UNITED STATES
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, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 0-26790
eSynch Corporation
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(Exact name of small business issuer as specified in its charter)
DELAWARE 87-0461856
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
15502 Mosher
Tustin, CA 92780
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(Address of principal executive offices)
(714) 258-1900
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(Issuer's telephone number, including area code)
4600 Campus Drive
Newport Beach, CA 92660
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(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 No X
The number of common shares outstanding at June 28, 1999: 9,031,840
TABLE OF CONTENTS
PART 1 Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - March 31, 1999
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 (Unaudited). . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 (Unaudited). . . . . . . . 3
Notes to Condensed Consolidated Financial Statements
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 9
PART II Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .10
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Reports on Form. . . . . . . . . . . . . . . . . .13
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . .14
PART 1 FINANCIAL INFORMATION
Item I - Financial Statements
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 11,540
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,693
Other receivable. . . . . . . . . . . . . . . . . . . . . . . . 50,000
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . 290,947
-----------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . 366,180
-----------
Property and Equipment, net . . . . . . . . . . . . . . . . . . 49,206
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,030
Assets to be sold - primarily goodwill. . . . . . . . . . . . . 4,552,847
-----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . .$ 5,028,263
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . .$ 1,136,985
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 769,160
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 616,161
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 5,218
Liabilities relating to assets to be sold . . . . . . . . . . . 4,502,847
-----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . 7,030,371
Redeemable Preferred Stock - $0.001 par value; 600,000
shares authorized; 600,000 shares of Series I issued
and outstanding; liquidation preference - $600,000 . . . . . . 600
-----------
Stockholders' Deficit
Preferred stock - $0.001 par value; 400,000 shares
authorized; none issued or outstanding. . . . . . . . . . . . -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 7,583,706 shares issued and outstanding . . . . . 7,584
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 4,755,431
Note receivable from shareholder. . . . . . . . . . . . . . . . (494,007)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (6,271,716)
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Total Stockholders' Deficit . . . . . . . . . . . . . . . . . (2,002,708)
-----------
Total Liabilities and Stockholders' Deficit. . . . . . . . . . .$ 5,028,263
===========
See the accompanying notes to the condensed consolidated financial statements.
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<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
Net Product Sales. . . . . . . . . . . . . . $ 408,850 $ 14,870
------------ ------------
Costs and Operating Expenses
Costs of products sold. . . . . . . . . . . 279,697 93,631
General and administrative. . . . . . . . . 718,998 221,310
------------ ------------
Total Costs and Operating Expenses . . . 998,695 314,671
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Operating Loss . . . . . . . . . . . . . . . (589,845) (299,801)
Interest expense . . . . . . . . . . . . . . (30,617) (12,060)
------------ ------------
Net Loss . . . . . . . . . . . . . . $ (620,462) $ (311,861)
============ ============
Basic and Diluted Loss Per
Common Share. . . . . . . . . . . . . . . . $ ( 0.09) $ (3.49)
============ ============
Weighted average number of common
shares used in per share calculation . . . . 7,234,295 89,357
============ ============
See the accompanying notes to the condensed consolidated financial statements.
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<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ------------
Cash Flows from Operating Activities
Net loss. . . . . . . . . . . . . . . . . . . .$ (620,462) $ (311,861)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . 9,225 10,049
Stock issued for services. . . . . . . . . . 649,425 -
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . - 25,000
Prepaid expenses . . . . . . . . . . . . . . (290,497) -
Accounts payable . . . . . . . . . . . . . . 16,220 116,808
Accrued liabilities. . . . . . . . . . . . . 76,320 55,048
Other liabilities. . . . . . . . . . . . . . 5,218 -
------------ ------------
Net Cash Used in Operating Activities. . . (154,551) (104,956)
------------ ------------
Cash Flows From Investing Activities
Acquisition of property and equipment . . . . . (6,225) -
Other receivable. . . . . . . . . . . . . . . . (50,000) -
Deposits. . . . . . . . . . . . . . . . . . . . (60,030) -
------------ ------------
Net Cash Used in Investing Activities. . . . (116,255) -
------------ ------------
Cash Flows From Financing Activities
Cash received on notes receivable
issued for common stock. . . . . . . . . . . . 71,433 -
Proceeds from borrowing . . . . . . . . . . . . 359,500 115,500
Payments on notes payable . . . . . . . . . . . (150,000) -
------------ ------------
Net Cash Provided by Financing Activities. . 280,933 115,500
------------ ------------
Net Increase in Cash . . . . . . . . . . . . . . 10,127 10,544
Cash at Beginning of Period. . . . . . . . . . . 1,413 -
------------ ------------
Cash at End of Period. . . . . . . . . . . . . .$ 11,540 $ 10,544
============ ============
Noncash Investing and Financing Activities
The Company issued common stock for a note receivable in the amount of
$565,440.
