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U.S. 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 June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from to
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Commission file number 0-2401
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E-SYNC NETWORKS, INC
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(Exact name of small business issuer as specified in its charter)
Delaware 06-0625999
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
35 Nutmeg Drive, Trumbull, CT 06611
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(Address of principal executive offices)
(203) 601-3000
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(Issuer's telephone number)
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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:
Class Outstanding at August 1, 2000
--------------------------- -----------------------------
Common Stock Par Value $.01 7,796,541 shares
Series A Preferred Stock No Par Value 1,000,000 shares
Series B Preferred Stock No Par Value 2,352,727 shares
Transitional Small Business Disclosure Format (Check one): Yes No X
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E-Sync Networks, Inc.
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheet at June 30, 2000 3
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
E-SYNC NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
JUNE 30,
2000
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(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ....................................................... $ 1,399
Accounts receivable, less allowance for doubtful accounts of $124 ............... 2,894
Other current assets ............................................................ 416
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Total current assets ....................................................... 4,709
Equipment, net ....................................................................... 4,113
Goodwill and other intangible assets, net ............................................ 3,964
Other assets ......................................................................... 250
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Total assets ............................................................... $ 13,036
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Term loan payable, current portion .............................................. $ 95
Obligations under capital leases, current portion ............................... 42
Accounts payable ................................................................ 852
Accrued expenses ................................................................ 1,812
Medical benefits obligation, current portion .................................... 30
Deferred revenue ................................................................ 173
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Total current liabilities .................................................. 3,004
Obligations under capital leases, less current portion ............................... 74
Medical benefits obligation, less current portion .................................... 196
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Total liabilities .................................................................... 3,274
Stockholders' Equity:
Convertible preferred stock, par value $.01 per share, 10,000,000 shares authorized
Series A - 1,000,000 shares issued and outstanding .............................. 10
Series B - 2,352,727 shares issued and outstanding .............................. 23
Common stock, stated value $.01 per share, 50,000,000 shares authorized,
7,796,541 shares issued and outstanding .......................................... 78
Additional paid in capital ........................................................... 27,126
Deferred compensation ................................................................ (406)
Accumulated deficit .................................................................. (15,853)
Less treasury stock at cost, 992,565 shares .......................................... (1,216)
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Total stockholders' equity ................................................. 9,762
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Commitments and Contingencies
Total liabilities and stockholders' equity ................................. $ 13,036
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SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
REVENUES:
Managed services .................... $ 837 $ 812 $ 2,028 $ 1,771
Professional services ............... 2,066 988 3,415 1,626
----------- ----------- ----------- -----------
Total revenues ................ 2,903 1,800 5,443 3,397
COST OF SALES:
Managed services .................... 987 760 1,916 1,420
Professional services ............... 1,480 644 2,748 1,072
----------- ----------- ----------- -----------
Total cost of sales ........... 2,467 1,404 4,664 2,492
GROSS MARGIN:
Managed services .................... (150) 52 112 351
Professional services ............... 586 344 667 554
----------- ----------- ----------- -----------
Total gross margin ............ 436 396 779 905
OPERATING EXPENSES:
Sales and marketing ................. 614 559 1,282 1,026
General & administrative ............ 1,284 617 2,048 1,335
Product development ................. 288 218 673 418
Amortization of goodwill and
other intangible assets ......... 228 -- 455 --
Non-cash compensation ............... 459 -- 561 --
----------- ----------- ----------- -----------
Total operating expenses ...... 2,873 1,394 5,019 2,779
Loss from operations ................ (2,437) (998) (4,240) (1,874)
OTHER INCOME (EXPENSE):
Other expense, net .................. (3) (1) (7) (101)
Interest income (expense), net ...... 19 4 117 10
----------- ----------- ----------- -----------
Total other income (expense) .. 16 4 110 (91)
Net loss .................................. $ (2,421) $ (995) $ (4,130) $ (1,965)
=========== =========== =========== ===========
Basic and diluted net loss per share ...... $ (0.36) $ (0.25) $ (0.61) $ (0.49)
=========== =========== =========== ===========
Weighted average number of shares ......... 6,756,832 4,049,628 6,756,832 4,000,045
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(4,130) $(1,965)
Adjustments to reconcile net loss to net cash provided by operating
activities ...........................................................
