10-Q 1 c60344_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2009 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _________________ Commission File No. 0-8693 TRANSNET CORPORATION -------------------- (Exact name of registrant as specified in its charter) DELAWARE 22-1892295 ----------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 45 Columbia Road, Somerville, New Jersey 08876-3576 ---------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 908-253-0500 ------------ -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last Report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act) Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller Reporting Company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) [ ] Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 12, 2010: 4,823,304. TRANSNET CORPORATION FORM 10-Q TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Balance Sheets December 31, 2009 (unaudited) and June 30, 2009 1 Consolidated Statements of Operations (unaudited) Three Months Ended December 31, 2009 and 2008 2 Six Months Ended December 31, 2009 and 2008 3 Consolidated Statements of Cash Flows (unaudited) Six Months Ended December 31, 2009 and 2008 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Certifications 19 i. TRANSNET CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements. 1 TRANSNET CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See Notes to Consolidated Financial Statements. 2 TRANSNET CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See Notes to Consolidated Financial Statements. 3 TRANSNET CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED DECEMBER 31, ------------------------------- 2009 2008 ---- ---- OPERATING ACTIVITIES: Net Income (Loss) $ 103,200 $ (1,180,343) ----------- ------------ Adjustments to Reconcile Net Income to Net Cash: Depreciation and Amortization 41,389 76,453 Provision for Doubtful Accounts (91,128) -- Changes in Assets and Liabilities: (Increase) Decrease in: Restricted Cash (6,258) (13,238) Accounts Receivable 661,076 2,142,132 Inventory 122,440 101,810 Other Current Assets (33,696) (32,732) Other Assets (980) (2,130) Increase (Decrease) in: Accounts Payable and Accrued Expenses (1,953,851) 493,270 Unearned Revenue (214,591) -- Income Tax Payable -- (1,457) ----------- ------------ Total Adjustments $(1,475,601) $ 2,764,108 ----------- ------------ NET CASH - OPERATING ACTIVITIES - FORWARD $(1,372,401) $ 1,583,765 ----------- ------------ INVESTING ACTIVITIES: Capital Expenditures $ (18,129) $ (8,069) ----------- ------------ FINANCING ACTIVITIES - Lines of Credit - Net $ (28,731) $(1,440,746) ----------- ------------ NET (DECREASE) INCREASE IN CASH $(1,419,261) $ 134,950 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODS $ 1,654,366 $ 314,618 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIODS $ 235,103 $ 449,568 ----------- ------------ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 27,554 $ 35,033 Income Taxes $ -- $ 1,457 See Notes to Consolidated Financial Statements. 4 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1.) BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included. The operating results for the three months and six months ended December 31, 2009 are not necessarily indicative of the results that can be expected for the year ending June 30, 2010. The balance sheet as of June 30, 2009 has been derived from the audited financial statements at such date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The complete list of significant accounting policies followed by TransNet Corporation (the "Corporation") are set forth in Note 2 to the Corporation's consolidated financial statements in the Form 10-K for the fiscal year ended June 30, 2009. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Corporation's Annual Report on Form 10-K for the year ended June 30, 2009. Certain reclassifications have been made to prior period financial statements to conform to the current year presentation. (2.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Consolidation: The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, Century American Corporation. Intercompany transactions and accounts have been eliminated in consolidation. (b) Inventory: Inventory consists of finished goods. The Corporation's inventory is valued at the lower of cost (determined on the average cost basis) or market. (c) Cash and Cash Equivalents: The Corporation considers highly liquid debt instruments, purchased with a maturity of three months or less, to be cash equivalents. (d) Revenue Recognition: The Corporation's revenues are derived from both the sale of equipment and services provided to customers. Revenues related to equipment sales are recognized when evidence of an arrangement exists, delivery has occurred, the sales price is both fixed and determinable, and collectability is reasonably assured. Revenues related to services provided are recognized ratably over the term of the underlying customer contract or when obligations have been satisfied. For service performed on a time and materials basis, revenue is recognized upon performance. 