See the accompanying notes to the condensed consolidated financial statements.
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<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS -- Intermark Corporation
("Intermark") was incorporated under the laws of the State of
California in October 1995. On August 5, 1998, Intermark was
reorganized into Innovus Corporation, a publicly-held shell
corporation. By shareholder action, Innovus Corporation, the parent
company, changed its name to eSynch Corporation ("eSynch") on
November 9, 1998. On November 17, 1998, eSynch acquired SoftKat Inc.
("SoftKat"). Subsequent to March 31,1999, SoftKat was sold to a
third-party. See Note 2.
The primary activities of eSynch, the consolidated company, have
consisted of raising capital, acquiring Innovus Corporation and
SoftKat Inc., and limited retail and turnkey sales of software
games and various other programs and related marketing services
through distribution channels and through the Internet.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated
financial statements include the accounts of Intermark Corporation
("Intermark") for all periods presented, and the accounts of Innovus
Corporation and SoftKat, Inc. from the dates of their acquisitions
on August 5, 1998 and November 17, 1998, respectively. These
entities are collectively referred to as "eSynch" or the
"Company". All inter-company transactions and balances have been
eliminated in consolidation. In accordance with the accounting
treatment for impairment of long-lived assets to be disposed
of, the accounts of SoftKat has been consolidated under two line
items on the financial statements, "Assets to be sold" and
"Liabilities relating to assets to be sold", respectively. The
carrying amount of assets to be sold has been adjusted by the
impairment loss on the subsequent sale of SoftKat. The impairment
loss was recognized in the year ending December 31, 1998.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumption that affect the
reported amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
INTERIM UNAUDITED FINANCIAL INFORMATION -- The accompanying
condensed financial statements have been prepared by the Company
and are not audited. In the opinion of management, all adjustments
necessary for a fair presentation have been included and consist
only of normal recurring adjustments except as disclosed herein. The
financial position and results of operations presented in the
accompanying financial statements are not necessarily indicative
of the results to be generated for the remainder of 1999.
These financial statements have been condensed pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in financial
statements have been condensed or omitted. These financial statements
should be read in connection with annual financial statements included
in the Company's Form 10-KSB dated December 31, 1998.
BUSINESS CONDITION -- The financial statements have been prepared
on the basis of the Company continuing as a going concern. The
Company has incurred losses from operations and negative cash
flows from operating activities and has accumulated a deficit at
March 31, 1999 in the amount of $6,271,716. These conditions
raise substantial doubt regarding the Company's ability to
continue as a going concern. Management's plan to mitigate the
impact of these conditions is to obtain additional equity
financing through the issuance of the Company's common stock,
convertible preferred stock or warrants. As discussed in Note 8,
the Company has obtained a signed commitment from an investment
source for equity financing in the aggregate amount of $2,500,000.
The Company is also currently in negotiations for additional
financing arrangements. However, realization of the proceeds from
these potential transactions is not assured. These financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets or amounts
and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern.
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CONCENTRATION OF RISK AND MAJOR CUSTOMERS -- The Company operates
exclusively in the software industry, accordingly, segment
information relating to operations in different industries is not
presented in these financial statements. The concentration of
business in the highly competitive software industry subjects the
Company to concentrated market risk. Sales to any major customer
during the quarters ended March 31, 1999 and 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The amounts reported as
cash, accounts payable, notes payable, and liabilities relating to
assets to be sold are considered to reasonable approximations of
their fair values. The fair value estimates were based on market
information available to management at the time of the preparation
of the financial statements.
