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, 2004
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
MERGENCE 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.)
One Technology Drive
Building H
Irvine, CA 92618
(Address of principal executive offices)
(949) 753-0590
(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 May 11, 2004:
7,745,262
Transitional Small Business Disclosure Format (Check one): Yes No X
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MERGENCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------- --------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
------------- --------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . - -
------------- --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,457,182 2,419,803
Accounts Payable - Related Party. . . . . . . . . . . . . . . . . . . . 33,800 33,800
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,499,721 2,615,821
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 833,400 833,400
Preferred dividends payable . . . . . . . . . . . . . . . . . . . . . . - 353,067
------------- --------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 4,824,103 6,255,891
------------- --------------
STOCKHOLDERS' DEFICIT
Series J convertible preferred stock - $10,000 stated value per share;
275 shares authorized; -O- and 58.2 shares outstanding,
liquidation preference of $-0- and $457,000;. . . . . . . . . . . . - 457,000
Series K convertible preferred stock - $10,000 stated value per share;
250 shares authorized; -0- 18.3 shares outstanding,
liquidation preference of $58,000 . . . . . . . . . . . . . . . . . - 58,000
Series M convertible preferred stock - $10,000 stated value per share;
220 shares authorized; 196.9 shares outstanding;
liquidation preference of $1,969,000 . . . . . . . . . . . . . . . . - 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;
6,745,262 and 4,605,923 shares issued and outstanding. . . . . . . . 6,745 4,606
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 52,956,969 48,690,169
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (57,787,817) (58,082,528)
------------- --------------
TOTAL STOCKHOLDERS' DEFICIT . . . . . . . . . . . . . . . . . . . . . (4,824,103) (6,255,891)
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT . . . . . . . . . . . . . . . $ - $ -
============= ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
MERGENCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2004 2003
------------ ------------
REVENUE. . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
COST OF PRODUCTS SOLD . . . . . . . . . . . . . . . . . - -
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . - -
------------ ------------
OPERATING AND OTHER EXPENSES
General and administrative. . . . . . . . . . . . . . 37,379 66,835
Shares issued to third parties for services . . . . . 532,010 670,000
Stock-based compensation to employees . . . . . . . . 252,000 611,000
Interest expense. . . . . . . . . . . . . . . . . . . 29,654 13,381
------------ ------------
TOTAL OPERATING AND OTHER EXPENSES. . . . . . . . . 851,043 1,361,216
------------ ------------
FORGIVENESS OF LIABILITY (NOTE 2) . . . . . . . . . . . 1,145,754 -
------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . 294,711 (1,361,216)
PREFERRED STOCK DIVIDENDS . . . . . . . . . . . . . . . - (170,851)
------------ ------------
INCOME(LOSS)APPLICABLE TO COMMON SHAREHOLDERS. . . . . . $ 294,711 $(1,532,067)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE. . . . $ 0.05 $ (0.51)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES. . . . . . . .
USED IN PER SHARE CALCULATION. . . . . . . . . . . . 5,593,093 3,005,935
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
MERGENCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2004 2003
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 294,711 $(1,361,216)
Adjustments to reconcile net loss to net cash used by operating
activities:
Stock issued for services . . . . . . . . . . . . . . . . . . . . . . 532,010 670,000
Stock based compensation. . . . . . . . . . . . . . . . . . . . . . . 252,000 611,000
Changes in operating assets and liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 37,379 50,850
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . (1,116,100) 28,381
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . - (985)
----------- -----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . - (985)
CASH - BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . - 985
----------- -----------
CASH - END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
In July 2003, the holders of all of the Company's outstanding Series J, K and M
preferred stock agreed to exchange the Preferred Stock and accrued dividends
for 575,000 shares (post-split) of the Company's common stock. The closing took
place simultaneously with the reverse spilt of the Company's common stock at a
rate of 40 for 1, which occurred on February 13, 2004.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The primary activities of Mergence Corporation (Mergence or the Company),
formerly eSynch Corporation, have consisted of raising capital, acquiring
businesses, developing and marketing video-on-demand services and video
streaming through the Internet, software sales through the Internet, and DVD
video encoding, compression and authoring. The Company has curtailed all of
these activities due to lack of financial resources. The Company is pursuing
acquisition and Oxford Media Corp., a Mergence-owned subsidiary focusing on
acquiring digital video on demand companies, has entered into a letter of
intent on to acquire eMOD Systems, Inc, a digital solutions company
concentrating on the secure high quality distribution of digital video content
to the hotel industry.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Mergence and of its wholly owned
subsidiaries. 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 2004.
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 for the year ended
December 31, 2003 as filed with the Securities and Exchange Commission on April
15, 2004.
