1
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 September 30, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT

For the transition period from to
---------------------- ------------------------

Commission file number 0-2401
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E-SYNC NETWORKS, INC
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)

Delaware 06-0625999
- ------------------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

35 Nutmeg Drive, Trumbull, CT 06611
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(203) 601-3000
- -------------------------------------------------------------------------------
(Issuer's telephone number)

- -------------------------------------------------------------------------------
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 November 10, 2000
--------------------------- --------------------------------
Common Stock Par Value $.01 6,804,809 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.
--------

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited):

Consolidated Balance Sheet at September 30, 2000 3

Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999 4

Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 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 2. Changes in securities and use of Proceeds 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 SHEET
(in thousands, except share and per share data)

SEPTEMBER 30,
2000
----
(unaudited)

ASSETS

Current Assets:
Cash and cash equivalents $ 1,144
Accounts receivable, less allowance for doubtful accounts of $124 1,959
Other current assets 314
--------

Total current assets 3,417

Equipment, net 3,969
Goodwill and other intangible assets, net 3,736
Other assets 250
--------

Total assets $ 11,372
========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Notes payable $ 1,136
Obligations under capital leases, current portion 27
Accounts payable 783
Accrued expenses 1,603
Medical benefits obligation, current portion 31
Deferred revenue 405
--------
Total current liabilities 3,985

Obligations under capital leases, less current portion 72
Medical benefits obligation, less current portion 222
--------
Total liabilities 4,279

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,
7,797,374 shares issued 78
Additional paid in capital 26,972
Deferred compensation (7)
Accumulated deficit (18,767)
Less treasury stock at cost, 992,565 shares (1,216)
--------
Total stockholders' equity 7,093
--------
Commitments and Contingencies

Total liabilities and stockholders' equity $ 11,372
========

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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)

REVENUES:
Managed services $ 887 $ 757 $ 2,915 $ 2,528
Professional services 1,054 1,002 4,469 2,628
----------- ----------- ----------- -----------
Total revenues 1,941 1,759 7,384 5,156

COST OF SALES:
Managed services 1,149 1,037 3,065 2,457
Professional services 1,554 873 4,302 1,945
----------- ----------- ----------- -----------
Total cost of sales 2,703 1,910 7,367 4,402

GROSS MARGIN:
Managed services (262) (280) (150) 71
Professional services (500) 129 167 683
----------- ----------- ----------- -----------
Total gross margin (762) (151) 17 754

OPERATING EXPENSES:
Sales and marketing 562 728 1,844 1,754
General and administrative 966 1,260 3,014 2,595
Product development 296 375 969 793
Amortization of goodwill and
other intangible assets 228 -- 683 --
Non-cash compensation 70 -- 631 --
----------- ----------- ----------- -----------
Total operating expenses 2,122 2,363 7,141 5,142

Loss from operations (2,884) (2,514) (7,124) (4,388)

OTHER INCOME (EXPENSE):
Other expense, net -- (1) (7) (102)

Interest income (expense), net (30) (12) 87 (2)
----------- ----------- ----------- -----------

Total other income (expense) (30) (13) 80 (104)

Net loss $ (2,914) $ (2,527) $ (7,044) $ (4,492)
=========== =========== =========== ===========

Basic and diluted net loss per share $ (0.43) $ (0.52) $ (1.04) $ (1.05)
=========== =========== =========== ===========

Weighted average number of shares 6,804,430 4,834,499 6,750,962 4,278,196
=========== =========== =========== ===========

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)

NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,044) $(4,492)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 633 293
Amortization of goodwill and other intangible assets 683 --
Loss on disposal of fixed assets -- 99
Amortization loan discount 17 --
Non-cash compensation 631 --
Changes in operating assets and liabilities:
Accounts receivable (811) (373)
Other current assets (90) (86)
Accounts payable and accrued expenses (421) 2,124
Other assets -- (250)
------- -------
Net cash used in operating activities (6,402) (2,685)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (981) (2,756)
------- -------
Net cash used in investing activities (981) (2,756)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loan 271 740
Proceeds from notes payable 1,000 --
Payments on loans payable (40) --
Proceeds from exercise of stock options and warrants 177 116
Proceeds from issuance of preferred stock and warrants -- 6,238
Payments under capital lease obligations, net (63) (110)
------- -------
Net cash provided by financing activities 1,345 6,984
------- -------

Net (decrease) increase in cash and cash equivalents (6,038) 1,543

Cash and cash equivalents at beginning of period 7,182 797
------- -------

Cash and cash equivalents at end of period $ 1,144 $ 2,340
======= =======

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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

1. ORGANIZATION AND BASIS OF ACCOUNTING

The consolidated balance sheet as of September 30, 2000, and the related
condensed consolidated statements of operations for the three and nine months
ended September 30, 2000 and 1999, and the condensed consolidated statements of
cash flows for the nine months ended September 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 the full year.

