<PAGE>
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 September 30, 2000
[ ] 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
--------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 87-0461856
------------------------------ -------------------
(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)
-------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
at November 17, 2000: 14,294,427
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
<PAGE>
TABLE OF CONTENTS
PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2000
and December 31, 1999 (Unaudited)
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
2
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
ASSETS
<S> <C> <C>
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 676,132 $ 1,319,971
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 149,692 19,153
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . 292,000 -
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 15,943
Other receivable . . . . . . . . . . . . . . . . . . . . . . . 51,879 24,296
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 1,208,867 21,814
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . 2,388,570 1,401,177
Property and equipment, net of accumulated depreciation . . . . . 815,136 621,638
Goodwill, net of accumulated amortization . . . . . . . . . . . . 2,886,400 4,142,901
Other assets, net of accumulated amortization . . . . . . . . . . 149,827 156,948
----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . $ 6,239,933 $ 6,322,664
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 917,545 $ 443,164
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 382,416 831,167
Accrued preacquisition liability . . . . . . . . . . . . . . . 1,201,180 1,293,594
Notes payable - current portion . . . . . . . . . . . . . . . 602,633 31,250
Capital Lease Obligation . . . . . . . . . . . . . . . . . . . 174,398 -
Preferred dividends payable . . . . . . . . . . . . . . . . . 195,874 62,324
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . . 3,474,046 2,661,499
=========== ===========
Notes payable - long term . . . . . . . . . . . . . . . . . . . . 77,150 77,150
----------- -----------
Stockholders' Equity
Preferred Stock - $0.001 par value; 400,000 shares authorized
Redeemable Preferred Stock - Series J, $0.001 par value;
275 shares authorized; 144.5 and 275 shares issued and outstanding;
liquidation preference $1,445,000 and
$2,750,000 . . . . . . . . . . . . . . . . . . . . . . . . . 1,320,000 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 -
Redeemable Preferred Stock - Series L, $0.001 par value;
210 shares authorized; 168 and 0 shares issued and
outstanding; liquidation preference $1,680,000 and
$0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821,882 -
Common stock - $0.001 par value; 50,000,000 shares
authorized; 14,294,427 and 10,505,464 shares
issued and outstanding . . . . . . . . . . . . . . . . . . . 14,294 10,506
Additional paid-in capital . . . . . . . . . . . . . . . . . . 24,716,624 17,044,450
Notes receivable - affiliate . . . . . . . . . . . . . . . . . (500,000)
Deferred compensation . . . . . . . . . . . . . . . . . . . . (232,092) (382,741)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (24,201,971) (15,506,812)
----------- -----------
Total Shareholders' Equity . . . . . . . . . . . . . . . . 2,688,737 3,584,015
----------- -----------
Total Liabilities and Stockholders' Equity . . . . . . . . . . $ 6,239,933 $ 6,322,664
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Revenue . . . . . . . . . . . . . . . . $ 194,614 $ 255,668 $ 727,708 $ 917,400
Cost of products sold . . . . . . . . . 48,318 91,521 101,129 459,944
----------- ----------- ----------- -----------
Gross Profit . . . . . . . . . . . 146,296 164,147 626,579 457,456
----------- ----------- ----------- -----------
Operating and Other Expenses
General and administrative . . . . . . 1,168,121 1,255,677 3,259,008 2,555,008
Research and development . . . . . . . 70,471 311,310
Stock issued for services . . . . . . . 278 184 308,238 421,234 1,622,164
Stock based compensation . . . . . . . 1,112,505 204,000 1,376,505 2,021,347
Amortization of goodwill . . . . . . . 418,766 406,878 1,256,301 818,756
Interest expense . . . . . . . . . . . 258,228 15,210 268,632 60,839
----------- ----------- ----------- -----------
Total Operating and Other Expenses 3,306,275 2,190,003 6,892,990 7,078,114
----------- ----------- ----------- -----------
Operating Loss . . . . . . . . . . . . . . (3,159,979) (2,025,856) (6,266,411) (6,620,658)
Other Income . . . . . . . . . . . . . . . 4,744 4,744 87,000
----------- ----------- ----------- -----------
Net Loss . . . . . . . . . . . . . . . . . (3,155,235) (2,025,856) (6,261,667) (6,533,658)
Preferred Dividend . . . . . . . . . . . . 47,431 - 2,415,804 -
----------- ----------- ----------- -----------
