10-Q 1 c63317_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 September 30, 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 November 10, 2010: 4,823,304. TRANSNET CORPORATION FORM 10-Q TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Balance Sheets September 30, 2010 (unaudited) and June 30, 2010 1 Consolidated Statements of Operations (unaudited) Three Months Ended September 30, 2010 and 2009 2 Consolidated Statements of Cash Flows (unaudited) Three Months Ended September 30, 2010 and 2009 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis 8 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Certifications 16 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 SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Consolidated Financial Statements. 3 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 of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The operating results for the three months ended September 30, 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, 2010 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, 2010. 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, 2010. All material intercompany transactions have been eliminated in consolidation. 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, in accordance with the FASB ACCOUNTING STANDARDS CODIFICATION (the "ASC") topic 605 REVENUE RECOGNITION. Revenues related to services provided are recognized ratably over the term of the underlying customer contract or at the end of the contract when obligations have been satisfied, in accordance with the ASC topic 605 REVENUE RECOGNITION. For service performed on a time and materials basis, revenue is recognized upon performance. 4 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 months ended September 30, 2010 and 2009. 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 period ended September 30, 2010 and 2009 because the options' exercise price was greater than the average market price of the common shares. (3.) NEW ACCOUNTING UPDATES 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. The Corporation adopted this new accounting pronouncement for the quarterly period beginning July 1, 2010, as required, and adoption did not have a material impact on its financial statements taken as a whole. In January 2010, the FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements". The guidance in ASU 2010-06 provides amendments to literature on fair value measurements and disclosures currently within the ASC by clarifying certain existing disclosures and requiring new disclosures for the various classes of fair value measurements. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Corporation's financial position or results of operations. In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" ("ASU 2010-20"). The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how allowances for credit losses are developed and how credit exposure is managed. ASU 2010-20 is effective for interim periods and fiscal years ending after December 15, 2010. The adoption of this guidance is not expected to have a material impact on the Corporation's financial position or results of operations. 5 (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 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. SEPTEMBER 30, DESCRIPTION 2010 LEVEL 1 LEVEL 2 LEVEL 3 ----------- ------------- --------- --------- --------- Certificate of Deposit $ 878,137 $ -- $ 878,137 $ -- (5.) DEBT The Corporation currently utilizes credit available from multiple vendors under terms which provide for interest free periods ranging from 30 to 60 days. The credit extended by the vendors is secured by substantially all 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 discretionary inventory line of credit with a third party, which is secured by substantially all of the Corporation's assets. The lender may determine the maximum amount of financing which it elects to extend. An affiliate of officers of the Corporation and an officer loaned the Corporation an aggregate amount of $70,000, and an additional $25,000 was loaned by an employee of the Company. The loans are non-interest bearing and are payable upon demand. 6 (6.) INCOME TAXES The following reconciles the tax provision with the U.S. statutory tax rates: THREE MONTHS ENDED SEPTEMBER 30, 2010 2009 Income taxes at U.S. statutory rate (35.0)% (35.0)% State taxes, net of federal tax benefit (6.0) (6.0) Tax benefit of federal net operating tax loss carryforward 41.0 41.0 TOTAL EXPENSE (BENEFIT) 0% 0% =============== ============== At June 30, 2010 the Corporation had a federal net operating tax loss carryforward of approximately $11.2 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 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 Revenues for the quarter ended September 30, 2010 increased to $6,025,249 from $5,864,949 in the same quarter in the prior year. For the September 2010 quarter, the Corporation reported net income of $40,249 as compared with net income of $102,062 for the quarter ended September 30, 2009. Revenues for fiscal quarter ended September 30, 2010 increased as compared to the same quarter in the prior year as a result of Management's focus on sales of higher-end systems and partially as a result of fulfillment of orders that were delayed from the prior quarter as a result of product constraints. Service related revenues (technical support, repair and maintenance, network integration, staffing, and training) decreased in correlation to the mix of products sold. Because service revenues yield higher profit margins than equipment sales, the reduction in service revenues reduced our overall profit margin and impacted our earnings. Revenues continue to be affected by the general slowdown resulting from the recession, including a significant reduction in purchases by state, and local governmental agencies, and educational customers (K-12 through higher education) (collectively "Public Sector" clients) and restrictions on capital expenditures experienced by many clients. Service revenues remained relatively constant during the comparative quarters. During the September 2010 quarter, the Corporation's clients continued to be conservative in their IT budgetary spending and to scrutinize their IT spending and the related returns on investments before incurring new expenses. As a result, Management concentrates on sales of higher margin equipment such as Voice over Internet Protocol ("VoIP") systems and physical security systems, optimizing the utilization rates of its service technicians, and reducing selling and administrative expenses. Demand for physical security systems marketed by TransNet continues to be strong, even in light of budgetary restrictions of Public Sector clients. While no assurances can be given, we believe that TransNet is well positioned in the State of New Jersey's purchasing contracts for growth of our business with Public Sector clients and that sales under these contracts will have a 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. Changes in purchasing mechanisms enacted by the State of New Jersey in fiscal 2010 require certain purchases made by State entities be made directly from manufacturers, which decreases our equipment sales revenue. Under this "agency model," certain orders are processed directly by our hardware partners, 8 who receive purchase orders directly, and ship and invoice to 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 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. Revenues from these transactions are included in Service 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. Service related revenues are a material portion of revenues and, as noted above, are significant in their contributions to net income because these operations typically yield a higher profit margin than equipment sales. Service revenues are generated primarily by services including planning, design, configuration, installation and implementation, testing, and optimization, often related to the sale and implementation of VoIP networks. Project work is