Depreciation ..................................................... 414 129
Amortization of goodwill and other intangible assets ............. 455 --
Loss on disposal of fixed assets ................................. -- 98
Non-cash compensation ............................................ 561 --
Changes in operating assets and liabilities:
Accounts receivable .......................................... (1,746) (533)
Other current assets ......................................... (141) (118)
Accounts payable and accrued expenses ........................ (401) 778
Other assets ................................................. -- (250)
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Net cash used in operating activities ............................ (4,988) (1,861)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (907) (859)
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Net cash used in investing activities ....................................... (907) (859)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank loan, net ....................................... (16) (6)
Proceeds from exercise of stock options and warrants ............. 174 116
Proceeds from issuance of preferred stock and warrants ........... -- 3,000
Payments under capital lease obligations, net .................... (46) (69)
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Net cash provided by financing activities ................................... 112 3,041
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Net (decrease) increase in cash and cash equivalents ........................ 5,783 321
Cash and cash equivalents at beginning of period ............................ 7,182 797
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Cash and cash equivalents at end of period .................................. $ 1,399 $ 1,118
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................................... $ 14 $ 33
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Non cash investing activities:
Capital Lease obligations incurred for fixed asset additions: .. $ -- $ 74
======= =======
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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E-SYNC NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
1. ORGANIZATION AND BASIS OF ACCOUNTING
The consolidated balance sheet as of June 30, 2000, and the related condensed
consolidated statements of operations for the three and six months ended June
30, 2000 and 1999, and the condensed consolidated statements of cash flows for
the six months ended June 30, 2000 and 1999 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
The condensed consolidated financial statements as of June 30, 2000, and for the
three and six months then ended, should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999. The
accounting policies followed by the Company with respect to the unaudited
interim consolidated financial statements are consistent with those stated in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
2. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments including money market funds and certificates of deposit with
original maturities of three months or less to be cash equivalents.
3. EARNINGS PER SHARE
For the periods presented in the condensed consolidated statement of operations,
the calculations of basic EPS and EPS assuming dilution vary in that the
weighted average shares outstanding assuming dilution include the incremental
effect of stock options.
Options to purchase 2,230,298 shares and 685,300 shares of common stock at
prices ranging from $0.01 to $15.00 were outstanding at June 30, 2000 and 1999,
respectively. Options to purchase 1,470,376 shares of common stock at prices
ranging from $0.01 to $15.00 were issued during the three months ended June 30,
2000.
In the second quarter of 2000, the Company issued an additional 80,000 shares of
Series B Convertible Preferred Stock in connection with the fourth quarter of
1999 offering of shares of Series B Convertible Preferred Stock at $4.40 per
share to accredited investors. The proceeds of $351,010 were received during the
fourth quarter of 1999 with respect to such shares. At June 30, 2000, 3,352,727
convertible preferred shares were outstanding. All the stock options and
convertible preferred shares were excluded from the calculation of diluted EPS
for the three and six month periods ended June 30, 2000 and 1999, because the
Company experienced a loss for those periods and inclusion of such securities
would have had an anti-dilutive effect.
4. STOCK OPTIONS
In December 1999, the Company issued options to purchase 40,000 shares of common
stock, at an exercise price of $4.20 per share, to a consultant in connection
with acting as a technical advisor for the Company's U.K. operations for three
years. The Company issued an additional 35,000 options to this consultant, at
exercise prices ranging from $6.375 to $11.125, in the quarter ended June 30,
2000. These options are exercisable for a period of ten years. Of the additional
options, 15,000 vest immediately and 20,000 vest ratably over three years. Also
during the quarter ended June 30, 2000, the Company issued options to purchase
4,000 shares of common stock to a consultant in exchange for providing certain
investor relation services over a nine month period. These options have an
exercise price of $15.00 are exercisable for a period of ten years and vest
ratably over the consultants period of service. The Company accounts for these
options in accordance with Emerging Issue Task Force Abstract No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services." Pursuant to EITF
96-18, the Company valued the options using a Black-Scholes pricing model. At
June 30, 2000, the market value of $468,000 ascribed to the options has been
recorded as deferred compensation. This cost is being amortized over the
applicable vesting periods. The value ascribed to these options is adjusted at
each intervening balance sheet date to the then-current market value. To date,
the Company has amortized $110,000 of the deferred compensation, $47,000 and
$96,000 has been amortized during the three and six month periods ended June 30,
2000, respectively. Such amounts are included in non-cash compensation in the
statements of operations.
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Also during the three months ended June 30, 2000 the Company issued fully vested
options to purchase 12,000 shares of common stock, at an exercise price of $0.01
per share, to a consultant in exchange for providing various operational advice
for a six month period. These options are exercisable for a period of ten years.
