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, 2002
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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3511 W. SUNFLOWER AVE. #250
SANTA ANA, CA 92704
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(Address of principal executive offices)
(714) 258-1900
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(Issuer's telephone number, including area code)
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(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 May 20, 2002: 54,289,618
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
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ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 4,783
Accounts receivable, net of allowance for bad debt of $31,150 . . . . . . . . . 19,872 41,779
Accounts receivable - related party, net of allowance for
bad debt of $46,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Notes receivable, net of allowance for bad debt of $361,285 and $347,040. . . . - -
Note receivable from affiliate, net of $300,000 compensation recognized in 2000 - -
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TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,872 46,562
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EQUIPMENT, NET OF ACCUMULATED DEPRECIATION. . . . . . . . . . . . . . . . . . . . 287,975 363,966
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION . . . . . . . . . . . . . . . . . . 217,150 250,602
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TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 524,997 $ 661,130
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Checks issued in excess of cash in bank . . . . . . . . . . . . . . . . . . . . $ 12,531 $ -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,149,846 1,148,646
Accounts payable - related party. . . . . . . . . . . . . . . . . . . . . . . . 81,832 59,359
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,583,425 2,567,858
Accrued preacquisition liabilities. . . . . . . . . . . . . . . . . . . . . . . 51,924 60,273
Notes payable - current portion . . . . . . . . . . . . . . . . . . . . . . . . 77,150 77,150
Notes payable - related party . . . . . . . . . . . . . . . . . . . . . . . . . 646,250 521,250
Capital lease obligation - current portion. . . . . . . . . . . . . . . . . . . 197,107 197,107
Preferred dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . 540,817 537,477
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TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 5,340,882 5,169,120
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STOCKHOLDERS' DEFICIT
Series J convertible preferred stock - $10,000 stated value per share;
275 shares authorized; 63.5 shares and 72.5 shares outstanding,
respectively; liquidation preference of $635,000 . . . . . . . . . . . . . . 510,000 600,000
Series K convertible preferred stock - $10,000 stated value per share;
250 shares authorized; 17.3 shares and 42.5 shares outstanding,
respectively; liquidation preference of $173,000 . . . . . . . . . . . . . . 48,000 300,000
Series M convertible preferred stock - $10,000 stated value per share;
220 shares authorized; 196.9 shares and 196.9 shares outstanding;
liquidation preference of $1,969,000. . . . . . . . . . . . . . . . . . . . 2,616,862 2,616,862
Undesignated preferred stock - $0.001 par value, 399,055 shares
authorized; no shares outstanding. . . . . . . . . . . . . . . . . . . . . . - -
Common Stock - $0.001 par value; 250,000,000 shares authorized;
51,289,618 and 36,914,742 shares issued and outstanding. . . . . . . . . . . 51,290 36,915
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 44,329,086 43,717,015
Receivable from shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . - (10,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,371,123) (51,768,782)
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TOTAL STOCKHOLDERS' DEFICIT . . . . . . . . . . . . . . . . . . . . . . . . . (4,815,885) (4,507,990)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 524,997 $ 661,130
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2002 2001
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REVENUE. . . . . . . . . . . . . . . . . . . . . . . . $ 100,687 $ 121,189
COST OF PRODUCTS SOLD . . . . . . . . . . . . . . . . . 65,889 23,965
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GROSS PROFIT. . . . . . . . . . . . . . . . . . . . 34,798 97,224
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OPERATING AND OTHER EXPENSES
General and administrative. . . . . . . . . . . . . . 432,550 997,078
Research and development. . . . . . . . . . . . . . . 15,111 103,092
Shares issued for services. . . . . . . . . . . . . . 85,600 168,765
Stock-based compensation to employees and consultants 45,900 373,899
Amortization of goodwill. . . . . . . . . . . . . . . - 423,189
Interest expense. . . . . . . . . . . . . . . . . . . 14,536 47,173
Reversal of bad debt expense. . . . . . . . . . . . . - (327,970)
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TOTAL OPERATING AND OTHER EXPENSES. . . . . . . . . (593,697) (1,785,226)
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OTHER INCOME. . . . . . . . . . . . . . . . . . . . . . 14,245 6,841
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LOSS BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . . (544,654) (1,681,161)
EXTRAORDINARY GAIN FROM DEBT FORGIVENESS, NET OF $0 TAX 8,349 -
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NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . (536,305) (1,681,161)
PREFERRED STOCK DIVIDENDS . . . . . . . . . . . . . . . (66,036) (381,326)
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LOSS APPLICABLE TO COMMON SHAREHOLDERS. . . . . . . . . $ (602,341) $(2,062,487)
============ ============
BASIC AND DILUTED EXTRAORDINARY GAIN PER COMMON SHARE . $ - $ -
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE . . . . . . . . $ (0.01) $ (0.13)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES. . . . . . . .