Business Condition - The accompanying consolidated financial statements have
been prepared on the basis of the Company continuing as a going concern. The
Company has incurred losses from operations, negative cash flows from operating
activities and has accumulated a deficit at March 31, 2004 in the amount of
$57,787,817 and has a working capital deficiency and a capital deficiency of
$4,824,103 at March 31, 2004. The Company has numerous judgments against it and
is unable to pay its current liabilities. Management's plans are to seek a
merger for the Company and to request compromise of existing liabilities.
Management does not anticipate that the Company can obtain additional debt or
equity financing. 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 a concentration of market risk.
Fair Values Of Financial Instruments - The amounts reported as accounts
payable, accrued liabilities, and capital lease obligations are considered to
be reasonable approximations of their fair values. The fair value estimates
were estimated by management and were not based on comparable debt, as the
Company is unable to obtain outside financing.
Stock-Based Compensation - Stock-based compensation to employees is measured by
the intrinsic value method. This method recognizes compensation expense related
to stock options granted to employees based on the difference between the fair
value of the underlying common stock and the exercise price of the stock option
on the date granted. Compensation expense related to stock options granted to
non-employees is determined based upon the fair value of the stock options on
the date granted.
Income / Loss Per Share - Basic income (loss) per common share is computed by
dividing income (loss) before extraordinary gain and net income (loss), both
adjusted by preferred dividends, by the weighted-average number of common
shares outstanding during the period. Diluted income (loss) per share is
calculated to give effect to stock warrants, options convertible preferred
stock and convertible notes payable except when those potentially issuable
common shares would decrease the income (loss) per share.
As of March 31, 2004 and 2003, there were 0 and 58.2 shares of Series J
convertible preferred shares, 0 and 18.3 shares of Series K convertible
preferred shares, and 0 and 196.9 shares of Series M convertible preferred
shares, respectively. As of March 31, 2004 and 2003, there were options and
warrants to purchase 24,125 and 37,373 shares of common stock. These items were
not included in the calculation of diluted income (loss) per share for the
periods ended March 31, 2004 and 2003, as the effect would have been anti-
dilutive.
Revenue Recognition - The Company sells software products at fixed prices for
which the right to return is granted to the buyer. Accordingly, revenue is
recognized when the buyer has paid for the products and the amount of future
returns can be reasonably estimated. Cost of products sold is recognized at the
date the sale is recognized less an estimate for sales returns. Until the sale
is recognized, products purchased from publishers are accounted for, as
consigned product from publishers and the related cost is not reflected in the
financial statements with the exception of software inventory owned by the
Company. Revenue from DVD video encoding, compression and authoring and video-
on-demand services is recognized when the product or services are completed,
the products are transmitted or shipped to the customer and accepted by the
customer.
New Accounting Standards - The Company adopted FASB Statement of Financial
Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections on January 1,
2003. Among other provisions, this statement modified the criteria for
classification of gains or losses on debt extinguishment such that they are not
required to be classified as extraordinary items if they are not unusual and
infrequent. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities.
Statement No. 150 will require financial instruments that are mandatory
redeemable or that contain an obligation to repurchase the financial instrument
to be classified as liabilities. Statement No. 150 must be applied by the
Company beginning July 1, 2003. The adoption of Statement No. 150 is not
expected to have a material effect on the financial position of the Company.
NOTE 2-ACCRUED LIABILITIES
Included in accrued liabilities at March 31, 2004 is $692,500 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, 2004 the Company has accrued salaries of $ 239,923.
Some of these employees have obtained judgments against the Company for
payments of these salaries and these amounts have been reclassified to accounts
payable. Additionally, during 2001 the Company withheld 401K contributions from
employees' wages that were not contributed to the plan. At March 31, 2004
amounts due to the plan were $43,467.
The Company reduced its accrual on previous estimates of accrued liabilities by
$1,145,754 in the quarter ended March 31, 2004, which represented for potential
payroll taxes due by individual shareholders for the years 1997 and 1998. A
review of individual tax returns showed that returns were filed properly by
these individuals with the payroll tax liabilities being assumed by the
individuals, whereby releasing the company from any liability.
NOTE 3-COMMITMENTS AND CONTINGENCIES
The Company is involved in one lawsuit in the normal course of business. A
collection action filed on May 9, 2002 wherein Garfinkle Limited Partnership II
("GLP") alleged breach of a $450,000 promissory note, plus interest. GLP was
granted a summary judgment in April 2004 against the Company. All amounts are
fully recorded in the financial statements.
Previous lawsuits for unpaid obligations resulted in judgments against the
Company totaling $1,174,000. All amounts have been recorded in the Company's
financial statements as accounts payable. The Company is currently attempting
to negotiate settlements with all creditors.