At June 30, 2000, the market value, using a Black-Scholes pricing model, of
$88,000 ascribed to the options has been recorded as deferred compensation. The
cost is being amortized over the applicable service period. The Company has
amortized approximately $40,000 during the three and six month periods ended
June 30, 2000. Such amounts are included in non-cash compensation in the
statements of operations.
During May 2000, the Company issued fully vested options to purchase 50,000
shares of common stock, at an exercise price of $4.20 per share, to a consultant
for services previously performed. These options are exercisable for a period of
ten years. The Company valued these options using the Black-Scholes pricing
model. For the three and six month periods ended June 30, 2000, the $318,000
ascribed to these options is in non-cash compensation in the statements of
operations.
During the three months ended June 30, 2000 the Company granted options to
purchase approximately 534,000 shares of common stock to employees at prices
ranging from $4.50 to $6.38. These options are exercisable for a ten year period
and vest over three years. In addition the Company granted options to purchase
752,000 shares of common stock, at an exercise price of $7.88, to the Company's
CEO. These options are exercisable for a period of ten years. Approximately
406,000 shares vest over three years, the balance of approximately 346,000
shares contain vesting provisions that are contingent upon the price of the
Company's stock achieving certain predefined levels. If the stock targets are
met, the Company will record a non-cash compensation charge based on the value
of the Company's stock at that time.
Options to purchase 76,000 and 189,000 shares of common stock were exercised
during the three and six months ended June 30, 2000, respectively. The Company
received proceeds of approximately $46,000 and $174,000, respectively upon the
exercise of such options.
5. COMMITMENTS AND CONTINGENCIES
The Company had a Loan and Security Agreement with a commercial bank for a line
of credit of $750,000 for working capital needs plus an additional term loan of
up to $100,000 for purchases of equipment. The working capital line of credit
was repaid and terminated in the fourth quarter of 1999.
Advances outstanding at December 31, 1998 were converted to a term loan. The
term of the loan is for thirty months payable in equal monthly principal
payments of one-thirtieth of the outstanding balance at December 31, 1998, plus
interest payable monthly commencing January 31, 1999, at one-half percent above
prime on the outstanding principal balance. The related term loan Security
Agreement provides that the loans be secured by the Company's existing and
future assets. Covenants under the Loan and Security Agreement provide that the
Company's current ratio cannot be lower than 1.2, tangible net worth be at least
$1,000,000 and the Company must achieve $100,000 net earnings for each six-month
period on a rolling six-month basis. The Company has obtained a waiver of the
net earnings covenant as of June 30, 2000. The amount outstanding under the term
loan at June 30, 2000 was approximately $12,000.
The Company's subsidiary, Braincraft Learning Technologies Inc., also has an
outstanding line of credit with a commercial bank of $100,000 bearing interest
at 2% above the bank's prime rate. The amount outstanding under the line of
credit at June 30, 2000 was approximately $84,000.
The Company's primary location is in a leased facility in Trumbull, Connecticut.
The lease obligates the Company to base rent payments commencing January 1, 2000
of $267,215 per year in years 1-5, $308,325 per year in years 6-10 and $349,435
per year in years 11-15. The Company is recording the rent expense ratably over
the lease term.
Annual employment agreements are in effect with various officers of the Company
which call for upon termination, in certain circumstances, severance payments to
be made to the officer. Assuming that the severance arrangements under such
agreements become operative, the minimum aggregate payoffs under such contracts
would approximate $265,800.
The Company is involved in claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material effect on the Company's financial
position, results of operations or liquidity.
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6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137, which deferred the effective date of SFAS No. 133. SFAS No.
137 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company has not yet analyzed the impact of this pronouncement on
its financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101") which summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will be required to
adopt the accounting provisions of SAB No. 101, no later than the fourth quarter
of 2000. The Company does not believe that the implementation of SAB No. 101
will have a significant effect on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For Certain
Transactions Involving Stock Compensation" ("FIN No. 44") provides guidance for
applying APB Opinion No. 25, "Accounting For Stock Issued To Employees." With
certain exceptions, FIN No. 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1, 2000. The Company does not believe
that the implementation of FIN No. 44 will have significant effect on its
results of operations.
