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, 2001
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
29 Hubble
Irvine, CA 92618
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(Address of principal executive offices)
(949) 727-3233
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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 November 16, 2001:
28,944,747
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PART I Financial Information. . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 (Unaudited) . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2001 and 2000 (Unaudited). . 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000 (Unaudited) . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited). 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 10
PART II Other Information. . . . . . . . . . . . . . . . . . . . . . 10
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 10
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . 11
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2001 2000
----------- -----------
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . $ - $ -
Accounts receivable, net of $27,534 and $80,504
allowance for bad debt, respectively . . . . . 19,437 8,414
Notes receivable, net of $31,000 and $350,929
allowance for bad debt, respectively. . . . . . 250,139 6,172
Note receivable from affiliate, net bad debt
of $300,000 and $300,000, respectively. . . . . - 200,000
Prepaid expenses and other current assets. . . . 235,426 22,154
----------- -----------
Total Current Assets. . . . . . . . . . . . 505,002 236,740
Property and equipment, net of accumulated
depreciation . . . . . . . . . . . . . . . . . . . 463,081 724,435
Goodwill, net of accumulated amortization . . . . . 1,210,908 2,467,434
Other assets, net of accumulated amortization . . . 297,215 206,169
----------- -----------
Total Assets . . . . . . . . . . . . . . . . .$ 2,476,206 $ 3,634,778
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks issued in excess of cash in bank . . . .$ 121,532 $ 150,797
Accounts payable. . . . . . . . . . . . . . . . 1,184,586 701,680
Accrued liabilities . . . . . . . . . . . . . . 2,583,660 1,961,044
Accrued preacquisition liability. . . . . . . . 185,791 606,147
Notes payable - current portion . . . . . . . . 163,400 83,400
Notes payable - related party . . . . . . . . . 450,000 450,000
Capital lease obligation, current portion . . . 77,336 63,244
Preferred dividends payable . . . . . . . . . . 479,399 374,754
----------- -----------
Total Current Liabilities . . . . . . . . . 5,245,703 4,391,066
----------- -----------
Long-Term Liabilities
Capital lease obligation. . . . . . . . . . . . 120,952 115,570
Convertible debentures. . . . . . . . . . . . . - 500,000
----------- -----------
Total Long-Term Liabilities . . . . . . . . 120,952 615,570
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Stockholders' Deficit
Preferred Stock - $0.001 par value; 400,000
shares authorized
Redeemable Preferred Stock - Series J, $0.001
par value; 275 shares authorized; 72.5 and
139.5 shares issued and outstanding,
respectively; liquidation preference
$725,000 . . . . . . . . . . . . . . . . . . 600,000 1,270,000
Redeemable Preferred Stock - Series K, $0.001
par value; 250 shares authorized; 42.5
and 81.5 shares issued and outstanding,
respectively; liquidation preference
$425,000 . . . . . . . . . . . . . . . . . . 300,000 690,000
Redeemable Preferred Stock - Series L,
$0.001 par value; 210 shares authorized;
no shares outstanding. . . . . . . . . . . . - -
Redeemable Preferred Stock - Series M,
$0.001 par value; 220 shares authorized;
196.9 and 172.8 shares issued and
outstanding, respectively; liquidation
preference $1,969,000. . . . . . . . . . . . 2,639,862 2,414,862
Common stock - $0.001 par value; 50,000,000
shares authorized, 26,764,747 and 13,234,757
shares issued and outstanding, respectively. . 26,765 13,235
Additional paid-in capital. . . . . . . . . . . 43,045,343 38,628,990
Deferred compensation . . . . . . . . . . . . . (40,135) (393,080)
Accumulated deficit . . . . . . . . . . . . . . (49,462,283) (43,995,865)
----------- -----------
Total Stockholders' Deficit . . . . . . . . (2,890,448) (1,371,858)
----------- -----------
Total Liabilities and Stockholders' Deficit . . $ 2,476,206 $ 3,634,778
=========== ===========
See the accompanying notes to the condensed consolidated
financial statements.
