<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 0-2401
E-SYNC NETWORKS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 06-0625999
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
35 Nutmeg Drive, Trumbull, CT 06611
(Address of principal executive offices)
(203) 601-3000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 _____
State the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at May 1, 2000
----- --------------------------
<S> <C>
Common Stock, Par Value $.01 3,730,976 shares
Series A Preferred Stock, No Par Value 1,000,000 shares
Series B Preferred Stock, No Par Value 2,272,727 shares
</TABLE>
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E-Sync Networks, Inc.
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet at
March 31, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
For the Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited)
For the Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
E-SYNC NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, 2000
(unaudited)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................................. $ 3,635
Accounts receivable, less allowance for doubtful accounts of $124,000 ..... 1,942
Other current assets ....................................................... 469
--------
Total current assets .................................................. 6,046
Equipment, net .................................................................. 4,191
Goodwill and other intangible assets, net ....................................... 4,192
Other assets .................................................................... 250
--------
Total assets .......................................................... $ 14,679
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Term loan payable, current portion ......................................... $ 105
Obligations under capital leases, current portion .......................... 81
Accounts payable ........................................................... 945
Accrued expenses ........................................................... 1,816
Medical benefits obligation, current portion ............................... 28
Deferred revenue ........................................................... 104
--------
Total current liabilities ............................................. 3,079
Term loan payable, less current portion ......................................... 3
Obligations under capital leases, less current portion .......................... 58
Medical benefits obligation, less current portion ............................... 210
--------
Total liabilities ............................................................... 3,350
Stockholders' Equity:
Convertible Preferred Stock, par value $.01 per share, 10,000,000 shares
authorized
Series A Convertible Preferred Stock, par value $.01 per share, 1,000,000 shares
issued and outstanding .......................................................... 10
Series B Convertible Preferred Stock, par value $.01 per share, 2,272,727 shares
issued and outstanding .......................................................... 23
Common Stock, stated value $.01 per share, 50,000,000 shares authorized, ....... 77
7,720,541 shares issued and outstanding at March 31, 2000
Additional paid in capital ...................................................... 26,346
Deferred compensation ........................................................... (479)
Accumulated deficit ............................................................. (13,432)
Less treasury stock at cost, 992,565 shares ..................................... (1,216)
--------
Total Stockholders' equity ............................................ 11,329
--------
Commitments and Contingencies
Total liabilities and stockholders' equity ............................ $ 14,679
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
REVENUES:
Managed services ....................................... $ 1,191 $ 959
Professional services .................................. 1,349 638
----------- -----------
Total revenues ..................................... 2,540 1,597
COST OF SALES:
Managed services ....................................... 929 660
Professional services .................................. 1,268 428
----------- -----------
Total cost of sales ................................ 2,197 1,088
GROSS MARGIN:
Managed services ....................................... $ 262 $ 299
Professional services .................................. 81 210
----------- -----------
Total gross margin ................................. 343 509
OPERATING EXPENSES:
Sales and marketing .................................... 668 466
General & administrative ............................... 991 718
Product development .................................... 385 199
Non-cash compensation .................................. 102 --
----------- -----------
Total Operating Expenses ........................... 2,146 1,383
----------- -----------
Loss from Operations ................................... (1,803) (874)
OTHER INCOME (EXPENSE):
Other expense, net ..................................... (4) (100)
Interest expense ....................................... (7) (13)
Interest income ........................................ 105 17
----------- -----------
Total other income (expense) ....................... 94 (96)
----------- -----------
NET LOSS .................................................. $ (1,709) $ (970)
=========== ===========
Basic and diluted net loss per share ...................... $ (.26) $ (.25)
=========== ===========
Weighted average number of shares used in basic and diluted
net loss per share ....................................... 6,689,983 3,950,461
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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E-SYNC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $(1,709) $ (970)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities
Depreciation and amortization ...................................... $ 419 $ 71
Loss on disposal of fixed assets ................................... -- 99
Non-cash compensation .............................................. 102 --
Changes in operating assets and liabilities:
Accounts receivable ................................................ (793) (14)
Other current assets ............................................... (140) (319)
Accounts payable and accrued expenses .............................. (646) 391
Deferred Revenue ................................................... (66) (76)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ....... (2,833) (666)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................... (763) (76)
------- -------
NET CASH USED IN INVESTING ACTIVITIES .............................. (763) (76)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank loan, net ................................ (4) (3)
Proceeds from exercise of stock options and warrants ...... 76 28
Proceeds from issuance of preferred stock and warrants .... -- 3,000
Payments under capital lease obligations, net ............. (23) (36)
Issuance of treasury stock as bonus ....................... -- --
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 49 2,989
------- -------
Net increase (decrease) in cash and cash equivalents ............... (3,547) 2,247
Cash and cash equivalents at beginning of period ................... 7,182 797
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 3,635 $ 3,044
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................. $ 7 $ 14
======= =======
Income Taxes .............................................. $ 4 $ 1
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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E-SYNC NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING
The condensed consolidated balance sheet as of March 31, 2000, and the related
condensed consolidated statements of operations for the three months ended March
31, 2000 and 1999, and the condensed consolidated statements of cash flows for
the three months ended March 31, 2000 and 1999 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
The financial statements as of March 31, 2000, and for the three months then
ended, should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999. The accounting policies followed by the Company with
respect to the unaudited interim financial statements are consistent with those
stated in the Company's Annual Report on Form 10-KSB for the year ended December
31, 1999.
2. CASH
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments including money market funds and certificates of deposit with
original maturities of three months or less to be cash equivalents.
3. EARNINGS PER SHARE
For the periods presented in the Consolidated Statements of Operations, the
calculations of basic EPS and EPS assuming dilution vary in that the weighted
average shares outstanding assuming dilution include the incremental effect of
stock options.
Options to purchase 850,089 shares and 685,300 shares of common stock at prices
ranging from $.25 to $5.0173 were outstanding at March 31, 2000 and 1999,
respectively. No options were issued in the three months ended March 31, 2000.
3,272,727 convertible preferred shares were outstanding at March 31, 2000. All
of the stock options and convertible preferred shares were excluded from the
calculation of Diluted EPS for the three months ended March 31, 2000 and 1999
because the Company experienced a loss for those periods and inclusion of such
securities would have had an anti-dilutive effect.
4. STOCK OPTIONS
In December 1999, the Company issued options to purchase 40,000 shares of common
stock at an exercise price of $4.20 per share to a consultant in connection with
acting as a technical advisor for the Company's U.K. operations for three years.
These options are exercisable for a period of 10 years. These options vest
ratably over three years. The Company accounts for these options in accordance
with Emerging Issue Task Force Abstract No. 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services@ ("EITF 96-18"). Pursuant to EITF
96-18, the Company valued the options using a Black-Scholes pricing model. The
$542,600 ascribed to the options reflects their market value as of March 31,
2000, and has been recorded as deferred compensation. This cost is being
amortized over the applicable vesting periods. The value ascribed to these
options will be adjusted at each intervening balance sheet date to bring the
total charge up to the then-current market value. To date, the Company has
amortized $63,300 of the deferred compensation, $49,300 of which has been
amortized in the current period. Such amount is included within non-cash
compensation in the statement of operations.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into a Loan and Security Agreement with People's Bank in
June 1998, for a line of credit of $750,000 for working capital needs plus an
additional term loan of up to $100,000 for purchases of equipment.
Interest on advances under the term loan are payable monthly in arrears at
one-half percent above prime and the total of such advances outstanding at
December 31, 1998 were converted to a term loan. The term of the loan is for 30
months, payable in equal monthly principal payments of one-thirtieth of the
outstanding balance at December 31, 1998, plus interest payable monthly
commencing January 31, 1999, at one-half percent above prime on the outstanding
principal balance. The amount outstanding under the term loan at March 31, 2000
was approximately $16,000. The Company's subsidiary, Braincraft Learning
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Technologies, Inc., also has an outstanding line of credit of $100,000 bearing
interest at 2% above the bank's prime rate. The amount outstanding under the
line of credit at March 31, 2000 was approximately $92,000.
