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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 June 30, 2000
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
----------------------------------------
(Address of principal executive offices)
(714) 258-1900
------------------------------------------------
(Issuer's telephone number, including area code)
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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 X No
The number of common shares outstanding at August 11, 2000: 13,l78,498
Transitional Small Business Format: Yes ( ) No (x)
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TABLE OF CONTENTS
PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2000
and December 31, 1999 (Unaudited)
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
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ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,562 $ 1,319,971
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 124,494 19,153
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . 250,000 -
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 15,943
Other receivable . . . . . . . . . . . . . . . . . . . . . . . 44,296 24,296
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 165,000 21,814
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . 648,352 1,401,177
Property and equipment, net of accumulated depreciation . . . . . 706,590 621,638
Goodwill, net of accumulated amortization . . . . . . . . . . . . 3,305,166 4,142,901
Other assets, net of accumulated amortization . . . . . . . . . . 158,215 156,948
----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . $ 4,818,323 $ 6,322,664
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 706,237 $ 443,164
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 465,393 831,167
Accrued preacquisition liability . . . . . . . . . . . . . . . 1,293,594 1,293,594
Notes payable - current portion . . . . . . . . . . . . . . . 603,292 31,250
Preferred dividends payable . . . . . . . . . . . . . . . . . 159,691 62,324
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . . 3,228,207 2,661,499
Notes payable - long term . . . . . . . . . . . . . . . . . . . . 77,150 77,150
----------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . 3,305,357 2,738,649
Stockholders' Equity
Preferred Stock - $0.001 par value; 400,000 shares
authorized
Redeemable Preferred Stock - Series J, $0.001 par value; 275 shares
authorized; 175.5 and 275 shares issued and outstanding; liquidation
preference $1,755,000 and $2,750,000 . . . . . . . . . . . . 1,630,000 2,418,612
Redeemable Preferred Stock - Series K, $0.001 par value;
250 shares authorized; 87.5 and 157.5 shares issued and outstanding;
liquidation preference $875,000 and $1,575,000 . . . . . . . 750,000 -
Common stock - $0.001 par value; 50,000,000 shares
authorized; 12,493,168 and 10,505,464 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . 12,493 10,506
Additional paid-in capital . . . . . . . . . . . . . . . . . . 20,397,201 17,044,450
Deferred compensation . . . . . . . . . . . . . . . . . . . . (295,111) (382,741)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . (20,981,617) (15,506,812)
----------- -----------
Total Shareholders' Equity . . . . . . . . . . . . . . . . 1,512,966 3,584,015
----------- -----------
Total Liabilities and Stockholders' Equity . . . . . . . . . . $ 4,818,323 $ 6,322,664
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
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ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Revenue . . . . . . . . . . . . . . . . $ 336,546 $ 252,882 $ 533,094 $ 661,732
Cost of products sold . . . . . . . . . 41,568 88,726 52,811 368,423
----------- ----------- ----------- -----------
Gross Profit . . . . . . . . . . . 294,978 164,156 480,283 293,309
----------- ----------- ----------- -----------
Operating and Other Expenses
General and administrative . . . . . . 1,037,136 946,049 2,090,887 1,217,331
Research and development . . . . . . . 169,940 240,839
Stock issued for services . . . . . . . 59,396 866,210 143,050 1,313,926
Stock based compensation . . . . . . . 231,000 1,817,347 264,000 1,817,347
Amortization of goodwill . . . . . . . 418,767 406,878 837,535 406,878
Interest expense . . . . . . . . . . . 5,766 15,012 10,404 45,629
----------- ----------- ----------- -----------
Total Operating and Other Expenses 1,922,005 4,051,496 3,586,715 4,801,111
----------- ----------- ----------- -----------
Net Loss. . . . . . . . . . . . . . . . . . (1,627,027) (3,887,340) (3,106,432) (4,507,802)
Preferred Dividend . . . . . . . . . . . . 605,598 - 2,368,373 -
----------- ----------- ----------- -----------
Loss Applicable to Common Shares . . . . . $(2,232,625) $(3,887,340) $(5,474,805) $(4,507,802)
=========== =========== =========== ===========
Basic and Diluted Operating Loss per