The condensed consolidated financial statements as of September 30, 2000, and
for the three and nine 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

Options to purchase 2,021,443 shares and 398,500 shares of common stock at
prices ranging from $0.01 to $15.00 were outstanding at September 30, 2000 and
1999, respectively. 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 September 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 nine month
periods ended September 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. During the quarter ended September 30, 2000 the consulting agreement was
terminated and the options were cancelled. As a result, the company reversed
approximately $337,000 of deferred compensation. During 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 consultant's 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 values the options using a Black-Scholes
pricing model. The value ascribed to these options is adjusted at each
intervening balance sheet date to the then-current market value. The cost is
being amortized over the applicable vesting periods. From the date of issuance,
the Company has amortized $112,000 of the deferred compensation, $7,000 and
$105,000 has been amortized during the three and nine month periods ended
September 30, 2000, respectively. Such amounts are included in non-cash
compensation in the consolidated statements of operations.

Also during 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. The Company valued
these options using the Black-Scholes pricing model and amortized the value over
the applicable service period. The Company amortized approximately $10,000 and
$50,000 during the three and nine month periods ended September 30,
2000, respectively. 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 nine month period ended September 30, 2000, the $318,000 ascribed
to these options is included in non-cash compensation in the consolidated
statements of operations.

During the three and nine month periods ended September 30, 2000, the Company
granted options at the then fair value to purchase approximately 43,000 and
534,000 shares, respectively, of common stock to employees at prices ranging
from $3.31 to $6.38. These options are exercisable for a ten year period and
vest over three years. In addition, during the second quarter of 2000, 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 were exercisable
for a period of ten years. Approximately 406,000 shares vest over three years,
with the balance of approximately 346,000 shares subject to vesting provisions
that are contingent upon the price of the Company's stock achieving certain
predefined levels. Subsequent to the end of the third quarter, this individual's
employment with the Company ended. Since none of these options have vested, such
options will be cancelled during the fourth quarter of 2000.

Options to purchase 189,000 shares of common stock were exercised during the
nine months ended September 30, 2000. The Company received proceeds of
approximately $177,000 upon the exercise of such options.

5. NOTES PAYABLE

During August 2000, the Company received $1,000,000 from affiliates in
connection with the issuance of subordinated term notes payable due on August
15, 2001. The notes bear an interest rate of 12% per annum. The principal
balance is payable at maturity, however, in the event the Company receives
proceeds in excess of $3,000,000 from the sale of securities, the holders may
demand prepayment of all or any part of the then outstanding balance.

In connection with the issuance of these notes, the Company issued warrants to
purchase 30,000 shares of the Company's common stock at exercise prices ranging
from $3.85 to $5.50 per share. The warrants are transferable and expire on
August 15, 2005. A value of approximately $167,000 was ascribed to these
warrants using the Black-Scholes pricing model. The value of the warrants was
recorded as a reduction to the notes payable with a corresponding increase to
additional paid-in capital. This value is being amortized as interest expense
over the one-year term of the notes. For the three months ended September 30,
2000, the Company amortized approximately $17,000, which is included in interest
expense in the consolidated statement of operations.