NOTE 4-STOCKHOLDERS' DEFICIT
Common Stock - On February 13, 2004, the shareholders of the Company approved a
1-for-40 reverse stock split of the Company's outstanding common stock. The
accompanying financial statements have been restated on a retroactive basis for
the effects of the reverse stock split for all periods presented.
During the three months ended March 31, 2004, the Company issued Common Stock
as follows: 525,000 for compensation valued at $252,000 ($0.48 per share) and
1,012,910 shares to consultants for services valued at $532,010 ($0.53 per
share).
In July 2003, the holders of all of the Company's outstanding Series J, K and M
preferred stock agreed to exchange the Preferred Stock and accrued dividends
for 575,000 shares (post-split) of the Company's common stock. The closing took
place simultaneously with the reverse spilt of the Company's common stock at a
rate of 40 for 1, which occurred on February 13, 2004.
NOTE 5-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 75,000
shares of common stock. On September 6, 2002, the 1999 Stock Incentive
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan was amended to allow the granting of options for up to 318,750 and on
January 6, 2004 was amended to allow the granting of options up to 10,000,000
shares of common stock. Under the 1998 Stock Option Plan, options may be
granted to employees and consultants for up to 15,000 common shares
During the three months ended March 31, 2004 the Company granted no stock
options or warrants.
NOTE 6 - SUBSEQUENT EVENT
The Company's subsidiary Oxford Media Corp. has issued a Letter of Intent to
acquire eMod Systems, Inc. The Company is in the process of due diligence
review and the transaction is expected to be finalized in May 2004.
The Company has approved the spin out of Oxford Media Corp. to the shareholders
of record on March 31, 2004. This transaction will finalize in conjunction
with Oxford's acquisition of eMod Systems, Inc.
The company issued 1,000,000 shares of common stock for $250,000 in May 2004.
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, 2003 found in the Company's Form 10-
KSB dated April 14, 2004.
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
During the three months ended March 31, 2004 and 2003, net sales were $0. The
sales result was attributable to the continued refocusing on new business and
discontinuing non-profitable operations.
Operating profit for the three months ended March 31, 2004 was $294,711
compared to an operating loss of $ 1,361,216 for the comparable period of the
prior year. The operating profit was due to a reduction in estimates of accrued
expenses of $1,145,754 from previous periods
Interest expense was $29,654 during the three months ended March 31, 2004,
compared to interest expense of $13,381 for the comparable period of the prior
year.
The Company incurred stock based compensation expense of $252,000 during the
three months ended March 31, 2004, compared to $611,000 for the comparable
period of the prior year. Stock issued for services was $532,010 for the three
months ended March 31, 2004 versus $670,000 for the same period in the previous
year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company had negative working capital of $4,824,103.
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 from other technical or communications
problems, such as power outages, system failures, system crashes, or hacking;
and (viii) the Company may be subjected to unknown risks and uncertainties, or
be unable to assess risks and uncertainties as may exist.
ITEM 3 - CONTROLS AND PROCEDURES:
(a)The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures performed within 90 days
of the filing date of this report, the chief executive officer and the
principal financial officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
(b)Changes in internal controls. The Company made no significant changes in
its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls
by the chief executive officer and principal financial officer.
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company has been 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.
We are involved in one lawsuit in the normal course of business. A collection
action filed on May 9, 2002 wherein Garfinkle Limited Partnership II ("GLP")
alleged breach of a $450,000 promissory note, plus interest. GLP was granted a
summary judgment in April 2004 against the Company. All amounts are fully
recorded in the financial statements.
ITEM 2 - CHANGES IN SECURITIES:
(a)The following securities were issued by the Company during the three
months ended March 31, 2004 without registration under the Securities Act
of 1933:
575,000 shares of the Company's common stock in exchange for all the
outstanding Series J, L and M Preferred Stock and
accrued dividends and 15,000 shares of common stock issued for
services valued at $8,400.
a) Exhibits
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350.
(1) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C filed March 27,2003
(2) Incorporated by reference to the like-numbered exhibit to the Company's Form DEF-14C filed April 8, 2003
(3) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K filed July 30, 2003
(4) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C dated August 1, 2003
(5) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8 filed September 15, 2003
(6) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C dated September 26, 2003
(7) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8 filed February 17, 2004
(8) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-K dated April 16, 2004
(99.5) Incorporated by reference to exhibit 99 to the Company's Form 10-KA filed September 14, 2003.
(99.5) Incorporated by reference to exhibit 99 to the Company's Form 10-K filed April 16, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERGENCE CORPORATION
Date: May 17, 2004 By: /s/ T. Richard Hutt
---------------------------------
T. Richard Hutt
Secretary and Chief Financial
Officer (Duly Authorized Officer and Principal
Financial and Accounting Officer)