The related Security Agreement provides that the loans be secured by the
Company's existing and future assets. Covenants under the Loan and Security
Agreement provide that the Company's current ratio cannot be lower than 1.2,
tangible net worth must be at least $1,000,000, and the Company must achieve
$100,000 net earnings for each six-month period on a rolling six-month basis.
The Company's primary location is a leased facility in Trumbull, Connecticut.
The lease obligates the Company to base rent payments commencing January 1, 2000
of $267,215 per year in years 1-5, $308,325 per year in years 6-10, and $349,435
per year in years 11-15. The Company is recording the rent expense ratably over
the lease term.
Annual employment agreements are in effect with two officers of the Company
which call for a base compensation to be mutually agreed upon at renewal, and
upon failure to reach agreement, will terminate, with the officer, in certain
circumstances, being entitled to a severance payment in an amount equal to
one-half to one and one-half of his then current annual base compensation.
Assuming that the severance arrangements under such agreements become operative,
the minimum aggregate payoffs under such agreements would approximate $268,000.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137, which deferred the effective date of SFAS No. 133. SFAS No.
137 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company has not yet analyzed the impact of this pronouncement on
its financial statements.
7. BUSINESS SEGMENT INFORMATION
The Company provides outsourced solutions for the development and hosting of
Web-based Extranet initiatives. Serving its Fortune 1000 customer base, the
Company offers secure online messaging, directory and fax services,
legacy-to-Web application development services, hosted communications, and
infrastructure support solutions that link business partners via the Web. The
operations of the Company are conducted through two business segments primarily
within the continental United States and the United Kingdom. Descriptions of the
business segments' services and operations are as follows:
MANAGED SERVICES
Managed Services provides customers with hosted global messaging services for
e-mail, fax, directory services, and remote management services supported by a
Company owned and operated, 24-hours-a-day, 7-days-a-week data center and help
desk that assures reliable and safe electronic communications. Messaging
services includes (i) TotalMail that provides user access to e-mail, shared
calendar scheduling, distribution lists and folders, and (ii) Hosting services,
whereby the Company will maintain customers' mail servers and run the e-mail
function remotely at one of its sites. Fax services includes (i) Application to
Fax which simultaneously delivers computer generated files from mainframe or
PC-based applications to one or many facsimile devices worldwide, (ii) Mailfax,
which sends faxes and attachments via e-mail, and (iii) Inbound Fax, which
allows receipt of inbound faxes at the desktop via e-mail. Directory Services
allows customers to outsource the management of their corporate data directories
via the Company's custom-designed directory solutions products. The Company also
offers secure e-mail and fax messaging services through public key
infrastructure (PKI), digital certificates, and SmartCard authentication
products.
PROFESSIONAL SERVICES
Professional Services is a consulting systems design and integration services
organization that provides legacy-to-Web application development and migration.
As a Microsoft Solution Provider Partner, certified system engineers and
Microsoft product specialists assist customers in designing and developing
migration strategies to Microsoft BackOffice(R) products. They provide
assistance for Windows NT(R), Exchange(R), Systems Management Server(R) (SNS),
SNA Server(R), and internet/intranet deployment through Internet Information
Server(R) (IIS). The Company's system engineers also provide design and
integration services, whereby they assess customers' information, messaging, and
connectivity needs, evaluate existing infrastructure architecture, define and
test migration processes, and prepare enterprise-wide implementation plans. They
also develop tools, utilities and conversion software for directory support as
well as design workflow automation solutions.
Identifiable assets by segment are those assets that are used in the operations
of each segment as well as the accounts receivable
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generated by each segment. Corporate assets consist primarily of cash and cash
equivalents, short term investments, prepaid expenses, and corporate furniture,
fixtures, and equipment. Capital expenditures are comprised primarily of
additions to data processing equipment, furniture and fixtures, and leasehold
improvements.