LOSS PER SHARE -- The Company computes basic and diluted loss per
share in accordance with Statement of Financial Accounting
Standards No. 128, ("SFAS 128"), Earnings Per Share. Basic loss
per common share is computed by dividing net loss available to
common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
calculated to give effect to stock warrants, options and
convertible notes payable except during loss periods when those
potentially issuable common shares would decrease the loss per
share. 1,351,800 and zero potentially issuable common shares
outstanding at March 31, 1999 and 1998 were excluded from the
calculation of diluted loss per share for the quarters ended
March 31, 1999 and 1998, as they would have decreased the loss
per share, respectively.
REVENUE RECOGNITION -- The Company sells software products at fixed
prices for which the right to return is granted to the buyer.
Accordingly, revenue is recognized when the buyer has paid for the
products and the amount of future returns can be reasonably
estimated. Cost of products sold is recognized at the date the
sale is recognized less an estimate for sales returns. Until the
sale is recognized, products purchased from publishers are
accounted for as consigned product from publishers and the related
cost is not reflected in the financial statements with the
exception of a limited amount of software inventory owned by the
Company at period-end.
NOTE 2--ACQUISITIONS
SOFTKAT -- On November 17, 1998, the Company acquired SoftKat,
Inc,. a California corporation primarily engaged in the wholesale
distribution of computer software games. In exchange for the
SoftKat common shares, the Company issued 720,000 common shares
and 600,000 shares of Series I redeemable, convertible preferred
shares. Up to an additional 720,000 common shares are contingently
issuable based upon the difference between the market price of
the common stock one year from the date of acquisition and a
target market price. The acquisition was accounted for using the
purchase method of accounting. The acquisition purchase price,
based upon the fair value of the common and preferred stock issued
and the additional contingently issuable common shares, was
$2,670,000. The excess of the purchase price over the estimated
fair value of the identifiable acquired assets less liabilities
assumed was $6,882,300, which was recognized as goodwill. The
results of operations of SoftKat have been included in the March
31, 1999 condensed consolidated financial statements.
In February 1999, Management of the Company decided to dispose of
SoftKat because it did not meet the core business objectives of
the Company. On May 25, 1999, SoftKat was sold to a third party
for $50,000 cash and a note receivable for $100,000 which resulted
in the recognition of an impairment loss of $2,323,841. The
subsequent sale and resulting loss provided evidence of conditions
that existed at December 31, 1998; therefore, an impairment loss
was recognized in 1998 in accordance with SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The impairment loss was determined by
the excess of the carrying amount of the assets in excess of the
$50,000 subsequently collected and the amount of the related
liabilities. The $100,000 note receivable was not considered in
the computation of the impairment loss or the resulting carrying
value of the assets to be sold, but will be recognized when
collected. The resulting amount of the assets to be sold and the
related liabilities assumed by the buyer have been presented
separately in the accompanying balance sheet.
-5-
NOTE 3--OTHER RECEIVABLE
On March 30, 1999, the Company loaned $50,000 to Kiss Software
Corporation ("Kiss"). As discussed in Note 9, the Company acquired
Kiss effective April 1, 1999. The advance is non-interest bearing
and is payable on demand.
NOTE 4--PREPAID EXPENSES
In January 1999, the Company prepaid consulting services by issuing
310,000 common shares of stock to two third-party consultants. The
prepaid services recognized from the issuance of these shares was
$361,250. As of March 31, 1999, $70,303 of the prepaid services had
been performed by the consultants and therefore, were expensed by
the Company.
NOTE 5--NOTES PAYABLE
In March 1999, the Company borrowed $19,500 from a third-party.
The note had a stated interest rate of 10% and was payable on
demand. The note was paid in full shortly after March 31, 1999.
During the period ending March 31, 1999, the Company made cash payments
of $30,000 interest and $100,000 principal to the holder of the 40%
convertible note.
In March 1999, the Company borrowed $250,000 from a third-party. The
note is unsecured and bears interest at the rate of 5% per annum. The
note and accrued interest are payable on or before July 5, 1999.
In March 1999, an officer of the Company loaned the Company $90,000 at
an interest rate of 10%. Prior to March 31, 1999, $50,000 of the loan
amount was repaid. The remaining principal amount of the note was repaid
subsequent to March 31, 1999.