the major source of service revenue generation and Management continues its focus on optimizing utilization rates of its service technicians. Revenues are also generated by a variety of support contracts for these networks which provide service and support for the customer's personal computers, peripherals, and networks. These contracts are short-term, and contain provisions which permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur. Under these agreements, 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 are for twelve months or less. In addition, our system engineers and service technicians provide service and support on an on-call basis. Management believes that future spending will be subject to specific criteria, but also believes that as single source provider, the Corporation is in a better position to satisfy client demands for cost-effectiveness and a suitable return on investment. The VoIP systems and solutions marketed by TransNet are designed with the capacity for "optimization" through the subsequent addition of layers of solutions, for example, security solutions, paving the way to future business from existing customers. The Corporation reviews and modifies its service offerings in response to industry fluctuations, and has recruited experienced and specially certified systems engineers and project managers to respond to increased VoIP projects. We are confident that our strategy of being an advanced solutions provider will result in future revenues from clients' optimization of already installed networks, providing clients with greater operating efficiencies. In addition to these technical services, TransNet provides temporary and permanent IT staffing and consulting services. Our staffing services are not a material source of revenues, but these services carry higher profit margins than equipment sales. During fiscal 2010, businesses were faced with special projects to perform required upgrades, repairs, and replacement of their networks despite the recession and demand for our services increased. Because employers are reluctant to expand their own workforce in light of the recession, TransNet's staffing operations experienced a strong demand for temporary IT support specialists. Revenues generated by our staffing operations continue to improve in conjunction with the demand for temporary employees. Although no assurances can be given, we believe that as the economy recovers and businesses begin to increase the number of employees, revenues and profits from our staffing services will be positively affected. Our clients continued to be conservative in their IT budgetary spending and to scrutinize budgets and returns on investments. In conjunction with attention on utilization rates of our service technicians, Management monitors and takes steps to monitor selling, general and administrative expenses in an effort to contain expenses as much as possible. 9 In addition to the challenging economic environment, the IT industry experiences a continuing trend of decreasing prices of 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. To meet these competitive challenges and to maximize the Corporation's profit margin, Management has modified its marketing strategy and has taken steps to reduce expenses. We have also developed new service offerings that take into account clients' cost constraints. We modified our service offerings in response to industry fluctuations, and employ 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. Management also utilizes approaches such as manufacturers' direct shipment as a means to reduce equipment related overhead costs which increases profits. Our marketing strategy focuses upon provision of technical services and sales of lower revenue/higher profit margin products related to service and support operations. We target commercial and public sector 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. 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. 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; availability of credit; the short-term nature of client's 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. Management continues its aggressive steps initiated in fiscal 2010 to significantly reduce selling, general and administrative expenses and to adjust the allocation of personnel to increase the number of employees providing billable services. We significantly decreased our actual expenses during fiscal 2010, through a number of staff reductions, and implementation salary freezes, salary reductions, and other cost reduction programs. The results of these cost-saving measures will be realized more fully going forward. We anticipate that selling, general, and administrative expenses for fiscal 2011 will be approximately 10% less than the prior year. Selling, general and administrative expenses for the quarter ended September 30, 2010, decreased in actual figures and also as a percentage of revenues, moving to 21% of revenues as compared to 22% of revenues for the comparative quarter in the prior year. Management continues its efforts to monitor and control expenses, despite increasing personnel related costs, such as health benefits. 10 Interest income decreased in the first fiscal quarter of 2011 as compared to the same quarter in the prior year as a result of lower interest rates and lower amounts invested. Interest expense increased in the September 2010 due to 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, a third party line of credit, and employment contracts. Cash and cash equivalents remained relatively constant during the quarter ended September 30, 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, many of whom are affected by the economic recession. 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 the 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. Additionally, the Corporation at times may absorb costs related to downtime of a portion of our technical staff which may result from any slowdown of new business or downtime between projects. Accounts receivable remained relatively constant for the September 2010 quarter. The timing of our collection of accounts receivable is a significant factor in our cash flow to fund operations. Products and are typically sold on short-term credit terms, but may also include extended terms under such projects as E-rate projects. These projects are funded by the Schools and Libraries Program of the Universal Service Fund, commonly known as "E-Rate," which is administered by the Universal Service Administrative Company (USAC) under the direction of the Federal Communications Commission (FCC). E-Rate provides discounts to assist most schools and libraries in the United States to obtain affordable telecommunications and Internet access. 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 in fiscal 2011 quarter due to fulfillment of orders. The increase in accounts payable during the quarter ended September 30, 2010 is attributable to the increase in equipment sales. Amounts outstanding under the line of credit decreased as a result of payments made on these lines. 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 11 and has taken steps to obtain the most favorable credit arrangements available. 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 going forward. 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. 12 ITEM 4. CONTROL AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Corporation have concluded, based on their evaluation as of September 30, 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 continues its efforts regarding 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. 13 PART II OTHER INFORMATION ITEM 5. OTHER INFORMATION On November 12, 2010, the Corporation issued a press release discussing its results of operations for the fiscal quarter ended September 30, 2010. A copy of the press release is attached as Exhibit 99.1 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 B. Reports on Form 8-K - None. 14 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: November 12, 2010 15

TRANSNET CORP 10-Q