Common Share . . . . . . . . . . . . . $ (0.14) $ (0.46) $ (0.28) $ (0.57)
Basic and Diluted Loss per
Common Share . . . . . . . . . . . . . $ (0.19) $ (0.46) $ (0.49) $ (0.57)
Weighted average number of common
shares used in per share calculations . 11,605,787 8,540,099 11,145,934 7,950,691
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
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ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,106,432) $(4,507,802)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 136,332 18,448
Amortization of goodwill . . . . . . . . . . . . . . . . . . 837,535
Stock Issued for services . . . . . . . . . . . . . . . . . 264,000 1,507,106
Stock issued for settlement of lawsuit . . . . . . . . . . . 97,000
Stock based compensation . . . . . . . . . . . . . . . . . . 143,050 1,850,997
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . (105,341)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 5,943
Other receivables . . . . . . . . . . . . . . . . . . . . . (20,000)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 21,814 (119,791)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 263,076 654,299
Accrued liabilities . . . . . . . . . . . . . . . . . . . . (365,774) 478,719
----------- -----------
Net Cash Used in Operating Assets . . . . . . . . . . . (1,828,797) (118,024)
Cash Flows From Investing Activities
Acquisition of property and equipment . . . . . . . . . . . . . (204,619) (36,045)
Note receivable . . . . . . . . . . . . . . . . . . . . . . . . (250,000) (13,625)
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . (17,535) (70,807)
----------- -----------
Net Cash Used in Investing Activities . . . . . . . . . (472,154) (120,477)
Cash Flows From Financing Activities
Stock issued for cash . . . . . . . . . . . . . . . . . . . . . 63,500
Proceeds from issuance of Preferred shares . . . . . . . . . . . 400,000
Cash received from notes receivable . . . . . . . . . . . . . . 221,433
Proceeds from borrowing . . . . . . . . . . . . . . . . . . . . 572,042 359,500
Payments on notes payable . . . . . . . . . . . . . . . . . . . (309,298)
----------- -----------
Net Cash Provided by Financing Activities . . . . . . . 1,035,542 271,635
----------- -----------
Net Increase (Decrease) in Cash . . . . . . . . . . . . . . . . . (1,265,409) 33,134
Cash at Beginning of Period . . . . . . . . . . . . . . . . . . . 1,319,971 1,413
----------- -----------
Cash at End of Period . . . . . . . . . . . . . . . . . . . . . . $ 54,562 $ 34,547
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
5
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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 -
eSynch Corporation ("eSynch") resulted from a shareholder action that renamed
Innovus Corporation to eSynch on November 9, 1998. A predecessor company,
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, incorporated in 1994. In
November 1998, eSynch acquired SoftKat Inc. ("SoftKat"). In May 1999, SoftKat
was sold to a third-party. On April 1, 1999, eSynch acquired Kiss Software
Corporation ("Kissco") and on September 20, 1999, eSynch acquired Oxford Media
Corporation ("Oxford").
The primary activities of eSynch, the consolidated company, have consisted of
raising capital, acquiring Innovus Corporation, SoftKat Inc., Kissco and Oxford,
developing and marketing video-on-demand services and video streaming through
the internet, and software sales through the internet.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of eSynch for all periods presented, the accounts of Kissco
and Oxford from the dates of their acquisitions on April 1, 1999 and September
30, 1999, respectively. These entities are collectively referred to as "eSynch"
or the "Company". All inter-company transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions 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 2000.
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,
1999.
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 December 31, 1999 in the amount of $15,506,812 and at the June 30,
2000 in the amount of $20,981,617. Management's plan to mitigate the impact of
these conditions is to obtain additional equity
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financing through the issuance of the Company's common stock, convertible
preferred stock or warrants. 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.
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 in 2000 and
1999 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 be 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. 3,760,839 and 3,791,120 potentially
issuable common shares outstanding at June 30, 2000 and 1999 were excluded
from the calculation of diluted loss per share for the three and six months
ended June 30, 2000 and 1999, as they would have decreased the loss per
share, respectively.