7. BUSINESS SEGMENT INFORMATION
Serving its Fortune 1000 customer base, the Company offers secure online
messaging, directory and fax services, Web application development services,
hosted communications and infrastructure support solutions that link business
partners via the Web. The operations of the Company are conducted through two
business segments primarily within the continental United States and the United
Kingdom. Descriptions of the business segments' services and operations are as
follows:
MANAGED SERVICES
Managed Services provides customers with hosted global messaging services for
e-mail, fax, directory services, and remote management services supported by a
Company owned and operated, 24-hours-a-day, 7-days-a-week data center and help
desk that assures reliable and safe electronic communications. Messaging
services includes (i) TotalMail that provides user access to e-mail, shared
calendar scheduling, distribution lists and folders, and (ii) Hosting services,
whereby the Company will maintain customers' applications remotely at one of its
sites (e.g., house a customer's mail servers and run the enterprise e-mail
function). Fax services includes (i) Application to Fax which simultaneously
delivers computer generated files from mainframe or PC-based applications to one
or many facsimile devices worldwide, (ii) Mailfax, which sends faxes and
attachments via e-mail, and (iii) Inbound Fax, which allows receipt of inbound
faxes at the desktop via e-mail. Directory Services allows customers to
outsource the management of their corporate electronic data directories via the
Company's custom-designed directory solutions products. The Company also offers
secure e-mail and fax messaging services through public key infrastructure
(PKI), digital certificates, and SmartCard authentication products.
PROFESSIONAL SERVICES Professional Services is a consulting systems design and
integration services organization that provides Web application design and
development and network infrastructure solutions. As a Microsoft Solution
Provider Partner, certified design and system engineers and Microsoft product
specialists assist customers in designing and developing migration strategies to
Microsoft BackOffice(R) products. They provide assistance for Windows NT(R),
Exchange(R), Systems Management Server(R) (SNS), SNA Server(R), Windows 2000 and
internet/intranet deployment through Internet Information Server(R) (IIS). The
Company's system engineers also provide design and integration services, whereby
they assess customers' information, messaging, and connectivity needs, evaluate
existing infrastructure architecture, define and test migration processes, and
prepare enterprise-wide implementation plans. They also develop tools, utilities
and conversion software for directory support as well as design workflow
automation solutions. Through its Braincraft subsidiary, the Company offers web
site design and application development services.
Identifiable assets by segment are those assets that are used in the operations
of each segment as well as the accounts receivable generated by each segment.
Corporate assets consist primarily of cash and cash equivalents, short term
investments, prepaid expenses, and corporate furniture, fixtures, and equipment.
Capital expenditures are comprised primarily of additions to data processing
equipment, furniture and fixtures, and leasehold improvements.
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The following table presents the Company's business segment financial
information, in thousands:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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2000 1999 2000 1999
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REVENUE:
Managed services $ 837 $ 812 $ 2,028 $ 1,771
Professional services 2,066 988 3,415 1,626
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Total revenues $ 2,903 $ 1,800 $ 5,443 $ 3,397
===================================================================
OPERATING LOSS:
Managed services $ (978) $ (576) $(1,757) $(1,097)
Professional services (1,459) (422) (2,483) (777)
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Operating loss from segments (2,437) (998) (4,240) (1,874)
Corporate expenses, net 3 1 7 101
Interest expense (income), net (19) (4) (117) (10)
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Net loss $(2,421) $ (995) $(4,130) $(1,965)
===================================================================
DEPRECIATION AND AMORTIZATION:
Managed services $ 92 $ 39 $ 162 $ 84
Professional services 19 6 42 12
Corporate 338 13 665 33
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Total depreciation and amortization $ 449 $ 58 $ 869 $ 129
===================================================================
CAPITAL EXPENDITURES:
Managed services $ 105 $ 260 $ 246 $ 311
Professional services 4 55 4 55
Corporate 34 467 656 493
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Total capital expenditures $ 144 $ 782 $ 907 $ 859
===================================================================
IDENTIFIABLE ASSETS AT: JUNE 30, 2000
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Managed services $ 2,879
Professional services 1,174
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Total assets for reportable segments 4,053
Corporate 8,983
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Total assets $13,036
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
E-Sync is a global provider of managed business-to-business e-commerce
applications and solutions that help medium and large businesses, including
Fortune 1000 companies, reinvent their businesses, interact more efficiently
with business partners, and web-enable their existing infrastructure. Through
these offerings, E-Sync provides comprehensive capabilities that provide secure
communication, information exchange and web-based transactions. The Company has
historically provided reliable, high-quality messaging and hosting services to
its customers, which are critical components that can serve as the backbone of
supply chain management solutions. In addition, the Company offers professional
services, primarily to large corporations, including systems integration,
technology planning and information technology (IT) support.