USED IN PER SHARE CALCULATION. . . . . . . . . . . . 46,891,253 15,820,427
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(536,305) $(1,681,161)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 109,443 87,459
Forgiveness of accrued liability. . . . . . . . . . . . . . . . . . . . . (8,349) -
Amortization of goodwill. . . . . . . . . . . . . . . . . . . . . . . . . - 423,189
Change in allowance for doubtful accounts . . . . . . . . . . . . . . . . - (306,929)
Stock issued for services, interest and settlements . . . . . . . . . . . 85,600 168,765
Stock based compensation. . . . . . . . . . . . . . . . . . . . . . . . . 45,900 373,899
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 21,909 (19,829)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23,154
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (50,038)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 316,339
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 105,817 3,668
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NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . (174,731) (661,484)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . - (276)
Other receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (52,577)
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NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . - (52,853)
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CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in checks issued in excess of cash in bank. . . . . . . 12,531 (21,734)
Related party accounts payable. . . . . . . . . . . . . . . . . . . . . . . 22,471 -
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . - 525,000
Proceeds from the issuance of warrants. . . . . . . . . . . . . . . . . . . - 63,356
Proceeds from issuance of preferred shares, net of costs. . . . . . . . . . - 113,644
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 40,000
Payment on capital lease obligation . . . . . . . . . . . . . . . . . . . . - (5,929)
Proceeds from shareholder receivable. . . . . . . . . . . . . . . . . . . . 10,000 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . 170,002 714,337
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NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . (4,783) -
CASH - BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,783 -
---------- ------------
CASH - END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
========== ============
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES - NOTE 7
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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 - The primary activities of eSynch
Corporation ("eSynch" or the "Company") have consisted of raising capital,
acquiring businesses, developing and marketing video-on-demand services, and
video encryption and streaming through the Internet, software sales through the
Internet, and DVD video encoding, compression and authoring.
In November 1998, as a result of shareholder action the Company was renamed
eSynch Corporation from Innovus Corporation. A predecessor company, Intermark
Corporation ("Intermark") was reorganized into Innovus Corporation in August
1998. 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").
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of eSynch for all periods presented and the accounting of
its subsidiaries from the dates of their acquisition. All inter-company
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 2002.
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 April 16, 2002.
BUSINESS CONDITION - The financial statements have been prepared on the basis of
the Company continuing as a going concern. The Company has a $5,321,010 working
capital deficit at March 31, 2002, has incurred losses from operations and
negative cash flows from operating activities and has accumulated a deficit at
March 31, 2002 in the amount of $52,371,123. 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.
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
5
concentration of business in the highly competitive software industry subjects
the Company to concentrated market risk. Sales to any major customer in 2002 and
2001 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 - 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.
As of March 31, 2002, there were 63.5 shares of Series J convertible preferred
shares, 17.3 shares of Series K convertible preferred. As of March 31, 2002
there were 196.9 shares of Series M convertible preferred. As of March 31, 2002
there were options and warrants to purchase 9,048,738 shares of common stock.
