company:

 

•      Sento has issued $1,300,000 in convertible debentures thatexpire in February 2003.  Sento is seekingapproval from the current debenture holders to extend the terms of repaymentand is also seeking commercial financial institutions, investment banks andprivate investors to replace the current debentures on commercially reasonableterms, but the Company cannot guarantee that it will be successful in thoseefforts.

 

•      The Company has a $2,000,000 bank line of credit that expiredJanuary 31, 2003.  There is no agreementto renew that line of credit, although if the Company is able to extend,refinance or replace the debentures, the Company believes that the bank mayrenew the line of credit.

 

•      The Company is continuing to feel the effects of the loss ofits largest customer in April 2002. Although the Company has been successful in replacing a portion of therevenue lost through that customer’s loss, it has continued to have asubstantial adverse effect on the Company’s revenues and has left the Companywith excess capacity to service additional call volume that the Company has notfilled as of this time.

 

# **Critical**Accounting Policies

 

Sento’s significantaccounting policies are described in Note 2 to Sento’s Consolidated FinancialStatements for the year ended March 30, 2002. Those financial statements wereprepared in accordance with accounting principles generally accepted in theUnited States and are included in Sento’s Form 10-KSB which has been filed withthe Securities and Exchange Commission. Included within these policies are the Company’s “critical accountingpolicies.”  Critical accounting policiesare those policies that are most important to the preparation of the Company’sconsolidated financial statements and require management’s subjective andcomplex judgments due to the need to make estimates about the effect of mattersthat are inherently uncertain.  TheCompany’s critical accounting policies relate to revenue recognition, creditrisk and stock-based compensation.  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.  Certain of the Company’s customer supportservices are delivered over a period of time. Revenue associated with these services is deferred until the customer supportis completed and Sento has no remaining obligation to provide further supportservices.

 

*CreditRisk.*In the normal course of business, the Company providesunsecured credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of itscustomers and maintains allowances for possible losses.  Except for the significant losses incurredduring the fourth quarter of fiscal 2001, the Company’s credit losses havegenerally been within management’s expectations.  However, there can be no assurance that the Company’s futurecredit 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.

 

7

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*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.

 

**Results of Operations**

 

**Three Months EndedDecember 31, 2002 Compared to Three Months Ended December 29, 2001**

 

*                Revenues.* Revenues decreased $1,410,000, or 26%, from $5,363,000 for the threemonths ended December 29, 2001 to $3,953,000 for the three months endedDecember 31, 2002.  The primarycontributors to the reduction in revenue were a reduction in volume from asignificant customer in the amount of $754,000 for the three months endedDecember 31, 2002 when compared to the three months ended December 29, 2001,and the loss of the Company’s largest revenue generating client, a majorcomputer OEM, which asked Sento toward the end of calendar 2001 for a reductionin rates of more than 30%.  This clientaccounted for $1,549,000, or 29%, of revenues for the three months endedDecember 29, 2001 and no revenue during the three months ended December 31,2002.  Sento declined the client’srequested rate reduction, as did eight other outsource centers that arecompetitors of Sento, who also were supplying outsourced call center servicesto this client.  To accept the lowerrate would have put the Company into a loss position with this client, althoughthe revenue would have covered some fixed overhead costs.  The Company was able to replaceapproximately $899,000 of the lost revenue discussed above with increasedrevenue from existing customers and revenue from new customers during the threemonths ended December 31, 2002. However, the loss of this large customer will likely continue to have asignificant adverse impact on Sento’s revenues and operating results if thebusiness is not replaced.

 

Currently, the Company hasexcess capacity available to service additional call volume, particularly inits Evanston, Wyoming facility.  Thiscapacity was built in anticipation of higher demand for the Company’sservices.  However, with the currenteconomic conditions, it is difficult to predict the Company’s ability to fillthis excess capacity with new business in the future.  In the event that the Company is unable to fill the unutilizedcapacity in the Evanston, Wyoming facility, it may have to record an impairmentcharge relating to its assets at that facility.

 

*Cost of Sales.*  Cost of sales decreased 20%, or $886,000,from $4,511,000 for the three months ended December 29, 2001 to $3,625,000 forthe three months ended December 31, 2002. This decrease in cost of sales was principally attributable to decreasedcustomer support call volume and a shift from traditional call center supportto Portal Services support, which has a lower cost.  Gross profit as a percentage of revenues decreased by eightpercentage points, from 16% of revenues during the three months ended December29, 2001 to 8% of revenues for the three months ended December 31, 2002.  The decrease in gross margin was primarilydue to the Company’s excess capacity and the failure to generate sufficientrevenue to cover the Company’s fixed costs.