REVENUE RECOGNITION - The Company recognizes service revenue upon performance
of the service. For software products sold by the Company, revenue is
recognized when shipped except for hard goods sold through distributors which
is recognized upon receipt of payment.
NOTE 2--ACCRUED LIABILITIES
The preacquisition liabilities are a reserve for potential liabilities assumed
at the time of the acquisition of Innovus and Intermark. No claims have been
made against for these items during the six months ended June 30, 2000.
NOTE 3--NOTES PAYABLE
Notes payable - current portion includes $570,000 loaned to the Company by an
officer-director and a director during the quarter ended June 30, 2000.
NOTE 4--COMMITMENTS AND CONTINGENCIES
PENDING ACQUISITION - On June 14, 2000, the Company signed a Letter of Intent
to acquire eLiberation.com Corporation. In June, 2000, the Company advanced
$250,000 to eLiberation.com under a short-term, secured note due August 31,
2000.
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MAJOR AGREEMENTS - On June 22, 2000, the Company entered into two agreements
with NBC Quokka Ventures, LLC., related to NBCOlympics.com web site. The
agreements cover the licensing of a custom version of the Company's ChoiceCaster
product, branding and recognition commitments on and sponsorship of the web
site, and certain other services to be provided by the Company.
CONSULTING AGREEMENTS - On August 27, 1999, the Company signed a consulting
agreement with a shareholder. Under the agreement, the consultant is to receive
20,000 shares of the common stock of the Company per quarter and $2,500 per
month. The term of the agreement is for one year.
LITIGATION -
eSynch and Subsidiaries
We are involved in several lawsuits in the normal course of business and all
amounts for exposure to these lawsuits have been recorded in our financial
statements except as noted below.
SoftKat
We acquired SoftKat, Inc. ("SoftKat") in November 1998 and sold SoftKat in May
1999.
Although we sold SoftKat, various claims were asserted against us for alleged
liabilities or obligations of SoftKat based upon the theory of successor
liability or alter ego. The Company prevailed in eight suits which have been
settled or dismissed. Other claims may be asserted against us by creditors of
SoftKat, Inc., but we are unaware of any pending claims at this time. The
following represents the only remaining lawsuit regarding SoftKat to which the
Company is a party:
On May 18, 1999, Frank Grange filed a complaint against us in the Sonoma County
Superior Court, State of California. The complaint alleges that we owe
$84,801.40 for damages resulting from a lease between that plaintiff and
SoftKat, Inc., and a judgment obtained against SoftKat for unpaid rent, based on
a theory of successor liability. We have filed an answer denying that we are
obligated to pay any of these claims, and we intend to vigorously oppose any
attempt to impose successor liability. A trial date has been set for October,
2000.
Intermark
Intermark Corporation became our subsidiary on August 5, 1998.
In September, 1999, U.S. Print Corporation filed a complaint in Orange County
Superior Court, State of California. The complaint seeks to recover from the
Company $92,414.69 for services allegedly purchased but not paid for by
Intermark. A reserve to cover the Company's potential liability has been accrued
in the financial statements.
In September, 1999, a lawsuit was filed by C-Group in United States District
Court, District of Maryland, against Intermark seeking $99,110 for goods that
were claimed to be purchased by Intermark. In October, 1999, the plaintiff
amended the complaint and reduced the amount it is seeking to $81,326. The
Company has filed a motion to dismiss for lack of personal jurisdiction. The
Federal District Court has remanded the case to a state court in Maryland to
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rule on the motion to dismiss. The state court denied the motion and we have
filed an answer with the court.
eSynch Corporation
The Company was named as a defendant in a lawsuit filed by a third-party
claiming damages for a breach of an oral agreement and for unpaid principal on a
promissory note. During the three months ended June 30, 2000, the original
complaint and our cross-complaint were dismissed without cost to the Company.
NOTE 5--STOCKHOLDERS' EQUITY
On March 27, 2000, certain executive Officers and Directors exercised stock
options and warrants for 805,700 shares of the Company's common stock in a
"cashless exercise" transaction resulting in the issuance of a total of
757,530 shares of stock.