These items were not included in the calculation of diluted loss per share for
the years ended March 31, 2002, as they would have been anti-dilutive, thereby
decreasing 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 delivered except for products sold through distributors for which revenue
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. During the three
months ended March 31, 2002 the Company reduced the reserve by $8,349, based on
items in which the statute of limitations of four years had expired. The gain
from reserve forgiveness during 2002 has been accounted for as an extraordinary
gain in the accompanying financial statements. No claims have been made against
these items during the three months ended March 31, 2002.
NOTE 3-NOTES PAYABLE
During the three months ended March 31, 2002 a consultant of the Company
advanced the Company a total of $125,000. The advances are due on demand and
bear no interest as of March 31, 2002.
During the three months ended March 31, 2002 there were no payments on notes
payable or related party notes payable.
NOTE 4-COMMITMENTS AND CONTINGENCIES
LITIGATION - In September, 1999 a lawsuit was filed by C-Group, Inc. 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 of the claim to $81,326.
In March 2001 a judgment was entered against Intermark in the amount of $133,658
related to the claim against Intermark which included $52,332 related to a claim
against Softkat. The Company was not properly notified and the judgment will be
appealed. As of March 31, 2002 the amounts are accrued.
On April 3, 2001, a lawsuit was filed by BFree Ltd. in Superior Court, County of
Orange, California, against the Company as successor to Innovus Corporation,
seeking $25,544 for goods and services claimed to have been provided to Innovus
during 1997. The claim is included in pre-acquisition liabilities on the
accompanying balance sheets. In February 2002 the Company entered into a
6
settlement agreement with Bfree Ltd. Under the agreement the Company is to pay
$4,000 in monthly increments of $500 starting on March 15, 2002. The amount
bears interest at 10%.
On July 18, 2001, David P. Noyes, the Company's former Chief Financial Officer,
filed a claim with the Labor Commissioner, State of California, for wages due
under an employment contract seeking $96,572. Mr. Noyes was terminated for cause
by the Company in November 2000. Subsequent to December 31, 2001 the Labor
Commission found that David P. Noyes had been terminated with cause. However,
the Labor Commission awarded David P. Noyes $11,695 for un-reimbursed expenses
and $1,544 for accrued interest on those expense. As of March 31, 2002 the
amounts have been accrued.
On July 26, 2001, Bixby Land Company, the Company's landlord, filed an unlawful
detainer action to recover delinquent rent and penalties in the amount of
approximately $125,000. On November 1st, 2001 the Company relocated its
corporate offices to 29 Hubble Irvine, CA 92618. In October a settlement
agreement with Bixby Land Company was reached regarding a settlement of the
Company's liability of $808,134 with respect to a lease obligation for the
Tustin facility. The settlement agreement provided that the Company would be
release from all future payments under the terms of the lease if the Company
made payments totaling $100,000 and transferred the Company's existing $60,010
security deposit to the landlord. The Company did not make the required payments
under the settlement agreement. In October 2001, Bixby received a judgment
against the Company for $136,058. As of March 31, 2002 the amounts are accrued.
On July 27, 2001, the Company filed a complaint against eLiberation Corporation,
which was subsequently amended January 3, 2002. The Company seeks compensatory
damages in the amount of $39,671. On September 28, 2001, eLiberation Corporation
filed a cross-complaint against the Company and an officer claiming that the
Company and the officer deliberately misrepresented and made false
representations to eLiberation Corporation. eLiberation Corporations seeks
general and special damages in the amount of not less than $2,500,000. The
Company believes that the cross-complaint is without merit and intends to
vigorously defend the action and thus nothing has been accrued as of March 31,
2002.
On July 27, 2001, the Company entered into a Release and Settlement Agreement
with Digital Leisure, Inc. Under the Release and Settlement Agreement, the
Company agreed to pay Digital Leisure a total of $40,867, plus interest, in
regularly scheduled payments. As a result of the Company's failure to comply
with the payment schedule, Digital Leisure has subsequently secured a judgment
for the total amount owed. On December 18, 2001 the Company entered into another
settlement agreement requiring total payment of $7,500 over the period of two
months. At December 31, 2001 the Company had an obligation of $6,500 in
connection with the settlement. During the three months ending March 31, 2002
the $6,500 was paid.