5 The Corporation also enters into revenue arrangements in which customers may purchase a combination of equipment and services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For services, VSOE of fair value is established by the rates charged when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met. (e) Earnings Per Share: Earnings per common share - basic and diluted are based on 4,823,304 weighted shares outstanding for the three and six months ended December 31, 2009 and 2008. The options to purchase an aggregate of 297,500 shares of our common stock at a price of $0.88 per share were not included in the computation of diluted earnings per share for the periods ended December 31, 2009 and 2008 because the options' exercise price was greater than the average market price of the common shares. (3.) NEW ACCOUNTING UPDATES On June 29, 2009, the FASB issued an accounting pronouncement establishing the FASB Accounting Standards Codification (the "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities. This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. The Corporation adopted this new accounting pronouncement for the quarterly period ended September 30, 2009, as required, and adoption did not have a material impact on its financial statements taken as a whole. In April 2009, the FASB issued Staff Position ("FSP") SFAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," which was subsequently incorporated into FASB ASC topic 820, "Fair Value Measurements and Disclosures." This ASC emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The ASC provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The ASC also requires increased disclosures. This ASC is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this ASC did not have a material impact on the Corporation's results of operations or financial position. In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, "Recognition and Presentation of Other-than-temporary impairments," which was subsequently incorporated into ASC topic 320, "INVESTMENTS - DEBT AND EQUITY SECURITIES." The purpose of this ASC was to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary impairment event and to communicate more effectively when an other-than-temporary impairment event has occurred. This ASC amends the other-than-temporary impairment guidance in GAAP for 6 debt securities and improves the presentation and disclosure of other-than-temporary impairment on investment securities and changes the calculation of the other-than-temporary impairment recognized in earnings in the financial statements. This ASC does not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. For debt securities, ASC topic 320 requires an entity to assess whether (a) it has the intent to sell the debt security, or (b) it is more likely than not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security must be recognized. In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), ASC topic 320 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. In these instances, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive loss and will be amortized over the remaining life of the debt security as an increase in the carrying value of the security (with no effect on earnings unless the security is subsequently sold or there is additional other-than-temporary impairment losses recognized). The total other-than-temporary impairment is presented in the income statement with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive loss. Previously, in all cases, if an impairment was determined to be other-than-temporary, an impairment loss was recognized in earnings in an amount equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date of the reporting period for which the assessment was made. The new presentation provides additional information about the amounts that the entity does not expect to collect related to a debt security. ASC topic 320 is effective and is to be applied prospectively for financial statements issued for interim and annual reporting periods ending after June 15, 2009. When adopting ASC topic 320, an entity is required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive loss if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the anticipated recovery of its amortized cost basis. In May 2009, the FASB issued SFAS 165 "Subsequent Events," which was subsequently incorporated into FASB ASC topic 855 "Subsequent Events." This ASC establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this ASC sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this ASC, an entity should apply the requirements to interim or annual financial periods ending 7 after June 15, 2009. Subsequent events were evaluated through February 16, 2010 which is the date the financial statements were issued. The impact of adoption of this ASC did not have a material impact on the results of operations or financial position of the Corporation. In June 2009, the FASB issued SFAS 166 "Accounting for Transfers of Financial Assets -- an amendment of FASB Statement No. 140." SFAS 166 amends SFAS 140 and removes the concept of a qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The new standard will become effective for the Corporation on January 1, 2010. This update is not expected to have a material impact on the results of operations or financial position of the Corporation. In June 2009, the FASB issued SFAS 167 "Amendments to FASB Interpretation No. 46(R)." SFAS 167 amends tests under Interpretation No. 46(R) for variable interest entities to determine whether a variable interest entity must be consolidated. SFAS 167 requires an entity to perform an analysis to determine whether an entity's variable interest or interests give it a controlling financial interest in a variable interest entity. SFAS 167 requires ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and enhanced disclosures that provide more transparent information about an entity's involvement with a variable interest entity. The new standard will become effective for the Corporation on January 1, 2010. This update is not expected to have a material impact on the results of operations or financial position of the Corporation. The FASB issues ASUs to amend the authoritative literature in ASC. There have been 23 ASUs to date that amend the original text of ASC. Except for ASU 2009-12, "Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" , many of the ASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections or (iii) are not applicable to the Corporation. In January 2010, the FASB issued Accounting Standards Update 2010-06, "Improving