Loss Applicable to Common Shares . . . . . $(3,202,666) $(2,025,856) $(8,677,471) $(6,533,658)
=========== =========== =========== ===========
Basic and Diluted Loss per
Common Share . . . . . . . . . . . . . $ (0.24) $ (0.22) $ (0.73) $ (0.78)
=========== =========== =========== ===========
Weighted average number of common
shares used in per share calculations . 13,200,370 9,266,893 11,833,905 8,389,358
=========== =========== =========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,261,667) $(6,533,658)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 234,568 27,765
Amortization of goodwill . . . . . . . . . . . . . . . . . . 1,256,301 818,756
Settlement of accrued preacquisition liability . . . . . . . (92,415)
Stock issued for services . . . . . . . . . . . . . . . . . 542,184 1,429,944
Liability for stock to be issued for services . . . . . . . 440,625
Stock issued for settlement of lawsuit . . . . . . . . . . . 97,000 26,456
Stock based compensation . . . . . . . . . . . . . . . . . . 1,255,555 2,021,347
Interest expense for Series L bridge loan warrants . . . . . 232,258
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . (130,539) (2,353)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 5,943 (12,211)
Other receivables . . . . . . . . . . . . . . . . . . . . . (27,583)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . (53,881)
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 21,778 (56,611)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 474,381 (9,723)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . (356,022) (168,766)
----------- -----------
Net Cash Used in Operating Assets . . . . . . . . . . . (2,748,258) (2,072,310)
----------- -----------
Cash Flows From Investing Activities
Note to affiliate . . . . . . . . . . . . . . . . . . . . . . . (500,000)
Acquisition of property and equipment . . . . . . . . . . . . . (204,056) (69,185)
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (292,000)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (17,477)
Kiss cash acquired . . . . . . . . . . . . . . . . . . . . . . . 49,233
Proceeds from sale of SoftKat, Inc. . . . . . . . . . . . . . . 50,000
----------- -----------
Net Cash Used in Investing Activities . . . . . . . . . (1,013,533) 30,048
----------- -----------
Cash Flows From Financing Activities
Stock issued for cash . . . . . . . . . . . . . . . . . . . . . 713,410 2,650,000
Proceeds from issuance of Preferred shares, net of costs . . . . 803,993
Proceeds from beneficial conversion feature of Preferred
offering . . . . . . . . . . . . . . . . . . . . . . . . . . 100,861
Proceeds from warrants issued in connection with Preferred . . . 645,646
Preferred shares issued for cash . . . . . . . . . . . . . . . . 400,000
Cash received from notes receivable issued for common stock . . 322,509
Proceeds from borrowing . . . . . . . . . . . . . . . . . . . . 574,042 371,070
Payments on notes payable . . . . . . . . . . . . . . . . . . . (120,000) (568,240)
----------- -----------
Net Cash Provided by Financing Activities . . . . . . . 3,117,952 2,775,339
----------- -----------
Net Increase (Decrease) in Cash . . . . . . . . . . . . . . . . . (643,839) 733,077
Cash at Beginning of Period . . . . . . . . . . . . . . . . . . . 1,319,971 1,413
----------- -----------
Cash at End of Period . . . . . . . . . . . . . . . . . . . . . . $ 676,132 $ 734,490
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
5
<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 -
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 and the
accounts of its subsidiaries from the dates of their acquisitions. 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 a $(1,085,476)
working capital deficit at September 30, 2000, has incurred losses from
operations and negative cash flows from operating activities and has
accumulated a deficit at September 30, 2000 in the amount of $24,201,971.
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
6
<PAGE>
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. There were 5,297,857 and 3,560,026
potentially issuable common shares outstanding at September 30, 2000 and
1999, respectively, which were excluded from the calculation of diluted loss
per share, as they would have decreased the loss per share.
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 products sold through distributors for
which revenue is recognized upon receipt of payment.
NOTE 2--NOTES RECEIVABLE
Notes receivable includes $12,000 loaned to an officer-director during the
three months ended September 30, 2000. The remaining $280,000 included in
notes receivable relates to a note from eLiberation.com as further discussed
in Note 5--Pending Acquisition.
NOTE 3--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 these items during the nine months ended September 30, 2000.
However, based upon the dismissal of a legal claim against Intermark, the
reserve was reduced by $92,415 during the period.