The following table presents the Company's business segment financial
information, in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
REVENUE:
Managed services $ 1,191 $ 959
Professional services 1,349 638
------- -------
Consolidated revenues $ 2,540 $ 1,597
======= =======
OPERATING LOSS:
Managed services $ (919) $ (611)
Professional services (815) (264)
------- -------
Operating income (loss) from segments (1,734) (875)
Corporate expenses, net 4 100
Interest expense (income), net (98) (4)
------- -------
Net loss $(1,639) $ (970)
======= =======
DEPRECIATION AND AMORTIZATION:
Managed services $ 70 $ 44
Professional services 22 7
Corporate 327 20
------- -------
Total depreciation and amortization $ 419 $ 71
======= =======
CAPITAL EXPENDITURES:
Managed services $ 141 $ 51
Professional services -- --
Corporate 622 25
------- -------
Total capital expenditures $ 763 $ 76
======= =======
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS AT: MARCH 31, 2000
--------------
<S> <C>
Managed services $ 2,314
Professional services 748
-------
Total assets for reportable segments 3,062
Corporate 11,617
-------
Total assets $14,679
=======
</TABLE>
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
E-Sync is a global provider of managed business-to-business e-commerce
applications and solutions that help medium and large businesses, including
Fortune 1000 companies, reinvent their businesses, interact more efficiently
with business partners, and web-enable their existing infrastructure. Through
these offerings, E-Sync provides comprehensive capabilities that provide secure
communication, information exchange and Web-based transactions. The Company has
historically provided reliable, high-quality messaging and hosting services to
its customers, which are critical components that can serve as the backbone of
supply chain management solutions. In addition, the Company offers professional
services, primarily to large corporations, including systems integration,
technology planning and information technology (IT) support.
Within the last year, the primary focus of the Company has been re-directed
toward offering powerful supply chain management solutions, consisting of secure
links between buyers and suppliers of goods and services, to its target market.
The Company's implementation strategy being deployed for the development and
delivery of these offerings combines XML-based, open standards with security
embedded directly into the applications, a predominantly modular architectural
design and core messaging capabilities, to create end-to-end solutions allowing
the web-enablement of legacy systems. Deep and trustworthy relationships with
the Company's existing Fortune 1000 customer base will provide the Company with
opportunities to migrate customers from current activities to higher-value web
supply chain offerings.
In addition to the Company's new strategy to develop and provide an end-to-end
web supply chain solution, the Company will continue to offer its existing
services on a modular basis to customers. These services include web design
consulting, secure online messaging, outsourced e-mail services, directory and
fax services, hosted communications, network design and integration, messaging
integration and message platform migration.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
The Company's revenues consist of fees for Professional Services provided to its
customers in the form of web development, messaging infrastructure and other
consulting services, and Managed Services in the form of hosting and messaging
services. Professional Services, including services provided by the Company's
subsidiary, Braincraft Learning Technologies, Inc. ("Braincraft"), are normally
billed on a time and material basis with contracts typically ranging from 1 to
12 months. Managed Services consist of both fixed charges, billed in advance,
and usage based charges billed at the end of the month. Contracts for Managed
Services are typically for a one-year period. The Company recognizes revenue in
the period the services are performed.
Managed Services revenues increased by 24.2% and Professional Services revenues
increased by 111.5% in the three months ended March 31, 2000. Managed Services
revenues increased primarily due to the initiation of the first TotalChain(SM)
pilot migration. The increase in Professional Services revenue is primarily due
to the acquisition and consolidation of Braincraft in November 1999. Net of the
effect of the consolidation of Braincraft, Professional Services revenue
increased by 41.3% over the periods, principally due to an increase in the
volume of Professional Services provided.
Gross margin for Managed Services decreased to 22.0% in the three months ended
March 31, 2000, compared to 31.2% for the three months ended March 31, 1999,
mainly due to increased costs associated with expanded capacity to support
future growth in new products. Gross margin for Professional Services decreased
to 6.1% in the three months ended March 31, 2000, from 32.9% for the three
months ended March 31, 1999, principally due to increased costs associated with
the recruiting and training of additional personnel to support anticipated
growth, partially offset by increased revenue from higher margin projects.