On August 9, 2001, an action was filed in California Superior Court, County of
Orange, against the Company, certain officers and its current Directors by
Donald C. Watters, the Company's former president, chief operating officer and
director, claiming breaches of contract, good faith and fair dealing, and
fiduciary duty, and tortious adverse employment action in violation of public
policy. Mr. Watters is seeking general damages of not less than $2,780,000,
punitive damages, interest, attorney's fees and court costs. Mr. Watters was
terminated by the Company for cause. The Company believes that the claims are
without merit and intends to vigorously defend the action and thus nothing has
been accrued as of March 31, 2002.
On August 10, 2001, a lawsuit was filed by Kforce.com seeking to collect
approximately $43,000 to be owed under a consulting services agreement. During
2001, the Company stipulated a judgment in favor of Kforce.com. As of March 31,
2002 the judgment is fully accrued in the Company's financial statements. In
March 2002, the Company entered into a settlement agreement with Kforce.com for
$42,315.
7
In September, 2001 a lawsuit was filed by Technopolis Communications, Inc. in
the Superior Court of California, County of Orange, against Innovus Corporation,
dba eSynch Corporation, seeking $35,733 for services claimed to have been
provided to eSynch. The case is currently in the discover stage and a mandatory
settlement conference date has been set. As of March 31, 2002 the Company has
accrued $50,000.
In 2002, a shareholder of the Company demanded payment of a $40,000 loan in
which he had loaned the Company during the year ended December 31, 2001. As of
March 31, 2002 the loan is included in noters payable - related party. The
Company is currently in negotiations to settle the loan with the shareholder.
In May 2002, a lawsuit was filed by a former director of the Company demanding
repayment of $450,000 that was loaned to the Company. At March 31, 2002 the
$450,000 is included in notes payable - related party.
Various claims have been asserted against the Company for alleged liabilities or
obligations of SoftKat, Inc., a subsidiary purchased in 1998 and sold in 1999,
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 the Company by creditors of SoftKat, Inc., but management is unaware of
any pending claims at this time.
PAYROLL AND PAYROLL TAX LIABILITIES - Included in accrued liabilities at March
31, 2002 are $1,534,555 in obligations to state and federal governments for
payroll taxes from the current years and from previous years and estimated
interest and penalties owing on such tax obligations. At March 31, 2002 the
Company has accrued salaries of $351,878, some of these employees have filed
labor actions against the Company for payments of these salaries. Additionally,
during 2002 and 2001 the Company withheld 401K contributions from employees'
wages however these employee contributions were not contributed to the plan. At
March 31, 2002, amounts due to the plan were $42,011.
OPERATING LEASE - In February 2002, the Company moved to Santa Ana, California
where it leases office facilities under a fifteen-month agreement classified as
an operating lease. Monthly minimum rental payments on the lease are $3,750.
Rent expense during the three months ended March 31, 2002 was $15,654.
NOTE 5-STOCKHOLDERS' DEFICIT
During the three months ended March 31, 2002, the Company issued Common Stock as
follows: 2,120,000 shares for compensation in the amount of $85,600 which was
charged to stock issued for services expense.
During the three months ended March 31, 2002, holders of Series J Convertible
Preferred Stock converted a total of 9 preferred shares valued at $90,000 and
received 3,254,876 common shares including accrued dividends in the amount of
$17,696. During the period, holders of Series K Convertible Preferred Stock
converted a total of 25.2 preferred shares valued at $252,000 and received
9,000,000 common shares including accrued dividends in the amount of $45,000.
During the three months ended March 31, 2002 various officers of the Company
contributed their services to the Company. The value of these services was
deemed to be $90,250 based upon the officers current wages. The $90,250 was
reflected as an increase to additional paid in capital during the three months
ended March 31, 2002. The Company does not have an obligation to pay the
officers related to these services.