Within the last year, the primary focus of the Company has been re-directed
toward offering powerful supply chain management solutions, consisting of secure
links between buyers and suppliers of goods and services, to its target market.
The Company's implementation strategy being deployed for the development and
delivery of these offerings combines XML-based, open standards with security
embedded directly into the applications, a predominantly modular architectural
design and core messaging capabilities, to create end-to-end solutions allowing
the web-enablement of legacy systems. Deep and trustworthy relationships with
the Company's existing Fortune 1000 customer base will provide the Company with
opportunities to migrate customers from current activities to higher-value web
supply chain offerings.
In addition to the Company's new strategy to develop and provide web supply
chain solutions, the Company will continue to offer its existing services on a
modular basis to customers. These services include web design consulting, secure
online messaging, outsourced e-mail services, directory and fax services, hosted
communications, network design and integration, messaging integration and
message platform migration.
The Company's revenues consist of fees for Professional Services provided to its
customers in the form of web development, messaging infrastructure and other
consulting services, and Managed Services in the form of hosting and messaging
services. Professional Services, including services provided by the Company's
subsidiary, Braincraft Learning Technologies, Inc. ("Braincraft"), are billed on
a fixed fee project or time and material basis with contracts typically ranging
from 1 to 12 months. Managed Services consist of both fixed charges, billed in
advance, and usage based charges billed at the end of the month. Contracts for
Managed Services are typically for a one-year period. The Company recognizes
revenue in the period the services are performed.
In December 1999, the Company issued options to purchase 40,000 shares of common
stock, at an exercise price of $4.20 per share, to a consultant in connection
with acting as a technical advisor for the Company's U.K. operations for three
years. The Company issued an additional 35,000 options to this consultant, at
exercise prices ranging from $6.375 to $11.125, in the quarter ended June 30,
2000. These options are exercisable for a period of ten years. Of the additional
options, 15,000 vest immediately and 20,000 vest ratably over three years.
Also during the quarter ended June 30, 2000, the Company issued options to
purchase 4,000 shares of common stock to a consultant in exchange for providing
certain investor relation services over a nine month period. These options have
an exercise price of $15.00, are exercisable for a period of ten years and vest
ratably over the consultants period of service. The Company accounts for these
options in accordance with Emerging Issue Task Force Abstract No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services." Pursuant to EITF
96-18, the Company valued the options using a Black-Scholes pricing model. At
June 30, 2000, the market value of $468,000 ascribed to the options has been
recorded as deferred compensation. This cost is being amortized over the
applicable vesting periods. The value ascribed to these options is adjusted at
each intervening balance sheet date to the then-current market value. To date,
the Company has amortized $110,000 of the deferred compensation, $47,000 and
$96,000 has been amortized during the three and six month periods ended June 30,
2000, respectively. Such amounts are included in non-cash compensation in the
statements of operations.
Also during the three months ended June 30, 2000 the Company issued fully vested
options to purchase 12,000 shares of common stock, at an exercise price of $0.01
per share, to a consultant in exchange for providing various operational advice
for a six month period. These options are exercisable for a period of ten years.
At June 30, 2000, the market value, using a Black-Scholes pricing model, of
$88,000 ascribed to the options has been recorded as deferred compensation. The
cost is being amortized over the applicable service period. The Company has
amortized approximately $40,000 during the three and six month periods ended
June 30, 2000. Such amounts are included in non-cash compensation in the
statements of operations.
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During May 2000, the Company issued fully vested options to purchase 50,000
shares of common stock, at an exercise price of $4.20 per share, to a consultant
for services previously performed. These options are exercisable for a period of
ten years. The Company valued these options using the Black-Scholes pricing
model. For the three and six month periods ended June 30, 2000, the $318,000
ascribed to these options is in non-cash compensation in the statements of
operations.
During the three months ended June 30, 2000 the Company granted options to
purchase approximately 534,000 shares of common stock to employees at prices
ranging from $4.50 to $6.38. These options are exercisable for a ten year period
and vest over three years. In addition the Company granted options to purchase
752,000 shares of common stock, at an exercise price of $7.88, to the Company's
CEO. These options are exercisable for a period of ten years. Approximately
406,000 shares vest over three years, the balance of approximately 346,000
shares contain vesting provisions that are contingent upon the price of the
Company's stock achieving certain predefined levels. If the stock targets are
met, the Company will record a non-cash compensation charge based on the value
of the Company's stock at that time.