Sales and marketing expenses increased $201,000, or 43.1%, in the current
quarter, and as a percent of total revenues decreased from 29.2% in the three
months ended March 31, 1999, to 26.3% for the three months ended March 31, 2000.
The increase in expenses is a result of the hiring of additional sales and
marketing personnel.
The Company's general and administrative expenses were $991,000, or 38.1% higher
for the three months ended March 31, 2000, than for the three months ended March
31, 1999. As a percent of total revenues, general and administrative expenses
decreased
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from 45.0% to 39.0% over the periods. The increase in costs is primarily
attributable to higher amortization resulting from the Braincraft acquisition
as, well as increases in general, sales and operations management personnel and
capabilities, and increased professional and consulting fees.
Research and development expenditures were $385,000 and $199,000 for the three
months ended March 31, 2000, and 1999, respectively. The 93.0% increase in
expenses for the current quarter was mainly due to the increase in the number of
research and development personnel as well as the increased use of outside
consultants. To date, all development costs have been expensed in the period
incurred.
Interest income, net of interest expense, was $98,000 in the three months ended
March 31, 2000, as compared to $4,000 in the three months ended March 31, 1999.
The change was mainly due to the investment of funds received through the
issuance of preferred stock prior to their use.
In December 1999, the Company issued options to purchase 40,000 shares of its
common stock at an exercise price of $4.20 per share to a consultant in
connection with the consultant acting as a technical advisor for E-Sync's U.K.
operations for three years. These options are exercisable for a period of ten
years and vest ratably over three years. The Company accounts for these options
in accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting
for Equity Instruments That are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling Goods or Services" ("EITF 96-18"). Pursuant to EITF
96-18, the Company has valued the options using a Black-Scholes pricing model.
The $542,600 ascribed to the options reflects the market value as of March 31,
2000, and has been recorded as deferred compensation. This cost is being
amortized over the applicable vesting periods. The value ascribed to the options
will be adjusted at each intervening balance sheet date to bring the total
charge up to the then current market value. To date, the Company has amortized a
total of $63,300 of the deferred compensation. Such amount includes $49,300,
which was amortized in the current quarter, and is included within non-cash
compensation in the statement of operations.
In 1999, the Company issued 75,000 non-refundable shares of its common stock to
an advisor for services to be performed over three years. The $422,000 value
ascribed to the 75,000 shares is recorded as an other asset and is being ratably
amortized over three years, with $52,700 of such amortization expensed in the
three months ended March 31, 2000. The issuance of the shares is non-refundable.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $3,546,499 during the three months ended
March 31, 2000, from $7,182,000 at December 31, 1999. The Company invested
approximately $763,000 in capital purchases related to the Company's
headquarters and data center. Operations of the Company used approximately
$2,832,900. At March 31, 2000, the Company had working capital of approximately
$2,968,300.
Net cash used in operating activities was $2,832,000 for the three months ended
March 31, 2000. Net cash flows used in operating activities in the period
reflect net losses of $1,709,000, an increase of $880,000 in accounts
receivable, and a decrease of $646 in accounts payable.
Net cash used in investing activities was $763,000 for the quarter ended March
31, 2000. Cash used in investing activities primarily reflects purchases of
property and equipment for the installation of new computer equipment, purchases
of furniture and equipment for employees, and leasehold improvements related to
the expansion of data center capacity and the relocation of the Company's
principal office to Trumbull, Connecticut. Management expects that the Company's
capital expenditures will continue to increase in the future. During this
period, management expects to fund capital expenditures either through the use
of working capital or with capital leases.
As of March 31, 2000, the Company had $3,635,000 of cash and cash equivalents.