During the three months ended June 30, 2000, holders of Series J Convertible
Preferred Stock converted a total of 99.5 preferred shares valued at $995,000
and received 292,972 common shares including accrued dividends in the amount
of $30,419. During the period, holders of Series K Convertible Preferred
Stock converted a total of 125 preferred shares valued at $1,250,000 and
received 366,919 common shares including accrued dividends in the amount of
$34,230.
In June, 2000, a director exercised warrants for 450,000 shares of the Company's
common stock in a "cashless exercise" transaction resulting in the issuance of a
total of 417,857 shares of stock.
During the quarter ended June 30, 2000, the Company also issued Common Stock as
follows: 86,000 shares for services in the amount of $404,000 of which $231,000
was charged to stock issued for services expense with the balance of $165,000 to
be expensed in the period of performance of the services; and 19,427 shares upon
exercise of options for $41,000 which was applied to an accounts payable balance
of equal amount.
In July, 2000, an officer and director of the Company exercised stock options
for 340,200 shares of the Company's common stock in a "cashless exercise"
transaction resulting in the issuance of 300,000 shares of stock.
In July 2000, the Company issued 60,000 shares of common stock under a
consulting agreement.
In August, 2000, the company issued 325,330 shares of Common Stock for the
exercise of warrants and issuance of new Common Stock in the amount of $664,910.
NOTE 6--STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees and consultants under a
stock-based compensation plan and under individual contracts. Under the 1999
Stock Incentive Plan, which was approved by the shareholders in November 1999,
the Company may grant options to its employees and consultants for up to
3,000,000 shares of common stock. In limited cases, the exercise price of
options granted under the plan and some individual contracts may be below the
market price of the Company's stock on the date of grant. Options generally vest
from immediately to over three years and are exercisable for up to five to ten
years. No options were granted in the three months ended June 30, 2000. In July,
2000, 2,160,000 options at $3.63 per share were issued under the plan to
officers, directors and employees of the Company.
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OPTIONS AND WARRANTS GRANTED TO NON-EMPLOYEES - During the three months ended
June 30, 2000, the Company issued options under a consulting agreement for
150,000 shares of common stock at $7.50 per share, vesting quarterly over a
year. In July, 2000, the Company issued warrants for 200,000 shares at prices
from $6.50 per share to $9.50 per share.
NOTE 7--SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 1999, the Company issued 235,377 shares for
a note receivable in the amount of $565,440. During the period, the Company
evaluated the value of the note receivable and wrote down the value of the
receivable $79,884. Two of the note holders of the Company converted $82,000 of
notes payable into 36,312 shares of common stock.
During the six months ended June 30, 2000, the Company amortized the discounts
of the Series J and Series K Preferred stock. The amount of the amortization was
$2,206,388. The Company converted $995,000 of Series J Preferred stock and
$1,250,000 of Series K Preferred stock into common stock. The Company accrued
$162,185 of dividends on the preferred stock and converted $64,648 of that
dividend into shares of common stock. In addition, the Company issued $165,000
shares of common stock for services that have yet to be performed. The amount
has been classified as a prepaid expense.
NOTE 8--SUBSEQUENT EVENTS
In July, 2000, the Company entered into an equipment lease in the amount of
$200,000.
In July, 2000, the Company entered into an agreement with a financial relations
and direct marketing advertising firm to assist the Company with its investor
relations for which compensation will be common stock and stock options.
On July 26, 2000, the Company filed on SEC Form 8-K reporting that on November
15, 1999, following the annual meeting of stockholders, the Company's Board of
Directors adopted Bylaws, which amend and restate the prior Bylaws of the
Registrant in their entirety.
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, 1999 found in the Company's Form 10-KSB dated
March 24, 2000.
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 negative
tangible net worth at June 30, 2000 in the amount of $1,867,201.
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Results of Operations
During the quarters and six months ended June 30, 2000, net sales were $336,546
and $533,094, compared to $252,882 and $661,732 for the comparable periods of
the prior year. The sales amounts for 1999 included sales for SoftKat in the
amount of $104,000 and $477,011. These sales did not continue as SoftKat was
sold May 25, 1999.