In 1999, the Company issued 75,000 non-refundable shares of its common stock to
an advisor for services to be performed over two years. The $422,000 value
ascribed to the 75,000 shares is recorded as an other asset and is being ratably
amortized over two years, with $52,700 and $105,400 of such amortization
expensed in the three and six months ended June 30, 2000,respectively.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Managed Services revenues increased by 3.1% and Professional Services revenues
increased by 109.0% in the three months ended June 30, 2000. The increase in
Professional Services revenue is primarily due to the acquisition and
consolidation of Braincraft in November of 1999. Net of the effect of the
acquisition of Braincraft, Professional Services revenue increased by 18.9% over
the prior period, principally due to the resale of software related to
professional services engagements.
Gross margin decreased to 15.0% in the three months ended June 30, 2000,
compared to 22.0% for the three months ended June 30, 1999. Managed Services
recognized a negative gross margin of (17.9%) or ($150,000) for three months
ended June 30, 2000 compared to a positive gross margin of 6.4% or $52,000 for
the three months ended June 30, 1999. Gross margin for Professional Services was
28.2% or $586,000 for three months ended June 30, 2000 compared to 34.8% or
$344,000 for the three months ended June 30, 1999. The decrease in both Managed
and Professional services is mainly due to increased costs associated with
expanded capacity to support future growth in new products. The increased costs
are associated with salaries, recruiting and training of additional personnel,
utilities and depreciation.
Sales and marketing expenses increased $55,000, or 9.8%, in the current quarter,
and as a percent of total revenues decreased from 31.1% in the three months
ended June 30, 1999, to 21.2% for the three months ended June 30, 2000. The
increase is a result of the hiring of additional sales personnel.
The Company's general and administrative expenses increased $667,000 or 108.1%
for the three months ended June 30, 2000 compared to the three months ended June
30, 1999. The increase in these costs is primarily attributable to increases in
general, sales and operations management personnel and increased professional
and consulting fees.
Research and development expenditures were $288,000 and $218,000 for the three
months ended June 30, 2000, and 1999, respectively. The increase in expense for
the current quarter was mainly due to the increased use of outside consultants.
To date, all development costs have been expensed in the period incurred.
Amortization of goodwill and other intangible assets of $228,000 is principally
the amortization of goodwill recorded in connection with the acquisition of
Braincraft in November 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Managed Services revenues increased by 14.5% and Professional Services revenues
increased by 110.0% for the six months ended June 30, 2000. Managed Services
revenues increased primarily due to the initiation of the first TotalChain(SM)
pilot migration. The increase in Professional Services revenue is primarily due
to the acquisition and consolidation of Braincraft in November of 1999. Net of
the effect of the acquisition of Braincraft, Professional Services revenue
increased by 27.7% over the prior period, principally due to an increase in the
volume of professional services provided.
Gross margin decreased to 14.3% for the six months ended June 30, 2000, compared
to 26.6% for the six months ended June 30, 1999. Gross margin for Managed
Services was 5.5% or $112,000 for the six months ended June 30, 2000,
compared to 19.8% or $351,000 for the six months ended June 30, 1999. Gross
margin for Professional Services was 19.5% or $667,000 for the six
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months ended June 30, 2000 compared to 34.1% or $554,000 for the six months
ended June 30, 1999. The decreases are mainly due to expenses incurred in
anticipation of future growth principally increased costs associated with
expanded data center capacity, increased salaries and costs associated with the
recruiting and training of additional personnel.
Sales and marketing expenses increased $256,000, or 25.0%, for the six months
ended June 30, 2000, and as a percent of total revenues decreased from 30.2% in
the six months ended June 30, 1999, to 23.5% for the six months ended June 30,
2000. The increase in these expenses is a result of the hiring of additional
sales personnel.
The Company's general and administrative expenses were $2,048,000 or 53.4%
higher for the six months ended June 30, 2000, then for the six months ended
June 30, 1999. As a percent of total revenues, general & administrative expenses
decreased from 39.3% to 37.6% over the periods. The increase in these costs is
primarily attributable to increases in general, sales and operations management
personnel and increased professional and consulting fees.
Research and development expenditures were $673,000 and $418,000 for the six
months ended June 30, 2000, and 1999, respectively. The increase in these
expenses for the period was mainly due to the increase in the number of research
and development personnel as well as the increased use of outside consultants.
To date, all development costs have been expensed in the period incurred.
Amortization of goodwill and other intangible assets of $455,000 is principally
the amortization of goodwill recorded in connection with the acquisition of
Braincraft Learning Technologies, Inc. in November, 1999.
