UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO.1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
------------------
(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.)
3511 W. Sunflower Ave. # 250
Santa Ana, CA 92704
----------------------------------------
(Address of principal executive offices)
(714) 258-1900
------------------------------------------------
(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: at August 9, 2002:
66,823,929
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE OF CONTENTS
PART I Financial Information1
Item 1. Financial Statements 1
Independent Accountants' Review Report 2
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2002 and 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
PART II Other Information 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Exhibits and Reports 14
Signatures 15
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included in our original Form
10-QSB were not reviewed by independent certified public accountants. However,
since the date of that report, Hansen, Barnett & Maxwell have reviewed our
interim financial statements. Accordingly, we have amended our Form 10-QSB to
reflect changes to our condensed consolidated financial statements as of June
30, 2002 and for the three and six month period ended June 30, 2002 and 2001.
There were no material changes to our condensed consolidated financial
statements. The following is the report of Hansen, Barnett & Maxwell on our
condensed consolidated financial statements.
HANSEN, BARNETT & MAXWELL
A Professional Corporation (801) 532-2200
CERTIFIED PUBLIC ACCOUNTANTS Fax (801) 532-7944
5 Triad Center, Suite 750
MEMBER OF AICPA SEC PRACTICE SECTION 55 North 300 West
MEMBER OF BAKER TILLY INTERNATIONAL Salt Lake City, Utah 84180-1128
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and the Shareholders
eSynch Corporation
We have reviewed the accompanying condensed consolidated balance sheet of eSynch
Corporation and subsidiaries as of June 30, 2002, and the related condensed
consolidated statements of operations for the three-month periods ended June 30,
2002 and 2001 and the condensed consolidated statements of operations and cash
flows for the six-month periods ended June 30, 2002 and 2001. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1, certain conditions exist that raise substantial doubt
regarding the Company's ability to continue as a going concern. The accompanying
condensed consolidated financial statements do not include any adjustments to
the financial statements that might be necessary should the Company be unable to
continue as a going concern for a reasonable period of time.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the year then ended (not presented
herein); and our report dated April 12, 2002 included an explanatory paragraph
describing an uncertainty about the Company's ability to continue as a going
concern for a reasonable period of time. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2001, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
August 22, 2002
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
2002 2001
----------- -----------
ASSETS
Current Assets
Cash $ 6,743 $ 4,783
Accounts receivable, net of $31,500
allowance for bad debt 32,794 41,779
----------- -----------
Total Current Assets 39,537 46,562
Property and equipment, net of accumulated
Depreciation 186,087 363,966
Other assets, net of accumulated amortization 158,578 250,602
----------- -----------
Total Assets $ 384,202 $ 661,130
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable 1,305,801 1,148,646
Accounts payable - related party 100,832 59,359
Accrued liabilities . 2,730,008 2,567,858
Accrued pre-acquisition liability 49,108 60,273
Notes payable - current portion 148,400 77,150
Notes payable - related party 575,000 521,250
Capital lease obligation, current portion 197,107 197,107
Preferred dividends payable 597,586 537,477
----------- -----------
Total Current Liabilities 5,703,842 5,169,120
----------- -----------
Stockholders' Deficit
Preferred Stock - $0.001 par value; 400,000
shares authorized
Redeemable Preferred Stock - Series J, $0.001
par value; 275 shares authorized; 62.5 and
73.5 shares issued and outstanding;
liquidation preference $615,000 and
$735,000 460,000 600,000
Redeemable Preferred Stock - Series K, $0.001
par value; 250 shares authorized; 25.5
and 42.5 shares issued and outstanding;
liquidation preference $255,000 and
$425,000 48,000 390,000
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 196.9 shares issued and
outstanding; liquidation preference
$1,969,000 and $1,969,000 2,616,862 2,616,862
Common stock - $0.001 par value; 250,000,000
shares authorized; 66,323,929 and 36,914,742
shares issued and outstanding 66,324 36,915
Additional paid-in capital 44,781,910 43,717,015
Receivable from shareholder - (10,000)
Accumulated deficit (53,292,736) (51,768,782)
----------- -----------
Total Stockholders' Deficit (5,319,640) (4,507,990)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 384,202 $ 661,130
=========== ===========
See the accompanying notes to the condensed consolidated financial statements.