On September 22, 2000, the Company entered into a one-year Financing Agreement
with a bank. The maximum available under the facility is $1.5 million. The
facility contains limits on borrowing based upon stipulated percentages of
accounts receivable and selected financial ratios. In addition, the Financing
Agreement requires the Company to raise additional funding in the form of equity
or subordinated debt in the amount of $3,000,000 on or before October 31, 2000
and an additional $6,000,000 on or before December 31, 2000. During November
2000, the Financing Agreement was modified to (a) waive the covenant to raise
equity or subordinated debt in the amount of $3,000,000 as of October 31, 2000,
provided the Company receives equity or subordinated debt of at least $1,000,000
on or before November 3, 2000 and an additional $2,000,000 on or before November
30, 2000 and (b) to reduce the maximum available to $750,000 until November 30,
2000. On November 2, 2000 the Company received $1,000,000 from the sale of
540,541 shares of the Company's common stock. The facility bears an interest
rate of the bank's prime rate plus 1.50% (11.0%) at September 30, 2000. In
addition, the facility requires payment of other fees of 1/2% per month (6% per
annum) of the outstanding balance. As of September 30, 2000, $271,000 was
outstanding under the facility. If the company does not meet the loan covenants,
all amounts previously drawn are immediately due.

In connection with the Financing Agreement as modified, the Company issued
warrants to purchase 18,181 shares of the Company's Common Stock at an exercise
price of $2.00 per share. The warrants are transferable and expire on September
22, 2007. A value of approximately $57,000 was ascribed to these warrants using
the Black-Scholes pricing model. The value was recorded as a reduction to the
notes payable with a corresponding increase to additional paid-in capital. The
value is being amortized over the one-year term of the agreement.

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 was 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 Company has repaid the amount outstanding under the term
loan during the third quarter of 2000.

The Company's subsidiary, Braincraft Learning Technologies Inc., ("Braincraft")
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 September 30, 2000 was approximately $68,000.

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6. COMMITMENTS AND CONTINGENCIES

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.

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.

7. 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 will adopt SFAS 133 on January 1, 2001. 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 adopted FIN No.
44 in the quarter ended September 30, 2000 and the results of the adoption did
not have a significant effect on its results of operations.

8. BUSINESS SEGMENT INFORMATION

Serving its medium and large businesses including Fortune 1000 customers, the
Company offers secure online messaging, directory and fax services, Web
application development services, hosted communications and infrastructure
integration 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 standards-based hosting services for
e-business and portal applications that are secure, scalable and reliable. These
services are supported by our state-of-the-art data center staffed 24x7 and
guaranteed system service level commitments. E-Sync Networks focuses on
availability and serviceability by providing extensive redundancy and proactive
monitoring of system level events, which results in a premium pricing revenue
generation model.

The Managed Services business delivers its services through three products,
TotalMail, Directory and Messaging Services, and Hosting Services. TotalMail
offers outsourced and Web-based integration of e-mail with voice mail, paging,
telephony, calendaring, public and private folders, directory services,
distribution lists, and virus scanning. TotalMail also provides portable access
and security with unique cardholder data to Information Exchange Services.
Directory and Messaging Services connects varied messaging environments
providing full synchronization between disparate systems and standards, in
addition to meta-directory solutions that allow a single entry point for
information to be shared by multiple platforms. As an enhancement, messaging
integration, which connects users of disparate messaging applications (Lotus
Notes, cc:Mail, Profs, etc.) within an organization, can be implemented over
intranets, extranets, and virtual private networks (VPNs). Fax services, which
allows conversion, encryption and delivery of faxes to e-mail or e-mail to faxes
without any additional hardware or software, 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. Hosting Services,
whereby the Company will maintain customers' applications remotely at one of its
sites using the latest technologies, provides security, redundancy, and data
backup for the client's applications. The Company uses public key infrastructure
(PKI) technology to deliver digital certificates, encryption keys, and
SmartCards for optimum secure messaging and hosting.

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PROFESSIONAL SERVICES
Professional Services provides consulting services in the areas of Network
Design and Integration, Security Solutions, and BackOffice Consulting. The
Network Design and Integration area provides expert resources as an extension of
a client's IT office to assess information, messaging, and connectivity needs,
evaluate existing infrastructure architecture for adaptability to change, define
and test migration processes, execute and document phased migration procedures
for disparate messaging platforms, and prepare enterprise-wide implementation
plans. The Security Solutions area provides the ability to exchange sensitive
documents and private information securely with confidence and reliability. With
Large-Scale Anti-Virus Protection capabilities and e-mail anti-virus filtering,
the Company provides full protection for applications, data, messaging, and user
systems across entire networks. BackOffice Consulting provides architecture,
design, and implementation services. The Company is a Microsoft Solutions
Provider Partner, and is uniquely qualified to conduct application analysis and
development, migration planning and implementation, and support for Windows NT,
Windows 2000, Exchange, Systems Management Server (SMS), SNA Server, and
Internet/intranet deployment.