NOTE 6--COMMITMENTS AND CONTINGENCIES
LITIGATION - SoftKat is a defendant in a lawsuit filed by a
third-party for alleged breach of distribution and licensing
agreements. Management of SoftKat claims it has paid money and
substantial merchandise to the plaintiff in satisfaction of a large
portion of the debt. The plaintiff has proposed to file a first
amended complaint naming as defendants the original parties as well
as eSynch and claiming trademark and intellectual property
violations. The amount claimed is $100,000. The Company believes
that the potential exposure is much less than this amount. The stage
of the proceedings does not allow the Company to estimate the
probability of an unfavorable outcome at this time. No provision for
a possible loss from this proceeding has been accrued in the
accompanying financial statements.
The Company is a defendant in a lawsuit filed by a third-party
claiming damages for unpaid printing charges. The suit asks for
damages of $6,091, plus interest and attorney fees of $660. The
Company is unable to estimate the likelyhood of an unfavorable
outcome of this lawsuit at this time. The Company denies the claim
and has cross-complained seeking damages in excess of $100,000,
claiming that the printing work was substandard and could not be
used with the software product. The Company intends to vigorously
defend against the claim and prosecute its cross-complaint. No
provision for a possible loss from this lawsuit has been accrued in
the accompanying financial statements.
The Company is a defendant in a lawsuit filed by a third-party for
unpaid rent payments relating to a prior lease agreement entered
into by SoftKat. In February 1999, a default judgment was obtained
by the plaintiff against SoftKat for $38,273. Subsequently, the
plaintiff sued the Company seeking damages of the original $38,273
plus $46,528 for additional losses incurred by the plaintiff in
conjunction with SoftKat's departure from the premises under lease.
The Company is a defendant in a lawsuit filed by a third-party for
non-payment of "guarantee" royalties in the amount of $34,750. The
Company is unable to estimate the liklihood of an unfavorable
outcome of this lawsuit at this time. The Company intends to
vigorously defend against this claim. A provision of $5,818 has
been accrued in the accompanying financial statements.
SoftKat is a defendant in a number of lawsuits and collection
actions filed by various third-parties. The damages asserted in
these claims have been accrued in the accompanying consolidated
financial statements and are included in the line item "Liabilities
relating to assets to be sold." These lawsuits and collection
actions may result in future claims against the Company in the event
that some or all of these claims are not assumed by the buyer in the
purchase of SoftKat.
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NOTE 7--STOCKHOLDERS' DEFICIT
In January 1999, the Company issued 310,000 shares of common stock for
prepayment of services. The value of the services was determined based
upon the trading price of the Company's common stock on the date of
issuance. The services were valued at $361,250; $70,303 of this amount
was expensed in the period and the remainder of $290,947 is shown as
prepaid expenses at March 31, 1999.
During the period ended March 31, 1999, the Company issued 148,500
shares of common stock for services valued at $288,175 or approximately
$1.94 per share. The value of these services was determined based upon
the trading price of the Company's common stock on the date of issuance.
During March 1999, the Company issued 235,377 shares of common stock
for notes receivable totaling $565,440. Prior to March 31, 1999, $71,433
of the notes were collected by the Company.
In March 1999, the Company issued 235,377 shares of common stock
for a note receivable totaling $565,440. Prior to March 31, 1999,
$71,433 was collected on the note. The note is due on or before
March 31, 1999 and has a stated interest rate of 10%. Subsequent
to March 31, 1999,$212,000 of the note was collected by the Company.
The note balance at March 31, 1999 has been included in Stockholders'
Deficit in the accompanying Condensed Consolidated Balance Sheet.
NOTE 8--SUBSEQUENT EVENTS
Effective April 1, 1999, the Company completed the acquisition of Kiss
Software Corporation ("Kiss"), a California corporation engaged in the
wholesale and retail distribution of computer and Internet utility
software products. Under the agreement, shareholders of Kiss agreed to
exchange each of their common shares for .181557136 common shares
of eSynch and each of their preferred shares for .4183964 common
shares of eSynch. The exchange resulted in the Company issuing
1,428,134 common shares to Kiss shareholders. The Company also
issued 163,187 options in conjunction with the purchase. These
options are exercisable at $2.05 each. During the second quarter 1999,
the acquisition will be accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value
of the common stock and options issued, has been estimated at
$4,141,978(unaudited). The excess of the purchase price over the
estimated fair value of the identifiable acquired assets less
liabilities assumed was $5,237,979 (unaudited), which will be
recognized as goodwill. Goodwill will be amortized over approximately
3 years on a straight-line basis.