Interest income, net of interest expense, was $117,000 for the six months ended
June 30, 2000, as compared to $10,000 in the six months ended June 30, 1999. The
change was mainly due to the investment of funds received through the issuance
of preferred stock prior to the use of such funds.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased during the six months ended June 30, 2000,
by $5,783,000 from $7,182,000 at December 31, 1999 to $1,399,000 at June 30,
2000. The Company invested approximately $907,000 in capital purchases related
to the Company's headquarters and data center. Operations of the Company used
approximately $4,988,000. At June 30, 2000, the Company had working capital of
approximately $1,705,000.
Net cash used in operating activities was $4,988,000 for the six months ended
June 30, 2000. Net cash flows used in operating activities in the period
principally reflects net losses of $4,130,000, adjusted for non-cash charges of
$1,430,000, an increase of $1,746,000 in accounts receivable, an increase of
$141,000 in other current assets and a decrease of $401,000 in accounts payable.
Net cash used in investing activities was $907,000 for the six months ended June
30, 2000. Cash used in investing activities primarily reflects purchases of
property and equipment for the expansion of data center capacity, purchases of
equipment for new employees, and the completion of leasehold improvements
related to the Company's headquarters and data center. Management expects that
the Company's capital expenditures will continue to be substantial in the
future. During this period, management expects to fund capital expenditures
either through the use of working capital or with capital leases.
During the second quarter ended June 30, 2000 the Company settled outstanding
litigation with System Research Applications Corporation ("SRA"). The litigation
related to services provided by SRA to the Company in connection with the
migration of the Company's data center to a new location. The Company and SRA
reached an agreement whereby the Company would pay $200,000, which was accrued,
to SRA for the work performed. The amount due was paid in two equal installments
of $100,000 each during June and July 2000.
In the second quarter of 2000, the Company issued an additional 80,000 shares of
Series B Convertible Preferred Stock in connection with the fourth quarter of
1999 offering of shares of Series B Convertible Preferred Stock at $4.40 per
share to accredited investors. The proceeds of $351,010 were received during the
fourth quarter of 1999 with respect to such shares.
As of June 30, 2000 the Company had $1,399,000 of cash and cash equivalents. The
Company expects to experience significant growth in its operating expenses,
particularly research and development and sales and marketing expenses for the
foreseeable future in order to execute its business plan. As a result, the
Company anticipates that such operating expenses, as well as planned capital
expenditures, will constitute a material use of cash resources. In addition, the
Company may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or product lines. The Company is
currently pursuing additional sources of equity or debt financing to meet
anticipated cash requirements. The Company may not be able to raise funds on
acceptable terms or at all.
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MARKET FOR REGISTRANT'S COMMON STOCK
Beginning on June 1, 2000 the Company's common stock, $0.01 par value ("Common
Stock") began trading on the NASDAQ SmallCap Market under the ticker symbol
"ESNI". The stock had traded previously on the OTC Bulletin Board System.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. Subsequently, the FASB
issued SFAS No. 137, which deferred the effective date of SFAS No. 133. SFAS No.
137 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company has not yet analyzed the impact of this pronouncement on
its financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101") which summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will be required to
adopt the accounting provisions of SAB No. 101, no later than the fourth quarter
of 2000. The Company does not believe that the implementation of SAB No. 101
will have a significant effect on its results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting For Certain
Transactions Involving Stock Compensation" ("FIN No.44") provides guidance for
applying APB Opinion No. 25, "Accounting For Stock Issued To Employees." With
certain exceptions, FIN No. 44 applies prospectively to new awards, exchanges of
awards in a business combination, modifications to outstanding awards and
changes in grantee status on or after July 1, 2000. The Company does not believe
that the implementation of FIN No. 44 will have significant effect on its
results of operations.
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PART II. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
The statements in this quarterly report on Form 10-QSB that are not historical
fact constitute "forward-looking statements." Said forward-looking statements
involve risks and uncertainties that may cause the actual results, performance
or achievements of the Company and its subsidiaries to be materially different
from any future results, performance or achievements, express or implied by such
forward-looking statements. These forward-looking statements are identified by
their use of forms of such terms and phrases as "expects", "intends", "goals",
"estimates", "projects", "plans", "anticipates", "should", "future", "believes",
and "scheduled".
The variables which may cause differences include, but are not limited to, the
following general economic and business conditions: competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and exceptions of the Company will be achieved.