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues
Revenue $ 42,864 $ 74,977 $ 143,551 $ 203,007
Cost of products sold 6,741 41,650 72,630 65,615
----------- ----------- ----------- -----------
Gross Profit 36,123 33,327 70,921 137,392
----------- ----------- ----------- -----------
Operating and Other Expenses
General and administrative. 704,669 1,034,665 1,137,219 1,724,635
Research and development 15,000 82,720 30,111 199,025
Stock issued for services. 57,600 156,200 143,200 290,890
Stock based compensation 103,950 106,359 149,850 480,258
Amortization of goodwill- 414,346 - 837,535
Interest expense, net 9,840 114,156 10,131 161,328
----------- ----------- ----------- -----------
Total Operating and Other
Expenses 891,059 1,908,445 1,470,511 3,693,671
----------- ----------- ----------- -----------
Loss Before Extraordinary Gain. (854,936) (1,875,118) (1,399,590) (3,556,279)
Extraordinary Gain from Debt
Forgiveness, Net of $0 Tax. - - 8,349 -
----------- ----------- ----------- -----------
Net Loss (854,936) (1,875,118) (1,391,241) (3,556,279)
Preferred Dividend (66,677) (48,286) (132,713) (429,612)
----------- ----------- ----------- -----------
Loss Applicable to Common
Shareholders $(921,613) $(1,923,404) $(1,523,954) $(3,985,891)
=========== =========== =========== ===========
Basic and Diluted Extraordinary
Gain Per Common Share $ - $ - $ - $ -
=========== =========== =========== ===========
Basic and Diluted Loss per
Common Share $ (0.02) $ (0.10) $ (0.03) $ (0.25)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Used in Per
Share Calculations 57,539,054 19,430,726 52,244,567 15,882,593
=========== =========== =========== ===========
See the accompanying notes to the condensed consolidated financial statements.
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Ended June 30,
-------------------------
2002 2001
----------- ----------
Cash Flows from Operating Activities
Net Loss $(1,391,241) $(3,556,279)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 272,273 251,144
Amortization of goodwill - 837,535
Reversal of allowance for bad debt - (306,929)
Write-off of acquired liabilities - (285,656)
Stock issued for services and stock based compensation 293,050 771,148
Stock issued for interest - 59,191
Additional compensation for modification of warrants - 20,344
Changes in operating assets and liabilities:
Accounts receivable 8,986 3,309
Other receivables - 12,962
Prepaid expenses and other current assets - (25,987)
Accounts payable 187,462 298,074
Accrued liabilities 389,900 251,791
----------- -----------
Net Cash Used in Operating Assets (239,570) (1,669,353)
Cash Flows From Investing Activities
Acquisition of property and equipment (2,370) (6,776)
----------- -----------
Net Cash Used in Investing Activities (2,370) (6,776)
Cash Flows From Financing Activities
Stock issued for cash - 1,385,000
Proceeds from issuance of Preferred shares, net of costs - 113,644
Proceeds from the exercise of options and warrants 108,900 86,400
Proceeds from warrants issued in connection with
Series M Preferred - 63,356
Proceeds from shareholder receivable 10,000 -
Proceeds from borrowing 125,000 40,000
Payments on capital lease - (12,271)
----------- ----------
Net Cash Provided by Financing Activities 243,900 1,676,129
Net Increase in Cash 1,960 -
Cash at Beginning of Period 4,783 -
----------- ----------
Cash at End of Period $ 6,743 $ -
=========== ==========
See the accompanying notes to the condensed consolidated financial statements.