On April 22, 1999, the Company entered into a one year agreement
with a consultant to assist the Company in raising equity
financing. The advisor is to receive 5% of the gross amount of the
proceeds of any equity financing consummated by the Company during
the term of the agreement.
On April 26, 1999, the Company issued 10,000 shares of common stock
to an individual for services provided to the Company. The expense
to be recognized will be $26,875.
On May 7, 1999, the Company issued 10,000 shares of common stock to
an individual for services provided to the Company. The expense to
be recognized will be $25,600.
-7-
On May 25, 1999, the Company sold all of the stock of SoftKat,
Inc. to an unrelated third party for $50,000 cash and a note
receivable of $100,000 due 180 days after the date of sale. See
Note 2.
On June 1, 1999, the Company entered into a one year agreement
with a consulting firm whereby the firm is to provide ongoing
stock market support for the Company. The agreement is renewable
for successive one year periods. As consideration for these
services, the Company is to pay $48,000 ($4,000 monthly) plus
reasonable expenses. For the period of June 1, 1999 through August
31, 1999, the monthly amount is to be paid in common shares of
the Company. The first cash payment of $4,000 is due September 1,
1999.
On June 10, 1999, the Company issued 75,000 shares of common stock
for $150,000 in cash or $2.00 per share.
On June 11, 1999, the Company agreed to pay $50,000 in cash and
agreed to issue 9,039 shares of common stock as a compromise and
settlement of a lawsuit relating to a legal dispute between Kiss
Corporation and a third-party.
On June 11, 1999, the Company received a signed commitment from an
investing source for equity financing in an aggregate amount of
$2,500,000, subject to certain terms and conditions. The financing
is to be in the form of preferred stock and warrants issued by the
Company. The Company is obligated, at its expense, to register the
stock within 60 days of closing, with an effective date within 150
days after closing or the investors will be entitled to a
registration payment equal to 2% of the purchase price for the
first 30 days the Company is tardy and 3% for every 30 day period
thereafter.
-8-
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The following discussion should be read in conjunction with the
financial statements and notes thereto found elsewhere herein. The
discussion assumes that the reader is familiar with or has access to
the Company's financial statements for the year ended December 31, 1998
found in the Company's Form 10-KSB dated June 21, 1999.
The financial statements have been prepared on the basis of the
Company continuing as a going concern. The Company has incurred losses
from operations and negative cash flows from operating activities and has
accumulated a deficit at March 31, 1998 in the amount of $6,271,716. These
conditions raise substantial doubt regarding the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Results of Operations
During the quarter ended March 31, 1999, net sales were $408,850,
compared to $14,870 for the comparable period of the prior year.
The sales amount for 1999 included sales for SoftKat in the amount
of $373,011. These sales will not continue as SoftKat was sold
May 25, 1999.
The costs of products sold in the quarters March 31, 1999 and 1998
were $279,697 and $93,361, respectively.
-8-
Operating loss for the quarter ended March 31, 1999 was 620,462
compared to an operating loss of 311,861 for the quarter ended
March 31, 1998. The increase operating loss was due to the difficulties
associated with Softkat operations and increased public relations due
to the Company being a public traded company.
The Company incurred $30,617 and $12,060 in net interest expense
during the quarters ended March 31, 1999 and 1998, respectively.
Liquidity and Capital Resources
At March 31, 1999 the Company had $11,540 of cash and a deficit
in working capital (current liabilities in excess of current assets)
of $6,664,191.
The Company had been relying upon short-term borrowings from affiliates
and others, as well as issuance of common stock.
Management's efforts to obtain additional financing were successful
to some degree. The Company borrowed $269,500 from two accredited
investors during the quarter. In addition, the Company issued 235,377
shares of common stock for notes receivable totaling $565,440.
The Company estimates that during the quarter it was using
approximately $100,000 more cash each month than was generated by
operations.
