10-Q 1 c61615_10-q.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 March 31, 2010 -------------- 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 May 13, 2010: 4,823,304. TRANSNET CORPORATION AND SUBSIDIARY FORM 10-Q TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Balance Sheets March 31, 2010 (unaudited) and June 30, 2009 1 Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 2010 and 2009 2 Nine Months Ended March 31, 2010 and 2009 3 Consolidated Statements of Cash Flows (unaudited) Nine Months Ended March 31, 2010 and 2009 4 Notes to Consolidated Financial Statements (unaudited) 5 Item 2. Management's Discussion and Analysis 10 Item 4. Controls and Procedures 15 PART II. OTHER INFORMATION Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Certifications 18 Exhibits 23 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)

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 nine months ended March 31, 2010 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. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K of TransNet Corporation and Subsidiary (the "Corporation") 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 The complete list of significant accounting policies followed by 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. The Corporation considers the following to be critical accounting policies as that term is defined by the Securities and Exchange Commission ("SEC"). (a) 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. 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 5 for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met. (b) Allowance for Doubtful Accounts: An allowance for doubtful accounts is provided against accounts receivable for amounts Management believes may be uncollectible. The Corporation monitors current conditions and determines the adequacy of this allowance by regularly reviewing the composition of its accounts receivable aging and evaluating individual customer receivables, considering each customer's financial condition and credit history. (c) Deferred Income Taxes: Pursuant to ASC Topic 740, "Income Taxes," income tax expense [or benefit] for the year is the sum of deferred tax expense [or benefit] and income taxes currently payable [or refundable]. Deferred tax expense [or benefit] is the change during the year in a company's deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The future realization of the deferred tax assets related to federal and state NOL carry-forwards is contingent upon the Corporation's future results of operations. The Corporation performs an analysis each year to determine if future income will more likely than not be sufficient to realize the recorded deferred tax asset. Management has established a deferred tax valuation on the total deferred tax asset as it may not be realized. (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 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- 6 605. 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. 2009-17, "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. In January 2010, the FASB issued updated accounting guidance related to fair value measurements and disclosures which amends and clarifies existing disclosure requirements. This updated accounting guidance requires new disclosures related to amounts transferred into and out of Level 1 and 2 fair value measurements as well as separate disclosures of purchases, sales, issuances, and settlements related to amounts reported as Level 3 fair value measurements. This guidance also clarifies existing fair value disclosure requirements related to the level of disaggregation and the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the separate disclosures of purchases, sales, issuances, and settlements related to amounts reported as Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The Corporation does not believe the adoption of this guidance will have a material impact on its consolidated financial statements. In February 2010, the FASB issued an additional accounting pronouncement that amended certain requirements for subsequent events (FASB ASC Topic 855), which requires an SEC filer or a conduit bond obligor to evaluate subsequent events through the date the financial statements are available to be issued and removes the previous requirement to disclose the date through which subsequent events have been evaluated. The amended amendments were effective on issuance of the final pronouncement. The adoption of this pronouncement had no effect 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 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 7 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. MARCH 31, DESCRIPTION 2010 LEVEL 1 LEVEL 2 LEVEL 3 ----------- --------- ------- --------- ------- Certificate of Deposit $ 872,973 $ -- $ 872,973 $ -- (5.) LINE OF CREDIT 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 financial institution, which is secured by the Corporation's certificate of deposit listed as restricted cash. 8 (6.) INCOME TAXES The following reconciles the tax provision with the U.S. statutory tax rates: THREE MONTHS ENDED MARCH 31, 2010 2009 Income taxes at U.S. statutory rate (35.0)% (35.0)% State taxes, net of federal tax benefit (6.0) (6.0) Change in valuation allowance on deferred tax assets 41.0 41.0 ----------- ----------- TOTAL EXPENSE (BENEFIT) 0% 0% =========== =========== NINE MONTHS ENDED MARCH 31, 2010 2009 Income taxes at U.S. statutory rate (35.0)% (35.0)% State taxes, net of federal tax benefit (6.0) (6.0) Change in valuation allowance on deferred tax assets 41.0 41.0 ----------- ----------- TOTAL EXPENSE (BENEFIT) 0% 0% =========== =========== 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. 