 

The Company anticipatesimproving call volume during the quarter ending March 31, 2003.  However, actual call volumes will be subjectto a number of factors beyond Sento’s control, including general economic andindustry conditions and much of the expected increase in call volume during thenext few months is seasonal.  Anincrease in call volumes, if achieved, would result in higher coverage ofoverhead and fixed costs, which would likely result in improved gross marginpercentages.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 9%, or $49,000 from $540,000 for the three months ended December29, 2001 to $589,000 for the three months ended December 31, 2002.  This increase was primarily due toapproximately $32,000 of expenses associated with the reverse stock split andincreased marketing efforts.  Managementanticipates that selling, general and administrative expenses will increase infuture periods as a result of increased selling efforts to improve revenues.

 

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**Nine Months EndedDecember 31, 2002 Compared to Nine Months Ended December 29, 2001**

 

*Revenues.*  Revenues decreased $4,977,000, or 30%, from$16,638,000 for the nine months ended December 29, 2001 to $11,661,000 for thenine months ended December 31, 2002. The primary contributors to the reduction in revenue were a reduction involume from a significant customer of $2,200,000 for the nine months endedDecember 31, 2002 when compared to the nine months ended December 29, 2001, andthe loss of the Company’s largest revenue generating client, a major computerOEM, which asked Sento toward the end of calendar 2001 for a reduction in ratesof more than 30%.  This client accountedfor 5,343,000, or 32%, of revenues for the nine months ended December 29, 2001and only $141,000 or 1% of revenue during the nine months ended December 31,2002.  Sento declined the client’srequested rate reduction, as did eight other outsource centers that arecompetitors of Sento, who also were supplying outsourced call center servicesto this client.  To accept the lowerrate would have put the Company into a loss position with this client, althoughthe revenue would have covered some fixed overhead costs.  The Company was able to replaceapproximately $2,425,000 of the lost revenue discussed above with increasedrevenue from existing customers and revenue from new customers during the ninemonths ended December 31, 2002. However, the loss of this large customer will likely continue to have asignificant adverse impact on Sento’s revenues and operating results if thebusiness is not replaced.

 

Currently, theCompany has excess capacity available to service additional call volume,particularly in its Evanston, Wyoming facility.  This capacity was built in anticipation of higher demand for theCompany’s services.  Managementanticipates increased call volume over the next few months.  However, much of the expected increase involume is seasonal.  With the currenteconomic conditions, it is difficult to predict the Company’s ability to fillthis excess capacity with new business in the future.  In the event that the Company is unable to fill the unutilizedcapacity in the Evanston, Wyoming facility, it may have to record an impairmentcharge relating to its assets at that facility.

 

*Cost of Sales.*  Cost of sales decreased 20%, or $2,976,000,from $14,666,000 for the nine months ended December 29, 2001 to $11,690,000 forthe nine months ended December 31, 2002. This decrease in cost of sales was principally attributable to decreasedcustomer support call volume and a shift from traditional call center supportto Portal Services support, which has a lower cost.  Gross profit as a percentage of revenues decreased by twelvepercentage points, from 12% of revenues during the nine months ended December29, 2001 to 0% of revenues for the nine months ended December 31, 2002.  The decrease in gross margin was primarilydue to the Company’s excess capacity and the failure to generate sufficientrevenue to cover the Company’s fixed costs.

 

*Selling, General and Administrative Expenses.*  Selling, general and administrative expensesincreased by 27%, or $380,000, from $1,412,000 for the nine months endedDecember 29, 2001 to $1,792,000 for the nine months ended December 31,2002.  This increase was primarily dueto increased marketing efforts and increased expenses associated with thereverse stock split.  Managementanticipates that selling, general and administrative expenses will increase infuture periods as a result of increased selling efforts to improve revenues.