Risk Factors
Statements regarding the Company's plans, expectations, beliefs,
intentions as to future sales of software, future capital resources and
other forward-looking statements presented in this Form 10-QSB constitute
forward looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. There can be no assurance that actual
results will not differ materially from expectations. Investors are
cautioned not to ascribe undue weight to such statements. In addition
to matters affecting the Company's industry generally, factors which
could cause actual results to differ from expectations include, but are
not limited to (i) sales of the Company's software may not rise to the
level of profitability; (ii) due to the rapidly changing and intensely
competitive nature of the industry, competitors may introduce new products
with significant competitive advantages over the Company's products;
(iii) the Company may not have sufficient resources, including any future
financing it is able to obtain, to sustain marketing and other operations;
(iv) the Company may be unable to attract and retain sufficient management
and technical expertise, or may lose key employees; (v) the Company's
contractual or legal efforts to protect its confidential information or
intellectual property may be inadequate or ineffective to provide
protection, and the Company may be unable financially to pursue legal
remedies that may be available; (vi) the Company's selection, due
diligence, execution, and integration of acquisitions may not prove
effective or reasonable; (vii) the Company may suffer in material respects
from the direct or indirect effects of the "Year 2000" problem on public
utilities, telecommunications networks, customers, vendors, service
providers, and the economy or financial markets generally;
(viii) the Company may suffer from other technical or communications
problems, such as power outages, system failures, system crashes, or
hacking; and (ix) the Company may be subjected to unknown risks and
uncertainties, or be unable to assess risks and uncertainties as
may exist.
-9-
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
In a Softkat related matter, on September 25, 1998, Diamar
Interactive Corp. filed a complaint against the Company in the
Sonoma County Superior Court, State of California. The complaint
alleges that the Company owes $44,183 for goods and services
provided to Softkat, Inc., a former subsidiary of the Company,
based on a theory of successor liability. The Company has filed
an answer denying that it is obligated to pay any amounts incurred
by Softkat.
In a Softkat related matter, on January 21, 1999, Interplay
Entertainment Corp. filed a complaint against the Company and
Innovus in the Orange County Superior Court, State of California.
The complaint alleges that the Company and Innovus owe $86,041 for
goods and services provided to Softkat, Inc., a former subsidiary
of the Company and Innovus, based on a theory of successor
liability. The Company and Innovus have filed an answer denying
that they are obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on February 2, 1999, RPS, Inc. filed
a complaint against the Company in the United States District
Court, Central District of California. The complaint alleges that
the Company owes $52,555.58 for delivery services provided to
Softkat, Inc., a former subsidiary of the Company, based on a
theory of successor liability. The Company has filed an answer
denying that it is obligated to pay any amounts incurred by Softkat.
On February 5, 1999, Lawrence Tyson filed a complaint against
Intermark and Innovus in the San Mateo County Superior and
Municipal Courts, State of California. The complaint alleges that
the Intermark and Innovus owe $8,000 on a promissory note given by
Intermark. The Company believes that the Complaint has not been
properly served on Intermark and Innovus and, therefore, no
answers or appearances have been filed. The Company denies any
amount is owed.
In a Softkat related matter, on February 24, 1999, Muramatsu, Inc.
filed a complaint against the Company and Intermark in the Orange
County Superior Court, State of California. The complaint alleges
that the Company and Intermark owe $42,207.65 for convention
display services provided to Softkat, Inc., a former subsidiary of
the Company and Intermark, based on a theory of successor
liability. The Company and Intermark have filed an answer denying
that they are obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on April 7, 1999, Sunclipse, Inc.
filed a complaint against the Company in the Orange County
Superior Court, State of California. The complaint alleges that
the Company owes $131,752.06 for goods and services provided to
Softkat, Inc., a former subsidiary of the Company, based on a
theory of successor liability. On May 24, 1999, Sunclipse filed a
first amended complaint seeking the same relief against the
Company as it sought in its original complaint. The Company
intends to file an answer denying that it is obligated to pay any
amounts incurred by Softkat.