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 digital rights management and 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 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 $5,664,305 working
capital deficit at June 30, 2002, has incurred losses from operations and
negative cash flows from operating activities and has accumulated a deficit at
June 30, 2002 in the amount of $53,292,736. 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 during 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 - The Company computes basic and diluted loss per share in
accordance with Statement of Financial Accounting Standards No. 128, ("SFAS
128"), Earnings Per Share. Basic loss per common share is computed by dividing
net loss available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted loss per share is
calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially issuable common shares
would decrease the loss per share. There were 133,245,422 and 21,859,056
potentially issuable common shares outstanding at June 30, 2002 and 2001,
respectively, which were excluded from the calculation of diluted loss per share
as they would have decreased the loss per share.
REVENUE RECOGNITION - The Company recognizes service revenue upon performance of
the service. For software products sold by the Company, revenue is recognized
when delivered except for products sold through distributors for which revenue
is recognized upon receipt of payment.
RECENTLY ENACTED ACCOUNTING STANDARDS - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes
the accounting for goodwill and intangible assets with indefinite lives from an
amortization method to an impairment-only approach. Effective January 1, 2002,
the Company adopted the requirements of SFAS No. 142. However, at December 31,
2001 the Company evaluated its goodwill and recognized impairment for the
remaining carrying value of goodwill. Accordingly, the adoption of SFAS No. 142
had no effect on the Company. Intangible assets other than goodwill consist
primarily of software and related technology and continue to be amortized over
their estimated useful lives. The Company has assessed the software and related
technology and has determined that no indications of impairment exist.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, this statement modifies the criteria for classification
of gains or losses on debt extinguishments such that they are not required to
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company will be required to apply the provisions of this
standard to transactions occurring after December 31, 2002. The adoption of this
standard in 2003 is not expected to have a material effect on the Company's
financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company will
be required to apply this statement prospectively for any exit or disposal
activities initiated after December 31, 2002. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made in the prior-period
condensed consolidated financial statements to conform with the current period
presentation.
NOTE 2 -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 six months
ended June 30, 2002 the Company wrote off $11,165 of these pre-acquisition
liabilities due to the expiration of legal obligations which has been included
in general and administrative expenses.
Included in accrued liabilities at June 30, 2002 and December 31, 2001 are
$1,225,309 and $891,161, respectively, 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 June 30, 2002
the Company has accrued salaries of $587,670, some of these employees have filed
labor actions against the Company for payments of these salaries. Additionally,
during 2001 the Company withheld 401K contributions from employees' wages
however these employee contributions were not contributed to the plan. At June
30, 2002, amounts due to the plan were $42,011.
NOTE 3 -NOTES PAYABLE RELATED PARTY
Notes payable - related party includes $450,000 loaned to the Company by a past
director during the quarter ended June 30, 2000. This obligation is currently
due and payable.
NOTE 4 -COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE - The Company entered into a lease for computer equipment during
the year ended December 31, 2000. The lease is for thirty-six months and
requires a monthly payment of $7,413. During the year ended December 31, 2001
the Company entered into an additional lease for computer equipment. The lease
is for thirty-six months and requires a minimum monthly payment of approximately
$1,171. The leases have been treated as capital leases and the related
obligations have been included in current liabilities.
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. However, as of June, 2001 the Company accrued $133,658.
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. Subsequent to December 31, 2001 the Company entered
into a 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. The Company accrued these
amounts during the year ended December 31, 2001.
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 June 30, 2002, the Company accrued the
$136,058 and expensed the security deposit. Additionally in conjunction with
this event the Company has written off the total net asset value of its
leasehold improvements of $51,174.
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. The company received a settlement agreement
consisting of cancellation of the cross complaint and $52,000 in payments to
eSynch, the total of which are due by October 15th, 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 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 to be owed under a consulting services agreement. During
2001, the Company stipulated a judgment in favor of Kforce.com. The judgment is
fully accrued in the Company's financial statements as of June 30, 2002.
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 June 30, 2002 the Company has
accrued $50,000.
On April 8, 2002 Adams Business Media filed a request for entry of default for
$11,000 for advertising services. The request was not contested. This amount has
been included in the account payable liability account.