The Company expects to experience significant growth in its operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute its business plan. As a result, the
Company anticipates that such operating expenses, as well as planned capital
expenditures, will constitute a material use of cash resources. In addition, the
Company may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. Thereafter, the Company
may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, the Company may not be able to raise
funds on acceptable terms or at all.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk. E-Sync's accounts receivables are subject, in the normal course of
business, to collection risks. E-Sync regularly assesses these risks and has
established policies and business practices to protect against the adverse
effects of collection risks. As a result, E-Sync does not anticipate any
material losses in this area.
Interest Rate Risk. E-Sync's investments are classified as cash and cash
equivalents with original maturities of three months or less. Therefore, changes
in the market's interest rates do not affect the value of the investments as
recorded by E-Sync.
PART II. OTHER INFORMATION
The statements in this quarterly report on Form 10-QSB that are not historical
fact constitute "forward-looking statements." Said forward-looking statements
involve risks and uncertainties that may cause the actual results, performance
or achievements of the Company and its subsidiaries to be materially different
from any future results, performance or achievements, express or implied by such
forward-looking statements. These forward-looking statements are identified by
their use of forms of such terms and phrases as "expects", "intends", "goals",
"estimates", "projects", "plans", "anticipates", "should", "future", "believes",
and "scheduled".
The variables which may cause differences include, but are not limited to, the
following general economic and business conditions: competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and exceptions of the Company will be achieved.
In addition, there can be no assurance that the Company will be successful in
further developing any of its new products, that the Company will not experience
difficulties that could delay or prevent successful development, introduction
and sales of these products, or that its new products and enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Although the Company expects to derive a substantial portion of its
revenue from the TotalChain(SM) offerings in the future, it is still developing
its pricing, expense and revenue model for the services associated with such
offerings. If the Company is unable to successfully establish a pricing, expense
and revenue model acceptable to its customers, the TotalChain(SM) offerings may
not be commercially successful. Management cannot be sure that existing and
future development efforts will be completed within the anticipated schedules or
that, if completed, they will have the features or quality necessary to make
them successful in the marketplace. Further, despite testing by the Company and
by current and potential customers, errors could be found in the Company's
products. E-Sync may not be able to successfully correct these errors in a
timely and cost effective manner. If the Company is not able to develop new
products or enhancements to existing products or corrections on a timely and
cost-effective basis, or if these new products or enhancements do not have the
features or quality necessary to make them successful in the marketplace, the
Company's business will be seriously harmed.
Management expects that most of the Company's enhancements to existing and
future products will be developed internally. However, the Company currently
licenses certain externally developed technologies and will continue to evaluate
externally developed technologies to integrate with its solutions. These
externally developed technologies, if suffering from defects, quality issues or
the lack of product functionality required to make the Company's solutions
successful in the marketplace, may seriously impact and harm the Company's
business. In addition, the Company must attract and retain highly qualified
employees to further its research and development efforts. The Company's
business could be seriously harmed if it is not able to hire and retain a
sufficient number of these individuals.
Item 2. Changes in securities and use of proceeds
None
11
<PAGE> 12
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
27 Financial Data Schedule (filed separately herewith)
(b) Reports on Form 8-K
None
</TABLE>
SIGNATURE
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.
Date: May 15, 2000 E-SYNC NETWORKS, INC.
/s/ Frank J. Connolly
----------------------
Frank J. Connolly, CFO
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE E-SYNC NETWORKS,
INC. CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2000, AND THE CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-01-2000
<CASH> 3635
<SECURITIES> 0
<RECEIVABLES> 2066
<ALLOWANCES> 124
<INVENTORY> 0
<CURRENT-ASSETS> 6046
<PP&E> 4191
<DEPRECIATION> 0
<TOTAL-ASSETS> 14679
<CURRENT-LIABILITIES> 3079
<BONDS> 0
0
33
<COMMON> 77
<OTHER-SE> 11219
<TOTAL-LIABILITY-AND-EQUITY> 14679
<SALES> 2540
<TOTAL-REVENUES> 2540
<CGS> 2197
<TOTAL-COSTS> 4343
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (98)
<INCOME-PRETAX> (1709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1709)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