-10-
On April 15, 1999, Bremer Public Relations, Inc. obtained a
default judgment in the amount of $32,980.85 against Innovus based
on a Complaint filed in the Third Judicial District for the City
of Salt Lake City, State of Utah. The Company has been attempting
to negotiate a settlement of the amounts owed but has not done so
to date.
In a Softkat related matter, on April 30, 1999, Digital Leisure,
Inc. filed a complaint against the Company and Innovus in the
Orange County Superior Court, State of California. The complaint
alleges that the Company and Innovus owe $125,715 for goods and
services provided to Softkat, Inc., a former subsidiary of the
Company and Innovus, based on a theory of successor liability.
The Company and Innovus have filed an answer denying that they are
obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on May 18, 1999, Frank Grange filed a
complaint against the Company in the Sonoma County Superior Court,
State of California. The complaint alleges that the Company owes
$84,801.40 for damages resulting from a lease between Plaintiff
and Softkat, Inc., a former subsidiary of the Company, and a
Judgment obtained against Softkat for unpaid rent, based on a
theory of successor liability. The Company has not yet responded
to the Complaint but intends to file an answer denying that it is
obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on June 4, 1999, Cambrix Publishing,
Inc. filed a complaint against the Company in the Orange County
Superior Court Harbor Justice Center, State of California. The
complaint alleges that the Company owes $12,067.05 for goods and
services provided to Softkat, Inc., a former subsidiary of the
Company, based on a theory of successor liability. On September
25, 1998; Diamar Interactive Corp. filed a complaint against the
Company in the Sonoma County Superior Court, State of California.
The complaint alleges that the Company owes $44,183 for goods and
services provided to Softkat, Inc., a former subsidiary of the
Company, based on a theory of successor liability. The Company has
not yet responded to the Complaint but intends to file an answer
denying that it is obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on May 25, 1999, Transworld Systems,
Inc. filed suit against the Company for $3,998.15 for collection
work done on behalf of Softkat Inc., a former subsidiary of the
Company.
Although Softkat has been sold there may be asserted and
unasserted claims against Softkat or the Company:
The Company is aware of several other creditors of Softkat, Inc.,
which have claims against Softkat for amounts owed based on good
and/or services provided to Softkat. In most cases, we do not
know the identity of these creditors, the amounts that they claim
are due and owing or the circumstances of their claims. Some of
the claims against Softkat have been asserted either in pending
litigation or threatened litigation.
Regarding these unasserted claims against Softkat, there is a
reasonable likelihood that some of the plaintiffs/creditors will
seek to satisfy their claims against the Company on theories of
either successor liability or alter ego.
-11-
Item 2 - Changes in Securities:
(a) The following securities were issued by the Company during
the quarter ended March 31, 1999 without registration under the
Securities Act of 1933:
(i) The Company issued 148,500 shares for services with a
value of $ 288,175
The Company believes the transactions were exempt from
registration pursuant to Section 4(2) of the Securities
Act of 1933
(ii) During the quarter, the Company issued 235,377 shares
for notes receivable in the amount of 565,440. The Company
believes the transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
(b) The following securities were on registered February 1, 1999
on Form S-8
(i) The Company issued 310,000 common shares in advance of services
performed in the amount of $361,250.
(ii) 60,000 of previously issued shares.
Item 6 - Exhibits and Reports on Form 8-K
None.
(a) Exhibits.
Those exhibits previously filed with the Securities and Exchange
Commission as required by Item 601 of Regulation S-K, are
incorporated herein by reference in accordance with the provisions
of Rule 12b-32.
(c) Exhibits
The following documents are included as exhibits to this report.
2.1(1) Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
Omitted are the following schedules or attachments
to the agreement identified immediately above:
(A) Form of Certificate of Designation of
Series H Convertible Preferred Stock;
(B) Intermark Corporation Financial Statements
(Unaudited) for its 1997 Fiscal Year;
(C) Confidentiality Agreement dated March 1998
between the Registrant and Intermark Corporation;
(D) Disclosure Schedule of Intermark Corporation;
(E) Disclosure Schedule of the Registrant.