NOTE 4--NOTES PAYABLE
Notes payable - current portion includes $450,000 loaned to the Company by a
director during the quarter ended June 30, 2000. Terms for repayment of the
loan have not been established.
NOTE 5--COMMITMENTS AND CONTINGENCIES
7
<PAGE>
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. On July 21, 2000 the Company advanced an additional $30,000 to
eLiberation.com under the existing terms and due date. On August 25, 2000 the
Company agreed to extend the due date of the note to November 30, 2000 based
upon the agreement by eLiberation to deliver certain marketing promotions for
the Company. Effective August 31, 2000, the Company exercised its option to
terminate the acquisition.
MAJOR AGREEMENTS - On June 22, 2000, the Company entered into two agreements
with NBC Quokka Ventures, LLC., related to NBCOlympics.com web site
(collectively, "NBCO"). 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. The Company provided all agreed services to NBCO during the
recently concluded 2000 Sydney Olympic Games. In July, 2000, the Company entered
into an equipment lease in the amount of $200,000.
CONSULTING AGREEMENTS - On July 18, 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 60,000 shares
of common stock and warrants to purchase 200,000 shares of common stock at
prices ranging from $6.50 to $9.50. In June, 2000, the Company entered into a
conditional services agreement with a marketing representative for which
warrants for 40,000 shares of common stock would be issued upon the Company's
successful negotiation of a licensing and services agreement. Such warrants were
issued in August, 2000.
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 nine 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 last 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 alleged that we owed, based
on a theory of successor liability, $84,801.40 for damages resulting from a
lease between that plaintiff and SoftKat, Inc., and a judgment obtained against
SoftKat for unpaid rent. We filed an answer denying that we were obligated to
pay any of these claims and we opposed any attempt to impose successor
liability. At trial on October 25, 2000, the court ruled in favor of the
Company.
8
<PAGE>
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 sought 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 was accrued in
the financial statements. In September, 2000, U.S. Print filed a motion to
dismiss the complaint against the Company and the reserve has been eliminated.
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. Discovery
proceedings are currently underway and the Company intends to vigorously defend
its position.
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 September 30, 2000, the original
complaint and our cross-complaint were dismissed without cost to the Company.
NOTE 6--STOCKHOLDERS' EQUITY
During the quarter ended September 30, 2000, the Company issued Common Stock as
follows: 91,000 shares for services in the amount of $342,600 of which $195,684
was charged to stock issued for services expense with the balance of $146,916 to
be expensed in the period of performance of the services.
In July, 2000, an officer-director of the Company exercised stock options for
346,632 shares of the Company's common stock in a cashless exercise transaction
resulting in the issuance of 300,000 shares of stock.
In August, 2000, the Company issued a total of 325,330 shares of Common Stock
for the exercise of warrants for 75,330 shares and the purchase of 250,000
shares of new Common Stock for a total cash consideration of $644,910.
Notes receivable - affiliate includes a loan to an officer-director made in
August, 2000, with a term of six months in the amount of $500,000.
In September, 2000, certain officers and an officer-director exercised stock
options and warrants for 1,040,000 shares of the Company's common stock in a
cashless exercise transaction resulting in the issuance of a total of 917,237
shares of stock.
In September, 2000, certain former employees exercised options for 23,400 shares
of the Company's common stock in a cashless exercise transaction resulting in
the issuance of a total of 20,172 shares of stock and a warrant was exercised
for 2,500 shares of stock for a cash consideration of $5,000.
During the three months ended September 30, 2000, holders of Series J
Convertible Preferred Stock converted a total of 31 preferred shares valued
9
<PAGE>
at $310,000 and received 119,853 common shares including accrued dividends in
the amount of $11,248. During the period, holders of Series K Convertible
Preferred Stock converted a total of 10 preferred shares valued at $10,000
and received 34,368 common shares.
NOTE 7--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. 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.
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 $7.75 per share, vesting quarterly over a
year; issued warrants under service agreements for 240,000 shares at exercise
prices from $2.00 per share to $9.50 per share; in connection with
convertible promissory notes issued warrants for 75,000 shares of common
stock at exercise prices from $3.50 to $4.50; in connection with the Series L
Convertible Preferred offering issued warrants for 413,332 shares of common
stock at exercise prices from $3.33 to $6.00.