8
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. Options for 10,000 shares expired or were cancelled during the three
months ended March 31, 2002. At the end of the period, options for 1,045,000
were outstanding under the 1999 Stock Incentive Plan. Options for an
additional 5,506,863 common shares are held by employees and others under prior
grants. At March 31, 2002, there were 2,496,875 warrants to purchase common
stock outstanding that were issued in connection with purchase and financing
transactions.
During the three months ended March 31, 2002 the Company granted options to
purchase a total of 3,000,000 shares of common stock at an exercise price of
$0.025 to a consultant of the Company. The options vest on the grant date and
expire in 120 days. The options were valued at $45,900 using the Black-Scholes
option pricing model with the following weighted-average assumptions; 4.96%
risk-free interest rate, 0% expected dividend yield, 149% volatility and 0.05
years. All amounts were expensed during the three months ended March 31, 2002.
Subsequent to March 31, 2002, options to purchase 3,000,000 shares of common
stock were exercised resulting in proceeds of $75,000.
NOTE 7-SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2002, the Company converted $90,000 of
Series J Preferred stock, $252,000 of Series K Preferred stock. The Company
accrued $66,036 of dividends on the preferred stock and converted $62,696 of
preferred dividends into shares of common stock. During the three months ended
March 31, 2002 officers of the Company contributed services valued $90,250 to
the Company.
NOTE 8 - SUBSEQUENT EVENT
Subsequent to March 31, 2002, options to purchase 3,000,000 shares of common
stock were exercised resulting in proceeds of $75,000.
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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, 2001 found in the Company's Form 10-KSB dated
April 16, 2002.
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 March 31, 2002 in the amount of $4,815,885.
Results of Operations
During the three months ended March 31, 2002, net sales were $100,687 compared
to $121,189 for the comparable period of the prior year. The decrease in sales
is attributable to the continued refocusing of the Company's business from
software product sales to video streaming and production services. The costs of
products sold in the three months ended March 31, 2002 were $65,889 compared to
$23,965 for the comparable period of the prior year. This increase was due to
increased distribution costs related to channel revenue sharing.
Operating losses for the three months ended March 31, 2001 were $536,305
compared to an operating loss of $1,681,161 for the comparable period of the
prior year. The improvement in operating results for the first quarter, 2002,
reflects management's focus on reducing general and administrative costs as the
Company transitions to new markets.
Interest expense was $14,245 during the three months ended March 31, 2002,
compared to interest expense of $47,173 for the comparable period of the prior
year. There was a reduction in interest cost related to the Series M
Convertible Preferred offering completed in January 2001 and interest paid on
the Convertible Secured Debenture that no longer exists.
The Company incurred stock based compensation expense of $131,500 during the
three months ended March 31, 2002, compared to $373,899 for the comparable
period of the prior year.
Liquidity and Capital Resources
At March 31, 2002, the Company had issued checks in excess of cash of $12,531 of
cash and had a deficit in working capital (current liabilities in excess of
current assets) of $5,321,010.
The Company has been relying upon the issuance of preferred stock, convertible
debentures, sale of common stock and short term notes to fund continuing
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,
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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
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.
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. In March
2001 a judgment was entered against Intermark in the amount of $133,658 related
to the claim against Intermark which included $53,332 related to a claim against
Softkat. The Company was not properly notified and the judgment will be
Appealed. As of December 31, 2000 the Company accrued $81,326. During the year
ended December 31, 2001 the Company accrued the remaining $52,332.
On April 3, 2001, a lawsuit was filed by BFree Ltd. in Superior Court, County of
Orange, California, against the Company as successor to Innovus Corporation,
seeking $25,544 for goods and services claimed to have been provided to Innovus
during 1997. A settlement reduced the liability to $4,000 in March of 2002 and
payments of $500 per month will retire this obligation by November 2002.
On July 18, 2001, David P. Noyes, the Company's former Chief Financial Officer,
filed a claim with the Labor Commissioner, State of California, for wages due
under an employment contract seeking $96,572. Mr. Noyes was terminated for cause
by the Company in November 2000. This claim was reduced to $13,239 by the
Federal Labor Board and left undecided a claim by the Company against Mr. Noyes
for an unpaid $20,000 loan plus interest. The Company is filing a counter claim
for repayment of the loan.