 

**Liquidity and Capital Resources**

 

Cash andshort-term investment balances increased 2%, or $33,000, from $1,976,000 atMarch 30, 2002 to $2,009,000 at December 31, 2002. The primary reason for theslight increase in cash and short-term investments, despite the Company’s$2,176,000 net loss for the nine months ended December 31, 2002, was due tonon-cash expense items such as depreciation included in the net loss and thecollection of accounts receivable. ** **Due,in part, to the accelerated collection of accounts receivable, as well as thedecline in revenues for the nine months ended December 31, 2002, accountsreceivable declined 49%, or $1,732,000, from $3,514,000 at March 30, 2002 to$1,782,000 at December 31, 2002, and working capital decreased 139%, or$2,277,000, to a $(639,000) deficit at December 31, 2002 from $1,638,000 at March30, 2002.

 

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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 December 31, 2002:

 
| **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)             |   | $                          | 1,100,000 |   | $ | 291,000 |   | $ | — |   | $ | — |   | $ | 1,391,000 |   |
| Convertible Debentures (2) (including interest) |   | 1,301,000                  |      | — |   | — |   | — |   | 1,301,000 |   |
| Capital Leases                                  |   | 338,000                    |      | 575,000 |   | 12,000 |   | — |   | 925,000 |   |
| Operating Leases                                |   | 915,000                    |      | 1,670,000 |   | 286,000 |   | 72,000 |   | 2,943,000 |   |
|                                            |   |                       |      |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations              |   | $                          | 3,654,000 |   | $ | 2,536,000 |   | $ | 298,000 |   | $ | 72,000 |   | $ | 6,560,000 |   |

 

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(1)   Asubstantial portion of the Company’s long-term debt carries a variable interestrate that is tied to the treasury rate. The remaining debt carries interest rates ranging from 6.7% to 10.9%.

(2)   Assumesdebentures, due in February 2003, will not be converted into shares of Sento’scommon stock.

 

In addition tothe above contractual obligations, the Company is contingently liable for anequipment lease that was assumed by Echopass Corporation.  The total amount of monthly payments dueunder this lease through September 2003 is $128,000.  The total amount of monthly payments due thereafter under thislease is $37,000.

 

At present, management believes the Company is able to meet its currentobligations for operations (excluding the current portion of its long-termobligations and debentures) as they come due; however, as discussed above, theCompany has experienced a significant decrease in revenues, and, unless theCompany is successful in its efforts to replace the lost revenues and to timelyrenegotiate or replace its debentures and line of credit, it will be unable tomeet its obligations under the line of credit and debentures as they becomedue.

 

The Company had arevolving line-of-credit agreement with a bank, which expired January 31,2003.  The Company is currently innegotiations with the bank to renew the line-of-credit. The line of credit(including the term loan agreements) subjects the Company to certainrestrictive covenants, including minimum liquidity and tangible net worth.  The Company was in compliance with itscovenants at December 31, 2002. The line of credit enabled the Company to drawup to $2,000,000 under the agreement, subject to eligible receivable balancesand reduced by the net balances of term loans outstanding with the bank (as ofDecember 31, 2002, the Company had $782,000 of outstanding term loans with thebank, all of which has been reclassified as a current liability).  The renewal of the credit line will likelybe contingent on the refinancing of the Company’s debentures that become due inFebruary 2003.

 

The Company isseeking approval from its current debenture holders to extend the terms ofrepayment and is also seeking commercial financial institutions and privateinvestors to replace the current debentures on commercially reasonable terms,but such potentially may have dilutive effects on the currentshareholders.  If the Company issuccessful in its efforts to refinance or replace its current debentures withother long-term financing, the bank may (but is not required to) renew its loanagreements.

 

Historically theCompany’s primary sources of liquidity have been cash received from sales ofassets and cash provided through private sales of equity and debt, as well asborrowings under a bank line of credit. During the two years ended March 30,2002 and the nine months ended December 31, 2002, liquidity and cash were alsoprovided by positive cash flow from operations.  In addition, the Company has financed some of the equipmentutilized in its business through long-term leasing and loan arrangements.  However, leasing and other finance companieshave become much more restrictive in providing financing because of theeconomic downturn, making it more difficult for the Company to obtain equipmentfinancing.  The growth of the Companyhas consumed substantial amounts of cash, and the Company may be required toobtain additional financing to sustain current operations and to retire orrefinance its subordinated debentures. In the event the Company is not able to find additional sources offunding and enter into financing transactions on reasonable terms, its abilityto sustain current operations (after the line of credit and debentures are due)will be limited, or it may be forced to reduce or suspend 

 