On April 17, 2002 a request for Entry of Default was filed by Information
Leasing Corporation for $179,364. The request was not contested. This amount was
fully accrued in Capital Lease Obligations - Current Portion as of June 30,
2002.
On May 21, 2002 Internap filed a request for entry of default with no specified
amount. The request was not contested. As of June 30, 2002 the Company carried a
balance of $17,798 for this vendor in accounts payable.
On May 31, 2002 Reuters Newsmedia filed a request for entry of default with no
specified amount. The Company believes the summons was not properly served and
the request is therefore invalid, However, as of June 30, 2002 the Company
carried a balance of $70,000 for this vendor in accounts payable.
PAYROLL AND PAYROLL TAX LIABILITIES - Included in accrued liabilities at June
30, 2002 and December 31, 2001 are $1,225,309 and $891,161, respectively, 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 June 01, 2002 the Company has accrued salaries of $587,670,
some of these employees have filed labor actions against the Company for
payments of these salaries. Additionally, during 2001 the Company withheld 401K
contributions from employees' wages however these employee contributions were
not contributed to the plan. At June 30, 2002, amounts due to the plan were
$42,011.
NOTE 5 - STOCKHOLDERS' EQUITY
During the six months ended June 30, 2002, the Company issued Common Stock as
follows: 4,040,000 shares for services in the amount of $143,200 which was
charged to stock issued for services expense. Also, 5,000,000 shares were issued
for accrued compensation valued at $137,500.
During the six months ended June 30, 2002, holders of Series J Convertible
Preferred Stock converted a total of 14 preferred shares valued at $140,000 and
received 4,979,187 common shares including accrued dividends in the amount of
$27,604. 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 six months ended June 30, 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 June 30, 2002. The Company does not have an obligation to pay the officers
related to these services.
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 might 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.
During the six months ended June 30, 2002, options to purchase 6,390,000 shares
of common stock were exercised for $108,900 by non-employees.
During the six months ended June 30, 2002 the Company granted options to
purchase a total of 3,000,000 shares of common stock at exercise prices ranging
from $0.01 t0 $0.025 to consultants of the Company. The options vest on the
grant date and expire in 120 days. The options were valued at $148,850 using the
Black-Scholes option-pricing model with the following weighted-average
assumptions; 3.25% risk-free interest rate, 0% expected dividend yield, 147%
volatility and 0.33 years. All amounts were expensed during the six months ended
June 30, 2002
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
During the six months ended June 30, 2002, the Company converted $140,000 of
Series J Preferred Stock, for a net issuance of 4,979,187 shares of common
stock, including interest shares. The Company accrued $23,940 of dividends on
the preferred stock and converted $27,604 of dividend into shares of common
stock. The Company also converted $252,000 of Series K Preferred Stock for a net
issuance of 9,000,000 shares of common stock, including interest shares. The
Company accrued $11,132 of dividends on the preferred stock and converted
$62,696 of preferred dividends into shares of common stock. During the six
months ended June 30, 2002, the Company accrued $97,641 in dividends on its
Series M Preferred Stock.
During the six months ended June 30, 2002 officers of the Company contributed
services valued $90,250 to the Company. Also during the six months ended June
30, 2002, the Company issued 5,000,000 shares for accrued compensation valued at
$137,500.
NOTE 8 -SUBSEQUENT EVENTS
ACQUISITION
As reflected in the 8-K filed July 31, 2002, Pursuant to an Escrow Agreement and
Irrevocable Proxy (the "Agreement") effective as of July 31, 2002, between
eSynch and NACIO SYSTEMS, INC., a California corporation ("Nacio"), eSynch
purchased from Nacio all of the issued and outstanding shares of common stock of
Nacio. Nacio is California based and provides high-reliability hosting,
commercial-grade Internet connectivity and outsourcing solutions and support
services for businesses that rely on the Internet for daily operations. On March
12, 2002, Nacio filed for voluntary Chapter 11 bankruptcy in the United State
Bankruptcy Court, Northern District of California, Santa Rosa Division (the
"Court"), Chapter 11 Case No. 02-10596. The transaction will be consummated upon
completion of Nacio's plan of reorganization. eSynch intends to continue in this
line of business. eSynch will acquire one hundred percent (100%) ownership
interest in Nacio in exchange for 30,000,000 shares of eSynch's common stock.