Disclosures about Fair Value Measurements." This update requires some new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, "Fair Value Measurements and Disclosures." The majority of the provisions of this update, including those applicable to TransNet, are effective for interim and annual reporting periods beginning after December 15, 2009. Early application of the provisions of this update is permitted. The Corporation will adopt the applicable provisions of this update in the third quarter of fiscal 2010 and is currently evaluating the impact the adoption of these provisions will have on its consolidated financial statement disclosures. In September 2009, the FASB issued ASU 2009-12, "Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)", to provide guidance on measuring the fair value of investments in entities that calculate net asset value. The standard amends ASC Topic 820, "Fair Value Measurements and Disclosures." The amendment permits, as a practical expedient, a reporting entity to measure the fair value of an investment, which is within the scope of the standard, on the basis of net asset value per share of the investment (or its equivalent). The amendment also requires disclosures by major category of investment about the attributes of investments, such as the nature of any restrictions on the investor's ability to redeem its investments at the measurement date, any unfunded commitments and the investment strategies of the investees. The guidance in the standard is effective for interim and annual periods ending after December 15, 8 2009. The Corporation adopted the new standard beginning with these financial statements. The impact of adoption was not material. In October 2009, the FASB issued ASU No. 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)," which amends ASC 605-25, "Revenue Recognition: Multiple-Element Arrangements." ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after July 1, 2010. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the application date and the impact of this standard on our consolidated financial statements. In October 2009, the FASB issued ASU No. 2009-14, "Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force)." ASU No. 2009-14 amends ASC 985-605, "Software: Revenue Recognition," such that tangible products, containing both software and non-software components that function together to deliver the tangible product's essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a multiple-deliverable revenue arrangement. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after July 1, 2010. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the application date and the impact of this standard on our consolidated financial statements. Both ASU No. 2009-13 and ASU No. 2009-14 must be adopted in the same period and must use the same transition disclosures. In December 2009, the FASB issued ASU No. 2009-16, "Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets." ASU No. 2009-16 is a revision to ASC 860, "Transfers and Servicing," and amends the guidance on accounting for transfers of financial assets, including securitization transactions, where entities have continued exposure to risks related to transferred financial assets. ASU No. 2009-16 also expands the disclosure requirements for such transactions. This ASU will become effective for us on April 1, 2010. We are currently evaluating the impact of this standard on our consolidated financial statements. In December 2009, the FASB issued ASU No. 2009-17, "Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities." ASU No. 2009-17 amends the guidance for consolidation of VIEs primarily related to the determination of the primary beneficiary of the VIE. This ASU will become effective for us on April 1, 2010. We are currently evaluating the impact of this standard on our consolidated financial statements. (4.) FAIR VALUE MEASUREMENTS We adopted ASC topic 820, "Fair Value Measurements and Disclosures" on July 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Topic 820 defines 9 fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Topic 820 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk. In addition to defining fair value, topic 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: o Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. o Level 2 - inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. o Level 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. The following table presents assets that are measured and recognized at fair value on a recurring basis. DECEMBER 31, ------------ DESCRIPTION 2009 LEVEL 1 LEVEL 2 LEVEL 3 ----------- ---- ------- ------- ------- Certificate of Deposit $ 869,879 $ - $ 869,879 $ - (5.) DEBT The Corporation previously financed inventory purchases through a credit line with a finance company, with a maximum credit line of $2,500,000, which was terminated by the Corporation in fiscal 2009. The Corporation currently utilizes credit available from multiple vendors under terms which provide for interest free periods ranging from 30 to 60 days. A significant portion of vendor credit is secured by certain of the Corporation's assets. The vendors may in their sole discretion from time to time determine the maximum amount of credit which they elect to extend. The Corporation entered into a line of credit with a third party, which is secured by the Corporation's certificate of deposit listed as restricted cash. 10 (6.) INCOME TAXES The following reconciles the tax provision with the U.S. statutory tax rates:

At June 30, 2009, the Corporation had federal net operating tax loss carryforwards of approximately $9.6 million, which will begin to expire on June 30, 2024. The Corporation has provided a full valuation allowance against its deferred tax asset due to the uncertainty about its realization. (7.) SUBSEQUENT EVENTS In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, "Subsequent Events," which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC Topic 855 is effective for interim or fiscal periods ending after June 15, 2009. Accordingly, the Corporation adopted the provisions of FASB ASC Topic 855 on June 30, 2009. We evaluated subsequent events for the period from December 31, 2009, the date of these financial statements, through February 16, 2010, which represents the date these financial statements are being filed with the SEC. Pursuant to the requirements of FASB ASC Topic 855, there were no events or transactions occurring during this subsequent even reporting period that require recognition or disclosure in the financial statements. With respect to this disclosure, we have not evaluated subsequent events occurring after February 16, 2010. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE ABOUT FORWARD LOOKING STATEMENTS Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that a statement is not forward-looking. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. RESULTS OF OPERATIONS Earnings for the quarter ended December 31, 2009 increased as compared to the same quarter in the prior year. For the quarter ended December 31, 2009, the Corporation reported net income of $1,136 as compared with a net loss of $1,230,774 for the quarter ended December 31, 2008. The increase in earnings for the December 2009 quarter and six-month period was due to an increase in gross profit margins as a result of the Corporation's focus on sales and service of more sophisticated and complex IT and physical security systems combined with a significant increase in service revenues. For the quarter ended December 31, 2009, primarily due to an increase in technical service revenue (discussed below), overall revenues increased to $5,775,086 as compared to $5,143,972 for the quarter ended December 31, 2008. Revenues for the six-months ended December 31, 2009 were $11,640,036 as compared with $13,709,236 for the same period ended December 31, 2008 due to a decrease in equipment sales. TransNet reported net income of $103,200 for the six-month period ended December 31, 2009, compared with a net loss of $1,180,343 for the same period in the prior fiscal year. Earnings for the quarter and six-month period ended December 31, 2009 were attributable to a number of factors including Management's emphasis on sales of higher profit margin equipment and services, aggressive measures in expense reduction, and steps to migrate our product line and service offerings to address economic challenges and to target new opportunities. Service revenues increased as demand resumed for technical services offered by the Corporation. In response to increased demand, we increased the number of our existing technicians in the field as well as their billable hours. Service related revenues, a material segment of revenues, are significant because these operations yield a higher profit margin than equipment sales. Despite a reduction in hardware sales and total revenues, overall profit margins increased to 24% for the second quarter of fiscal 2010 from 4% in the same quarter in fiscal 2009, and increased to 24% from 15% for the comparative fiscal 2010 and 2009 six-month periods ended December 31, respectively. The increase in profit margins resulted from Management's concentration on sales of and services related to higher margin equipment such as Voice over Internet Protocol ("VoIP") systems and physical security systems. Implementation of the new "agency model" recently instituted by the State of New Jersey contributed to the decrease in equipment sales revenue for the December 2009 quarter and six-month period. Under this model, certain orders are processed directly by our hardware partners, who receive purchase orders directly, and ship and invoice our clients directly. TransNet is paid an agency fee for generating the transaction. Although these transactions lower the amount of revenue realized, they provide payment of the fee within a shorter period than the typical 12 payment period for sales invoiced by the Corporation, and free our funding for other transactions. Sales under this agency model were not a material source of revenues. Cost of equipment sold may be impacted by the Corporation's eligibility for temporary incentives, such as rebates, offered by equipment manufacturers from time to time. The Corporation's eligibility for the rebates is usually subject to minimum sales levels and satisfaction of other criteria established by the manufacturers in their sole discretion. Rebates received during the December 2009 quarter and six-month period did not have a material impact upon cost of equipment sold. As the economy continues to face challenges recovering from the recession, credit remains tight, and clients often face reduced budgets. We confront continued restrictions on capital expenditures for many clients, including commercial and state, and local governmental agencies, and educational customers (K-12 through higher education) (collectively "Public Sector" clients). The Corporation's clients have restricted their IT budgetary spending and scrutinized their IT spending and the related returns on investments before incurring new expenses, often delaying purchases. As stated above, Management responded by refocusing our attention on sales of higher profit margin IT equipment, optimizing the utilization rates of its service technicians, and reducing selling and administrative expenses. Management believes that as a single-source provider, the Corporation will be in a better position to satisfy client demands for cost-effectiveness and a suitable return on investment. The VoIP networks marketed by TransNet are designed with the capacity for "optimization" through the subsequent addition of layers of solutions, for example, physical security