Through the Company's Braincraft subsidiary, which is reported as part of
Professional Services, the company provides business solutions that use digital
technologies to enhance communications and commerce between businesses and their
consumers, suppliers, employees and other partners. Braincraft provides
integrated, end-to-end solutions. Braincraft's consultants carry out every
aspect of a solution from strategic consulting to design of information
architectures and user-interfaces to integration of legacy systems utilizing a
wide variety of platforms, including the World Wide Web, wireless, broadband and
a variety of digital devices and information appliances, including desktop PCs,
mobile phones, pagers and personal digital assistants.

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.

The following table presents the Company's business segment financial
information, in thousands:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----

REVENUE:
Managed services $ 887 $ 757 $ 2,915 $ 2,528
Professional services 1,054 1,002 4,469 2,628
------- ------- ------- -------
Total revenues $ 1,941 $ 1,759 $ 7,384 $ 5,156
======= ======= ======= =======
OPERATING LOSS:
Managed services $ (942) $(1,353) $(2,699) $(2,450)
Professional services (1,942) (1,161) (4,425) (1,938)
------- ------- ------- -------
Operating loss from segments (2,884) (2,514) (7,124) (4,388)
Corporate expenses, net -- (1) (7) (102)
Interest (expense) income, net (30) (12) 87 (2)
------- ------- ------- -------
Net loss $(2,914) $(2,527) $(7,044) $(4,492)
======= ======= ======= =======
DEPRECIATION AND AMORTIZATION:
Managed services $ 87 $ 62 $ 249 $ 146
Professional services 23 9 65 21
Corporate 352 68 1,002 126
------- ------- ------- -------
Total depreciation and amortization $ 462 $ 139 $ 1,316 $ 293
======= ======= ======= =======
CAPITAL EXPENDITURES:
Managed services $ 44 $ 461 $ 291 $ 771
Professional services 30 13 34 68
Corporate -- 1,430 656 1,917
------- ------- ------- -------
Total capital expenditures $ 74 $ 1,904 $ 981 $ 2,756
======= ======= ======= =======

IDENTIFIABLE ASSETS AT: SEPTEMBER 30, 2000
------------------

Managed services $ 3,029
Professional services 1,292
-------
Total assets for reportable segments 4,321
Corporate 7,051
-------
Total assets $11,372
=======

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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 e-business infrastructure products and solutions
that help medium and large businesses, including Fortune 1000 companies. The
Company offers web-based e-business applications, IT consulting, support and
hosting capabilities. 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 Company directed substantial efforts toward offering a
business-to-business integration platform, consisting of secure links between
enterprises, 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 offerings to higher-value secure integration offerings as a natural
evolution of its current business. In addition to the Company's development of
this new solution platform, the Company will continue to offer its existing
services to new and existing 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 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. During the quarter ended September 30, 2000, the consulting agreement was
terminated and the options were cancelled. As a result, the company reversed
approximately $337,000 of deferred compensation. During 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 consultant's 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 values the options using a Black-Scholes
pricing model. The value ascribed to these options is adjusted at each
intervening balance sheet date to the then-current market value. The cost is
being amortized over the applicable vesting periods. From the date of issuance,
the Company has amortized $112,000 of the deferred compensation, $7,000 and
$105,000 has been amortized during the three and nine month periods ended
September 30, 2000, respectively. Such amounts are included in non-cash
compensation in the consolidated statements of operations.

Also during 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. The Company valued
these options using the Black-Scholes pricing model and amortized the value over
the applicable service period. The Company amortized approximately $10,000 and
$50,000 during the three and nine month periods ended September 30, 2000,
respectively. Such amounts are included in non-cash compensation in the
consolidated 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 nine month period ended September 30, 2000, the $318,000 ascribed
to these options is included in non-cash compensation in the consolidated
statements of operations.