3
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Revenue . . . . . . . . . . $ 81,710 $ 194,614 $ 284,718 $ 727,708
Cost of products sold . . . 27,012 48,318 92,627 101,129
----------- ----------- ----------- -----------
Gross Profit. . . . . . 54,698 146,296 192,091 626,579
----------- ----------- ----------- -----------
Operating and Other Expenses
General and administrative. 936,478 1,168,121 2,946,769 3,259,008
Research and development. . 58,750 70,471 257,775 311,310
Stock issued for services . 49,038 278,184 339,928 421,234
Stock based compensation. . 5,709 1,112,505 485,967 1,376,505
Amortization of goodwill. . 402,062 418,766 1,239,597 1,256,301
Interest expense, net . . . 34,280 258,228 195,609 268,632
----------- ----------- ----------- -----------
Total Operating and Other
Expenses. . . . . . . . 1,486,317 3,306,275 5,465,645 6,892,990
----------- ----------- ----------- -----------
Operating Loss . . . . . . . . (1,431,619) (3,159,979) (5,273,554) (6,266,411)
Other Income and Expense. . . . 11,375 4,744 297,031 4,744
----------- ----------- ----------- -----------
Net Loss. . . . . . . . . . . . (1,420,244) (3,155,235) (4,976,523) (6,261,667)
Preferred Dividends . . . . . . 60,284 47,431 489,896 2,415,804
----------- ----------- ----------- -----------
Loss Applicable to Common Shares $(1,480,528) $(3,202,666) $(5,466,419) $(8,677,471)
=========== =========== =========== ===========
Basic and Diluted Loss per
Common Share . . . . . . . $ (0.06) $ (0.24) $ (0.24) $ (0.73)
=========== =========== =========== ===========
Weighted-average number of
common shares used in per
share calculations . . . . . . 26,119,179 13,200,370 21,175,515 11,833,905
=========== =========== =========== ===========
See the accompanying notes to the condensed consolidated
financial statements.
4
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Ended September 30,
--------------------------
2001 2000
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Cash Flows from Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .$(4,976,523) $(6,261,667)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 398,217 234,568
Amortization of goodwill . . . . . . . . . . . . . . . . . 1,239,597 1,256,301
Reversal of allowance for bad debt . . . . . . . . . . . . (306,929) -
Impairment of property and equipment . . . . . . . . . . . 51,174 -
Settlement of accrued pre-acquisition liability . . . . . - (92,415)
Write-off of acquired liabilities. . . . . . . . . . . . . (420,356) -
Stock issued for services . . . . . . . . . . . . . . . . 339,928 542,184
Stock issued for settlement of lawsuit . . . . . . . . . . - 97,000
Stock issued for interest payment. . . . . . . . . . . . . 71,191 -
Additional compensation for modification of warrants . . . 20,344 -
Stock based compensation . . . . . . . . . . . . . . . . . 485,967 1,255,555
Interest expense for Series L bridge loan warrants . . . . - 232,258
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (11,023) (130,539)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . - 5,943
Other receivables . . . . . . . . . . . . . . . . . . . . 262,962 (27,583)
Prepaid expenses and other current assets. . . . . . . . . (19,850) 21,778
Accounts payable . . . . . . . . . . . . . . . . . . . . . 453,515 474,381
Accrued liabilities . . . . . . . . . . . . . . . . . . . 682,646 (356,022)
----------- -----------
Net Cash Used in Operating Assets . . . . . . . . . . (1,729,140) (2,748,258)
Cash Flows From Investing Activities
Note to affiliate . . . . . . . . . . . . . . . . . . . . . - (500,000)
Acquisition of property and equipment . . . . . . . . . . . . (8,006) (204,056)
Note receivable . . . . . . . . . . . . . . . . . . . . . . . - (292,000)
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . - (17,477)
----------- -----------
Net Cash Used in Investing Activities . . . . . . . . (8,006) (1,013,533)
Cash Flows From Financing Activities
Stock issued for cash . . . . . . . . . . . . . . . . . . . . 1,413,000 713,410
Proceeds from issuance of Preferred shares, net of costs . . . 113,644 803,993
Proceeds from beneficial conversion feature of Preferred Offering - 100,861
Proceeds from the exercise of options and warrants . . . . . . 86,400 -
Proceeds from warrants issued in connection with Preferred . . 63,356 645,646
Preferred shares issued for cash . . . . . . . . . . . . . . . - 400,000