9 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 Overall revenues decreased in the quarter ended March 31, 2010 to $4,892,908 from $5,176,608 in the same period in the prior year, due to a decrease in service revenues resulting from product constraints and purchasing freezes by the State of New Jersey, as discussed below. Revenues from equipment sales increased slightly during the quarter, however. For the quarter ended March 31, 2010, the Corporation reported a net loss of $499,702 as compared with net loss of $585,190 for the similar period in the prior fiscal year. Revenues and earnings decreased in the nine-month period ended March 31, 2009 as compared to the same period in the prior year, primarily due to the factors referenced above. Revenues for the nine months ended March 31, 2010 were $16,532,943 as compared with $18,885,844 for the same period in fiscal 2009, with a net loss of $396,503 for the nine-month period ended March 31, 2010, compared with net loss of $1,765,607 for the same period in the prior fiscal year. Operations were significantly effected by the freeze on purchases of equipment and services implemented by the State of New Jersey following the November 2009 gubernatorial election as the new administration was established and evaluated the State's financial condition. This reduced equipment and service revenues from state and local governmental agencies and educational customers (K-12 through higher education) (collectively "Public Sector" clients). As a result, sales to Public Sector clients during the second and third quarters of fiscal 2010 were lower than anticipated. Subsequent to the March 31, 2010 end of the period, the State has resumed purchases and the Corporation has received orders from its Public Sector clients. Management notes that no existing orders were cancelled as a result of the State freeze, but orders were delayed, however, which contributed to the decrease in service revenues. Demand for physical security systems marketed by TransNet continues to be strong, even in light of budgetary restrictions of Public Sector clients. As of the present time, our backlog of open orders from commercial and Public Sector clients is at the highest level in recent years, particularly with respect to orders received in April 2010. As previously reported, while no assurances can be given, we believe that TransNet is well positioned in the State's new purchasing contracts for growth of our business with Public Sector clients and that sales under these contracts will have a significant and positive impact on results. TransNet is listed by State selected manufacturers as an approved vendor for a significant number of IT, communication, and security products pursuant to these contracts. Management also notes that the federal stimulus package is expected to provide capital for a number of projects for Public Sector clients. 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 10 products sold and supported by the Corporation. Due to uncertainties regarding the economy, however, no assurances can be given. In addition to the Public Sector freeze, the Corporation's operations were significantly impacted by unanticipated product constraints on equipment manufactured by Cisco Systems, Inc. ("Cisco"). Cisco curtailed its manufacturing when demand for its products fell as the recession deepened. As demand increased with the beginnings of the economic recovery, Cisco's reduced levels of production were insufficient to meet its industry partners' growing demand for its product.. Based upon information reported by Cisco that is it investing in and improving the supply chain, Management believes that the constraints will ease by the end of the Corporation's fiscal year. Cisco product comprises a significant portion of system components for Voice over IP ("VoIP") systems provided by TransNet, and result in higher profit margin transactions. In response to these constraints, Management has implemented expense reduction measures until product levels improve and return to normal levels. The losses for the nine-month period ended March 31, 2010 were attributable to the effects of the State freeze and product constraints, which decreased overall revenues, particularly service revenues. The reduction in service revenues significantly impacted profit margins. Despite the Cisco shortages, as a result of sales of higher profit IT solutions such as physical security systems, gross profit margin increased on equipment sales for the three and nine month period ended March 31, 2010 compared to the fiscal 2009. Because projects were delayed due to the freeze and constraints, the Corporation absorbed expenses related to under-utilization of its technical staff during the March 2010 quarter. This is particularly significant regarding the compensation levels for the more highly skilled members of the staff, whose skills demand higher wages. Despite the decrease in the March 2010 quarter, service revenues increased during the nine-month period ended March 31, 2010 as compared to the prior year in conjunction with increased demand for services during the first two quarters of fiscal 2010. Demand for our products and services to date in the fourth quarter of fiscal 2010 has increased due in part to the State of New Jersey's resumption of purchases and to the easing of pent-up demand for IT products and services. Despite the results reported herein, Management is cautiously optimistic about the results for the remainder of fiscal 2010 and beyond. 