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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 of Financial Conditionand Results of Operations” and encompass Sento’s beliefs, expectations, hopesor 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 the Company as of such date, and the Company assumesno 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 of Financial Conditionand Results of Operations---Risks Related to Existing and ProposedOperations.”  All subsequent written andoral forward-looking statements attributable to the Company or persons actingon its behalf are expressly qualified in their entirety by this section andother factors 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 Sento’s operations and financialresults.  The slowing economy hasresulted in increased pricing pressures and lower call volumes from existingclients, and may have limited Sento’s ability to attract new clients.  These factors have contributed to a declinein Sento’s revenues and net income and have resulted in Sento’s excess capacityto service call volumes.  A substantialpercentage of Sento’s expenses is attributable to labor costs associated withstaffing Customer Contact Solutions Centers, which Sento may not be able toreduce on short notice in order to compensate for unexpected shortfalls in callvolumes.  Sento cannot forecast futurefluctuations in economic conditions, and its operations and financial resultsmay be materially and adversely affected by continued economic volatility.

 

*Dependence**on KeyClients.*  Five clientsaccounted for approximately 80% of the Company’s revenues for the nine monthsended December 31, 2002. These five clients accounted for approximately 32%,14%, 13%, 11% and 10%, respectively of revenues for the same period.  The Company’s largest client during fiscal2002 terminated its relationship with Sento in April 2002.  The loss of this client has had asignificant adverse impact on Sento’s operations and will likely have asignificant adverse impact on Sento’s revenues and net income during theremainder of fiscal 2003, if the business is not replaced.

 

Consistentwith industry standards, Sento’s contracts are generally cancelable by theclient on short-term notice.  Sento’sloss of a significant amount of business with any of its key clients couldhave, and the loss of a substantial amount of business with any of its largestexisting technical support clients would have, a material adverse effect on Sento’sbusiness, financial condition, and results of operations.  In addition, Sento’s future revenue growthis dependent upon its ability to attract and retain new clients.

 

*Liquidity and Capital Resources*.  At December 31, 2002, Sento had a workingcapital deficit of $(639,000) (representing a decline of 139% from March 30,2002).  Future growth, particularlygrowth in excess of planned growth, will depend on the Company’s ability toobtain financing.  The historic growthrate of Sento’s Customer Contact Solutions operations (most of which was in theUnited States) has consumed substantial amounts of cash and will continue torequire significant capital investment if the Company continues to grow as ithas in the past.  It should be notedthat there is very little capital spending required for growth using offshorepartners.  The Company may be requiredto pursue additional funding opportunities to sustain its currentoperations.  In the event the Company isnot able to find additional sources of funding and enter into financingtransactions on reasonable terms, its ability to sustain current operationswill be limited, or it may be forced to reduce or suspend its operations.  There 

 

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can be no assurance that theCompany will be able to obtain necessary capital funding on terms favorable tothe Company, if at all.

 

Furthermore,the Company’s line of credit expired January 31, 2003.  The Company is currently in negotiationswith the bank to renew the line-of-credit. However, the renewal of the line-of-credit will likely be contingent onthe refinancing of the Company’s debentures that are due in February 2003.  The Company is seeking approval from itscurrent debenture holders to extend the terms of repayment and is also seekingcommercial financial institutions, investment banks and private investors toreplace the current debentures on commercially reasonable terms, but suchpotentially may have dilutive effects on the current shareholders.  If the Company is successful in its effortsto refinance or replace its current debentures with other long-term financing,the bank may (but is not required to) renew its loan agreements.

 

*CreditRisk.*  In the normalcourse 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.

 

*Risks of Growth*Strategy.  Sento’s business strategy is premised, inpart, upon expansion of its operations by opening customer contact facilities,or partnering or developing strategic alliances with other customer contactproviders in strategic locations throughout the U.S. and foreigncountries.  Substantial risks accompanySento’s growth plans.  For example,Sento’s growth plans are dependent upon its ability to attract and retain newclients.  Sento’s failure to attract andretain new clients, or the loss of existing clients, will not only prevent theimplementation of its business strategy, but may leave Sento with excesspersonnel and physical facilities, which would have a negative impact onSento’s results of operations and financial condition.

 

Sento’s growthplans are also subject to fluctuations in technology and industry standards,changes in customer requirements and preferences and general economicconditions, among other factors.  Manyof these factors are beyond Sento’s control. If Sento is incorrect in its assessment of the feasibility of its growthplans, or if circumstances change in a way that Sento did not foresee oranticipate, Sento may not be able to grow as planned or its growth strategy mayhave an adverse effect on its business operations and financial condition.