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During the three and nine month periods ended September 30, 2000, the Company
granted options at the then fair value to purchase approximately 43,000 and
534,000 shares, respectively, of common stock to employees at prices ranging
from $3.31 to $6.38. These options are exercisable for a ten year period and
vest over three years. In addition, during the second quarter of 2000, 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 were exercisable
for a period of ten years. Approximately 406,000 shares vest over three years,
with the balance of approximately 346,000 shares subject to vesting provisions
that are contingent upon the price of the Company's stock achieving certain
predefined levels. Subsequent to the end of the third quarter, this individual's
employment with the Company ended. Since none of these options have vested, such
options will be cancelled during the fourth quarter of 2000.

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 $158,100 of such amortization
expensed in the three and nine months ended September 30, 2000, respectively.

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999

Managed Services revenues increased by 17.2% and Professional Services' revenues
increased by 5.2% in the three months ended September 30, 2000 compared to the
same period in 1999. The increase in Managed Services' revenue is primarily a
result of an increase in the volume of services to the Company's current
customers. The increase in Professional Services' revenue is primarily due to
revenue generated by Braincraft, which was acquired in November 1999. Excluding
the effect of the acquisition of Braincraft, Professional Services' revenue
decreased by 10.7% compared with the prior period. The decrease is principally
due to a lower level of consulting engagements.

The Company recognized a negative gross margin of (39.3%) or ($762,000) for the
three months ended September 30, 2000 compared to a negative gross margin of
(8.6%) or ($151,000) for the same period in 1999. Managed Services recognized a
negative gross margin of (29.5%) or ($262,000) for the three months ended
September 30, 2000 compared to a negative gross margin of (37.0%) or ($280,000)
for the same period in 1999. Professional Services recognized a negative gross
margin of (47.4%) or ($500,000) for the three months ended September 30, 2000
compared to a positive gross margin of 12.9% or $129,000 for the same period in
1999. The decrease in gross margin is principally to the inclusion in third
quarter of 2000 of the loss at the Company's Braincraft subsidiary which does
not have a prior period counterpart.

Sales and marketing expenses decreased $166,000 or 22.8% for the three months
ended September 30, 2000 compared to the same period in 1999. The decrease is a
principally due to lower expenditures for consultants and advertising.

General and administrative expenses decreased $294,000 or 23.3% for the three
months ended September 30, 2000 compared to the same period in 1999. The
decrease in costs is primarily attributable to a decrease in consulting fees and
employee recruitment expenses.

Research and development expenditures decreased $79,000 or 21.1% for the three
months ended September 30, 2000 compared to the same period in 1999. The
decrease in expense is mainly due to a decrease in outside consultant costs.

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.

Interest expense, net of interest income, was $30,000 for the three months ended
September 30, 2000, as compared to $12,000 in the same period 1999. The increase
in net interest expense is principally due to an increase in outstanding loans
during the periods.

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999

Managed Services revenues increased by 15.3% and Professional Services revenues
increased by 70.1% for the nine months ended September 30, 2000. Managed
Services revenues increased primarily due to the initiation of the first
TotalChain(SM) pilot migration and an increase in volume. The increase in
Professional Services revenue is primarily due to the acquisition of Braincraft
in November of 1999. Excluding the effect of the acquisition of Braincraft,
Professional Services revenue increased by 13.0% over the prior period,
principally due to an increase in the volume of professional services provided.

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Gross margin decreased to 0.23% for the nine months ended September 30, 2000,
compared to 14.6% for the same period in 1999. Managed Services recognized a
negative gross margin of (5.1%) or ($150,000) for the nine months ended
September 30, 2000, compared to a positive gross margin of 2.8% or $71,000 for
the same period in 1999. Gross margin for Professional Services was 3.7% or
$167,000 for the nine months ended September 30, 2000 compared to 26.0% or
$683,000 for the same period in 1999. The decreases are mainly due to expenses
incurred in anticipation of future growth including increased costs associated
with expanded data center capacity, increased salaries and costs associated with
the recruiting and training of additional personnel and the inclusion of the
loss at the Company's Braincraft subsidiary which does not have a prior period
counterpart.

Sales and marketing expenses increased $90,000 or 5.1% for the nine months
ended September 30, 2000, and as a percent of total revenues decreased from
34.0% in the nine months ended September 30, 1999, to 25.0% for the nine months
ended September 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 $3,014,000 or 16.1%
higher for the nine months ended September 30, 2000, then for the nine months
ended September 30, 1999. As a percent of total revenues, general and
administrative expenses decreased from 50.3% to 40.8% for the nine month periods
ended September 30, 1999 and 2000, respectively. 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 $969,000 and $793,000 for the nine
months ended September 30, 2000, and 1999, respectively. The increase in these
expenses for the nine months ended September 30, 2000 was mainly due to the
increase in the number of research and development personnel as well as the
increased use of outside consultants in the first six months of 2000. To date,
all development costs have been expensed in the period incurred.