On July 26, 2001, Bixby Land Company, the Company's landlord, filed an unlawful
detainer action to recover delinquent rent and penalties in the amount of
approximately $125,000. On November 1st, 2001 the Company relocated its
corporate offices to 29 Hubble Irvine, CA 92618. In October a settlement
agreement with Bixby Land Company was reached regarding a settlement of the
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Company's liability of $808,134 with respect to a lease obligation for the
Tustin facility. The settlement agreement provided that the Company would be
release from all future payments under the terms of the lease if the Company
made payments totaling $100,000 and transferred the Company's existing $60,010
security deposit to the landlord. The Company did not make the required payments
under the settlement agreement. In October 2001, Bixby received a judgment
against the Company for $136,058. As of December 31, 2001, the Company accrued
the $136,058 and expensed the security deposit. The Company is currently
negotiating a reduced settlement with Bixby Land Company. Additionally in
conjunction with this event the Company has written off the total net asset
value of its leasehold improvements of $51,174.
On December 18, 2001, the Company settled with Digital Leisure, Inc. for a
$7,500 payment arrangement, which was paid in full by February 1, 2002.
On August 9, 2001, an action was filed in California Superior Court, County of
Orange, against the Company, certain officers and its current Directors by
Donald C. Watters, the Company's former president, chief operating officer and
director, claiming breaches of contract, good faith and fair dealing, and
fiduciary duty, and tortious adverse employment action in violation of public
policy. Mr. Watters is seeking general damages of not less than $2,780,000,
punitive damages, interest, attorney's fees and court costs. Mr. Watters was
terminated by the Company for cause. The Company believes that the claims are
without merit and intends to vigorously defend the action and thus nothing has
been accrued as of December 31, 2001.
On August 10, 2001, a lawsuit was filed by Kforce.com seeking to collect
approximately $43,000 claimed to be owed under a Consulting Services Agreement.
The claim was fully accrued in the Company's financial statements as of December
31, 2001. In March 2002 the Company agreed to a settlement of $42,315 with
Kforce.com.
In September, 2001 a lawsuit was filed by Technopolis Communications, Inc. in
the Superior Court of California, County of Orange, against Innovus Corporation,
dba eSynch Corporation, seeking $35,733 for services claimed to have been
provided to eSynch. The case is currently in the discover stage and a mandatory
settlement conference date has been set. As of December 31, 2001 the Company has
accrued $50,000.
On July 27, 2001, the Company filed a complaint against eLiberation Corporation,
which was subsequently amended January 3, 2002. The Company seeks compensatory
damages in the amount of $39,671. On September 28, 2001, eLiberation Corporation
filed a cross-complaint against the Company and an officer claiming that the
Company and the officer deliberately misrepresented and made false
representations to eLiberation Corporation. eLiberation Corporations seeks
general and special damages in the amount of not less than $2,500,000. The
Company believes that the cross-complaint is without merit and intends to
vigorously defend the action and thus nothing has been accrued as of March 31,
2002.
In 2002, a shareholder of the Company demanded payment of a $40,000 loan in
which he had loaned the Company during the year ended December 31, 2001. As of
March 31, 2002 the loan is included in noters payable - related party. The
Company is currently in negotiations to settle the loan with the shareholder.
In May 2002, a lawsuit was filed by a former director of the Company demanding
repayment of $450,000 that was loaned to the Company. At March 31, 2002 the
$450,000 is included in notes payable - related party.
Item 2 - Changes in Securities:
(a) The following securities were issued by the Company during the three months
ended March 31, 2002 without registration under the Securities Act of 1933:
1,000,000 shares issued for services.
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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: May 20, 2002
eSynch Corporation
By: /S/ Thomas Hemingway
Thomas Hemingway, Chief Executive Officer
(Authorized Officer)
By: /S/ Mark Utzinger
Mark Utzinger, Vice President - Finance
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