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 Public Sector 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, 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. During fiscal 2010, businesses were faced with special projects to perform required upgrades, repairs and replacement of their networks despite the recession. Because employers were reluctant to expand their own workforce, TransNet's staffing operations experienced a strong demand for temporary IT support specialists. Revenues generated by our 11 staffing operations continue to improve as the demand for temporary employees increases. 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. As the economy slowly recovers from the recession, credit remains tight, and clients often face reduced budgets. We are confronted by continued restrictions on capital expenditures for many clients, who 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. 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 businesses to sell a greater volume of equipment to maintain past earning levels. Another result of the 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. During the quarter ended March 31, 2010, selling, general and administrative expenses were 26% of revenue as compared to 25% for the comparative quarter in the prior year. Similarly, selling, general and administrative expenses for the nine-month period of fiscal 2010 and fiscal 2009 remained at 24% of revenues. Actual expenses decreased significantly for both 2010 periods as the Corporation undertook a number of staff reductions, and implemented salary freezes, salary reductions, and other cost reduction 12 programs. The results of these cost-saving measures will be realized more fully through the remainder of fiscal 2010 and forward. Management continues its efforts to control expenses, despite increasing personnel related costs, such as health benefits. Interest income decreased in the quarter and nine-month period ended March 31, 2010 as compared to the comparative periods in fiscal 2009 as a result of lower amounts invested. Interest expense increased in the quarter and nine month period ended March 31, 2010 compared to prior periods as a result of increased borrowing to fund equipment sales. The Corporation utilizes vendor credit options, which provide more favorable terms. LIQUIDITY AND CAPITAL RESOURCES There are no material commitments of the Corporation's capital resources, other than leases, third party lines of credit, and employment contracts. Cash and cash equivalents decreased in the interim period ended March 31, 2010, 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 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 at March 31, 2010 due to reduced revenues. Extended payment cycles of commercial customers and governmental agencies continue to affect our accounts receivable levels. 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 at March 31, 2010 as a result of shipments to fill existing open orders. The decrease in accounts payable at March 31, 2010 is attributable to the overall 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 third party lines of credit and vendor credit to fund our day-today operations, particularly at the end of our fiscal quarters when demand for our products and services increase. We continue our concerted effort to improve our working capital position and have 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 credit facilities and available vendor credit and has taken steps to obtain the most favorable credit arrangements available. Prior to 2009, 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 13 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. 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. 14 ITEM 4. CONTROL AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Corporation have concluded, based on their evaluation as of March 31, 2010, 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. 15 PART II OTHER INFORMATION ITEM 5. OTHER INFORMATION SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS On March 10, 2010, the Corporation held its annual meeting of shareholders for the purpose of considering and acting upon the election directors and ratification of selection of independent public accountants. At the meeting, the election of three nominated directors was approved. Election of Directors: Name Shares Voted Broker Non-Votes ---------------------------- ------------------------------ ---------------- For Authority Withheld --------- ------------------ Raymond J. Rekuc 1,752,192 442,309 1,286,654 Steven J. Wilk 1,750,272 444,229 1,286,654 Susan M. Wilk 1,710,147 484,354 1,286,654 Ratification of MSPC, Public Accountants and Advisors, a Professional Corporation as independent public accounting firm For Against Abstain --------- ------- ------- 3,062,372 392,053 26,730 REGULATION FD DISCLOSURE On April 21, 2010, TransNet issued a press release announcing $1.1M IT award RESULTS OF OPERATIONS AND FINANCIAL CONDITION On May 14, 2010, TransNet issued a press release reporting its results of operations for the quarter and nine-month period ended March 31, 2010. 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 99.1 Press Release dated April 21, 2010 announcing $1.1M IT award 99.2 Press Release dated May 14, 2010 reporting TransNet's results for the quarter and nine month period ended March 31, 2010 B. Reports on Form 8-K - On February 10, 2010, TransNet Corporation filed a Form 8-K under Item 7.01. 16 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, Chief Financial Officer DATE: May 17, 2010 17

TRANSNET CORP 10-Q