Amortization of goodwill and other intangible assets of $683,000 is principally
the amortization of goodwill recorded in connection with the acquisition of
Braincraft in November 1999.

Other expense of $102,000 for the nine months ended September 30, 1999 included
a write off of equipment and leasehold improvements identified in connection
with the relocation of the Company's headquarters in 1999.

Interest income, net of interest expense, was $87,000 for the nine months ended
September 30, 2000, as compared to net interest expense of $2,000 in the nine
months ended September 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 nine months ended September 30,
2000, by $6,038,000 from $7,182,000 at December 31, 1999 to $1,144,000 at
September 30, 2000. The Company received approximately $1,345,000 from financing
activities, primarily from loans from affiliates and bank loans, for the nine
months ended September 30, 2000. The Company invested approximately $981,000 in
capital purchases related to the Company's headquarters and data center.
Operations of the Company used approximately $6,402,000 for the nine months
ended September 30, 2000. At September 30, 2000, the Company had a working
capital deficit of approximately $568,000.

Net cash used in operating activities was $6,402,000 for the nine months ended
September 30, 2000. Net cash flows used in operating activities in the period
principally reflects net losses of $7,044,000, adjusted for non-cash charges of
$1,964,000, an increase of $811,000 in accounts receivable, an increase of
$90,000 in other current assets and a decrease of $421,000 in accounts payable.

Net cash provided by financing activities was approximately $1,345,000. During
August 2000, the Company received $1,000,000 from affiliates in connection with
the issuance of subordinated term notes payable due on August 15, 2001. The
notes bear an interest rate of 12% per annum. The principal balance is payable
at maturity, however, in the event the Company receives proceeds in excess of
$3,000,000 from the sale of securities, the holders may demand prepayment of all
or any part of the then outstanding balance.

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On September 22, 2000, the Company entered into a one-year Financing Agreement
with a bank. The maximum available under the facility is $1.5 million. The
facility contains limits on borrowing based upon stipulated percentages of
accounts receivable and selected financial ratios. In addition, the Financing
Agreement requires the Company to raise additional funding in the form of equity
or subordinated debt in the amount of $3,000,000 on or before October 31, 2000
and an additional $6,000,000 on or before December 31, 2000. During November
2000, the Financing Agreement was modified to (a) waive the covenant to raise
equity or subordinated debt in the amount of $3,000,000 as of October 31, 2000,
provided the Company receives equity or subordinated debt of at least $1,000,000
on or before November 3, 2000 and an additional $2,000,000 on or before November
30,2000 and (b) to reduce the maximum available to $750,000 until November 30,
2000. On November 2, 2000 the Company received $1,000,000 from the sale of
540,541 shares of the Company's common stock. The facility bears an interest
rate of the bank's prime rate plus 1.50% (11.0%) at September 30, 2000. In
addition, the facility requires payment of other fees of 1/2% per month (6% per
annum) of the outstanding balance. As of September 30, 2000 $271,000 was
outstanding under the facility. If the Company does not meet the loan
covenants, all amounts previously drawn are immediately due.

In connection with the Financing Agreement as modified, the Company issued
warrants to purchase 18,181 shares of the Company's Common Stock
at an exercise price of $2.00 per share. The warrants are transferable and
expire on September 22, 2007. A value of approximately $57,000 was ascribed to
these warrants using the Black-Scholes pricing model. The value was recorded as
a reduction to the notes payable with a corresponding increase to additional
paid-in capital. The value is being amortized over the one-year term of the
agreement.

Net cash used in investing activities was $981,000 for the nine months ended
September 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.