solutions. We are confident that our strategy of being an advanced solutions provider will result in future revenues from clients' optimization of already installed networks. In conjunction with these solutions, we note the technologies of the integration of voice, video, and data that provide clients with new levels of operating efficiencies. Management notes that, following implementation of new State purchasing mechanisms in New Jersey, purchases by Public Sector clients increased during the first half of fiscal 2010, but continue to be subject to budgetary restrictions. Due to the impending change in administration following the New Jersey gubernatorial election in November, however, a freeze on purchases was instituted until the new administration was installed. As a result, sales to Public Sector clients during the second quarter of fiscal 2010 were lower than anticipated. Uncertainty of our Public Sector clients regarding the proposed federal stimulus package added to the overall slowdown while their projects were on hold pending funding parameters. Once fully implemented, the stimulus package is expected to provide an influx of capital for these clients and to clients in healthcare to use for programs such as security and first-responder technology and other products sold and supported by the Corporation. Management is cautiously optimistic about the results for the remainder of fiscal 2010. Due to uncertainties regarding the economy, however, no assurances can be given. Our service revenues are generated primarily by services including system planning, design, configuration, installation and implementation, testing, and optimization, often related to the sale and implementation of VoIP networks. In the past year, Management refocused its attention on utilization rates of its service technicians. As previously reported, project work has become the major source of service revenue generation. Revenues are also generated by a variety of support contracts with a number of corporate and educational customers. Under these agreements, which provide service and support for customers' networks, personal computers, and peripherals, TransNet's Support Center provides troubleshooting, diagnosis, and remedial services performed remotely by skilled system engineers, who will be dispatched to perform on-site repairs, if necessary. The agreements provide a range of guaranteed response times, based upon the client's specific response requirements or the nature of the outage. The availability of these services is determined by the client, from 24/7 to next business day. These contracts are short-term, and contain provisions that permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur. Our system engineers and service technicians also provide service and support on an on-call basis. In addition to these services, 13 TransNet provides temporary and permanent staffing and consulting services. Our staffing services are not a material source of revenues, but these services carry higher profit margins than equipment sales. This area of our operations was significantly impacted by the recession during fiscal 2009 as businesses curtailed staffing and reduced their personnel levels. In the first half of fiscal 2010, as businesses were faced with special projects to perform required upgrades repairs, and replacement of their networks despite the recession, TransNet's staffing operations experienced a strong demand for temporary IT support specialists. Although no assurances can be given, we believe that as the economy recovers and businesses begin to increase the number of employees, the demand for our staffing services will be positively affected. Management has directed attention to new service offerings that take into account clients' cost constraints. The Corporation modified its service offerings in response to industry fluctuations, and employs experienced and specially certified systems engineers and project managers to respond to VoIP projects. We believe our focus upon higher margin services related to VoIP/IP Telephony and physical security will lead to growth and opportunities for the Corporation. Our goal is to increase our profit margins further as we focus on higher-end products and services flowing from security, communications, and data center management. The complex products and services not only are higher-margined items, but are also of pressing importance to our clients. During the fiscal periods discussed, the Corporation performed under contract awards for VoIP products and services, pending construction of the sites into which the systems will be installed and implemented. Management notes that some of these projects were affected by construction delays beyond the Corporation's control, and these delays resulted in some order backlogs. Construction related delays are typical in a number of projects because the Corporation's portion of the project cannot be performed until a specified amount of the construction has been completed and/or certain determinations made as to specifics of the project due to customer-originated change orders. None of these delays had any significant impact upon the operations of the Corporation. During the quarter ended December 31, 2009, selling, general and administrative expenses decreased by 7% as compared to the same quarter last year due to Management's concerted efforts to reduce expenses. These efforts included salary reductions, salary freezes, staff reductions, and other cost reduction programs. As a percentage of revenues, these expenses decreased to 23% from 28% of revenues for the comparative quarter in the prior year. For the six-month period ended December 31, 2009, selling, general and administrative expenses were reduced by 18% as compared to the same period in 2008. Actual expenses decreased for both the three and six-month periods ended