Proceeds from borrowing . . . . . . . . . . . . . . . . . . . 80,000 574,042
Payments on notes payable . . . . . . . . . . . . . . . . . . (120,000)
Payments on capital lease. . . . . . . . . . . . . . . . . . . (19,254) -
----------- ----------
Net Cash Provided by Financing Activities . . . . . . 1,737,146 3,117,952
Net Decrease in Cash . . . . . . . . . . . . . . . . . . . . . . - (643,839)
Cash at Beginning of Period . . . . . . . . . . . . . . . . . . - 1,319,971
----------- -----------
Cash at End of Period . . . . . . . . . . . . . . . . . . . . .$ - $ 676,132
=========== ===========
See the accompanying notes to the condensed consolidated
financial statements.
5
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 developing and marketing media
rights management solutions, video-on-demand services and video
streaming through the Internet, software sales through the
Internet, video encoding, compression and authoring, raising
capital, and acquiring businesses.
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).
eSynch designs, develops, markets and supports intelligent
digital media solutions and services, including media rights
management, audio and video encryption, delivery, tracking and
measurement tools, and streaming media services. The Company has
developed a suite of software and related components designed for
the delivery of live and on-demand audio and video through cable,
satellite and the Internet. The Company provides turnkey
solutions, offering services necessary to provide secure
streaming media including software development and implementation
of e-commerce applications, production, encoding, decoding and
encryption, client-side metrics, reporting, content management,
pay-per-view streaming, hosting and archiving. The Company's
software helps businesses deliver high-quality video content to
their customers. The Company also develops PC utility products,
primarily for the Internet user.
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 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 2001.
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, 2000.
BUSINESS CONDITION - The financial statements have been prepared
on the basis of the Company continuing as a going concern. The
Company has a $4,740,701 working capital deficit at September 30,
2001, has incurred losses from operations and negative cash flows
from operating activities and has accumulated a deficit at
September 30, 2001 in the amount of $49,462,283. 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 concentration of
business in the highly competitive software industry subjects the
Company to concentrated market risk. Sales to any major customer
in 2001 and 2000 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, Series J,
Series K and Series M redeemable preferred stock and convertible
notes payable except during loss periods when those potentially
issuable common shares would decrease the loss per share. At
September 30, 2001, there were shares of Series J redeemable
preferred stock, 42.5 shares of Series K redeemable preferred
stock, 196.9 shares of Series M redeemable preferred stock and
there were options and warrants to purchase 5,857,630 shares of
common stock that were not included in the computation of diluted
net loss per shares of common stock that were not included in the
computation of diluted net loss per common share as their effect
would have been anti-dilutive, thereby decreasing the net loss
per common share. There were 5,297,857 potentially issuable
common shares outstanding at September 30, 2000, 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 delivered except for products
sold through distributors for which revenue is recognized upon
receipt of payment.
NEW ACCOUNTING STANDARDS - On July 20, 2001, the Financial
Accounting Standards Board issued SFAS No. 141, Business
Combinations and SFAS No. 142 Goodwill and Other Intangible
Assets. These pronouncements significantly change the accounting
for business combinations, goodwill, and intangible assets.
SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations and further clarifies the
criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS No. 141 are effective for any business
combination accounted for by the purchase method that is
completed after June 30, 2001.