-12-
2.2(2) First Amendment, dated as of June 17, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark Corporation,
a California corporation; and the Exchanging Security
holders of Intermark Corporation
2.3(2) Second Amendment, dated as of July 30, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark Corporation,
a California corporation; and the Exchanging Security
holders of Intermark Corporation
2.4* Agreement and Plan of Merger dated as of February 26,
1999 among the Company; Softkat, Inc, a California
corporation ("Softkat"); certain stockholders, of Softkat,
and INUS-Softkat Acquisition Corporation, a wholly-owned
subsidiary of the Company. Omitted are the following
schedules or ancillary documents to the agreement identified
immediately above:
(A) Disclosure Schedule of Softkat;
(B) Disclosure Schedule of the Company.
2.5(4) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; Kiss
Software Corporation, a California corporation
("Kissco"); certain stakeholders,
of Kissco; and ESYN Kissco Acquisition
Corporation, a wholly-owned subsidiary of the
Registrant. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Escrow Agreement;
(B) Disclosure Schedule of Kissco;
(C) Disclosure Schedule of the Registrant.
3.1(5) Restated Certificate of Incorporation of the Company
3.2(8) By-laws
4.1(6) January 1999 Stock Plan, including 310,000
shares of Esynch Common Stock granted and
issued to individual consultants named on the
attached Corporate Resolutions
4.2(6) Corporate Resolutions relating to January, 1999 Stock Plan
4.10(2) Certificate of Designation - Series H Preferred Stock
4.11(7) Certificate of Designation - Series I Preferred Stock
4.12(7) Certificate of Elimination - Series A Preferred Stock
4.13(7) Certificate of Elimination - Series C Preferred Stock
4.14(7) Certificate of Elimination - Series D Preferred Stock
4.15(7) Certificate of Elimination - Series E Preferred Stock
4.16(7) Certificate of Elimination - Series F Preferred Stock
4.17(7) Certificate of Elimination - Series G Preferred Stock
4.18(7) Certificate of Elimination - Series H Preferred Stock
10.4(7) Registration Rights Agreement dated August 4, 1998
among the Company and those holders of the Company's
stock listed in Exhibit A thereto
10.5(7)* Form of Stock Option Agreement dated April 24, 1998
between Intermark Corporation and each of Thomas
Hemingway, T. Richard Hutt and James Budd
10.6* Instrument of Option Assumption dated August 4,
1998 between the Company and each of the optionees
named in Exhibit 10.5, among others, resulting in
the Company's assumption of options as follows:
Thomas Hemingway 331,541 shares of common stock at $.83 each
T. Richard Hutt 132,616 shares of common stock at $.83 each
James Budd 132,616 shares of common stock at $.83 each
27.1 Financial Data Schedule
99* Press Release on sale of Softkat,Inc.
-13-
(1) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed May 12, 1998.
(2) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed August 20, 1998.
(4) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed April 19, 1999.
(5) Incorporated by reference to Exhibit A to the
Company's Schedule 14A filed October 7, 1998.
(6) Incorporated by reference to the like-numbered exhibit to the
Company's Form S-8 filed February 1, 1999.
(7) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 25, 1998.
(8) Incorporated by reference to the like-numbered exhibit to the
* Incorporated by reference to the Company's Form 10-KSB
for the year ended December 31, 1998 filed June 24, 1999.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 29, 1999
eSynch Corporation
By: /S/ Thomas Hemingway
------------------------------------
Tom Hemingway, Chief Executive Officer
(Authorized Officer)
By: /S/ David P. Noyes
------------------------------------
David P. Noyes, Chief Financial Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of March 31, 1999, and statements of operations for the three months
ended March 31, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,540
<SECURITIES> 0
<RECEIVABLES> 50,000
<ALLOWANCES> 0
<INVENTORY> 13,693
<CURRENT-ASSETS> 366,180
<PP&E> 49,206
<DEPRECIATION> (9,225)
<TOTAL-ASSETS> 5,028,263
<CURRENT-LIABILITIES> 1,030,371
<BONDS> 0
600
0
<COMMON> 7,584
<OTHER-SE> (2,020,292)
<TOTAL-LIABILITY-AND-EQUITY> 5,028,263
<SALES> 408,850
<TOTAL-REVENUES> 408,850
<CGS> 279,697
<TOTAL-COSTS> 279,697
<OTHER-EXPENSES> 718,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,617
<INCOME-PRETAX> (620,462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (620,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (620,462)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
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