 

*Reliance on a Software Company for Chat andEmail applications*. Sento contracts with a software company to provide chat and email toolsused with Sento’s CRM software, reporting and management services.  If this software company fails in itsbusiness efforts, Sento may be required to identify and retain one or morealternate third-party providers of such services and could experience servicedelays, interruptions or cancellations.

 

*Changing Needs of the Customer ContactService Market*. The customer contact service industry is characterized by rapidtechnological change, changes in customer requirements and preferences, and theemergence of new industry standards and practices that could render Sento’sexisting and proposed products, services, technology and systems obsolete.  To remain competitive, Sento 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 customers. If Sento cannot adapt or respond in a cost-effective and timely mannerto changing industry standards, market conditions, or customer requirements,its business and operating results would suffer and could negatively impactSento’s financial condition.

 

Sento’ssuccess may also depend in part on its ability to develop solutions that keeppace with continuing changes in information technology, evolving industrystandards, and changing client requirements. There can be no assurance that Sento will be successful in adequatelyaddressing these developments on a timely basis or that, if these developmentsare addressed, Sento will be successful in the marketplace.  In addition, there can be no assurance thatproducts or technologies developed by others will not render Sento’s servicesnon-competitive or obsolete.  Sento’sfailure to address these developments could have a material adverse effect onits business and financial condition.

 

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*Competition*.  The market for customer contact services ishighly fragmented and very competitive. The customer contact services industry, however, has begun to experiencea degree of consolidation, and the existence of major customer contact centercompanies has resulted in an additional level of competition from serviceproviders that have greater name recognition, larger installed customer bases,and significantly greater financial, technical, and marketing resources thanSento.  Over the past several years, anumber of existing companies have enjoyed increasing success and rapid internalgrowth.  Several of these companies havebeen active in acquiring smaller regional customer contact services companiesand are becoming major competitors with a measurable share of this rapidlyexpanding market.  Also, many majorcompanies provide their own in-house customer care support and customertraining.

 

Sento cannotprovide any assurance that better and more efficient services will not beprovided by new or existing customer contact service providers in competitionwith Sento.  The services provided bysuch competitors may be more effective or less expensive than those provided bySento.  There can be no assurance thatSento will improve, refine or enhance the services it provides.

 

*Competition in Customer Contact ServicesMarket*.  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.  Although Sento was a relatively earlyentrant in the customer contact services market, any delays in marketacceptance of customer contact service applications in general, or Sento’sproposed products and services in particular, would likely harm Sento’scompetitive position.  Delays would allowSento’s 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 Sento’starget markets. Increased competition could result in pricing pressures,reduced operating margins and loss of market share.

 

*Risk of Emergency Interruption of CustomerContact Solutions Center Operations*.  Sento’s business depends to a large extenton computer and telecommunications equipment and software systems (both equipmentand systems maintained by Sento and equipment and systems maintained by thirdparties).  Sento cannot provide anyassurance that natural disaster, human error, equipment malfunction orinadequacy, or other events would not result in a prolonged interruption inSento’s ability to provide support services to its clients.  The temporary or permanent loss of computeror telephone equipment or systems, through casualty, operating malfunction orotherwise, could have a material adverse effect on Sento.  Property and business interruption insurancemay not be adequate to compensate Sento for all losses that it may incur.

 

*Attracting, Training, and Retaining QualityManagement and Employees*.  Sento’s success will depend, in large part, on its ability toattract, retain and train highly qualified technical, managerial and marketingpersonnel with the required expertise. Sento has not entered into employment agreements that require theservices of any of its key managerial or technical personnel to remain with Sentofor any specified period of time.  Therecan be no assurance that Sento will be able to attract and maintain thepersonnel necessary for the development and operation of its business or thatit will be able to train its current employees on new developments intechnology.  Specifically, the loss ofany key personnel or an inability to attract, retain, train or motivatequalified personnel could have a material adverse effect on Sento’s business,financial condition and results of operations.

 

In addition,Sento’s total employee count has fluctuated from approximately 585 as of March31, 2000 to a high of approximately 953 as of December 31, 2000, and hasdecreased to approximately 370 as of January 31, 2003.  The support required for one of the Company’slargest clients is seasonal.  There is,therefore, a necessity for very rapid increases in employees and subsequentdecreases in the number of employees as the requirements for support change.  The Company cannot provide any assurancethat its current management team can successfully manage Sento’s rapidlyevolving business, and any failure to do so could have a material adverseeffect upon Sento’s operating results.