SFAS No. 142 states goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed for impairment
annually (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful
lives. The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July
1, 2001, companies are required to adopt the pronouncement in
their fiscal year beginning after December 15, 2001.
The Company expects to adopt these standards during the year
ended December 31, 2001 and management does not know the impact
of these statements on the Company's results of operations,
financial position or liquidity.
NOTE 2--NOTES RECEIVABLE
Notes receivable includes $250,085 loaned to Streamedia
Communications Inc. during the quarter ended March 31, 2001. The
amounts were loaned under an assumed merger. The loans bear
interest at 10% and were due on May 21, 2001. The loan is
collateralized by 913,687 shares of Streamedia Communications,
Inc. common stock. Management is reviewing the options
available with respect to collection of monies due.
Notes receivable includes an outstanding balance of $250,000 for
loans from eLiberation.com Corporation during the year ended
December 31, 2000. The loans were made in anticipation of a
planned merger which was never consummated and are collateralized
by a UCC-1 Financing Statement filed with the California
Secretary of State. During the nine months ended September 30,
2001, the Company received approximately $250,000, net legal
expenses from eLiberation.com on this receivable.
NOTE 3--ACCRUED LIABILITIES
The pre-acquisition liabilities are a reserve for potential
liabilities assumed at the time of the acquisition of Innovus and
Intermark. During the nine months ended September 30, 2001 the
Company wrote off $420,356 of these pre-acquisition liabilities
due to the expiration of legal obligations which has been
included in other income and expense.
NOTE 4--NOTES PAYABLE RELATED PARTY AND NOTES PAYABLE
Notes payable - related party includes $450,000 loaned to the
Company by a director during the quarter ended June 30, 2000. On
January 10, 2001, the terms for repayment were restated from due
on demand to due on twenty days written notice.
During the three months ended September 30, 2001, the Company
borrowed $80,000 from two individuals. Subsequent to September
30, 2001, $40,000 of the notes payable and accrued interest was
converted into 500,000 shares of common stock.
NOTE 5-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 December 31,
2000 the Company accrued $81,326. During the nine months ended
September 30, 2001 the Company accrued the remaining $52,332.
In June 2000, the Company was named as a co-defendant along with
its landlord, Bixby Land Company, in a lawsuit filed by Terry
Murphy, a former employee, in California Superior Court, County
of Orange, claiming unspecified damages resulting from an
accident that occurred at the Company's leased offices.
Subsequently, Bixby filed a cross-complaint against the Company
related to the lawsuit seeking indemnity, equitable contribution
and declaratory relief. The Company's insurance carriers are
defending the claims against the Company and discovery
proceedings are currently underway.
On January 11, 2001, the Company was named as defendant in a
lawsuit filed by Post Modern Edit, LLC, in California Superior
Court, County of Los Angeles, seeking damages of not less than
$50,000 for breach of a confidentiality agreement, breach of
contract, and other claims related to a proposed but
unconsummated acquisition of Post Modern Edit by the Company. On
May 9, 2001, the parties reached a full settlement of the
litigation in which Post Modern Edit agreed to return 21,000
shares of the Company's common stock it owned in exchange for
$6,300 cash paid by the Company.
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.
Management is evaluating the claim and has referred the lawsuit
to outside counsel for review and appropriate response. The claim
is included in pre-acquisition liabilities on the accompanying
balance sheets.
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. The Company believes that the claim is
without merit and intends to vigorously defend against the claim.
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. Additionally in
conjunction with this event the Company has written off the total
net asset value of its leasehold improvements of $51,174. As of
September 30, 2001, the Company accrued the $100,000 and expensed
the security deposit.
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. The
Company accrued this liability during the three months ended
September 30, 2001.
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 September 30, 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. Management has referred the
lawsuit to outside counsel for review and appropriate response.
The claim is fully accrued in the Company's financial statements
as of September 30, 2001.