In addition, there can be no assurance that the Company will be successful in
further developing any of its new products, that the Company will not experience
difficulties that could delay or prevent successful development, introduction
and sales of these products, or that its new products and enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Although the Company expects to derive a substantial portion of its
revenue from the TotalChain(SM) offerings in the future, it is still developing
its pricing, expense and revenue model for the services associated with such
offerings. If the Company is unable to successfully establish a pricing, expense
and revenue model acceptable to its customers, the TotalChain(SM) offerings may
not be commercially successful. Management cannot be sure that existing and
future development efforts will be completed within the anticipated schedules or
that, if completed, they will have the features or quality necessary to make
them successful in the marketplace. Further, despite testing by the Company and
by current and potential customers, errors could be found in the Company's
products. E-Sync may not be able to successfully correct these errors in a
timely and cost effective manner. If the Company is not able to develop new
products or enhancements to existing products or corrections on a timely and
cost-effective basis, or if these new products or enhancements do not have the
features or quality necessary to make them successful in the marketplace, the
Company's business will be seriously harmed.
Management expects that most of the Company's enhancements to existing and
future products will be developed internally. However, the Company currently
licenses certain externally developed technologies and will continue to evaluate
externally developed technologies to integrate with its solutions. These
externally developed technologies, if suffering from defects, quality issues or
the lack of product functionality required to make the Company's solutions
successful in the marketplace, may seriously impact and harm the Company's
business. In addition, the Company must attract and retain highly qualified
employees to further its research and development efforts. The Company's
business could be seriously harmed if it is not able to hire and retain a
sufficient number of these individuals.
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Item 1. Legal Proceedings
During the second quarter ended June 30, 2000 the Company settled outstanding
litigation with System Research Applications Corporation ('SRA"). The litigation
related to services provided by SRA to the Company in connection with the
migration of the Company's data center to a new location. The Company and SRA
reached an agreement whereby the Company would pay $200,000, which was accrued,
to SRA for the work performed. The amount due was paid in two equal installments
of $100,000 each during June and July 2000.
Item 2. Changes in Securities and Use of Proceeds
In the second quarter of 2000, the Company issued an additional 80,000 shares of
Series B Convertible Preferred Stock in connection with the fourth quarter of
1999 offering of shares of Series B Convertible Preferred Stock at $4.40 per
share to accredited investors. The Company received proceeds of $351,010 during
the fourth quarter of 1999 with respect to such shares. The Company believes
that such issuances were exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), by virtue of the
exemptions set forth in Sections 4(2) thereof and Rule 506 of Regulation D
thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 24, 2000. Of the
6,730,976 Common Shares, 1,000,000 Series A Preferred Shares, and 1,590,909
Series B Preferred Shares outstanding, as of the record date 5,674,673 Common
Shares, 1,000,000 Series A Preferred Shares and 999,180 Series B Preferred
Shares, respectively, were present or represented by proxy. The following
actions were voted upon at this meeting:
(a) To elect the following directors to serve until the next Annual
Meeting of Shareholders and until their successors are elected and have
qualified.
Number of votes
Nominee Number of Votes For Against/Withheld Abstentions Broker Non Votes
------- ------------------- ---------------- ----------- ----------------
Peter J. Boni 8,231,781 10,249 -- --
Bruce H. Buckland 8,231,781 10,249 -- --
Nathan Gantcher 8,231,781 10,249 -- --
Stephen D. Grubbs 8,231,781 10,249 -- --
John C. Maxwell III 8,231,781 10,249 -- --
Jonathan Rubin 8,231,781 10,249 -- --
Jean-Pascal Tranie 8,231,781 10,249 -- --
(b) To approve amendments to the Corporation's 1999 Long-Term Incentive
Plan to (i) increase the number of shares of Common Stock available for awards
under the Plan from 750,000 shares to 4,500,000 shares, (ii) increase the
maximum number of shares of Common Stock subject to an award under the Plan to
any individual employee during any calendar year from 180,000 to 800,000, (iii)
provide for annual grants to non-employee directors of options to purchase
20,000 shares of Common Stock, and (iv) clarify that in the event of a change in
control of the Corporation, options to acquire Common Stock with a fair market
value in excess of $100,000 may be accelerated. The vote on such action was
6,052,621 votes in favor, 42,748 votes against, 755 votes abstaining and
2,145,906 broker non-votes.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
27 Financial Data Schedule (filed separately herewith)
(b) Reports on Form 8-K
None
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SIGNATURE
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.
Date: August 14, 2000 E-SYNC NETWORKS, INC.
/s/ Frank J. Connolly
---------------------------------------
Frank J. Connolly, Jr.
Chief Financial Officer
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