 

During the time period beginning July 2000 through December 2002, theCompany has partnered and continues to partner with offshore entities thatsupply Customer Contact Center services on a contract basis to theCompany.  Currently there areapproximately 280 agents in these offshore contracted Customer ContactCenters.  Managing the quality ofservices rendered to Sento’s clients is further complicated by the remotelocation and language and cultural differences of agents supplying theseservices, and there can be no assurance that Sento can adequately manage theseremote 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 Sento’s operatingresults.

 

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*Dependence on Industry Trend to OutsourceServices*. Sento’s business depends in large part on the trend within the ITindustry to outsource certain services. Sento cannot provide any assurance thatthis trend will continue or that, if the trend continues, it will continue atthe same rate of growth.  The failure ofthis trend to continue could have a material adverse effect on Sento’sbusiness, financial condition, and results of operations.

 

*Potential Significant Fluctuations inQuarterly Results*. The value of individual transactions can constitute a substantialpercentage of Sento’s quarterly revenue, and particular transactions maygenerate a substantial portion of the operating profits for a quarter.  Because Sento’s staffing and other operatingexpenses are based on anticipated revenue levels, and a high percentage of itsexpenses are fixed, delays in the receipt of orders can cause significantvariations in operating results from quarter to quarter.  In addition, Sento may expend significant resourcespursuing potential sales that will not be consummated.  Sento also may choose to reduce prices or toincrease spending in response to competition or to pursue new marketopportunities, which may adversely affect its operating results.

 

In particular,Sento’s quarterly revenues from its Customer Contact Solutions Centeroperations are potentially volatile. Such revenues are principally a function of the number of supportrequests received by Sento, and the time spent on such requests.** **Consequently, Sento’sprofitability may be adversely affected if Sento 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 Sento’s results of operations may not be meaningful and that no one shouldrely upon them as an indication of future performance.  Furthermore, Sento cannot provide anyassurance that it will be able to achieve or sustain profitability on a quarterlybasis.

 

*Volatility of Stock Price*.  The trading price of Sento’s common stockhas fluctuated widely in response to variations in quarterly operating results,announcements by Sento or its competitors, industry trends, general economicconditions or other events or factors. Such fluctuations, as well as fluctuations in the trading volume of thecommon stock, may continue in the future. Regardless of the general outlook for Sento’s business, the announcementof quarterly operating results below analyst and investor expectations couldhave a material and adverse effect on the market price of the common stock.

 

The Companyreceived a de-listing notice from Nasdaq on September 17, 2002, due to the bidfor Sento’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 that was held on October 24,2002.  In addition, The Company’sshareholders voted in favor of amending the Company’s amended and restatedarticles of incorporation to effect a one-for-four reverse split of theoutstanding 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.

 

The Company values its listing on the Small Cap Market, and will seekto remain in compliance with the applicable listing qualification standards;however, the price of the common stock is determined by a number of factors, includinggeneral economic and market conditions, industry trends and public perception,many of which are beyond the Company’s control. If the bid price for the commonstock does not remain above $1.00 on a consistent basis, the Company may loseits listing privileges on the Nasdaq Small Cap Market, and may be forced tofind another forum for trading of its common stock.

 

*Anti-Takeover Considerations.*  Sento’s Articles of Incorporation andBylaws, the Utah Revised Business Corporation Act, and the Utah Control SharesAcquisition Act each contain certain provisions that may have the effect ofinhibiting a non-negotiated merger or other business combination.  Sento’s Articles of Incorporation grant tothe Board of Directors the authority, without further action by Sento’sshareholders, to fix the rights and preferences of, and issue shares ofpreferred stock.  These provisions maydeter hostile takeovers or delay or prevent changes in control of Sento orchanges in Sento’s management, including transactions in which shareholdersmight otherwise receive a premium for their shares over the then-current marketprices. In addition, these provisions may limit the ability of shareholders toapprove transactions that they may deem to be in their best interests.

 

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Item 3.    Controlsand Procedures

 

Within the 90 days prior to the date of filing this Quarterly Report on Form 10-QSB, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer and the SeniorVice President of Finance, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14).  Based uponthe evaluation, the Company’s management, including the Chief Executive Officerand Senior Vice President of Finance, concluded that, as of the date of thatevaluation, the disclosure controls and procedures were effective in timelyalerting them to material information relating to the Company required to beincluded in the Company’s periodic SEC filings.  Subsequent to the date of that evaluation, there have been nosignificant changes in the internal controls or in other factors that couldsignificantly affect internal controls, nor were any corrective actionsrequired with regard to significant deficiencies and material weaknesses.