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. Management believes the claim is without merit and has
referred the lawsuit to outside counsel for review and
appropriate response. No amounts have been accrued as of
September 30, 2001.
Payroll Tax Contingency
During 2000 and 2001, the Company did not pay payroll taxes to
the respective governmental agencies and has unpaid federal and
state payroll tax liabilities, which have been reflected in the
financial statements of approximately $467,937. The Company has
not notified the Internal Revenue Service regarding this matter,
however, no penalties and interest have yet been assessed. In
addition, the Company recorded a contingent liability of $75,367
for potential tax penalties and interest as of September 30,
2001.
Capital Lease
During the nine months ended September 30, 2001 the Company
entered into a lease for computer equipment. The lease is for 36
months and requires a minimum monthly payment of approximately
$1,171. The lease has been treated as a capital lease.
NOTE 6--STOCKHOLDERS' EQUITY
In conjunction with issuing the Secured Convertible Debentures
and related warrants in December 2000, the Company agreed to
exchange its Series L Convertible Preferred Stock and the
warrants issued therewith for a new series, the Series M
Convertible Preferred Stock, and warrants so as to be consistent
with the terms of the Secured Convertible Debentures and related
warrants, including the applicable conversion price and exercise
price, issued in connection with the Secured Convertible
Debentures. The exchange of Series L Convertible Preferred Stock
and warrants with Series M Convertible Preferred Stock and
warrants was completed on January 23, 2001 resulting in the
issuance of 175.3 shares of Series M Convertible Preferred Stock
and warrants to purchase 1,000,000 shares of common stock in
exchange for the then outstanding shares of Series L Convertible
Preferred Stock. The accounting for this exchange was included
in the year-ended December 31, 2000.
On January 23, 2001, the Company issued additional shares of
Series M convertible preferred stock in a private placement
offering. The Company received $177,000 in net proceeds (net of
$33,300 of offering costs) in exchange for the issuance of 20
shares of Series M convertible preferred stock and warrants to
purchase 100,000 shares of common stock at an exercise price of
$1.375 per share. The placement agent received 1.6 shares of
Series M convertible preferred stock and warrants to purchase
25,000 shares of common stock at an exercise price of $1.375.
The accounting for the additional issuance of Series M preferred
shares and the related warrants was recognized in the nine months
ended September 30, 2001. The Series M shareholders received a
beneficial conversion feature related to the issuance of the
warrants in the amount of $113,644. The amount was recognized as
additional paid-in capital.
The fair value of the additional warrants on the date issued was
$111,500. The net proceeds from the offering were allocated to
the Series M convertible preferred stock and the warrants based
upon their relative fair values and resulted in allocating
$113,644 to the beneficial conversion feature and $63,356 to the
warrants. The allocated value of the warrants was recognized as
additional paid-in capital.
During the nine months ended September 30, 2001, the Company
issued Common Stock as follows: 1,939,500 shares for services in
the amount of $533,350 of which $339,928 was charged to stock
issued for services expense and $193,422 was recorded as a
prepaid expense, the purchase of 5,655,709 shares for a total
cash consideration of $1,413,000, and 801,187 shares in the
amount of $275,448 as part of the acquisition of data encryption
technology. Additionally, the Company issued 97,821 shares
valued at $30,190 in settlement of interest.
During the nine months ended September 30, 2001, holders of
Series J Convertible Preferred Stock converted a total of 67
preferred shares valued at $670,000 and received 1,568,315 common
shares including accrued dividends in the amount of $126,763.
During the period, holders of Series K Convertible Preferred
Stock converted a total of 39 preferred shares valued at $390,000
and received 1,041,102 common shares including accrued dividends
in the amount of $56,367. During the period, holders of Secured
Convertible Debenture converted a total of $500,000 and received
2,132,463 common shares including accrued interest, legal fees
and penalties in the aggregate amount of $41,001. No Secured
Convertible Debentures were outstanding at September 30, 2001.
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.