The costs of products sold in the quarter and six months ended June 30, 2000
were $41,568 and $52,811, compared to $88,726 and $368,423 for the comparable
periods of the prior year. The decrease is attributable to the discontinuance of
SoftKat sales and the refocusing of the Kissco business from hard goods to
electronic distribution.
Operating losses for the quarter and six months ended June 30, 2000 were
$1,627,027 and $3,106,432 compared to an operating losses of $3,887,340 and
$4,507,802 for the comparable periods of the prior year. The improvement in
operating results reflects the continuing expansion of eSynch into the
video-on-demand business and the integration of Kissco and Oxford acquired
during 1999.
The Company incurred net interest expense of $5,766 and $10,404 during the
quarter and six months ended June 30, 2000, compared to $15,012 and $45,629 for
the comparable periods of the prior year
Liquidity and Capital Resources
At June 30, 2000, the Company had $54,562 of cash and a deficit in working
capital (current liabilities in excess of current assets) of $2,579,855.
The Company has been relying upon the issuance of preferred stock and short term
notes to fund continuing operations. During the quarter ended June 30, 2000,
officers and directors loaned the company $570,000 and a third-party exercised
an option for 19,427 common shares totaling $41,000 which was applied against an
outstanding accounts payable balance of the same amount. During the last 12
months, the Company issued 487.5 shares of Convertible Preferred Stock plus
warrants to purchase shares of Common Stock in exchange for an investment of
$4,625,000.
Subsequent to June 30, 2000, shareholders exercised warrants and purchased
common shares in the aggregate amount of 325,330 shares for which the Company
received $644,910.
The Company estimates that during the quarter it was using approximately
$300,000 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 which may not rise to
the level of profitability; (ii) due to the rapidly changing and intensely
competitive nature of the industry,
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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.
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
Although Softkat was sold in May 1999, 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.
The Company is a defendant in a lawsuit filed by a third party claiming damages
for a breach of an investment banking agreement. As damages, the third party is
seeking 250,000 warrants to purchase shares of common stock of the Company. The
Company intends to vigorously defend the claim and believes that the third party
has never performed according to the terms of the agreement.
Item 2 - Changes in Securities:
(a) The following securities were issued by the Company during the quarter ended
June 30, 2000 without registration under the Securities Act of 1933:
(i) The Company issued 86,000 shares of Common Stock for services.
(ii) The Company issued 417,857 shares of Common Stock upon the conversion of
warrants.
The Company believes the transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
(b) The following registration statements were filed by the Company during the
quarter ended June 30, 2000.
(i) On January 18, 2000, February 15, 2000 and April 3, 2000,
the Company filed Amendments 1, 2 and 3, respectively, to
the Form SB-2 Registration Statement originally filed on
November 29, 1999, related to the registration of common
stock of the Company
12
<PAGE>
as required by terms of the Series J Convertible Preferred Stock
Purchase Agreement dated July 22, 1999. The registration became
effective on April 7,2000.
(ii) On April 28, 2000, the Company filed Amendment 1 to the
Form SB-2 Registration Statement originally filed on
February 29, 2000, related to the registration of common
stock of the Company as required by terms of the Series K
Convertible Preferred Stock Purchase Agreement dated
December 30, 1999. The registration became effective on May
10, 2000.
Item 6 - Exhibits and Reports on Form 8-K
(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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
3.3(1) Bylaws
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the same number Exhibit to the Form 8-K filed
July 26, 2000 by the Company with the Securities and Exchange Commission
(b) Reports on Form 8-K
During the period covered by this report the Company filed the following reports
on Form 8-K:
none
SIGNATURES
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: August 11, 2000
eSynch Corporation
By: /s/ Thomas Hemingway
--------------------------------------
Thomas Hemingway, Chief Executive Officer
(Authorized Officer)
By: /s/ David P. Noyes
-------------------------------------
David P. Noyes, Chief Financial Officer
13