ISSUANCE OF COMMON STOCK
In August 2002, the Company issued 500,000 shares for services rendered; these
shares were valued at $15,000 or $0.03 per share, which was the market value of
the shares on the date of issuance.
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 June 30, 2002 in the amount of $5,319,640.
RESULTS OF OPERATIONS
During the three and six months ended June 30, 2002, sales were $42,864 and
$143,551 compared to $74,978 and $203,007 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 digital rights management,
video streaming and production services. The cost of products sold in the three
and six months ended June 30, 2002 were $6,741 and $72,630 compared to $41,650
and $65,615 for the comparable periods of the prior year.
Operating losses for the three and six months ended June 30, 2002 were $854,433
and $1,391,241 compared to an operating losses of $1,740,428 and $3,556,279 for
the comparable periods of the prior year. The operating results for the reported
periods reflect management's continued efforts to maximize potential and contain
costs while it repositions the Company for revenue growth.
The Company incurred net interest expense of $9,840 and $10,131 during the three
and six months ended June 30, 2002 compared to $114,156 and $161,328 for the
comparable periods of the prior year.
During the three and six months ended June 30, 2002, the Company spent $15,000
and $30,111 on research and development related to digital rights management
technology and other product initiatives launched and under development in the
periods reported. The Company spent $82,720 and $199,025 in the comparable
periods of the prior year.
The Company incurred stock issued for services expense of $57,600 and $143,200
during the three and six months ended June 30, 2002 compared to $156,200 and
$290,890 for the comparable periods of the prior year.
The Company incurred stock based compensation expense of $103,950 and $149,850
during the three and six months ended June 30, 2002 compared to $106,359 and
$480,258 for the comparable periods of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash of $6,743 of cash and had a deficit in
working capital (current liabilities in excess of current assets) of $5,664,305.
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 3 months ended June 30, 2002, the Company issued
3,390,000 common shares upon the exercise of stock options with net proceeds to
the Company of $33,900. The Company estimates that during the quarter it was
using approximately $135,000 more cash each month than was generated by
operations.
RISK FACTORS
Statements regarding the Company's plans, expectations, beliefs, intentions as
to future sales of software, future capital resources and other forward-looking
statements presented in this Form 10-QSB constitute forward looking information
within the meaning of the Private Securities Litigation Reform Act of 1995.
There can be no assurance that actual results will not differ materially from
expectations. Investors are cautioned not to ascribe undue weight to such
statements. In addition to matters affecting the Company's industry generally,
factors which could cause actual results to differ from expectations include,
but are not limited to (i) sales of the Company's software which may not rise to
the level of profitability; (ii) due to the rapidly changing and intensely
competitive nature of the industry, competitors may introduce new products with
significant competitive advantages over the Company's products; (iii) the
Company may not have sufficient resources, including any future financing it is
able to obtain, to sustain marketing and other operations; (iv) the Company may
be unable to attract and retain sufficient management and technical expertise,
or may lose key employees; (v) the Company's contractual or legal efforts to
protect its confidential information or intellectual property may be inadequate
or ineffective to provide protection, and the Company may be unable financially
to pursue legal remedies that may be available; (vi) the Company's selection,
due diligence, execution, and integration of acquisitions may not prove
effective or reasonable; (vii) the Company may suffer in material respects from
the direct or indirect effects of the "Year 2000" problem on public utilities,
telecommunications networks, customers, vendors, service providers, and the
economy or financial markets generally; (viii) the Company may suffer from other
technical or communications problems, such as power outages, system failures,
system crashes, or hacking; and (ix) the Company may be subjected to unknown
risks and uncertainties, or be unable to assess risks and uncertainties as may
exist.
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
- 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 June, 2001 the Company accrued $133,658.