Options for 1,325,000 shares expired or were cancelled during the
nine months ended September 30, 2001. During the nine months
ended September 30, 2001, options to purchase 20,000 shares of
common stock were exercised for $4,500.
Options and Warrants Granted to Non-Employees
During the nine months ended September 30, 2001, the Company
issued warrants to purchase 1,125,000 shares of common stock in
connection with the Series M Convertible Preferred offering,
cancelled warrants to purchase 413,334 shares of common stock in
connection with the cancellation of the Series L Convertible
Preferred, and warrants to purchase 250,000 shares in connection
with revising and extending the repayment terms of the note
payable to a director. These warrants were valued at $160,850.
The Company also issued to this director Warrants to purchase
950,000 shares under a license agreement for certain patents, and
reissued with modified terms warrants to purchase 450,000 shares
to a director related to his service as a director and consultant
to the Company. The effect of these warrants was recorded in
2000 because in each case the grants were a modification of the
original grants.
Additionally, holders of warrants issued in conjunction with the
Secured Convertible Debenture converted the warrants for 312,500
common shares for a net cash consideration of $81,900. During the
nine months ended September 30, 2001, the Company modified the
exercise price of these warrants resulting an additional charge
of $20,344 to operations.
NOTE 8--SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 2001, the Company
converted $670,000 of Series J Preferred stock, $390,000 of
Series K Preferred stock, $500,000 of Secured Convertible
Debenture, and agreed to rescind the conversion of $40,000 of
Series M Preferred stock for a net issuance of 4,744,874 shares
of common stock, including interest shares. The Company accrued
$312,896 of dividends on the preferred stock and converted
$181,644 of that dividend into shares of common stock. The
Company accrued $41,001 of interest on the convertible debenture
and converted $41,001 of that interest into shares of common
stock.
The Company acquired $38,727 of computer equipment under a
capital lease during the nine months ended September 30, 2001.
The Company wrote off leasehold improvements with a cost of
$78,113 and accumulated amortization of $26,939.
NOTE 9--SUBSEQUENT EVENTS
On October 1st, 2001, the Company settled payment of a $40,000
loan through issuance of 500,000 shares of stock.
On November 1st, 2001, the Company issued an option for 2,000,000
common shares for services with a 30 day expiration and issued
1,680,000 shares for consulting services. These issuances and
consulting contracts have been recorded under the S-8 filing by
the Company on November 19th, 2001.
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, 2000 found in the Company's Form 10-KSB dated April
2, 2001.
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, 2001 in the amount of $49,462,283.
On October 16th, 2001Norton Garfinkle resigned from the Board of
Directors. The number of Directors on the Board is now a more
practical, odd number for decision making purposes.
Results of Operations
During the three and nine months ended September 30, 2001, sales
were $81,710 and $284,718 compared to $194,416 and $727,708 for
the comparable periods 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 cost of products sold in the three and
nine months ended September 30, 2001 were $27,012 and $92,627
compared to $48,318 and $101,129 for the comparable periods of
the prior year.
Operating losses for the three and nine months ended September
30, 2001 were $1,431,619 and $4,976,523 compared to an operating
losses of $3,159,979 and $6,266,411 for the comparable periods of
the prior year. The operating results for the reported periods
reflect management's continued success at reducing operating
costs, improving efficiency and maximizing potential while it
repositions the Company for revenue growth.
The Company incurred net interest and other expenses of 34,280
and $195,609 during the three and nine months ended September 30,
2001 compared to $258,228 and $268,632 for the comparable periods
of the prior year. During the three and nine months ended
September 30, 2001, the Company spent $58,750 and $257,775 on
research and development, reflecting management's commitment to
efficiency, related to the digital rights management tool and
products, various streaming media and other product initiatives
launched and under development in the periods reported. The
Company spent $70,471 and $311,310 in the comparable periods of
the prior year.