December 31, 2009 as the Corporation undertook a number of staff reductions, and implemented salary freezes and salary reductions. As a percentage of revenues for the six-month period, the expenses were relatively stable at 23% of revenues as a function of the decrease in total revenue for the fiscal 2010 period. Management continues its efforts to control expenses, despite increases in costs, such as health benefits, beyond its control. Interest income decreased in the quarter and six-month period ended December 31, 2009 as compared to the comparative periods in fiscal 2009 as a result of lower amounts invested. Interest expense increased in the quarter ended December 31, 2009 compared to the December 2008 quarter as a result of increased borrowing to fund equipment sales. For the six-month period of fiscal 2010 as compared to fiscal 2009, interest expense decreased due to the Corporation's use of vendor credit options, which provide more favorable terms. In addition to the challenging economic environment, the computer industry has experienced a continuing trend of decreasing prices of computers and related equipment. Management believes that this trend will continue. Industry-wide, the result of price erosion has been lower profit margins on sales, which require 14 price decreases has been intensified competition within the industry, including the consolidation of businesses through merger or acquisition, as well as the increased initiation of sales by certain manufacturers directly to the end-user and the entrance of manufacturers into technical services business. Management believes that the adoption of policies by many larger corporate customers, which limit the number of vendors permitted to provide goods and services for specified periods of time, has further increased price competition. To meet these competitive challenges and to maximize the Corporation's profit margin, Management reviewed and has modified its marketing strategy and has enforced expense controls. Management also utilizes approaches such as manufacturers' direct shipment and billing of the customers in exchange for payment to the Corporation of an "agency fee" as a means to reduce equipment related costs while increasing profits. These direct ship sales are an alternative to sales through traditional channels. Management's current marketing strategy is designed to shift its focus to provision of technical services and to sales of higher profit margin products related to service and support operations. Our efforts target commercial, educational, and governmental customers who provide marketplaces for a wide range of products and services at one time, a cost-effective approach to sales. These customers often do not have their own technical staffs and outsource their computer service requirements to companies such as TransNet. Management believes it maximizes profits through concentration on sales of highly sophisticated higher profit VoIP and related systems and solutions; promotion of the Corporation's service and support operations; and strict adherence to cost cutting controls. In light of the above, Management emphasizes and continues the aggressive pursuit of an increased volume of sales of VoIP systems, and related technical service and support programs, and has introduced new technical support programs offering a wide variety of alternatives of remote and on-site network support and monitoring. Management believes that product sales will continue to generate a significant percentage of the revenues. In addition, the Corporation's buying arrangement with Ingram Micro, Inc. enhances the Corporation's competitive edge through product discounts unavailable through other sources. The Corporation's performance is also impacted by other factors, many of which are not within its control. These factors include: industry and general economic conditions; the short-term nature of client commitments; patterns of capital spending by clients; the timing and size of new projects; pricing changes in response to competitive factors; the availability and related costs of qualified technical personnel; timing and customer acceptance of new product and service offerings; trends in IT outsourcing; and product constraints. LIQUIDITY AND CAPITAL RESOURCES There are no material commitments of the Corporation's capital resources, other than leases, a third party line of credit, and employment contracts. Cash and cash equivalents decreased in the interim period ended December 31, 2009, as cash was used to fund operations. Cash levels continue to be impacted by the slow payment cycles of Public Sector clients and extended payment cycles from some commercial clients as a result of the economic downturn. The Corporation has entered into vendor credit arrangements to assist in purchasing inventory and provide more flexibility with respect to cash. A significant portion of vendor credit is secured by certain of the Corporation's assets. The amount of cash received from or used by operating activities will vary based on a number of business factors which may vary at different times, including terms of available financing from vendors, and slowdowns or upturns in our business or that of our customers. A decline in service revenues and/or a change in the proportion of service revenues to total revenues may affect operating cash flow as the bulk 15 of the Corporation's service revenues are derived from billing of our technical staff's services. The cash outlay for the labor/payroll underlying these services is incurred on a semi-monthly basis. Billing is determined by timeframes set by our clients. Accounts receivable decreased for the first half of fiscal 2010 due to reduced revenues. The Corporation continues to be impacted by the extended and slower payment cycles of commercial customers and governmental agencies. Accordingly, Management vigorously