NOTE 8--SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1999, the Company issued 235,377
shares of common stock 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 by $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 nine months ended September 30, 2000, the Company amortized the
discounts of the Series J, Series K and Series L Preferred stock as a dividend.
The amount of the amortization was $2,224,077. The Company converted $1,305,000
of Series J Preferred stock and $1,250,000 of Series K Preferred stock into
784,911 shares of common stock. The Company accrued $133,550 of dividends on the
preferred stock and converted $75,866 of that dividend into shares of common
stock. In addition, the Company issued common stock valued at $1,208,831 for
services that have yet to be performed. The amount has been classified as a
prepaid expense. Equipment under capital lease of $199,910 was acquired under
the terms of a capital lease obligation.
NOTE 9--SUBSEQUENT EVENTS
In November, 2000, the Company reached general agreement on the settlement of a
lawsuit claiming breach of an investment banking agreement. The Company had
previously reserved 200,000 warrants in accordance with the original banking
agreement. Under the settlement, the Company expects to issue a warrant for less
than the reserved total.
10
<PAGE>
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 September 30, 2000 in the amount of $264,239.
Results of Operations
During the quarter and nine months ended September 30, 2000, net sales were
$194,614 and $727,708, compared to $255,668 and $917,400 for the comparable
periods of the prior year. The sales amounts for the nine month period of 1999
included sales for SoftKat in the amount of $477,011. The decrease in sales is
attributable to the refocusing of the Company's business from software product
sales to video streaming and production services.
The costs of products sold in the quarter and nine months ended September 30,
2000 were $48,318 and $101,129, compared to $91,521 and $459,944 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 nine months ended September 30, 2000 were
$3,159,979 and $6,266,411 compared to an operating losses of $2,025,856 and
$6,620,658 for the comparable periods of the prior year. The decline in
operating results for the third quarter, 2000, reflects the refocusing of eSynch
into the video streaming and production services business along with increased
interest expense and stock issued for services which was offset to some extent
by a decrease in stock based compensation.
The Company incurred net interest expense of $258,228 and $268,632 during the
quarter and nine months ended September 30, 2000, compared to $15,210 and
$60,839 for the comparable periods of the prior year. The majority of the
increase was associated with the Series L Convertible Preferred offering
completed in September, 2000.
The Company incurred stock issued for services expense of $278,184 and $421,234
during the quarter and nine months ended September 30, 2000, compared to
$308,238 and $1,622,164 for the comparable periods of the prior year.
The Company incurred stock based compensation expense of $1,112,505 and
$1,376,505 during the quarter and nine months ended September 30, 2000, compared
to $204,000 and $2,021,347 for the comparable periods of the prior year.
11
<PAGE>
Liquidity and Capital Resources
At September 30, 2000, the Company had $676,132 of cash and a deficit in working
capital (current liabilities in excess of current assets) of $1,085,476.
The Company has been relying upon the issuance of preferred stock and short term
notes to fund continuing operations. During the last 12 months, the Company
issued 393 shares of Convertible Preferred Stock plus warrants to purchase
shares of Common Stock in exchange for an investment of $3,725,000.
The Company estimates that during the quarter it was using approximately
$325,000 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, 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.
12
<PAGE>
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
seeks 250,000 warrants to purchase shares of common stock of the Company. In
November, 2000, a general agreement of settlement was reached under which the
Company will issue a warrant in an amount less than sought.
Item 2 - Changes in Securities:
(a) The following securities were issued by the Company during the three months
ended September 30, 2000 without registration under the Securities Act of 1933:
(i) The Company issued 86,000 shares of Common Stock for services. The
Company issued 937,409 shares of Common Stock upon the conversion
of stock options.
(ii) The Company issued 77,830 shares of Common Stock upon the
conversion of warrants.
(iii) The Company issued 250,000 shares of Common Stock for cash
consideration.
(iv) The Company issued 168 shares of Series L Convertible Preferred
Stock for cash consideration.
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 September 30, 2000.
None
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.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
--------------------------------------
3.3(1) Bylaws
27 Financial Data Schedule
(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:
On July 26, 2000, reported on Form 8-K 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.
13
<PAGE>
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: November 17, 2000
eSynch Corporation
By: /S/ Thomas Hemingway
--------------------------------------
Thomas Hemingway, Chief Executive Officer
(Authorized Officer)
By: /S/ Mark Utzinger
--------------------------------------
Mark Utzinger, Vice President - Finance
14