 

 

**PARTII****.                OTHERINFORMATION**

 

### **Item 4**.    Submission of Matters to Voteof Security Holders

 

On November14, 2002, the Company held its Annual Meeting of Shareholders (the “AnnualMeeting”).  At the Annual Meeting, threematters were submitted to the Company’s shareholders for consideration andapproval.  Those matters, together withthe voting results for each matter, are described in the following paragraphs.

 

1.     Sevendirectors of the Company were elected to serve until the 2003 Annual Meeting ofShareholders of the Company.  Thedirectors elected, together with votes received are: Gary B. Filler 1,820,008votes; Patrick F. O’Neal 1,824,508, Dennis L. Herrick 1,604,025 votes; Kieth E.Sorenson 1,601,363 votes; Kim A. Cooper 1,743,914 votes; Lyndon L. Ricks1,753,717 votes; and Eric Olafson 1,812,633 votes.

 

2.     TheCompany’s shareholders approved a proposal to ratify the appointment of Ernst& Young LLP as independent auditors of the Company for the fiscal yearending March 31, 2003.  With respect tothis proposal, there were 1,828,969 shares cast in favor of the proposal,10,296 shares cast against the proposal, 1,775 votes abstained, and 65,383shares were un-voted.

 

3.     TheCompany’s shareholders approved a proposal to amend the Amended and RestatedArticles of Incorporation of the Company to effect a one-for-four reverse splitof the issued and outstanding shares of the Company’s common stock.  With respect to this proposal, there were1,785,899 shares cast in favor of the proposal, 44,575 shares were cast againstthe proposal, 1,250 votes abstained and 74,700 shares were un-voted.

 

### **Item 5**.    Other Information

 

During January2003, the Company accepted the resignations of two members of its Board ofDirectors, Lyndon L. Ricks and Dennis L. Herrick.  These resignations were not the result of a disagreement with theCompany on any matter in relation to the Company’s operations, policies, orpractices.

### ** **

Item 6.    Exhibits and Reports on Form8-K

 

 

a)     Exhibitsattached to the 10-QSB are as follows:

 

Exhibit  3                Amendedand Restated Articles of Incorporation

Exhibit 10               Loan Modification agreement withSilicon Valley Bank dated October 21, 2002

Exhibit 99.1            Certification of the Company’s ChiefExecutive Officer

Exhibit 99.2            Certification of the Company’s ChiefFinancial Officer

 

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b)    Reports onForm 8-K

 

Current report dated November 14, 2002 filed for thepurposes of disclosing to shareholders and the financial markets two pressreleases also dated November 14, 2002 and filed as exhibits to the Form8-K.  These press releases described theextension received by the Company from the Nasdaq Qualifications Hearing Paneland the approval at the annual meeting of Shareholders of the proposedone-for-four reverse split of the Company’s common stock.

 

# **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  February 12, 2003. |   |               |   |

 

 

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### **CERTIFICATIONS** *

I, Patrick F. O’Neal, certify that:

 

1.             I have reviewed this quarterlyreport on Form 10-QSB of Sento Corporation;

 

2.             Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)             designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the registrant’s board of directors (or personsperforming the equivalent function):

 

a)             all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Date: February 12, 2003

 
|   |   | /s/ PATRICK F. O’ NEAL           |   |
|--------|--------|---------------------------------------|--------|
|   |   |                                  |
|   |   | Patrick F. O’Neal                |
|   |   |                                  |
|   |   | President and Chief Executive Officer |

 

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I, Stanley J. Cutler, certify that:

 

1.             I have reviewed this quarterlyreport on Form 10-QSB of Sento Corporation;

 

2.             Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.             Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)             designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)            evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)             presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the registrant’s board of directors (or personsperforming the equivalent function):

 

a)             all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 

Date: February 12, 2003

 
|   |   | /s/ STANLEY J. CUTLER                          |   |
|--------|--------|------------------------------------------------|--------|
|   |   |                                           |
|   |   | Stanley J. Cutler                              |
|   |   |                                           |
|   |   | Senior Vice President of Finance and Secretary |

 

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