The Company incurred stock issued for services expense of $49,038
and $339,928 during the three and nine months ended September 30,
2001 compared to $1,112,505 and $1,376,505 for the comparable
periods of the prior year.
The Company incurred stock based compensation expense of $5,709
and $485,967 during the three and nine months ended September 30,
2001 compared to $278,184 and $421,234 for the comparable periods
of the prior year.
Liquidity and Capital Resources
At September 30, 2001, the Company had issued checks in excess of
cash of $121,532 of cash and had a deficit in working capital
(current liabilities in excess of current assets) of $4,740,701.
The Company has been relying upon sale of common stock, the
issuance of the preferred stock, convertible debentures and short
term notes to fund continuing operations. During the three months
ended September 30, 2001, the Company issued 230,000 common
shares in exchange for an investment of $28,000, issued 49,390
common shares upon the conversion of preferred stock, and issued
40,000 common shares as interest on a short term note of $40,000.
The Company estimates that during the quarter it was using
approximately $175,000 more cash each month than was generated by
operations. This represents 22% reduction in the Company's burn
rate.
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
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 plus $52,332 related to a
claim against Softkat. The Company was not properly notified and
the judgment will be appealed.
In June 2000, the Company was named as a co-defendant along with
its landlord, Bixby Land Company, in a lawsuit filed by Terry
Murphy, a former employee, in California Superior Court, County
of Orange, claiming unspecified damages resulting from an
accident that occurred at the Company's leased offices.
Subsequently, Bixby filed a cross-complaint against the Company
related to the lawsuit seeking indemnity, equitable contribution
and declaratory relief. The Company's insurance carriers are
defending the claims against the Company and discovery
proceedings are currently underway.
On January 11, 2001, the Company was named as defendant in a
lawsuit filed by Post Modern Edit, LLC, in California Superior
Court, County of Los Angeles, seeking damages of not less than
$50,000 for breach of a confidentiality agreement, breach of
contract, and other claims related to a proposed but
unconsummated acquisition by the Company of Post Modern Edit. The
parties reached a settlement of the litigation and Post Modern
Edit returned 21,000 shares of the Company's common stock and
received $6,300 cash. This case is now closed.
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.
Management is evaluating the claim and has referred the lawsuit
to outside counsel for review and appropriate response.
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 during 2000. Management believes the claim is without
merit and has referred the lawsuit to outside counsel for review
and appropriate response.
Item 2 - Changes in Securities and Use of Proceeds:
(a) The following securities were issued by the Company during
the three months ended September 30, 2001 without registration
under the Securities Act of 1933:
(i) 1,208,500 shares of Common Stock for services.
(ii) 230,000 shares of Common Stock for cash consideration.
(iii) 49,390 shares of Common Stock upon conversion of
preferred stock.
(iv) 40,000 shares of Common Stock as interest on a short term
note.
The cash proceeds from these issuances were used for general
corporate purposes.
The Company believes the transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933.
(b) The following registration statement was filed by the Company
during the three months ended September 30, 2001.
(i) On August 15, 2001 the Company filed a NTN 10Q.
(ii) On August 20, 2001 the Company filed a 10QSB, a Quarterly
Report.
(iii) On August 21, 2001 the Company filed a 10QSBA, an
Amended Quarterly Report to the 10QSB originally filed on August
20, 2001.
(iv) On August 30, 2001 the Company filed a 10QSBA , an Amended
Quarterly Report, to the 10QSBA originally filed on August 21,
2001.
(v) On September 14, 2001 the Company filed a 10QSBA, , an
Amended Quarterly Report, to the 10QSBA originally filed on
August 30, 2001.
(vi) On September 14, 2001, the Company filed an S-8, Employee
Benefit Plan Registration Statement.
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 19, 2001
eSynch Corporation
By: /S/ Thomas Hemingway
---------------------------------
Thomas Hemingway, Chief Executive Officer
(Authorized Officer)
By: /S/ Mark Utzinger
---------------------------------
Mark Utzinger, Vice President - Finance