As of September 30, 2000, the Company had $1,144,000 of cash and cash
equivalents. The Company incurred a net loss attributable to common stockholders
of $7.0 million for the nine months ended September 30, 2000 and had an
accumulated deficit of $18.8 million as of September 30, 2000. Management
expects the Company to continue to incur substantial net losses and negative
operating cash flow. The Company has begun and will continue to increase its
operating expenses in anticipation of future growth. The Company may make
strategic acquisitions and investments, which may result in significant
amortization of goodwill and other expenses. Management is making these
expenditures in anticipation of higher revenues, but there will be a delay in
realizing higher revenues even if the Company is successful. If the Company does
not succeed in substantially increasing its revenues, losses will continue
indefinitely and will increase.

Management anticipates the need to raise additional capital in the future.
However, the Company may not be able to raise on terms favorable to it, or at
all, amounts necessary to fund the planned expansion, develop new or enhanced
services, respond to competitive pressures, or acquire complementary businesses,
technologies or services. Some of the Company's stockholders have registration
rights that could interfere with our ability to raise needed capital.

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 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 adopted FIN
No.44 in the quarter ended September 30, 2000 and the results of the adoption
did not have a 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 business-to-business integration solutions offerings in the future,
it is still developing its business plan for such offerings. If the Company is
unable to successfully execute on the business plan for the business-to-business
integration products and services, the 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.

The Company's operations continue to generate significant operating losses in
anticipation of increased future revenues. If the Company does not succeed in
substantially increasing the revenues, its losses will continue indefinitely and
will increase. Management anticipates the need to raise additional capital in
the future. However, the Company may not be able to raise on terms favorable to
it, or at all, amounts necessary to fund its planned losses.

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Item 1. Legal Proceedings - N/A

Item 2. Changes in Securities and Use of Proceeds

During August 2000, the Company received $500,000 in connection with
the issuance of a subordinated term note to Michael P. Schulhof, the
beneficial owner of more than 10% of the Company's common stock due on
August 15, 2001. The note bears an interest rate of 12% per annum. The
principal balance is payable at maturity, however, in the event the
Company receives proceeds in excess of $3,000,000 from the sale of
securities, the holder may demand prepayment of all or any part of the
then outstanding balance. In connection with the issuance of this note
the Company issued warrants to purchase 15,000 shares of the Company's
common stock at exercise prices ranging from $3.85 to $5.50 per share.
The warrants are transferable and expire on August 15, 2005.

During August 2000, the Company received $500,000 in connection with
the issuance of a subordinated term note to John C. Maxwell, Chairman
of the Board, due on August 15, 2001. The note bears an interest rate
of 12% per annum. The principal balance is payable at maturity,
however, in the event the Company receives proceeds in excess of
$3,000,000 from the sale of securities, the holder may demand
prepayment of all or any part of the then outstanding balance. In
connection with the issuance of these notes the Company issued warrants
to purchase 15,000 shares of the Company's common stock at exercise
prices ranging from $3.85 to $5.50 per share. The warrants are
transferable and expire on August 15, 2005.

The Company believes that these issuances of securities are exempt from
the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), by virtue of the exemption set forth in section
4(2) of the Act.

Proceeds received were used for general working capital purposes.

Item 3. Defaults Upon Senior Securities - N/A

Item 4. Submission of Matters to a Vote of Security Holders - N/A

Item 5. Other Information - N/A

Item 6. Exhibits and reports on Form 8-K

(a) Exhibits

Exhibit Number Description of Exhibit
-------------- ----------------------

4.3 Subordinated Term Promissory Note dated August 15,
2000 between E-Sync Networks Inc and Michael P.
Schulhof.

4.4 Subordinated Term Promissory Note dated August 15,
2000 between E-Sync Networks Inc and John C.
Maxwell.

15
16

4.5 Transferable Warrants to Purchase Common Stock of E-Sync
Networks, Inc. dated August 15, 2000, issued to Michael P.
Schulhof.

4.6 Transferable Warrants to Purchase Common Stock of E-Sync
Networks, Inc. dated August 15, 2000, issued to John C.
Maxwell.

4.7 Accounts Receivable Financing Agreement Between E-Sync
Networks, Inc. and Silicon Valley Bank dated September 22,
2000.

4.8 Warrant to Purchase Common Stock of E-Sync Networks, Inc
dated September 22, 2000 issued to Silicon Valley Bank.

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: November 14, 2000 E-SYNC NETWORKS, INC.

/s/ Frank J. Connolly, Jr.
--------------------------------------------
Frank J. Connolly, Jr.
Chief Financial Officer