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. Subsequent to December 31, 2001 the Company entered
into a 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. The Company accrued these
amounts during the year ended December 31, 2001.
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 December 31, 2001, the Company accrued
the $136,058 and expensed the security deposit. Additionally in conjunction with
this event the Company has written off the total net asset value of its
leasehold improvements of $51,174.
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. The company received a settlement agreement
consisting of cancellation of the cross complaint and $52,000 in payments to
eSynch, the total of which are due by October 15th, 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 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 to be owed under a consulting services agreement. During
2001, the Company stipulated a judgment in favor of Kforce.com. The judgment is
fully accrued in the Company's financial statements as of December 31, 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. 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 April 8, 2002 Adams Business Media filed a request for entry of default for
$11,000 for advertising services. The request was not contested. This amount has
been included in the account payable liability account.
On April 17, 2002 a request for Entry of Default was filed by Information
Leasing Corporation for $179,364. The request was not contested. This amount was
fully accrued in Capital Lease Obligations - Current Portion as of March 31,
2002.
On May 21, 2002 Internap filed a request for entry of default with no specified
amount. The request was not contested. As of June 30, 2002 the Company carried a
balance of $17,798 for this vendor in accounts payable.
On May 31, 2002 Reuters Newsmedia filed a request for entry of default with no
specified amount. The Company believes the summons was not properly served and
the request is therefore invalid. As of June 30, 2002 the Company carried a
balance of $70,000 for this vendor in accounts payable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:
(a) The following securities were issued by the Company during the three months
ended June 30, 2001 without registration under the Securities Act of 1933:
(i) 1,920,000 shares of Common Stock for services.
(ii) 3,390,000 shares of Common Stock upon the exercise of stock options.
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 June 30, 2001.
(i) On May 24, 2002 the Company filed the Registration Statement on Form S-8.
(c) 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.
ITEM 3 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Those exhibits previously filed with the Securities and Exchange Commission as
required by Item 601 of Regulation S-K, are incorporated herein by reference in
accordance with the provisions of Rule 12b-32.
Exhibit No. 1
---------------
(b) Reports on Form 8-K
After the period covered by this report the Company filed the following report
on Form 8-K:
On July 31, 2002 the Company filed on Form 8-K reporting that Pursuant to an
Escrow Agreement and Irrevocable Proxy (the "Agreement") effective as of June
24, 2002, between the Registrant and NACIO SYSTEMS, INC., a California
corporation ("Nacio"), the Registrant purchased from Nacio all of the issued and
outstanding shares of common stock of Nacio. Nacio is California based and
provides high-reliability hosting, commercial-grade Internet connectivity and
outsourcing solutions and support services for businesses that rely on the
Internet for daily operations. On March 12, 2002, Nacio filed for voluntary
Chapter 11 bankruptcy in the United State Bankruptcy Court, Northern District of
California, Santa Rosa Division (the "Court"), Chapter 11 Case No. 02-10596. The
transaction will be consummated upon completion of Nacio's plan of
reorganization. The Registrant intends to continue in this line of business. The
Registrant will acquire one hundred percent (100%) ownership interest in Nacio
in exchange for 30,000,000 shares of the Registrant's common stock.
Exhibit No. 2
---------------
(c) Certification
EXHIBIT 2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly report of eSynch Corporation (the
"Company") on Form 10-QSB for the period ending June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), We, Tom
Hemingway and Mark Utzinger, Chief Executive Officer and Vice President, Finance
respectively, of the Company, certify to the best of our knowledge, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Thomas Hemingway
--------------------------------------
Thomas Hemingway, Chief Executive Officer
(Authorized Officer)
Date: August 19, 2002
/s/ Mark Utzinger
--------------------------------------
Mark Utzinger, Vice President - Finance
Date: August 19, 2002
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 19, 2002
eSynch Corporation
By: /S/ Thomas Hemingway
--------------------------------------
Thomas Hemingway, Chief Executive Officer
(Authorized Officer)
By: /S/ Mark Utzinger
--------------------------------------
Mark Utzinger, Vice President - Finance