continues its efforts to expedite payments from the governmental bodies and is working to implement more favorable payment schedules where possible. Management notes that payment terms with governmental clients are usually dictated by the client. Inventories decreased in the first half of fiscal 2010 quarter as a result of shipments to fill existing open orders. The decrease in accounts payable during the quarter ended December 31, 2009 is attributable to the reduction in equipment sales. Amounts outstanding under the line of credit decreased because purchases were made using vendor credit. We require access to working capital from a third party line of credit and vendor credit to fund our day-to-day operations, particularly at the end of our fiscal quarters when demand for our products and services increase. We have made a concerted effort to improve our working capital position and implemented measures to reduce headcount, streamline operations, and manage costs in response to the impact of the recession. In conjunction with the tightening of credit in the US economy, which has negatively impacted our access to credit, Management has reviewed the Corporation's line of credit and available vendor credit and has taken steps to obtain the most favorable credit arrangements available. The Corporation previously financed inventory purchases through a credit line with a finance company, with a maximum credit line of $2,500,000, which was terminated by the Corporation in fiscal 2009 because the modified terms were unfavorable. Management currently utilizes various vendor credit options, all of which provide the Corporation with more favorable payment terms than those available under the prior credit line. Management believes that its cash balance and access to credit will be sufficient to fund its operations for the next twelve months. The unavailability of such credit going forward may have an adverse impact upon the operations of the Corporation. IMPACT OF INFLATION The effects of inflation on our operations were not significant during the periods presented. CRITICAL ACCOUNTING POLICIES The Corporation's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The methods, estimates, and judgments used in applying these most critical accounting policies have a significant impact on the results reported in the financial statements. The Securities and Exchange Commission has defined critical accounting policies as policies that involve critical accounting estimates that require (a) management to make assumptions that are highly uncertain at the time the estimate is made and (b) different estimates that could have been reasonably used for the current period, or changes in the estimates that are reasonably likely to occur from period to period, which would have a material impact on the presentation of our financial condition, changes in financial condition or in result of operations. Based on this definition, the most critical policies include: revenue recognition, allowance for doubtful accounts, and valuation of deferred tax assets. 16 INVESTMENT CONSIDERATIONS AND UNCERTAINTIES THE MATTERS DISCUSSED IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THROUGHOUT THIS REPORT THAT ARE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT MANAGEMENT EXPECTATIONS THAT INVOLVE RISK AND UNCERTAINTIES. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION: THE IMPACT OF ECONOMIC CONDITIONS GENERALLY AND IN THE INDUSTRY FOR IT PRODUCTS AND SERVICES; DEPENDENCE ON KEY VENDORS AND CUSTOMERS; CONTINUED COMPETITIVE AND PRICING PRESSURES IN THE INDUSTRY; PRODUCT SUPPLY SHORTAGES; OPEN-SOURCING OF PRODUCTS OF VENDORS, INCLUDING DIRECT SALES BY MANUFACTURERS; RAPID PRODUCT IMPROVEMENT AND TECHNOLOGICAL CHANGE, SHORT PRODUCT LIFE CYCLES AND RESULTING OBSOLESCENCE RISKS; TECHNOLOGICAL DEVELOPMENTS; CAPITAL AND FINANCING AVAILABILITY; AND OTHER RISKS SET FORTH HEREIN. ITEM 4. CONTROL AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Corporation have concluded, based on their evaluation as of December 31, 2009, that the Corporation's disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Corporation in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Corporation in such reports is accumulated and communicated to the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In light of this conclusion, the Corporation has initiated documentation of its policies and procedures, and will institute compensating procedures and processes as necessary to ensure the reliability of its financial reporting. Management intends to remediate weaknesses in the control environment through new resources and processes in its accounting department. Management believes that its actions will continue to improve the Corporation's internal control over financial reporting, as well as its disclosure controls and procedures. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. The Corporation has commenced a review by its internal staff, including its accounting staff, of new processes to provide an evaluation of the level of controls and related procedures currently in place for each process. 17 PART II OTHER INFORMATION ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits - 31.1 Certification required by Section 302 31.2 Certification required by Section 302 32 Certification required by Section 906 B. Reports on Form 8-K - On October 28, 2009, TransNet Corporation filed a Form 8-K under Item 2.02 and 7.01. 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 the undersigned thereunto duly authorized. TRANSNET CORPORATION (Registrant) /s/ Steven J. Wilk --------------------------------- Steven J. Wilk, President and Chief Executive Officer /s/ John J. Wilk --------------------------------- John J. Wilk, Principal Financial and Accounting Officer And Chairman of the Board of Directors DATE: February 16, 2010 18

TRANSNET CORP 10-Q